Real Estate Pipeline Strategies, Tax Hacks, and Fundraising Secrets with Pavan Maddi

Pavan Maddi (00:00)
Every type of asset has a life

wanna have this conveyor belt of projects coming in,

of the reasons that I treat it as a manufacturing plant, there’s also tax ⁓ strategies that we

you actually limit your tax liability in the process.

Erika (01:50)
Hey everyone, welcome to the Real Estate Pro Show. I’m your host, Erika, and today I’m thrilled to be joined by Pavan Maddi, who’s been crushing it in the real estate investing space. Pavan, it’s awesome to have you here.

Pavan Maddi (02:04)
Thank you for having me.

Erika (02:06)
So let’s jump on in for our audience who doesn’t really know you yet. Give us the rundown. How did you get started in the investing space and what was that journey like over the years?

Pavan Maddi (02:18)
⁓ it’s, you know, we have the, there’s some ebb and flows in the market. ⁓ I got into, ⁓ investing in real estate, I would say around the 2008 financial crash. some serious lessons learned, but, ⁓ we’ve been progressing ever since. ⁓ from overall, from an investment standpoint, I try to build out all the verticals that made it a lot more efficient and effective and being able to.

acquired, designed, and built. So we’ve been growing pretty rapidly in the last couple of years and taking advantage of the Southern California market.

Erika (02:55)
Awesome, awesome. And what kind of properties are you looking for in Southern California?

Pavan Maddi (03:00)
⁓ Three pronged approach that we have, we do the short-term projects that are fix and flips that we could go in and out real quick. In the process, we look for damaged homes that could be torn down and rebuilt. We also work on track development and multifamily projects.

Erika (03:18)
That’s exciting. And can you give us a little bit of a breakdown with what that process is like? Do you have a system or tools to determine whether someone’s a good fit? Is it more of a gut feeling or a mix of both?

Pavan Maddi (03:32)
You know, nowadays I would say a mix of both because, ⁓ you know, with experience you have, you actually build out a gut feeling about a certain project property, but that in itself doesn’t help you make sound decisions. So we do take pen to paper and analyze the deal and make sure that it does pencil in and it makes sense and assess it from ⁓ all prongs, from a repair standpoint.

what our timeline is, how the market trends are doing, what we can actually profit if we execute on a deal.

Erika (04:09)
Yeah, have you found any unique opportunities or challenges that have shaped your approach in any way?

Pavan Maddi (04:17)
⁓ Well, there’s always uncertainty in the market, now greater than ever. So we are being very careful on how we analyze and invest. ⁓ Every one of our investments moving forward, we have a two-prong approach. One, we look at the asset from a resellability standpoint on can we make a profit if we sell. Two, the second prong is like, ⁓ we generate a decent return?

if we hold it within our portfolio. The reason we do that, if there is a shift, we want to have those two problems always and readily available to us. If we’re forced to hold onto it, we want to be able to maintain it and manage it.

Erika (05:01)
That’s awesome. And I know with all your experience, you’re probably used to this, but we have some listeners, you know, who, who might be newer to the game. How do you balance the operational side with the big picture vision with investing?

Pavan Maddi (05:17)
Biggest thing is build out your verticals. You need that because if you’re be successful in real estate in the long term, without the verticals, it’s very difficult. I have multiple companies. I have a brokerage and development arm that has an in-house structural engineer. We have a general construction arm that are license bonded where we have a full team that can execute on deals. And I have my real estate fund that actually does the financial component of all the acquisitions.

So having these verticals really help us not only to locate, assess, design, build, either resell or keep it within our rental portfolio.

Erika (06:48)
Great, Pavan. Every investor has a story where things got intense. So I’m sure you have a story to share. Maybe a deal went sideways or you had to make a tough call. Can you share one of those moments and what you learned from it?

Pavan Maddi (07:03)
Well, the biggest mistakes I’ve was probably, I wouldn’t call it mistakes, but it was market forces that impacted us, right? In 2007, 2008, the market was in turmoil. Some of the projects that we already acquired, they’re already losing. And we realized that we had to shift gears and be able to reinvest as quickly as possible on new opportunities that were coming.

But that requires abundance of capital to be able to deploy because you’re having losses on one side, but the hope was to make gains on the other, right? Our bet panned out. It was an amazing learning experience. Would I ever want to go through that learning experience again? Probably not. But here’s the thing. Those bad experiences teach you to give you the greatest lessons in life on how to manage risk.

and how to think about investment.

Erika (08:04)
Yeah, absolutely. And as I’m sure you know, relationships are everything in real estate and investing. What’s been your approach to building a network or building a team and how has it impacted your success?

Pavan Maddi (08:21)
So real estate is always a team effort. I might be the person that people see all the time, but without the team, my success is null and void. Because it’s the right team members that can help you execute deals. One of the things that we also do is we teach real estate professionals on different asset classes and how to underwrite them with the hopes that they could actually act as boots on the ground to bring us opportunities in what they see.

Real estate professionals are probably the key element because they’re there day in, day out in the trenches, you know, seeing everything that’s moving. So, you know, building up that network of real estate professionals that could learn from you as well as bring you opportunities when they see you.

Erika (09:11)
when you were talking about education, are we talking about something formal that you’ve offered or is this something more like for your team? Can you tell us a little more?

Pavan Maddi (09:20)
Yeah, so I developed a program called the magic of real estate. It’s an investment series that says that we designed it as a case study. So if it’s a, it’s a five part program that helps you ⁓ introduce an asset, do your core analysis, which is your property level data, your market analysis and your financial feasibility and being able to combine it into a precise 60 second pitch. Right? So it doesn’t matter if it’s a

fix and flip that you’re trying to underwrite, it doesn’t matter if it’s a land development. These same systems apply, just some of it is a little bit more intricate. We’ve been teaching it to a lot of real estate professionals throughout Southern California, and we are in the process of launching more of a web-based scenario, and then going from there.

Erika (10:45)
That’s exciting. Do you have any success stories from that education?

Pavan Maddi (10:52)
So one of the greatest things about it is that I would say about 70 % of our deal flow right now is coming from our students. Right? So it’s amazing. So out of thousands of people that we were able to get in front of and teach this, I would say maybe 10 % grasp the theory and be able to take theory into action. But that 10%, I’ll be honest with you, they’re on the streets, boots on the ground, bringing us opportunities.

Now, do all the opportunities make sense? No, not always, right? So we do take additional steps to underwrite it ourselves just to make sure the pencil’s in. But ⁓ a lot of the students, they’ve been loving the program and I’m excited to actually ⁓ convert it to an online segment very shortly.

Erika (11:41)
That’s exciting. For our listeners who are new to investing, what’s one principle or habit that you swear by that keeps you profitable?

Pavan Maddi (11:53)
Well, what’s the old saying in real estate? Profits are made at the purchase, right? You need to know what your bottom line is on what you’re gonna be buying and why you’re gonna be buying, right? So, ⁓ you know, if you look at a fix and flip, for example, you you look at the market conditions and see that a property that’s fully fixed up will sell for a million dollars, but this property is in very poor shape. You need to be able to understand what type of construction needs to happen, how much…

money that you’re going to be putting into it and how much profits you want to make or desired on the deal. Typically, I would want to see anywhere from 12 to 15 % on the low end. But sometimes we hit some home runs, sometimes it’s single bases, sometimes it’s double bases. But you got to keep on churning and treat it as a manufacturing component so you can keep on building up your pipeline.

Erika (12:46)
Yeah, can you talk more about building up that pipeline? That’s an interesting analogy.

Pavan Maddi (12:52)
from ⁓ a manufacturing component?

Erika (12:54)
Mm-hmm.

Pavan Maddi (12:57)
type of asset has a life

If it’s a fix and flip, you have typically about six to eight months. If it’s a single family home that’s gonna be torn down to rebuild, in Southern California, it’s taking anywhere from 24 to 36 months, ⁓ and so on and so on, right? But

wanna have this conveyor belt of projects coming in,

so that way that while one goes,

you have another one being added. Now,

of the reasons that I treat it as a manufacturing plant, there’s also tax ⁓ strategies that we

I’m an accountant by trade. So one of the key things I always look at is like, okay, what type of incomes are we getting? Is it just capital gains? Is it ordinary income? And when you have this pipeline of different asset classes that are going in your process, some of the losses on one project that are going through the development stage,

to the ⁓ actual gain on a short-term project can be offset.

you actually limit your tax liability in the

right? So, I mean, there’s the strategy, I could expand on this forever, but I’m hoping that gives you a good sense of the way I look at it.

Erika (14:09)
Yeah, yeah, that’s really helpful and interesting. What would you say is probably the most common tax strategy that you use?

Pavan Maddi (14:17)
Well, the common one is the tax harvesting component, right? Tax loss harvesting, you know? So I’ll give you a prime example. In the last two years, we picked up, ⁓ we have 16 projects going at once, right? But different stages of the cycle, right? Like we started on two luxury homes that we’re building. We’re going to be starting on another one in about six months. And of course our Venice Beach project. But while we’re constructing, we also…

do short-term projects that have a net gain that becomes ordinary income for the most part, right? ⁓ So, but those gains can be offset by the development projects that are treated more on the long-term capital gains point of view, right? So it becomes a wash and we kind of lump a lot of the profits into the capital gain segment. So we save an extra 15 to 20 % in our tax liability.

Erika (15:58)
Yeah, that’s awesome. Pavan, what would you say is next on the horizon? What’s your next big goal or vision that you have in mind?

Pavan Maddi (16:09)
It’s larger projects pretty much, right? So two of the projects that we’re looking at, they’re right here in the Southern California region. One is for 75 track homes. The other one is a 25 track homes that are more on the luxury side. So those are areas that we want to lean into because we are growing, we’re building up our team. And I think our next stage is to do the larger projects.

Erika (16:35)
Yeah, that’s awesome. And then what is your plan to get there with those larger projects? For example, with raising capital.

Pavan Maddi (16:43)
So we already raised $5 million on our, well, little under that. And we’re gonna be launching our Series B, Class B ⁓ capital raise, which is gonna be the next $45 million. So we’re pretty excited about that. We’ve been talking to a lot of investors. And we are also ⁓ having our preliminary discussion with a private equity group that would back.

a nice chunk of our capital layout that we need. It’s still in the ⁓ beginning phase and with the private equity, but the conversations have been very ⁓ positive.

Erika (17:24)
Yeah, that’s awesome. What’s your approach to building trust and getting investors excited to join in as a partner?

Pavan Maddi (17:33)
The biggest thing I tell people, you need to get to know the operator. Let’s have conversations. You get to pick my brain. You get to see how I work, how I tick, what I do, and how I do it. That way you have a better sense of where I stand and my approach. Anybody can put together a fund, but a lot of funds…

the smaller funds at least like mine, they’re more financial professionals, they’re not operators, right? So you need to understand the operation before you decide to invest in that particular project or particular fund.

Erika (18:14)
Yeah, absolutely. And one other thing that I wanted to ask you too is what would you say is the biggest misconception with raising a fund like that?

Pavan Maddi (18:26)
So most people are used to asset-based capital rates, right? Meaning that you find a property, you think it’s a good deal, and then you tie it up, and then you actually start trying to put the money together. You’re fighting with yourself, right? You’re negotiating here, and you’re trying to negotiate with your investors. With raising a fund, you take away the asset in the interim, and you’re basically ⁓ telling the investor,

that this is your formula, this is your business strategy, and with your money, this is how we’re gonna approach it. ⁓ Biggest obstacle, I would say, is like, they don’t see the assets yet, so depending on you being able to find the assets to deploy that capital with. So it’s, ⁓ the biggest myth is like, one thing I would not wanna do anymore is tie up an asset and then try to raise capital.

I’d rather raise the capital and then look for the assets that you could buy based on your model.

Erika (19:30)
Yeah, yeah, absolutely. Pava, before we wrap up, what’s the best way for someone to connect with you or maybe they’re interested in this fund?

Pavan Maddi (19:41)
Honestly, if you could Google my name, I’d pop up everywhere. So that’s one way, or after this I could actually get you all my contact information, or unless I could give them my contact information over this airway.

Erika (19:56)
Yeah, you absolutely can.

Pavan Maddi (19:58)
Yeah, you could reach me on my cell phone at 562-754-2726 or you could email me pavan @ remre.fund. Those are the two best ways to get a hold of me. And if you’re interested in learning more on what we do and how we do it, would genuinely enjoy a conversation with

Erika (20:18)
Awesome. Pavan, thank you so much for dropping this knowledge today.

Pavan Maddi (20:22)
Thank you for having me, Erika.

Erika (20:25)
to everyone listening. If you love this episode, make sure that you’re subscribed to the Real Estate Pro Show. We’ve got more conversations with investors who are out there making big moves in real estate. We’ll see you on the next episode. Bye.