Chad Sutton, a Managing Partner and leader of the acquisitions team of Quattro Capital, and the host of the Real Estate Runway Podcast joins us to share his journey as a “recovering engineer,” before following his passion as a multifamily real estate investor.

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Devin Elder: (00:03)
Chad, welcome. Thanks for coming on the show. How are you?

Chad Sutton: (00:06)
Devin, I’m blessed. Happy to be here, and I’m fresh out of the newborn cycle with my second child. So if you see bags under the eyes, I’m glad the audience can’t see them, but here I am.

Devin Elder: (00:17)
They can see them. This will be on YouTube, but most of it is in audio download on Spotify or Apple. Well, listen, man congrats on number two. A boy or girl?

Chad Sutton: (00:27)
Yeah, it’s a boy. So, I have a three-year-old little girl who we had first and who’s counting? If you count the dog that makes three kids, right?

Devin Elder: (00:36)
That’s right.

Chad Sutton: (00:38)
But yeah, little boy and everyone’s happy, healthy. We’re just, mom and dad are just trying to catch up.

Devin Elder: (00:43)
Love it, man. Well, congratulations. That’s a very finite time of life. That little period doesn’t last long. It feels like it lasts long when you’re in it. But it goes pretty quick, as everybody says, but congrats, man. So growing the family, trying to balance being a businessman and a father. That’s we could record episodes and episodes of podcasts about that. We’ll talk a little about that. But let’s talk a little bit about your background. So, for folks listening we talk a lot about multifamily, a lot about real estate, a lot about entrepreneurship. But what’s your background? And we’re here talking today because of your investment company, but take a step back and where are you from, and how did you get to real estate?

Chad Sutton: (01:28)
Yeah, Devin, I’m glad you asked. And it goes way, way back. I’m actually a third generation real estate investor. I didn’t know it for a long time.

Devin Elder: (01:39)
That’s funny.

Chad Sutton: (01:40)
Yeah, it is funny. So, my grandparents bought a large portfolio of single family real estate late in their career. Then they figured it out on their own that. So we-

Devin Elder: (01:51)
What market was that?

Chad Sutton: (01:53)
It was in Waco, Texas. So, an area you know very well.

Devin Elder: (01:56)
Yeah, everybody knows Waco maybe not for the best reasons. But lately it’s undergone kind of a renaissance, right?

Chad Sutton: (02:03)
That’s right. Lately, I think the reason would be Fixer Upper and that TV show. But previous to that it was other reasons that we don’t have to get into on the podcast.

Devin Elder: (02:10)
When were they buying in Waco? Was this a long time ago? 50 years ago or?

Chad Sutton: (02:15)
It would’ve been… No, not 50 years ago. It would have been the ’90s, I think.

Devin Elder: (02:17)
Okay. Okay. So, in recent memory for me and you.

Chad Sutton: (02:24)
Yeah, that’s right. So most of my life they’ve owned property in Waco. And I worked on them as a kid, Devin. I mean, I’ve always worked with my hands. So, that was I’ve gained some trade skills that way, if you will. But I was always encouraged to go to school and get a good job and work for a big company because that was the American dream, right?

Devin Elder: (02:42)
That’s right. Yeah.

Chad Sutton: (02:44)
And I think they were still figuring this out until much later in my life. And so, I don’t know if they were quite ready to encourage their family to go into it as well. So, fast forward several years, I watched them own those. I went to school, became an engineer. I was always great with numbers, and building blocks, and things of that sorts. The world told me to be an engineer Dev and I became an engineer. And I worked for large companies or as a civil servant for organizations like NASA back when the space shuttle still flying. I worked for General Electric building most of the commercial airline engines you would fly around on today. So, I did a lot of really hardcore engineering work for a long time. And a lot of simultaneous things happened.

Chad Sutton: (03:27)
I looked down and I realized, well, gee whiz, I’m getting really good at this one thing, and that was combustion analysis and design. I knew how to light things on fire, get a lot of power out of it.

Devin Elder: (03:39)
Suck, squeeze, bang, blow, right?

Chad Sutton: (03:41)
I’m really impressed you know that. Suck, squeeze, bang, blow. That is simplest way of how an aircraft engine works. Do you have a background there as well?

Devin Elder: (03:47)
I’m a pilot. Yeah.

Chad Sutton: (03:48)
Okay, you know it. Fantastic. I love that. But yeah, that was the first real simple explanation of how an engine works. And so, I worked in the bang section. I was where we lit stuff off on fire. I realized, I looked up after about my third design program I worked on… So, if you’re a pilot, I worked on the 777X for Boeing. I worked on the 737 Max. I worked on some of the Embraer stuff that we put out. So, a lot of small to large range… Oh, and the 787 Dreamliner. That was a pentacle.

Devin Elder: (04:22)
Those are some wild projects to be involved in professionally, that’s pretty cool.

Chad Sutton: (04:26)
It was really fun. It was a good time to be a young engineer in our industry where a lot of the older workforce had been laid off because of prior down cycles, right? Well, I came in at the right time when the work was just exploding. Everyone was re-engineering aircraft, new aircraft were being designed. So, it was a really cool time to gain your chops as an engineer. So, I don’t regret any of it. I had a blast. I met some great people. I was very rarely the smartest guy in the rooms I was in, which is a good place to be. But what I realized Devin is I’m a very highly paid worker is all it is. And what I discovered is, every program I did, they were always trying to do it in shorter amounts of time and with less resources.

Chad Sutton: (05:10)
I finally realized, if a company could develop the product and sell it without the engineering workforce, they would do it, but we’re a necessary evil. And then I also realized I look to my left, and I look to my right at my cubicle, after I finished my third design program. I was like, “Wow, I see my principal engineer down there who’s very senior in years, and I see my lead engineer in front of me.” I was like, “That’s my path. I’m going to be very good at doing this one thing, and I can work for three companies in the world.” Well, that scared me.

Chad Sutton: (05:40)
So, that told me to diversify myself. And right around that time was when the GE stock price crashed. I’m sure you all remember that. We formed a bunch of internal consulting teams, kind of like an internal McKinsey and Deloitte and I was fortunate enough to fly around the world and go to every GE center in the world with the sole purpose of how do we improve the bottom line of the profit and loss statement? And so, having that product design brain, I was able to help with manufacturing and product redesigns, and things like that. So, I got to go be a consultant before kids game and just fly around, which was really cool.

Devin Elder: (06:12)
Right. Pretty demanding schedule there, right?

Chad Sutton: (06:14)
It was, but it was really cool, right?

Devin Elder: (06:16)
For sure.

Chad Sutton: (06:16)
I gained my business savvy and my analytical skills and things like that from there, which it really translated… And negotiation, by the way. I did a lot of international negotiation, and supplier contracts in that job as well. So, that made me what I am today. And then simultaneously, another path was happening. My grandfather, who was a huge influence in my life passed away in 2016. It was a pretty heart wrenching end to a big Texas man’s life. But nonetheless, it happened.

Chad Sutton: (06:48)
Well, all of a sudden, one of my business partners, Kim Wendland, who is our director of asset management today. She stepped in and took over the family portfolio, and right around the same time I was asking questions. I mean, tell me one person who hasn’t read Rich Dad Poor Dad and had a paradigm shift, right? I was reading those kinds of books because I was like, “Wait a minute, I’m making a lot of money. I’m paying a lot of money in taxes. I’m getting a 3% year over year raise, unless I get a promotion, which is barely keeping up with inflation. It was like, “How do people get wealthy in this country? What am I doing wrong?” I’m working for the shareholders right now.

Devin Elder: (07:23)
Yeah, you did all the right things, right?

Chad Sutton: (07:25)
Yeah, did all the right things, why am I not there? Why am I not any better than I was five years ago? And that’s where all those books came in. And simultaneously, my now business partner was taking over the real estate portfolio. We just found all these common denominators in the wealth store. You can go be an Elan Musk and change the world, which is God bless him, but 99 out of 100 Elon Musk don’t make it. It’s really hard to do that. You can go invest in the stock market or other assets. But there’s a really common denominator in wealthy families and real estate going back to the king of England way back in the day.

Devin Elder: (08:02)
That’s right.

Chad Sutton: (08:03)
Land leases was one of the earliest forms of wealth. And so, all that started to formulate into a plan of Well, how do we do this? And so I started trying to create the Tennessee version of our single family portfolio in Texas. And that was hard because at this time Nashville, who doesn’t know about Nashville, Tennessee? It’s been a top performing market in the country for about 10 years now. It was exploding. You could not purchase… I mean, for all of you multifamily people out there, there is the sales comp method, which most single family homes are sold by, which is like, “Well, what did your neighbors pay for it? That’s what it’s worth.” And then there’s the income method, which we value multifamily properties on mostly, and that’s based on how much money it makes.

Chad Sutton: (08:51)
Well, I realized you just cannot purchase a home that cash flows in Tennessee at this time, unless you’re buying something that’s falling apart. So, we step back again, and I took a friend of mine out to lunch who he’s my age. He and his father have been acquiring multifamily properties requests quite some time now, some with their own capital, some with that a private equity and JV equity. And I asked him, I said, “How are you doing this?” And he handed me a book, and I wish I still had it on that bookshelf, but I’ve lent it out probably 500 times. It was written by David Lindahl, and it was a little blue book that’s called Multifamily Millions. And it was one of the many books out there talking about how to syndicate, acquire, operate, and perform value add plans on these things, and how the economics work.

Chad Sutton: (09:42)
Devin, I couldn’t put it down. Just I couldn’t put it down. And so, that led to 10 other books like that. I’m a reader as you can tell behind me here on the bookshelf. And so, I got my partner and we got on the first boot camp we could find and then we went to two, and three, and five, and 10. We just we learned as much as we could for probably a year before we ever bought a property. And then we got up enough confidence and we said, “You know what, we’re going to sell a few single family homes. We will take some of our money, and we’ll ind, we will buy multifamily property. And we did, we hooked up with two other partners of ours and bought a transaction, or bought a property in Knoxville, Tennessee.

Chad Sutton: (10:21)
And then that property led to two and then three and then five, and then 10, and then 15. And we just kept going, and that that group organically became Quattro Capitals as we discovered, wow we really round out each other well. We have good white glove service with our equity relations. We have top-notch industry pros, working with us who are running our asset management. We have… I spend most of the time on the acquisition side of this because financial analysis proformas, knowing how things go together and come apart, that’s a specialty of mine, I enjoy that. And so, we found success. And then eventually came some early exits and that really got us to the point where we’ve been tea to green on things and really gone full cycle and have that credibility, and here we are, Devin.

Chad Sutton: (11:14)
So, it was really a very organic path that a couple of things came together. The timing was right. And oh, by the way early… I don’t know how long DJE has been in business. But we still feel like we’re a teenage company, right? We survived and operated at a very, very profitable state. And I’ll say high level of acuity through COVID. And that was like earning your battle stripes early. I think stressing that theme early was a really good thing. So I’ve never been more proud of the team. And that’s how we got to where we are today. So I hope that wasn’t too long of a story. But here we are.

Devin Elder: (11:54)
No, I love it. I would say that’s probably incredibly condensed. There’s a lot in there. What was that first asset? How big? How much equity? How much debt?

Chad Sutton: (12:02)
Yeah, yeah, it was a… And I actually made some mistakes here. It’s just funny. You read everything, and until you really do it you just [crosstalk 00:12:11]-

Devin Elder: (12:10)
Oh, yeah. I’d say you got… I mean, we got some coaching clients and other people to talk to about the stuff all the time. I think you get about half of it through a full force education. I mean, meeting people, reading stuff, touring properties, studying, doing all of it, get about half of it. The other half you get, which really stinks. You would hope to get 90% of it from education. But I think about half and another half, man, you got to go do it. You just have to do it.

Chad Sutton: (12:44)
That’s right, Devin, and the good thing is that 50%, those are usually going to be your put you out of the game mistakes. You’re going to [crosstalk 00:12:52]-

Devin Elder: (12:51)
That’s right.

Chad Sutton: (12:54)
The other 50% of the smaller ones. So, it’s kind of like Pareto’s law. You get an 80% of the good stuff that maybe you don’t injure yourself, or lose money. So, anyway, we bought a 35-unit property that it was actually a unique asset. It was in North Knoxville, Tennessee.

Devin Elder: (13:10)
That’s a good size for a first deal. I mean, coming from some single family stuff, and jumping in, that’s good.

Chad Sutton: (13:17)
It really was. We bought it at $2.65 million, which now it’s worth… Knoxville’s done crazy things.

Devin Elder: (13:26)
Oh, sure. Yeah.

Chad Sutton: (13:27)
We can upsell it for a lot of money. Yeah, so we bought that property. It was a unique story that this architect actually had a house up on the hill, and about every… We joke about it. Every time he got mad at his wife, he went out back and built an 8-plex. And over about 10 or 15 years, he had 35 units.

Devin Elder: (13:44)
A lot of fights.

Chad Sutton: (13:45)
Yeah, exactly. So, it was kind of that… Every time we show it to the insurance agents who are bidding it like, “Wait, how many years of construction do you have here?” It’s like, “Yes, they started in 1980, and then those ones in 1995.”

Devin Elder: (13:57)
That’s hilarious.

Chad Sutton: (13:57)
So, they all look the same, though, and they’re thoughtfully built. I mean, it was just a great asset to start with. We brought to the tables $605,000 in equity of our own money. It was most of the four partners who bought it together, wanted to really make sure we knew how to do this, and we could prove it out before we had the burden of paying investors a spread.

Devin Elder: (14:20)
Yeah, I love that approach. I mean, I did my first multifamily deal the same way as six units, it wasn’t 35. But it’s all my money, me in the bank. I just could not envision taking on capital yet. I don’t know. It’s easy to say now, go into 100 plus units, you get all these efficiencies. There’s all this stuff. Raising capital is easy. It’s easy for you, right? You’ve done it a bunch. It’s easy for us because we point to these full cycle deals, but boy starting out I just really, really liked that approach of just, hey, it’s your money. It’s a partner’s money. Let’s do proof of concept on our own nickel. And probably wasn’t the most efficient deal you could have done. I just really liked that approach though.

Chad Sutton: (15:06)
Yeah, it really, and the funny thing is we operated it for probably two or three months. Okay, this is working. We’re going to go, and the next deal we did-

Devin Elder: (15:15)
You kind of check the box, right? Yeah.

Chad Sutton: (15:17)
Yeah. So we figured out that, okay, this thing isn’t blowing up and the bank is not taking it back 30 days in. We’re doing okay. We’ve got the right teams. So, all those limiting beliefs, and they’re just limiting beliefs, Devin. We could have gone to 100 unit, and we probably could have been fine, but we just didn’t want the… We just mitigated the risk of not having to worry about our credibility with capital until we knew we could do it.

Devin Elder: (15:39)
I love it. And I’m sure your investors appreciate that. I think that’s a great move.

Chad Sutton: (15:44)
Yeah, yeah. And so the thing I did wrong there. Had I bought this today, I probably would have put a bridge note on it. Something with extensions. You never want to get caught having a refi in a bad time. But the bridges we’ve done are two or three years plus one plus one. So that’s two extensions for a fee. So, that can get you… That can spread you pretty far if you have to get through something. But there was so much value in this building. It’s now worth 3.6, and it’s not been that long, so if we… It would have been better to refi, but instead we put a Freddie Mac small balance loan on it. Sadly, the small balance loan program does not allow second… You can’t do a cash out refinance. It comes with a big prepay so kind of have debt equity. We have debt equity [crosstalk 00:16:37]-

Devin Elder: (16:37)
Yap, or can. I mean, the Freddie SPL is a great product. If the step down prepays an option, but even that you’re looking at something to watch out for anybody listening get into deals it’s low rate, fixed debt is beautiful thing, but usually the backside of that is this prepay and you see deals out there, I see deals out there where somebody’s got a $2 million prepay, they’re not getting out of it until they can burn some of that off. So, that’s definitely a big got you to watch out for. And such a common story with first deals is like, “Oh, the low rates sounded great. And somebody told me to lock it in. And I’m going to hold this thing for seven years,” and it’s like, you’re probably going to hold it for two in reality.

Chad Sutton: (17:22)
Exactly. Let’s talk about that for a second because you bring some good points there. We could have even done this a little bit better because you can… You’re not going to get the best rate this way, but you can do a five-year yield maintenance. We did the full 10-year term yield maintenance. So, I’ve got up to nine and a half years that I’ve got to pay a lot of money to terminate that loan, right?

Devin Elder: (17:41)

Chad Sutton: (17:42)
Which it is what it is, and we’re probably going to do that when we sell it, but it’s a lesson learned. To Devin’s point, we could have done a step down prepay, which it depends, but it might be like 5%, 4%, 3%, 2% of the loan over five years. You’ll pay a little more rate. But there’s ways we could have done that better. Whereas, the best route would have been take it down with a local bank. I use local banks for the bridge loans all the time, by the way, because they usually don’t have a prepay. They’ll usually give you 18 months IO, some capex on the loan. They’ll give you-

Devin Elder: (18:13)
Good rate.

Chad Sutton: (18:13)
Yeah, a good rate, and 3.75 is my latest one.

Devin Elder: (18:16)
Now, is recourse a factor on those that you’re okay with? It’s an okay trade?

Chad Sutton: (18:22)
It is an okay trade for us. We don’t like recourse, and you have to be careful with it because… It’s not because we’re worried projects are going to go bad, Devin. But it’s a contingent liability and banks know this. When a bank underwrites you, they’re going to look at all your recourse loans and lower your net worth based on that. So, it dings your scorecard, if you will, to use Robert Kiyosaki’s term.

Devin Elder: (18:46)
Yap, such a great point. Yep.

Chad Sutton: (18:48)
So, that’s our problem with it. But what I’ve been successful with, and guys everything is negotiable in this space, everything. Go to the bank and say, “Look, I could do a Freddie Mac SPL on this, I could, I really could.” But this is a local deal. We’d like to put it with a local bank. We have a vision for this property. They love investing in the community. You’re like, “Look, but hey, here’s the deal. We can’t do a full joint and several recourse. We have five partners. You don’t need 500% of the loan guarantee. So, break it up. Maybe you want an aggregate of adding us all together, it’s 105% or something, or 125%.” And so what we’ll often do is individually limit our liability pretty far. But we never intend to keep those loans longer than a year and a half, so it’s a risk tolerance thing.

Devin Elder: (19:40)
Chad, you’re using a local bank in place of a bridge, getting better terms, you’re taking some limited recourse for a finite period of time. That’s a good play, and then you refi out into some fully non-recourse stuff.

Chad Sutton: (19:53)
I want to preface that because I don’t want to get our listeners in trouble here. If you got a rough property that’s got high delinquency, high vacancy, you’re going to need a real bridge loan for that.

Devin Elder: (20:02)
Yeah, that’s right.

Chad Sutton: (20:03)
Banks are not going to touch that. But if like this property, it was already stabilized. It was 95% occupied. It was just low rent. We had the ability to organically and with some slight renovation take a stabilized property and make it a higher rent stabilized property. So, that’s where that really shines is those textbook value adds where it’s already pretty stabilized.

Devin Elder: (20:26)
Sure. Yeah, that’s a great point. There’s this whole spectrum between stabilized and just total war zone properties. There’s a spectrum there. But if you’re on the cleaner side, that reduces your risk in a lot of ways, makes it palatable to take on some of that recourse debt for a little bit up front.

Chad Sutton: (20:44)
I’ve done all of them. I’m sure you have as well. We’ve done a Class D property. I probably never do one again. It’s just I don’t have enough hair in my head to deal with that again.

Devin Elder: (20:54)
Amen to that.

Chad Sutton: (20:55)
Yeah, and we’ve done ones where we’re basically taking over something that’s 60% occupied and those are good, those are worth it. Because I mean, that we’re going to double value on that in 18 months, not equity value. So, those can be really, really powerful as well, but it’s a different business plan.

Devin Elder: (21:14)
Yeah, that’s right. That’s right. You got to figure out what you’re up for, what your team’s up for, know what you’re getting into. At the end of the day, if you’re raising capital, what’s the investor return metric? If you could do something cleaner, bigger, more stabilized, and still hit your invest returns or beat it, do it. But yes, sometimes those crazy hairy ones equate to a lot of value, and sometimes they don’t. Just because it’s beat up and 50% occupied doesn’t mean it’s a deal, necessarily.

Chad Sutton: (21:45)
Most people are chasing high cap rates, and that’s good to a point. But you got to ask yourself in this market, if you’re buying something that’s an eight cap rate, you better be careful because something’s wrong with it [crosstalk 00:22:00] and it might be a 14 cap rate when you sell it.

Devin Elder: (22:03)
Yeah, that’s right. I mean, somebody told me that cap rates measure desirability of the asset. And there’s a reason it’s high. That’s less desirable. There’s something behind those numbers there for sure. You better be ready to deal with.

Chad Sutton: (22:20)
That’s right. A good friend of mine, Dan Hanford with Passiveinvesting.com says it best. They exclusively buy low cap rate assets-

Devin Elder: (22:26)
Yeah, that’s right.

Chad Sutton: (22:27)
… three and a half to four, that’s their business strategy. But it goes into risk reward. If I’m going to go take down… Look, and we can talk about this Class D asset, it’s got some pretty funny stories. But if I go take down something like that with investor capital, that’s high risk. There’s a lot of risk. It won’t cash flow for a while, there is… But so they’re going to expect, investors are going to expect, and you should expect a higher return. It better be better than 25% for something that risky. But if you’re going to go and buy a Class A luxury building where it’s stabilized white collar tenants that always pay their rent. Maybe it’s in a tech space where everything is really, really stable. I mean, the tech industry just killed it through COVID. Everyone’s working remotely [crosstalk 00:23:12].

Devin Elder: (23:12)
Sure. Oh, yeah.

Chad Sutton: (23:14)
When you look at assets like that, your return is going to be lower, but you’re probably going to have a much higher probability of getting that return. So, that’s something to think about there. But what Dan says, if you think about the cap rate, and the fact that cap rate is your net operating income over the price of the asset would sell or be bought for. Well, if you rearrange that equation, and say, “Well, if I’m going to add a dollar in NOI, net operating income, and I divide by my cap rate.” If you’re at a 10 cap rate, or even an eight cap rate, just for simple numbers, that 10 cap rate is going to equate to basically the same certain amount of money, but if you buy it at a five cap rate that one dollar is now worth twice as much as that, as it would be at a 10 cap rate.

Chad Sutton: (24:06)
So, while you may or may not cash flow as strongly as one of these really busted assets that you go and really just turn the NOI around, your appreciation is going to be much higher on a low cap rate asset. Even if it stays flat, or even if it decompresses by 50 basis points from a 5.5 to a six or something or even a five to a 5.5 that multiplier effects can be really big. I think that’s one of the ways they rationalize it plus making sure they’re in core city centers, and high acuity or high not acuity… I’m losing words here. Really, really good job supported areas where they the white collar individuals.

Devin Elder: (24:54)
Yeah, it’s an interesting approach. I mean, yeah, your NOI increase on a low cap rate property is going to have a bigger impact on value for sure. Also, none of us like to buy for appreciation, and just hope for it. But it is happening and it’s going to happen and trillions of dollars just got introduced to the economy in the last 18 months. You get all these new dollars chasing the same assets. Everything’s… Used cars cost more, stock markets through the roof, everything’s going to cost more. So, it’s an argument to be in some nicer assets that you’ve got low RNM number, you’ve got strong occupancy, all that stuff into the future. I think that’ll probably work out well. And then there’s just so many headaches in… I mean, look, I would say you’d put 300 people living together on a couple acres stuff, life’s going to happen, and it’s just going to be less messy on a 2012 property versus a 1982 property. So, it’s all trade offs, and I think the risk adjusted return there on those type assets can be really good.

Chad Sutton: (26:06)
Let’s talk about that a little bit. I love that topic you just brought up because when you’re looking at what assets you want to be investing in or buying today, whether you’re putting deals together or investing as LP equity, you need to think about this from both scenarios. So, we started out doing mainly ’70s assets, pretty hard repositions, and we did well with them. But you have the challenge of cost overruns because you get behind the wall and you find, wow, didn’t anticipate that. We inspected as well as we could, but we couldn’t see this, right?

Devin Elder: (26:40)
That’s right.

Chad Sutton: (26:40)
So you always have to really budget for fluff, there’s that risk, and then you have the more, what’s the right term? Volatile resident base.

Devin Elder: (26:48)
Good way to put it.

Chad Sutton: (26:51)
Volatile, yeah, and I do have a story on that. Don’t let me forget this [crosstalk 00:26:54].

Devin Elder: (26:55)
All right.

Chad Sutton: (26:57)
But when you think about what’s happening in today’s economy. If we take out Chad and Devin’s crystal ball here. This is a fact, we have printed 22%, I think was the number last I checked of the country’s money supply is about 18 months old.

Devin Elder: (27:18)
That’s right.

Chad Sutton: (27:19)
Let that sink in. I don’t know what the total amount in there is, but that’s a fifth, guys, that’s a fifth of the nation’s money was printed in the last 18 months. And I get why they did it. Currency is the lubrication that keeps the economic machine moving, I get it. But there are repercussions to every decision that you make. They could have let the economy seize up. And we might have had a massive downturn like we did in… Different reasons, but like we did in 2008. They chose to keep the wheels turning.

Chad Sutton: (27:51)
Well, guess what happens now? You hear all these people talking about this word inflation. We had deflation in 2008. Now we’re having inflation. Whether you believe it or not, but I think 5.4% was the last number posted.

Devin Elder: (28:05)
Published number, and who knows what the real number is.

Chad Sutton: (28:07)
Published, yeah, and [crosstalk 00:28:09] I promise you.

Devin Elder: (28:09)
No doubt.

Chad Sutton: (28:10)
I mean, just look at single family homes, for example, across the nation, those are up 24% in 12 months. 24%, tell me that’s not inflation?

Devin Elder: (28:19)
Which is pretty crazy how closely that maps to the money supply increase, right?

Chad Sutton: (28:23)
Oh, wow, I hadn’t thought about that.

Devin Elder: (28:24)
It’s a couple of percentage points off. It’s like, here’s 22% increase in money supply, and here’s a 22% increase in asset value across a lot of things. We could point to a lot of assets that have increased around that metric.

Chad Sutton: (28:39)
Yeah. And so, you couple supply and demand with that and there’s your problem. All that money wound up in people’s bank accounts and institution’s bank accounts, and they got redeployed into assets. And guess what, we’re having trouble getting people coming back to work. We’re having to pay them more. Salaries are going up. So, that that is all inflation. Well, here’s the thing. As a real estate owner, this is really good because banks are now… An example, I bought a deal in Chattanooga about four months ago, another story, but that was the best set of terms from a bank I’ve ever got. I got 3.75%. I got an 80% loan to cost. So they’re covering my construction loan.

Devin Elder: (29:18)

Chad Sutton: (29:19)
I got two years of interest only and I got a 25 year AM. Usually, I get two out of three. You never get [crosstalk 00:29:23]-

Devin Elder: (29:23)
That’s right.

Chad Sutton: (29:24)
So, the reason is, I was good friend with the banker. We’re talking about this like, look, one we want an asset to be proud of in Chattanooga is the local bank. But two, all the stimulus money, where did it go? It went straight to people’s bank accounts. And then that means it’s on the bank’s balance sheet. Well, now banks are in the business of making money, put money to work. They’re like, “We have all this money we’ve got to get loaned out quick.” Because as soon as you put money in the bank, they can lend out 10 times that. So, the beauty of this is the fixed rate, long term debt, that’s cheap is not going anywhere as fast as inflation is coming. It will go up at some point. Maybe five years, maybe 10 years, I don’t know. But that’s abundantly available.

Chad Sutton: (30:05)
So, you can still get really cheap money in today’s dollars for debt. Well, guess what? If we just assume those asset prices continue to go up with inflation, you’re going to be paying the same debt payment in today’s dollars as that asset price just continues to climb because you’re putting your money in hard assets and the dollar and what people want to pay for it is dollar’s depreciating and what people want to pay for it is going up. So, you want to talk about creating arbitrage. Creating the gap between your expenses and your income. That’s the way to do it. And now here’s your premonition side, cap rates are compressed.

Chad Sutton: (30:40)
Our group plays in the five to six cap range. We don’t do eight caps, we don’t do three caps. But if we’re playing in that range, if I’m going to pay a five cap for something, I rather pay a five cap for a ’60s asset in Atlanta, or would I rather go down the road and buy an ’85 asset? So, you buy nicer assets with the same cap rate that have a stabler tenant base. And, oh, by the way, this debt and value thing is widening. If I get my hands going the right way widening over time. What’s not to love about this space?

Devin Elder: (31:16)
100%. I mean, I think a number of years ago you saw this stratification of cap rates according to asset classes, and now it’s just been smashed together. So, just like you said, you’re buying a ’60s asset on a five cap, or ’90s asset for negligible changes in cap rate, and very real changes in operating experience between those two. And so, it’s a great point. I mean, the cap rate discrepancy between asset classes is all but disappeared. It’s all been smashed together.

Chad Sutton: (31:52)
Let’s give you an example. You just brought a perfect segue to that story I’ve been wanting to tell, operating experience, okay?

Devin Elder: (31:57)

Chad Sutton: (31:58)
Let’s just say that Chad bought two buildings, and they both were bought at a six cap rate. One building is a Class D asset. And that means we’re basically in the roughest part of town. It’s trending. I mean, there’s a path of progress coming down, the city’s revitalizing. It’s trending. Really difficult tenant base, but it’s got a lot of upside. We’re talking $250 in rent increase. We got a lot of renovations, and we got to manage the resident base, the tenant base. I’m going to call this one a tenant base. I usually call my tenants residents because there are people, but this is tenant based, this is different, I’m going to explain why.

Chad Sutton: (32:36)
Then I go over here, and I’ll buy a Class B building or something that is nicer 1980s asset, I’m going to call that Class B finishes, and I pay the same cap rate for it. And I have a mixture of blue and white collar workers by choice, and it’s a pretty decent little asset. Well, the story that I have over here on the Class D asset. This is the kind of tenant base that you tell them they don’t have to pay rent on TV, and they take that seriously and say, “I’m not paying rent.”

Devin Elder: (33:06)
That’s right.

Chad Sutton: (33:07)
They also have no respect for what they live in. It’s a project what they’ve been brought up on. It’s sad, but no matter what you do nice for the residents, the tenants in this situation do not have any respect to the building. That’s the difference to me between tenants and residents is respect for the building.

Devin Elder: (33:25)
It’s a good distinction. Yep.

Chad Sutton: (33:26)
I’ll give you an example. We went in and dropped about $40,000 on an encapsulation program in these old basements because there were mold problems. We needed to remediate. We knew that. We got this finished on June 30th 2020. And then the Fourth of July happened the next week, and I’ll be darned if this tenant base didn’t throw block party, break into the basements, pull all the tarps out of basement [crosstalk 00:33:51] and made them a slip and slide down MLK Boulevard.

Devin Elder: (33:54)
Here you go.

Chad Sutton: (33:55)
Those kinds of shenanigans, you don’t deal with certain resident bases, right?

Devin Elder: (33:59)

Chad Sutton: (33:59)
So, that’s the kind of operation that you just can’t predict. It’s funny. I mean, you got to stop and laugh.

Devin Elder: (34:06)
In retrospect, sure.

Chad Sutton: (34:09)
But now we have to do this again. So, it’s those kinds of things you just can’t predict. And they’re going to really have a huge impact on your operations. Whereas, if you buy the same asset over here, maybe I still got to spend a little bit of money on the units. Maybe there’s only $100 rent bump available for a renovated unit. But you’re working with a much more… You’re typically working with families, you’re working with working class people who have respect for the building.

Chad Sutton: (34:39)
The project we did over here on the left side with Class D, that was a mission for us. We did it with our own capital. It was like, “Hey, let’s really revitalize this area, and we did it.” We’re selling it because we don’t want it anymore. But it was like, we really want to make an impact on the affordable housing in this area, and we actually… We filled it with charity. People who are backed by charity rather than market rate tenants right. So, it was a really cool mission. But there are, you got to do that because you love it. You don’t just chase high cap rate high return because you’re going to be dealing with a whole lot more gray hair situations than if you had just bought a comparable asset at the same cap rate that’s much newer and has a more working class resident base.

Devin Elder: (35:28)
Yeah, no, that’s quite the story. I bet you have more. I’ve got a ton, and it’s funny that this trajectory. It’s like everybody starts in these ’60, ’70s high cap rate assets, and then they cut their teeth. And then they go bigger and cleaner. I’ve just seen that trajectory. I see it with us. I see it with all kinds of different firms. It’s like, “All right, we made it through the gauntlet. We made investor some money. And we learned a whole lot of things that we don’t want to do again.”

Chad Sutton: (35:57)
Yeah. That’s exactly it.

Devin Elder: (35:59)
That’s good. That’s part of the process.

Chad Sutton: (36:00)
Yeah, that’s very true, and there’s nothing wrong with doing assets like that. It does take a little more operational rigor to make them happen. But I think you’re also able to hire, you can hire better with the nicer assets.

Devin Elder: (36:12)
Yeah, that’s right.

Chad Sutton: (36:12)
The property management firms that you have access to on these more maybe not luxury, but higher end assets. They’re more abundant. Those teams don’t want to deal with that either. So, this is the way it is.

Devin Elder: (36:28)
Yep. Yeah, the whole team gets a little bit better. The team you’re able to hire, and the whole… The tenant base, the resident base, whatever it is, improves. So what are you guys looking at? We’re talking mid-2021 now. What are you guys looking at? What’s an ideal deal for your firm to take down now?

Chad Sutton: (36:47)
Yeah, I mean, we’re working on something in the Dalton Georgia sub market. It’s a sub market of the Chattanooga MSA. We really like the Tennessee, Georgia, Alabama regions right now. I think an ideal deal for us is newer than 1980. I’ve not really been excited or successful buying anything newer than 2004, which is plenty new for us. I like a little meat on the bone. We really like to see, and I think this is kind of a textbook answer. We like to see that we don’t have ancient electric systems and plumbing systems in there. No [inaudible 00:37:26], no cast iron, no galvanized, no aluminum wiring.

Chad Sutton: (37:31)
We want to make sure the structure is somewhat intact. So, as long as we have something that’s really sound there, and we can focus on building the community, improving your resident base, and their experience, and focus on finishes and getting that to where it wants to be. That’s an ideal deal. We’re not afraid to touch some big ticket items, but those just add risk. And quite frankly, you don’t increase your NOI by improving a roof. Maybe there’s intangibles like if the roof was leaking, people actually will stay in your building if you fix the roof right. But you’d rather spend your money and your investor’s money on something, you can draw a straight line to the profit it produced. So, I think our ideal property is one where we spend all the money on that, and the asset is in good shape.

Devin Elder: (38:23)
Yeah, that’s right. I mean, you’ve got to have a target and an ideal to pursue and maybe there’s 10 factors or components of that. The age and location, and maybe you get seven, and you make an offer, and you and you get it done, and you deal with it. But it is important to have that ideal. I think for people listening that are getting into this, you’re probably not going to check all 10 boxes, but you at least want to have a target dialed in as much as you can because that’s going to drive your broker conversations, that’s going to drive how you raise capital, it’s going to drive your whole company to at least have the ideal in mind and know that reality’s not going to perfectly match up, but at least you’ve got a filter to look through. So, you’re not looking at every single deal that hits a desk that you could spend your whole day sifting through that stuff.

Chad Sutton: (39:13)
That’s absolutely right. When I first started out, I mean, we had through our networks, we had sponsorship available to us, and we were giving ideas to brokers. Hey, we’ll buy anything from two and a half million to 100 million. No, that’s not even the same buyer pool.

Devin Elder: (39:32)
Right. Who are you? Yeah. All things, all people.

Chad Sutton: (39:36)
Yeah, we didn’t really have success. And so, we were like, “No, this is the avatar that we’re looking for and this is what we’re willing to go after. So, I couldn’t agree more with you on that.”

Devin Elder: (39:46)
Yeah, that’s awesome. So, what does the firm look like today, and how do you guys divvy up duties?

Chad Sutton: (39:53)
Yeah. So Quattro Capital is made up of five partners and we actually have something unique called an alliance partnership program. We set out at the very beginning to not become an institution. We want to be a boutique private equity group. And the way that looks is with the exception of a couple of VAs that are contract, we don’t hire employees. We have the five managing partners, two of which Erin Hudson and Maurice Philogene are really our… They really give white glove service and really personalized one on one experience with all of our investors. They are our client relations group. They focus on all things from joint venture equity and private equity groups down to the individual investor. That’s one thing I’m really proud to say our investors get a white glove experience. They feel like a person and they matter with our group because that’s one thing we wanted to make sure we never lost, right?

Chad Sutton: (40:57)
Then we have Kim Wendland who is our Asset Management Director. She’s got many, many years of global IT and project management experience, like in the billion with a B dollar range. So, she is definitely best fit for managing all the complex things from that perspective of managing our teams. I lead the acquisition phase. So, everything from the inception of broker relationship to the take down, I’m involved with it, even with the deal structures, things of that sort.

Devin Elder: (41:26)
That’s the fun part. That’s the fun stuff.

Chad Sutton: (41:28)
That’s the hunting, right?

Devin Elder: (41:29)
That’s right.

Chad Sutton: (41:30)
And then Tammy, Tammy Sutton, who is actually full disclosure, my mother is Tammy Sutton. My aunt, her sister is Kim Wendland so we do have a family… They’re the second generation to my third generation real estate [crosstalk 00:41:41]. She is what we call our transition manager. So, we have found out, like if you can envision two trains. One of them is the asset management train, and the other is the acquisition train. And the handoff between those trains is where a lot of projects go off the rails.

Devin Elder: (41:58)
No doubt.

Chad Sutton: (41:58)
So, we have designed our company to where we have the acquisitions train that’s running. And then eventually the asset management train catches up, the transitions player helps get everything from one train to the other. And then the acquisition train stops and the asset management train takes over. So, it’s really a big… So, she floats between the later end of acquisitions and the early phase of takeover in asset management. So, that’s how we’ve structured internally. But how do we manage all these assets we have? Well, our alliance partnership program is something we designed because as I’m sure you have as well, we have found in a lot of these network groups that we’ve been a part of, there’s a lot of really, really, really cream of the crop people who rise to the top. They get through all the material, but there’s a barrier to entry in this business.

Chad Sutton: (42:52)
And so, we’ll start from as little as a sponsorship relationship, and then all the way to an alliance partner at different phases. But if we sponsor a deal that you’re doing, and we work well together, we’ll move you to an apprenticeship phase. And it’s basically on the job training, where you are working with us under our direction to follow our systems, processes, and procedures. And then you in turn, build your business and become savvy and capable. And then you move to the next phase which is the full blown branding. So, our alliance partners are branded with our Quattro Capital name. When they reach out to people in the industry, they’re part of us, right?

Devin Elder: (43:32)
Right. Huge leg up.

Chad Sutton: (43:34)
Yeah, huge leg up. So, it really builds that credibility. And then we have a select few who we’re just doing deal after deal with. So, we’ve expanded our team that way. Sure, it costs us a little bit equity, but we’re really lean. Our overhead is really low. Guys, we’re helping. We’re helping people the way we were helped when we were getting started.

Devin Elder: (43:54)
That’s right. I love it.

Chad Sutton: (43:57)
It’s all about people. You really got to spread the love and make sure you’re given a hand up as much as you can.

Devin Elder: (44:05)
Yeah, that’s right. I like to say we’re all linked in a chain, and there’s people behind me, but there’s a lot of people in front of me that have pulled me along. I think we’ve all got that story, right?

Chad Sutton: (44:16)

Devin Elder: (44:16)
I like that model a lot. Well, this is awesome. Chad, I love what you guys are doing. I love that you shared your story. Congratulations on the transition to full-time real estate entrepreneur. I think this is a dream for a lot of people and you made it happen. So, that’s outstanding. If somebody listening wants to connect with you, learn more about what you guys are doing, how can they do that?

Chad Sutton: (44:43)
The easiest way is to go to our website. That’s thequattroway.com. I’ll make sure Devin has that so we can put it in the show notes but Quattro is Q-U-A-T-T-R-O, and you’ll be able to reach out. Click on our pictures, reach out to any one of us via social media, email, calendar, whatever you’re after. We’d love to have a conversation. We’re always really open to even if it’s just say hi, and talk about real estate a little bit. We love doing that. And I’m also the host of the Real Estate Runaway Podcast wherever you get your podcasts. And if Devin is amenable to it, you may even see him on there soon.

Devin Elder: (45:19)
Excellent. Let’s do it.

Chad Sutton: (45:20)
So, yeah.

Devin Elder: (45:21)
Fantastic. Well, we will link to that in the show notes. And you can click right there in the description and go to the website and meet Chad and the team. Well, Chad, thank you so much. I really enjoyed it. I wish you guys continued success here in the year ahead.

Chad Sutton: (45:35)
Absolutely, Devin. Thank you for having us on and look forward to seeing you in future.

Devin Elder: (45:40)
Alrighty, take care.