Real Estate Due Diligence: How to Protect Your Capital Before Investing in a Deal

Alex Zhang (00:00)
Whoever this operator is if let’s say that they’re working directly without me this operator could say you signed this so therefore This is why it happens without educating I’m here to make sure to educate these investors that hey Please know that this is what you are signing up for if for whatever reason I happen to hear just as simple as this if I ever hear that you’re going to put any of your emergency funds into this property I will slap you silly.

Cody Crabb (02:01)
Hello and welcome back to the Real Estate Pros podcast. My name is Cody Crabb with Investor Fuel. And today I’m talking to Alex Zhang. He’s the founder of Horizon Oaks Capital, where he brings a boots on the ground operator background into a, into a fund management. So he helps connect vetted development opportunities with private investors whose capital may otherwise just be sitting on the sidelines. So Alex, thanks so much for joining us today.

Alex Zhang (02:26)
Cody, thank you so much for having me. This is great.

Cody Crabb (02:29)
Yeah, so I’d love to hear a little bit about this. I love that you’ve kind of got the two angles, the two perspective side here. So take me back to this kind of boots on the ground perspective first. What were you doing before Horizon Oaks became more of a fun model?

Alex Zhang (02:42)
Yeah, so over the past decade, ⁓ I had worked in the construction industry. So what that means is that I have positioned myself into the general contractor role and in a owner’s rep role, which means I represent for the property owner many times. And having navigated about $200 million of construction projects, ⁓ it helps me make sure to mitigate risk. And here we are.

Cody Crabb (03:10)
Yeah, so tell me about the pivot then. So tell me about Horizon Oaks and what it is that you do exactly.

Alex Zhang (03:14)
Yeah.

Yeah, so Horizon Oaks is essentially a fund so that we make sure to bridge the gap between the investors who are looking for capital for their real estate deals. And I also make sure to bridge the gap with the investors who have absolutely no idea what they want to do, except they do want to invest into passive real estate properties. So this is where I make sure that it before any investors, if they’re ever going to invest, I make sure that these deals

are vetted through and through my due diligence so that they are essentially protected, secured, and insured.

Cody Crabb (03:55)
Tell me a little bit about that vetting process. I mean, that can mean so many different things. I’m curious how you see that.

Alex Zhang (04:00)
Of course, so every deal is structured differently and it all depends on a capital stack. For those of us who don’t know what capital stack is, essentially is a breakdown structure of knowing how much equity you’re putting into and how much debt is put into so that you can fulfill the entire deal structure. If we were to break it down even more simply, how much of your own personal money are you going to put into this property versus how much are other people’s money going to put into?

it so that we can fulfill this capital stack.

Cody Crabb (04:35)
So ⁓ I’d love to hear kind of, ⁓ know, what are some of these first red flags? If someone brings a deal to you, what is something that you see that is maybe like, I’m already not gonna touch this, just I see this in here, I’m not even gonna touch it.

Alex Zhang (04:52)
Yes, so before we even…

raise capital for just about anyone, the first person I or the first thing I need to know is I need to know this person first

because my philosophy within Horizon Oaks Capital or even with me really is a belief and that strong belief is that it takes a village to raise a whole child. So what that means and why this is so related to real estate is that I need to know this person first. Hey is this a person I can have fun with? Can I see myself having a drink?

with? Can I also make sure that I can see this person that ⁓ over time if there are still challenges over way, what are the best ways that we can make a mitigate risk at the end? Because at the end of the day, the problem is not with the deal or the person. It’s about just making sure that we’re solving the problem on what is at risk and how we mitigate or minimize it.

Cody Crabb (06:36)
So how much detail do you go into with like, what are your goals? And would you say no to a deal if someone was like, I wanna do A, B, and C, and you’re thinking that’s not really how you accomplish that. Would you say no to a deal that way?

Alex Zhang (06:50)
I would most likely say no to that and the reason why I had to say no is because again, I needed to know the person first and it’s about you know, the personality of this person and then after let’s say that we have a talk maybe let’s say 50 minutes or so then it’s okay that we can go straight to the deal after you know, 50 minutes that’s how I usually vet through if someone

to go straight to into the deal without knowing who I am and I did not get a chance to know who they are and where they are coming from

It feels a little awkward. Wouldn’t you agree, Cody?

Cody Crabb (07:24)
Yeah,

well, and also I think I find it interesting. I was I was kind of asking you about the about how you look at red flags and deals, but you immediately went, it’s no, it’s the people like you were like, and so if you trust somebody immediately, you hit it off, you feel like you want to work with them and they bring you a deal that’s kind of in between. Would you be more willing to go that way just because of who they are instead of the deal?

Alex Zhang (07:34)
is the

Okay.

I mean, not exactly true. The reason why I first, ⁓

use the people first philosophy is to know this person first. Of course, there’s still a number of crunching to do. There is still some due diligence I need to do. If let’s say that there is an asset, let’s say it’s not a single family home, but a commercial property, eventually I will ask, hey, what is your, let’s say your cap rate or what is your net operating income or what is the projected NOI growth? Those three metrics, for example, are the three metrics I really, I personally like

look into because it tells me what we can see over the next five years so that these investors can paint sure themselves how they’re going to make sure that they get their money back as well.

Cody Crabb (08:36)
So let me zoom out a little bit. ⁓ What kind of made you choose the mixed use development world instead of something else like traditional multifamily or other things like that?

Alex Zhang (08:38)
Yeah.

Yep, so.

every asset class within the commercial space, whether it’s residential or even commercial space, not all asset classes are created equal. So based on the economy, some people would ask like, hey, how are the interest rates or hey, how are the economics because of today’s politics, whether it’s within US or outside of the US. It’s much bigger than that, actually, because we needed to know like how much how many people are actually moving from

state to state what the net migration trends are. ⁓ And we’re all here to look to solve that one problem. And that one problem is.

how we’re to make sure, for example, that everyone gets, you know, have an opportunity to work at that place. Like say for senior living, for example, ⁓ is there really a problem over there that there is a huge demand for seniors who needs assistance? And that is one verification I would need to verify within that area.

Cody Crabb (09:52)
Can you give me, so we have investors that are kind of across the spectrum as far as like experience levels. Can you give me an example of ⁓ a mixed use project and kind of what that could look like in a real world, real world scenario?

Alex Zhang (09:56)
Right.

Yeah.

So having lived here in San Francisco last year, I was focusing on a condo conversion project So picture yourself that you are about to purchase a building that has six units that are a protect That are essentially law offices So you are going to convert those six in law in units offices into six actual residential condo units and there is a huge process in

in

place that you not only do you need to understand the politics within San Francisco because ⁓ every neighborhood is very different within San Francisco, you also want to verify the demand that’s, hey, are there really like a lot of restaurants nearby? Are they popping? Are there great locations such as our great grocery stores such as Whole Foods? Is it close by so that we can verify the demand? So that’s essentially the things that I tend to look into prior

to investing into this deal for example.

Cody Crabb (11:46)
So now that we’re in kind of in a development sense, since you kind of have followed that route as well, ⁓ how have you kind of handled that now that kind of capital is more expensive and people may be a little bit less willing to go after those projects?

Alex Zhang (11:54)
Mm-hmm.

Yeah, so essentially it all depends on which phase of the project that we work on. So for example, on phase one, using this as example, this condo conversion projects, we tend to break it into two phases. The first phase is the acquisitions and the entitlement phase. And we look for the competitive rates that would work within that first phase. Typically, it could take about ⁓ seven to eight months to go through that process on the phase one.

Now, when we are about to enter phase two, phase two has to do with construction and sales. And this is the fun part where if we do see that there is a fluctuation in the cap rates or in the interest rates, that is the perfect opportunity for us to work with ⁓ additional partners so that we can refinance and so that we can go straight to construction and sales.

Cody Crabb (12:59)
So like, let’s ⁓ say you’re looking at a project ⁓ and ⁓ let’s say the different phases have completely different risk associated with each one. How do you kind of balance that? Because I imagine that is very tricky.

Alex Zhang (13:03)
Mm-hmm.

Yeah, it can be tricky as well. So this is very dependent on our underwriting and we always look out for the worst case scenario in our underwriting. If we are overly optimistic such as let’s say that we look at our metrics, which is the loan to value or how much loan we are aiming to work with for this particular property. If it’s really high, let’s say on let’s say 70 % for example, or even higher, especially in the neighborhood in San Francisco, it can be pretty tricky.

If however our loan to value rate is actually 55 % or 60 % that actually is a very good sweet spot to work with because even if let’s say that we have made mistakes along the way prior to construction and sales phase for example there’s still some wiggle room to work because we have some contingencies.

Cody Crabb (14:09)
So let’s talk about, you’re talking about passive investment. I always say like, passive is one of those words that people think they know what it means, but they may or may not be accurate. when you’re talking about passive investment, what do you mean exactly?

Alex Zhang (14:18)
Hmm.

Yeah

Yeah, so passive investment means that especially if you are investing in debt, it means that you can actually invest, let’s say at a hundred thousand dollar check to a property. And with that hundred thousand dollar check, all you needed to make sure of is you get monthly updates with your capital partner or with your sponsor, your operator. And with this operator, they would make sure and communicate with you on a month to month basis. Of course, if there are some clarification questions that are needed,

we’re happy to hop on a call on a one-on-one basis and make sure that you know exactly what ⁓ exactly is going on so that you don’t lose your sleep over like say 2 in the morning the next day

as an example

Cody Crabb (15:51)
Yeah. Well, so, okay, that does sound pretty passive. What should you expect to actually receive? When you say updates, what is it that a passive investor would actually get and kind of need to look at in that kind of update?

Alex Zhang (16:05)
Yeah, so for example, I’m currently I’m working on ⁓ a single family manufactured home at this time and with this single family manufactured home all we needed to know is ⁓ as soon as this lender has Invested let’s say hundred thousand dollars into it. We just needed to make sure that hey ⁓ This could be as simple as hey, how is the deed of trust going? Have we received it yet? And if we have not received it when are we projected to receive that second deed of trust?

As I had mentioned before, in this particular case, which is a single-family manufactured home, not a condo conversion project now, ⁓

I make sure that these lenders are protected, secured, and insured. just to back up a little bit, ⁓ being protected means that you get the promissory note.

secured means that you get the deed of trust, could be a first-lien position or a second-lien position. And the third one is the insurance, which could be a homeowner’s insurance or a builder’s risk policy insurance, depending on what phase of the project it is. These are the monthly updates that we make sure of.

And that first update I will be expecting would be, hey, where is the deed of trust at First Lien Position?

Cody Crabb (17:26)
So ⁓ this has been really interesting so far. I think like I said, when people hear about ⁓ some of these words, I feel like it’s important to kind of talk about what do you mean when you actually say that? Because I feel like we talk about some things in just kind of passing terms and then we just kind of go passive. So a question I’d have for you, again, going back to the passive thing. I’m very interested in this. ⁓ So.

Alex Zhang (17:35)
What the?

Yeah.

Cody Crabb (17:52)
Is there such a thing as too passive? Like is there such a thing where you sign out too much and you’re just risking it way too much because you’re not paying attention? Like getting an update once a month seems very, very passive to me, but is there, can you push that too far?

Alex Zhang (18:07)
Right. Right.

⁓ Yeah, there are times actually I so I haven’t experienced this myself when it comes to the other investors They tend to be so laid-back that they have not kept track of their documents for example they have not bothered to read through what was written before signing it and they just signed it and The reason why I people like me as a fund manager ⁓ Raising capital it frustrates me that these past investors don’t know about it. It’s because

When the times get tough, the…

Whoever this operator is if let’s say that they’re working directly without me this operator could say you signed this so therefore This is why it happens without educating I’m here to make sure to educate these investors that hey Please know that this is what you are signing up for if for whatever reason I happen to hear just as simple as this if I ever hear that you’re going to put any of your emergency funds into this property I will slap you

I am not afraid to spell that out. ⁓ Because that is how much I value these lenders. Because again, this is a relationship-based business.

Cody Crabb (19:25)
Yeah, very much so. And I love that you’re kind of willing to, I love hearing when people are willing to, instead of just taking someone’s money, they’re like, please don’t do that. That’s a terrible idea. So.

Alex Zhang (19:34)
No. ⁓ and

I am not afraid of saying no to that.

Cody Crabb (19:38)
That’s great, yeah.

All right, well, so let’s say someone is interested in kind of what you’re doing and they’re kind of thinking, I could really use some help here. What is it that, who should be reaching out to you and how can they do it?

Alex Zhang (19:49)
Mm-hmm.

Yeah, so for those of you who are interested in getting to know me better, find me on Instagram. It is Alex Zhang. With an H ends with a G, dot real estate (alexzhang.realestate). And if you contact me or DM me, I’m happy to show you the ropes on how to make sure you’re protected, secured, and insured. And I will also give you a freebie, which is a funding toolbox so that you don’t invest with your emergency money.

Cody Crabb (20:19)
Yeah, because as you just told us, that’s dangerous around you. No one wants to do that. ⁓ You’ll get slapped silly. Yeah, so that’s great. Thank you so much. ⁓ just kind of as we’re closing out here, ⁓ there any kind of final words of advice you’d have? Let’s say you’re talking to some early real estate investors. What’s something that you could give them that would be like, thanks for that. That really changed a lot for me down the line.

Alex Zhang (20:25)
No. Yes.

Of course.

Mm-hmm.

Yeah, so what I recommend is that do not invest immediately. Make sure to ask some questions that are important to you. Make sure that you know which documents that you are signing up for. And because the less documents that you have, the thinner they are, it is harder to work with. The more documents you have, there tends to be a safer sweet spot for you so that you don’t lose your money. That’s my first tip.

Cody Crabb (21:16)
That is, I’ve never actually heard that tip yet. So that I think that is, that’s might be the first time I’ve heard that one. So that’s good. That’s a really good one. Yeah. Yeah. ⁓ great. Well, thanks again so much for joining us today, Alex. and if, ⁓ audience, if you liked what you heard today, go ahead and give us a like, subscribe, all the things and make sure you follow us so that you don’t miss more awesome conversations like this. Alex, it’s been a pleasure. Thank you so much for joining today.

Alex Zhang (21:21)
Yeah! Yeah.