Scaling a Real Estate Portfolio with Smart Financing and Off-Market Deals

Danny Flores (00:00)
What I see sometimes is people trying to take too big of a bite, meaning they’re new, even maybe their team members are new, and they’re trying to source a deal, they’re trying, they’re gonna try to raise money, they’re going to try to get a loan at the same time. And when you don’t have any experience doing that. It’s way too much to do that all by yourself, all at once, because it’s a lot of work. For us, as an example, it’s fairly easy if we get a new deal under contract. Probably in about a couple of hours, we can call everybody from our transactional attorney, our securities attorney, our insurance broker, our loan broker, ⁓ whether it’s the.. escrow company and we can get everybody on board at the starting line really quick. But that’s because we’ve done it so many times and we have everybody basically at the tips of our fingers. We work with them consistently so they know how we work and we have everything set up. Somebody who’s trying to get into the business doesn’t have those relationships built yet. So what I always say is don’t try to take such a big bite. Take a smaller bite bring some value to the table and partner with somebody such as ourselves who’s an experienced operator. So we can kind of bring you in as a, maybe as a small fractional ⁓ part of ⁓ the general partnership group. And that’s because you were able to add value, whether you’re bringing a deal to the table or maybe you’re creating a fund of funds to be able to participate in the fundraising.

Erika (03:15)
Hey everyone, welcome to the Real Estate Pro Show. I’m your host, Erika, and today I’m thrilled to be joined by Danny Flores, the CEO and founder of Prime Capital Investments. Danny, it’s great to have you on the show today.

Danny Flores (03:29)
Thank you, Erika. Thanks so much for having me.

Erika (03:32)
Our listeners are really going to be in for a treat, especially with how you’ve been scaling your portfolio and all of your years of expertise. So let’s dive on in. Daddy, for those who might not know you yet, give us the rundown. How did you get started in the investing world?

Danny Flores (03:51)
Yes, so I started, well I have a unique background and I think I bring a unique skill set to the table. My first career was in construction and I was 16, I was a builder for 16 years and learned how to build homes and then did some heavy construction as well. But then I decided to go back to school and wanted to do a career change.

and I was lucky enough to get into USC. I got a corporate finance degree and became a banker, which was my second dream and second career. And we did loans between 25 million to over a billion dollars. And that’s where I cut my teeth on the finance side of this business. When I was doing that, never in a million years did I think I was going to be doing what I do now. But nevertheless, my ultimate dream was to buy multifamily.

and I was able to save $65,000. And in 2000, I bought my first Fourplex here in California. And then what I did is I ended up selling it about a year and a half later, got a $100,000 profit off of that and then an exchange. And I did that for about 15 years, just building my own portfolio with my own money at that time. And in 2006, I started a property management company.

which I sold about four years ago. And so I learned how to do the property management side. So now I have construction side, I have the finance side, and I have the property management side. In 2018, I was introduced to syndicating and the ability to be able to raise money from family friends. And we have ⁓ private equity, we have institutional capital now.

and learn how to put equity together to be able to do larger projects. And since then, 2018, 2019, we kind of shifted gears and started doing larger buildings. We do heavy repositions, heavy value adds. Sometimes it’s just operational plays where we buy already renovated buildings and come in and basically fix the operations and get pretty good returns for our investors.

Erika (06:58)
Danny, with your experience in investing, what has been the biggest shift that you’ve seen since you’ve started?

Danny Flores (07:08)
that’s a good question. So when I started back, what, 25 years ago, we were buying buildings in California at a true eight cap on existing rent. And it was to the point where the banks would tell us that, would tell me, you don’t have to put 25 % down. We’ll let you buy this building with 20 % down. So the cap rates were really high, cashflow was really high, and valuation moved very fast.

And I think the biggest difference that I noticed being in the business, it was after the stock market crash, 2007, right around that time when that happened, or a little bit before that, is when I saw a lot of people coming into the business and became more competitive. And as it became more competitive, we saw cap rate compression and it changed a little bit. And now, now it’s even more competitive.

And so those large profits and those cash flows that we used to get off with these buildings are not there now. It takes a little bit longer to build up to them and you got to look a little bit harder.

Erika (08:21)
Yeah, so with those changes, how have you been pivoting to accommodate that shift?

Danny Flores (08:28)
Well, we pivot a couple things that we have to do different. One, we have to be pickier into the markets that we go into and in the areas of the market. So you have to buy good buildings. You can’t buy too old of a building. You have to buy them in a good location and you preferably need to get them off market because if you get a fully marketed deal,

then you have a lot of investors coming after it and they bid the price up. And then sometimes it just doesn’t make sense when the price gets too high. So just being more careful, ⁓ concentrated more on building relationships with brokers so that you do get to that A list and be one of the top ⁓ group of investors that they call when they have off-market deals.

has basically been our, I guess, secret sauce in finding deals at Cashflow.

Erika (09:35)
that makes a lot of sense. When it comes to emerging markets that you see, is there anything that you’re particularly excited about right now?

Danny Flores (09:45)
Well, we see because we’re super active in Arizona, we see that as an emerging market and because it continues to grow, because population continues growing, because businesses keep moving in and building their headquarters or their offices there. That’s always exciting because as the market continues year after year,

the population continues to grow year after year. And so being able to be there in the buildings and buying the right buildings and operating them during that time ⁓ gets us excited because we know that we’ll get plenty of appreciation in the coming years.

Erika (10:34)
I noticed on your website that you, your company, Prime Capital, has a rigorous four-part process. Can you go over that with us and explain how you’re able to do that and have so much success with all the deals that you’re doing?

Danny Flores (11:26)
yes, ⁓ definitely. So we have to understand when we get a broker that calls us for a deal that has a deal available, you can’t just say, yes, I would buy it. So first, when they tell us, we get the address and we find out what the location is. Usually we make calls to people that are in the area that know the area probably better than us.

And ask what’s the area like what’s you know, is it a tougher area is a good area is it a B or C area? Definitely D areas we won’t buy because we don’t need to So understanding that because that’s where your tenant base is going to come from and if it’s worth Continuing then we we we underwrite it. We put it on our models We see what the current owner is doing. We’ll go out and we’ll shop

our loan to see what the lenders could do. We talked to our insurance companies, which are some of the most expensive parts of the deal. And then we basically piece it together. And we usually do five-year plans. And we’re always looking for a minimum of 15 IRR for our investors on the investor level for any deal that we do.

And that’s on a conservative level because we always want to leave a cushion in case the market changes on us and we can’t produce the results that we wanted. So we’re really careful in making sure that we understand what we’re going to make the deal look like as we operate it and as we do the rent increases. And if we’re comfortable with that.

and understanding the market and the micro market too. What are the neighbors doing? How are they ⁓ pricing their units? What do the units look like? And being able to understand it. Then we get comfortable with the deal and that’s when we pursue, decide to pursue the deal and go after it and see if we can get it at the price that we want to pay for it.

Erika (13:38)
I know that you work with multifamily for our listeners here. What’s one strategy you can share that has unlocked hidden value in a property that other people might overlook?

Danny Flores (13:53)
Well, there’s many strategies, but I’ll share that one of the last ones that we used. We just closed on an 84 unit building in Tucson, and we all know anybody who’s operating ⁓ across the country knows how expensive insurance is. And in Arizona, it’s more stable because there’s no hurricanes, there’s no earthquakes, there’s no storms. And so the…

Insurance typically has been going up for us maybe 10 to 12, 13 % annually. Where in other areas, I’ve heard such as Florida, it’s quadrupled. But one strategy that we just used is on this particular deal, we underwrote our insurance cost out of about $43,000 a year. And it was pretty much in line with the previous owner was paying. But because we have a really good insurance broker,

and we had to think outside of the box, we have other assets in Tucson as well, and we were able to get a blanket policy and get our insurance costs on that building at about $20,000. Now, if you don’t know what a blanket policy is, it’s basically one policy that covers more than one building. And the insurance companies are willing to do that because the losses are kind of mitigated between different buildings.

and they’re able to give you better pricing. So being able to reduce the cost by that much was a great benefit and it all trickled down to the NOI, which trickles down to the investors.

Erika (15:33)
Yeah, that’s a really excellent strategy. So as I’m sure you’re familiar with, every investor has a story where things got real. Maybe a deal went sideways or you had to pivot fast. Danny, can you share one of those moments like that on your journey?

Danny Flores (16:32)
Yes, yeah that’s true. If you do enough deals that sooner or later you get a couple bruises along the way. But the trick to that is being able to kind of grab the bull by the horns and make a shift. ⁓ Small shift. A lot of times it’s lot of small shifts that kind of redirect the ship. And sometimes you might have to make one big one. But to answer your question, I had a, when I was initially starting, probably somewhere around 2018.

And I did a couple trial runs on syndicating amongst friends. So got a small group of friends and I did a handful of deals out here in California. So we ended up buying one fourplex. So it’s a four unit building out in a rougher area. And I’ve done plenty of deals out there, but this one was particularly harder and it was in Compton. And I bought a fourplex where we just…

Couldn’t get traction on the tenants and at one point or another we’re doing one or two evictions the tenants weren’t paying and it was harder to lease and And it just so happened that on that deal. I think we held it for maybe about a year and a half maybe two at most But we end up selling it. I ended up selling it and basically breaking even so whatever the the investors Put into that deal. I was able to give them the same amount of money back

there were no real returns on that. And so that was like a failure for me, but it also taught me that for us to be able to do what we do, those smaller buildings don’t work. There’s just not enough cash flow, it’s not big enough, where if you have one or two vacancies, you’re 25 or 50 % vacant. And so that doesn’t work. So the bigger, the better because you can run.

kind of it’s steadier when tenants move out and you can make the shifts and you can control it that way. So yes, so we don’t buy smaller buildings anymore, but that was definitely a lesson as we move along through the process.

Erika (18:40)
Yeah, Danny, you had also shared that you had built a property management company that you then sold or exited. Do you have any lessons from that experience too?

Danny Flores (18:51)
boy, yeah, that was really interesting. And that was property management that operated in California. So anybody who’s listening, California has different rules. And that’s why it makes it a harder state to operate in. But nevertheless, when I started it, it wasn’t that bad. And I started the company before we had any of the electronic payments, the app folios and the yardies. And so back then,

you have everybody would still pay with a check, or they pay cash with money orders, and we had to input manually every check we had to deposit. So I got to see how everything evolved from being manual input to going to electronic. And when we actually did the switch, and we actually used that folio as a property management software, and we switched everybody to electronic payment, we were actually able to save

like one bookkeeper we were able to eliminate because of that. So that was the drastic change that was happening in the industry where everything went electronically, all electronic records. We know when we started, we used to have these big file rooms where we had everything, all the tenant leases and all the properties that we bought, all the owner files, all in real paper.

And through time the cloud started so we switched over to pay all electronic and cloud So it was really interesting to be able to see the transition of that And I learned all that and learned how to handle the tenants how to how to how to the maintenance request the the move out the move in and so when I Speak to property management companies now I can guide them

⁓ first of all knowing what our business plan is one and Secondly is making sure to understand that if things aren’t leasing up quick enough Then I know I have to look at the advertising and what are we doing in advertising? What are what’s our traffic like and make tweaks on advertising to increase traffic or if we’re spending a lot of money on maintenance Why what do we have to do to cut back on it? So it really helps me to be able to operate these properties

efficiently because I understand in the back end what they’re doing or maybe what they’re not doing.

Erika (21:18)
That makes a lot of sense. For our listeners who are earlier in their journey or maybe they want to scale more, what’s one piece of advice that you would give them? Let’s say they’re working on smaller deals and they want to move to the larger multifamily deals that you’re doing.

Danny Flores (21:36)
yeah, so I do get the chance, the opportunity to speak to a lot of people that are getting started in the business. And I see, I think

what I see sometimes is people trying to take too big of a bite, meaning they’re new, even maybe their team members are new, and they’re trying to source a deal, they’re trying, they’re gonna try to raise money, they’re going to try to get a loan at the same time. And when you…

don’t have any experience doing that. It’s way too much to do that all by yourself, all at once, because it’s a lot of work. For us, as an example, it’s fairly easy if we get a new deal under contract. Probably in about a couple of hours, we can call everybody from our transactional attorney, our securities attorney, our insurance broker, our loan broker, ⁓ whether it’s the…

escrow company and we can get everybody on board at the starting line really quick. But that’s because we’ve done it so many times and we have everybody basically at the tips of our fingers. We work with them consistently so they know how we work and we have everything set up. Somebody who’s trying to get into the business doesn’t have those relationships built yet. So what I always say is don’t try to take such a big bite. Take a smaller bite

bring some value to the table and partner with somebody such as ourselves who’s an experienced operator. So we can kind of bring you in as a, maybe as a small fractional ⁓ part of ⁓ the general partnership group. And that’s because you were able to add value, whether you’re bringing a deal to the table or maybe you’re creating a fund of funds to be able to participate in the fundraising.

And then that way you can see how we operate or another group, how they operate, and you can learn that way. Because there’s a lot of things, a lot of moving parts during the acquisition side, but there’s also lot of moving parts during the asset management side and during the hold period that you have to learn and you can’t just do it and be successful at it at the same time. So go out and find somebody that you can partner with and that can help you scale up that way.

Erika (23:59)
what kind of a networking advice would you get? Was there a particular group that made all the difference for you, especially when you were starting off?

Danny Flores (24:09)
Well, there’s a lot of groups out there that have annual events. And yes, one of the things that I think you need to do is you need to get out there and you need to meet people. Like when I started, I’d go to these networking events and in the back of my mind was, okay, I gotta get as many cards as I can from many people. And you gotta remember I’m using business cards now because…

That’s kind of dating myself a little bit because nobody really carries around business cards anymore. Everybody, everything’s done electronically. And so, so either way, that’s how we collect ⁓ contacts as we go to events now. But as I’ve gotten more seasoned, it hasn’t been, I guess my mindset has shifted and not as many contacts, but more valuable contacts. And that’s going out.

networking, but literally sitting and talking to people and getting to know them and trying to figure out how you can help them. So that’s kind of the trick is don’t go into it thinking how can they help me. If you go out and you help people, you’ll get that help in return. So go to events as many as you can, meet as many people as you can, talk to as many people as you can. Pick the brain, get ideas.

and kind of figure it out little by little, one step at a time.

Erika (25:40)
I love that. Danny, what’s the next big move for prime capital investments? Are you doubling down on a market or exploring something new?

Danny Flores (25:49)
We are, we’re looking at other markets. We want to get into ⁓ one other market. We’re in other markets, but super active in Arizona. So we’re actually looking to get into another market, ⁓ probably somewhere in the Midwest somewhere. And also as we do that, bringing in partnerships ⁓ that can enhance or fill.

in the weaknesses that we have, maybe on the fundraising side. So bringing in partners that would potentially concentrate on doing the fundraising and we kind of concentrate on our strengths, working on everything else. ⁓ So that’s what we’re exploring this year. So hopefully we’re able to put something together. We’re pretty excited about that. And then at the same time, see if we can find more deals in our Arizona market too.

Erika (26:44)
Danny, before we wrap, if someone wants to connect with you, learn more about Prime Capital Investments, or explore some opportunities with you, what’s the best way for them to reach you?

Danny Flores (26:55)
Yes, they can email me at dflores at primecapi.com. Once again, dflores at primecapi.com. ⁓

Erika (27:11)
Perfect. Danny, thank you so much for sharing your insights and your journey. It’s clear you’re building something amazing with Prime Capital Investments.

Danny Flores (27:19)
Thank you so much for having me, Erika. I’ve really enjoyed this.

Erika (27:23)
for everyone listening. If you found value from this episode, make sure that you’re subscribed to the Real Estate Pro Show. We’ve got more conversations with operators like Danny who are crushing it in the real estate space. We’ll see you on the next