Unlocking Real Estate Success: 7 Insights from Expert Rick Melero

Erika (00:00.856)
Hey everyone, welcome to the Real Estate Pro Show. I’m your host, Erika, and today I’m thrilled to be joined by Rick Melero, a powerhouse in the real estate and private lending space. Rick, it’s awesome to have you on the show. Did I say your last name right? As I said it, I wasn’t sure. Was I close enough? Okay. So Rick, for those of us who don’t know you yet.

Rick Melero (00:14.574)
Thank you, Erica.

Rick Melero (00:20.996)
Close enough, Malero’s fine.

Erika (00:28.984)
Give us a quick rundown. What’s the core of your business and which markets are you dominating these days?

Rick Melero (00:36.046)
Okay, awesome. Yeah, so right now we’re private real estate investment company. And what that means in today’s world is that we have two main vehicles of real estate. One of them is what we call our equity arm, which is where we buy properties, we develop projects, and we do a combination of things on the equity side. The other arm is our private lending company, which is actually a private lender we finance, in essence, our competitors. We finance fix and flip guys, ground up construction, some small commercial, and that model has been growing exponentially. And what I love about the tie-in is that

because we do have equity projects, we think like investors and in many cases we’ve helped a lot of our borrowers who were about to walk into a landmine, they just didn’t see it coming. And so we love the fact that we can draw from those experiences to help investors make the right decisions. Now currently we’re doing quite a few states. Our equity side is typically going to be more tied to Florida, North Carolina, Georgia, South Carolina and Tennessee. That’s more of our equity. We do have some projects in Tulu, Mexico and a few other places that we’re working on that are kind of

exotic, but the core base, would say, primarily is in the markets that I said. As far as funding, we’re in Idaho, we’re in all over the place. So there’s most markets that we’re able to finance investors. The East Coast has been great to us, so we love it. We’ve done deals in Texas and so forth. So I would say those are markets that we’re constantly expanding on. We’re just very strategic. We’re very much looking at what those markets look like and does the activity in that market support the strategy for our clients. So we’re very strategic about that.

Erika (02:05.006)
Can you dive into that a little bit more? Like, do you have an example?

Rick Melero (02:08.834)
Yeah, so I’ll give an example. like, like this is one of the biggest, one of the biggest things that a lot of people think. So like when the market seems to be shifting, a lot of investors will say, well, let’s find a market where I can find a lower price. And to a degree that’s possible. Now that being said, we’ve done a couple hundred million dollars in loans. And one of the things we learned between what we did and a couple of hedge funds that we did over $2 billion in business, like they have a portfolio of $2 billion is we started pulling data. And what we realized was a very interesting factor that I think most investors don’t know.

And that is that when investors are moving to lower markets to find that lower price point because they feel like they’re safer there actually is a threshold based on what we call a rural market and It’s it’s a very fine dance, but I have a criteria that I’ll share with you in a minute But the reason why I say that is we found that close to 60 % of these hedge funds and even the capital that we had That had exposure to an actual loss in the event of a default. They were all in these rural markets

So what I mean by rural for those that don’t know, the rural markets that have the highest risk are places with very low population, not a lot of growth. And what we found as a common denominator is that the actual properties, couldn’t find a comparable sale for under three and a half miles. And that became a red flag for us because we saw that in those markets, since the population is so low and there’s not a lot of growth activity or jobs taking place when the market shrinks or when there’s

a correction in the marketplace, those are the markets that are hit the most. And so what we’re doing now is we’re exposing that potential risk to our investors who think they’re just getting a better deal. So they’re going to a market, they’re getting a much lower price, but they don’t realize that they’re potentially walking into a landmine.

Erika (03:55.896)
Got it. Yeah, it’s so great that you have all that knowledge to basically avoid that. With what you were sharing earlier, there’s a lot of different markets that you’re operating in. How do you balance all of that?

Rick Melero (04:10.008)
really good team. It’s a really good team. know, honestly, I wish I could tell you that we’re just super smart, that we’re the best in the world. But the truth is, we’ve learned a lot through failure, we’ve made a lot of mistakes, we’ve trusted a lot of different processes that just weren’t properly connected. One of the biggest things that I would say, especially for investors that are going in multiple states or multiple markets, right, is that real estate is hyper local. And so you really need to have the proper boots on the ground to be able to rely on to verify

certain things, right? And so one of the ways that we try to do it is we kind of layer a team. We have our asset team, right, which understands our criteria, our risk mitigation, they order the valuations and all the key things for us to make sure that the actual numbers are gonna make sense. But once we get to that, we have another third party company that’s more hyper local for those markets that we trust. And what we have them do is to look at all the data we pulled, all the valuations, and to run an analysis to see if there’s a deviation between reality

what’s on paper and you’ll be amazed how many times there is actually a difference. Our rule of thumb is if the difference is under 10 % we’re good because at the end of the day values are based on subject to somebody’s opinion but anything over 10 % there should be a red flag for us to pause and take a look at it right and so in the event that that happens we send a local asset to verify that for us just to make sure that the discrepancy isn’t there so you can see we’re creating the layers but the key for all these layers to work so that we can still move quickly

is in the proper communication and the technology. So what we do is when our team gets to a certain stage of diligence, they can hit one button in our platform and it automatically sends the data so that the communication is happening simultaneously, not like waiting till you get to the next step. And so this allows us to get ahead of issues prior to the closing date, right? That’s really our main goal is to make sure that we do all of the vetting to the best of our abilities at that stage. Now, once we feel comfortable, we move forward and we secure our investments and we

forward and do that. One of the things we’ve learned over the years is that you need to have the right project manager and a lot of real estate investors do not have that.

Rick Melero (06:18.402)
So when we’re vetting a potential client to fund, we want to make sure that first and foremost, they either have the experience and they do it themselves or that they have a team member that properly knows how to project manage. We have seen amazing deals go sideways again and again, primarily because the operator partner didn’t have the right project manager. They go out of budget, they go out of time, they get money stolen from them. And then now here they are calling back asking for me to rescue them. So I told them, listen, I’m the longer firefighter. So my goal is to work

Erika (06:46.766)
Yeah.

Rick Melero (06:48.336)
with you and help you ahead of time. And so in many cases, I will actually offer project managers that we’re comfortable with if they don’t have it. And that’s their choice if they want to use them or not. But again, our idea is to make sure that from the funding to the project management, that it’s going as seamless as possible. And then of course, we have a local project manager that helps us not only with the completion of the work, but then also either executing the exit strategy, which could be either renting the property or selling the property. So again, there’s a lot of collaboration that’s involved in doing business.

And our goal is to make sure that we work with it seamlessly. And if a client of ours doesn’t have one of those pieces, we ask those questions to probe and see if we can help them to properly set up a system that will help them succeed. That’s the only way you can do business in multiple states.

Erika (07:34.21)
Got it, got it. Yeah, you’ve got like a multi-pronged approach to remove as much risk as possible. I love it. So with all those moving parts that you got to work together, you mentioned the importance of a good project manager. What other advice would you give to people? What other pieces can make or break a deal?

Rick Melero (07:56.068)
Yeah, so I mean there’s a lot of components that could potentially make somebody, you know, turn and cry. In Alabama, I’d say we just had a country song, right? We could write a country song with that deal. The truth is, you know, we all have to remain humble. I don’t care how many deals I’ve done. I always come to every project humble, thankful for the opportunity, but willing to learn. What I have found is when somebody gets arrogant and they feel like they know it all, that’s typically when you open the door for punishment.

And I don’t want any more punishment. I’ve learned enough my own So typically just being humble enough asking the right questions and making sure that there is a system in place for follow-up If you’re not actively working on the timelines and the budgets and the follow-up What is your system to be able to make sure that those people you’ve assigned are actually doing their job correctly? Consistently and effectively right that’s an essential piece that I would tell investors the other thing that I would really say especially in volatile markets, right like

right now for example, we’re living in a world where people are still trying to figure out, okay, well what are these new political changes gonna do to the atmosphere? Maybe I’ll just hit the brakes. Right, so if your goal was to flip a property in 90 days and now you’re sitting here for 200 days, that’s a problem. Right, so one of the things that we like to tell investors, especially in these volatile markets, is first of all, don’t over leverage. In these kind of markets, you are literally better off borrowing some, and I’ll say less, and bringing the difference with an equity partner.

that gets a piece of the action. Why? Because the lower the debt, the lower the carrying cost, right? And because you have an equity partner and you borrowed a little bit, you could probably buy two or three properties. So why is this important? The reason why this is important, Erica, is because most investors are very linear. They’re thinking one deal, one deal at a time. But if you want to be safe in a market like this, you need to be diversified, right? And the key here is diversification with the proper leverage.

By keeping your debt as low as possible, your payments are lower, so if you go two to three more months, you’re less likely to eat up all of your equity. That’s part one.

Rick Melero (10:01.154)
by having an equity partner, even though you might think that you’re giving up more equity, right? More of your profits at the end of the day, what you’re getting is more peace of mind. And you have another partner that’s going to shoulder the risk with you. And that way, if something goes south, you can pivot, which leads to my next point. So when you’re looking at a real estate investment, right? And you want to really be successful doing that, you need to understand that you have to look at this deal from a perspective of this is our plan a, but would it still work?

on Plan B. So what is Plan B? Well, I’ll give you some examples. I’ve got clients that we’ve worked with, that we’ve converted a property that was meant to be sold into literally a short-term rental property. We’ve literally rented individual rooms because some of these happen to be by colleges. So that’s another example of a strategy that became a Plan B that was profitable. And another case is just a long-term tenant, right? So you need to start asking yourself if the project is not moving in the path that we needed to because of the market, can this

still perform in some form or fashion, right? That’s just wisdom, right? And so if you really want to be successful in these kind of volatile markets that really a lot of people don’t know, make sure you have the right equity and not too much debt. And then number two, make sure that you under rolled the deal for a couple of different strategies. The investors that think like this, you’re always a step ahead.

I’ll give an example. I’ve got plenty of projects that we did that was initially meant to be sold But we underwrote it with seller financing So even though we were not able to move quickly I’ve now turned those deals around and I became the bank seller financing the end consumer so I’m doing fine in fact I’ve increased my profitability because I underwrote the deal correctly, but there’s been times I didn’t right and so then what happens is you have to then lower your price take a loss and Then you have to move on to hopefully fight another day so investors that don’t want to make that mistake

should definitely understand those two components. That will kill you. Too much debt will kill you, but not looking at the deal from different angles could also kill you as well.

Erika (12:01.954)
Yes, certainly. Rick, you’ve been in the game for a while. I read that you closed over a hundred past deals in the past year alone, which is very impressive. Every real estate pro has a story about a deal that went sideways. Can you share a character building moment in your journey with all these deals?

Rick Melero (12:27.982)
Which one do you want to hear? So I think one of the biggest things that I’ve had, to be honest with you, Erica, I started when I was in my early 20s.

I got this grade from real estate. I’ll definitely give that the credit. But one of my goals has been to, because I’ve always been very actively involved in my business, and I wanted to slowly pull back and become more of passive investor and then give opportunities to other investors to earn my trust so that I can become their partner. And then now they’ve run and I can slowly but surely go back to my passion, which is missions. And so I did a couple of deals and I got a little bit to, let’s just say that

to drop some of my standards with somebody that I really thought had potential. And this happened to be in Montgomery, Alabama. There was a gentleman who had a lot of potential, had a business partner, and they did some pretty interesting projects. Well, in the rush of things, they had this opportunity for a property in Montgomery that was very historic, beautiful property. That should have been the red flag, right?

The mistake that we made is we became the passive investors funding him to do the deal and we provided funding for him and his business partner. So the secret sauce wasn’t just one guy, it was the two of them. Well, you fast forward, they started the project, they request another six month extension because they had some delays for permitting, which was the red, the first red flag. Well, as we looked into the project, everything seemed fine and some of the renovation photos, our third party inspectors went in, everything seemed to be good until his business partner died.

And unfortunately, which again, that’s something we couldn’t plan for, that was the brains behind some of the key items. And so what the partner did to not give us fear, he moved on with the plans on his own. But unbeknownst to him, since he had never worked in a project in a community that was restricted, a historic area, he did everything outside of code.

Rick Melero (14:26.326)
And so here we are getting ready to put that property on the market and we find out that he put the wrong roof in. The exterior needed a fence to a certain height. He went three feet over that. And you can imagine the list goes on and on. He replaced all the windows and those were supposed to be original window types. And so that was a very painful experience. And again,

First way that I would have caught that is, hey, this is in a location that requires this extra level of experience. Show me how many deals you’ve done in this area. That would have killed the deal right there. So as an example of just one simple question that we could have reviewed, but in the speed of things to get the deal closed and with very hopeful hearts, we pulled forward and we had to deal with that headache. And it was a very painful one. Luckily, we kind of navigated through it. But that’s an example of what could really go wrong if you’re not really asking the key questions.

Erika (15:20.876)
Right, right. And you’re here now, you went through that, what did you learn from that that you still carry with you?

Rick Melero (15:30.424)
Yeah, so you know, first of all, you know, we actually tightened up our business model because of mistakes like that. So the first thing that we noticed when we analyzed this project was first and foremost, we had never partnered with this person. We had seen their track record. We had seen pictures of their properties, but we didn’t know their character and their experience firsthand. So one of the first things we do now, if we’re going to consider a partner, is we provide at least one to two projects that we’re just the bank and we let them go at it.

we let them do their part and then we can see the quality of work.

We can see if they told us this is a 90 day project, they completed in 90 days. When they say these are the level finishes, my question when I loan the money is, is the level finished there? And if they give us a price range and that price range is close to what they sold it for, well then now I’m seeing a pattern of consistency, right? So that’s one of the key things that I begin to do now. So I call it dating before marriage. And so that’s a part of what we do, right? We’ll provide the funding as a lender. And then when we see the character, we see their performance, then we can decide to marry them and say, look, I’m gonna keep

owning your money here, but if you find that one deal you need a partner in, I’m your guy. So that’s one of the key things. The other thing is this, to keep the main thing the main thing, if you will, for us what we say is, do you have like kind experience? And that’s an essential piece. A lot of guys say, yeah, I’ve done 50 deals, right? But what they’re telling you is, hey, I’ve gotten 50 small rental properties and the project I’m putting before you today is a $2 million house.

Well let me tell you, I’ve worked with guys that do two plus million dollar houses in fact I’ve got a client I was just meeting with today for coffee at his house and we just sold the house for 5.1 million dollars.

Rick Melero (17:09.691)
His level of experience, his selection for the quality of workmanship, the material list that he imports from other countries is completely at another level. So a landlord that’s renting properties for 800 bucks a month, unless if he’s done a few of these, chances are he’s not likely to hit a home run the first deal, right? So we have to be very careful now when we’re analyzing these kind of deals. Is it a like kind investment? And then the last part, and I think this is an essential piece that connects the dots, is

So if I feel like they have the character and the experience and it’s like kind then my next question is this a profitable venture for everybody?

I’ve noticed that there’s a lot of hard money lenders out there that are loaning to own. So they’re strategically giving money with the intent to take the property back. I don’t believe in that. I believe that we should all win. And so what then I do is now when I know that my money’s safe, that you have the experience for the like kind deal, well then I say, are the economics? Let’s make sure that you win, that we’re winning. And as long as everybody wins, it’s a yes. But if it’s not a definitive yes, for me, it’s a definitive no. And so those are just some of the core to simplify what we’ve updated in our systems. Those are some of

core fundamentals that I believe have really changed even the way that we approach our equity investments.

Erika (18:24.322)
Yeah, you’re clearly well connected in the industry and your experience has taught you to not compromise those values and those goals and those ideals. With you being active in multiple networks, can you share for our listeners who are early in their journey or looking the level up?

What relationships have driven your business forward and how did you find those?

Rick Melero (18:56.686)
You know, that’s a great question. You know, a lot of this comes back down to kind of what your approach is. Like there’s going to be some people here that just want to be a landlord. Some people that might want to become a private lender, someone to flip, someone to build.

They’re all different angles, different directions in our space. That’s the beauty of real estate, by the way, that really you can have so many different strategies that you implement into your business. So I would say the first thing that I would caution investors to consider is don’t fall in the trap of one strategy. It’s okay to begin with one.

But what I tell people, I call it my 40-40-20 plan. When I look at my money and I look at my time, I ask myself, I diversifying enough so that I’m developing a portfolio? Because if I don’t have a portfolio and something goes wrong, then that one strategy is at risk. So what I wanna do is, as quickly as possible, start developing a strategy that is more comprehensive. Now 40 % of my efforts typically is what I call a short-term gains, bigger profits. That means that I’m buying something at a discount that’s distressed today, whether it’s a small mortgage,

Distress property right whatever it is and I’m looking to ultimately get a game within the next 12 months That’s my short-term gain. So about 40 % of my efforts I want something that’s gonna come back within 12 months because those are the pops that are gonna keep us going right? That said though The reason why I want that money coming in at the larger lump sums in a shorter period of time is because of number two Which is 40 % cash flow Okay. Now this is a statement that is worth remembering

Right? And this is really important. A lot of people get excited about my big returns, but what they forget is that cash flow covers a multitude of cents. And the second bucket needs to be passive income. At the end of the day, I don’t care what strategy you’re doing. All of us, if we’re going to a real estate investment venture, our goal is to get to the place that we don’t have to work more. We didn’t want to create another job that’s going to take a hundred hours a week. We wanted to buy freedom of time. And the only way you accomplish that is if you take from those wins,

Rick Melero (20:57.33)
and you put them in cash flow so that little by little your money becomes an employee and you’re sending that money out to work each and every day and that cash flow creates that base and then lastly that 20 % is once you’re stable right you’ve got a good little pipeline of good deals coming here you’ve got some cash flow rolling consistently then one those crazy opportunities that may potentially triple quadruple your value you got that slice for that 20 % to do that higher risk higher reward

And so that’s a fundamental piece that I really think is essential for people to see it. Now, that leads to this piece. How do you get to all these things? We’re living in a world that is so disconnected because of technology, right? Most of us don’t even know our neighbors. That’s a fact. But if you really want to go deep in this business and you want to leverage people’s years of experience, it is all about relationships.

I don’t have guys that spend $30,000, $40,000 a month finding motivated sellers so they can wholesale or flip properties. Do know how much money I spend in marketing? Zero.

But yet I get access to more opportunities than most of those guys because I built relationships with other professionals in the industry and they send me their clients or they send me their opportunities to do deals. That is going deeper in relationships, right? So you can look at all these people in the industry from brokers, wholesalers, title companies, insurance companies. You have property managers, you name it. These are all individuals that are working for the same type of business that you want to be a part of. The more you build those relationships and you add value

value, the more they add value to you in return. So for me, I’m not just going there to say, Erica, how are you? I notice you’re doing ABC. Here’s what I’m looking for. Feed me. What I’m saying is Erica, tell me what you do in the industry. I find out and then I connect you to Steve and John and all these other people hoping you guys will do business. Well, now Erica is looking at Rick differently. You’re saying, wait a minute Rick, whoa, you’re the first person that wanted to know more about me than to tell me about yourself. And by the end of our first meeting, you’re introducing me to people. You’re a connector

Rick Melero (22:58.182)
And the moment you’re seen like a connector in the industry, people reciprocate. So that would be one of the biggest things that I would say to anybody starting is become a person of value that is building relationships and that you’re connecting people first before you ask for anything in return.

Erika (23:16.31)
I love that Rick, that makes so much sense. Thank you for dropping all this knowledge today. Before we let you go, if someone’s listening and wants to connect with you, maybe collaborate or tap into your lending expertise, what’s the best way for them to reach out to you?

Rick Melero (23:34.02)
Sure, so right now we’ve kind of built, like I said, kind of an inner circle of a group called, we call it our Micro Banking Method. So they can go to themicrobankingmethod.com and they can learn more about how we’re integrating our lending to empower investors to go out there and get access to not only deals but lending options and capital. So that would be a way, if somebody has questions, things they want to learn about, they can go to themicrobankingmethod.com.

Erika (23:57.976)
Awesome. So great having you on. Your story and approach are exactly what this industry needs. We need people that are more purpose-driven and results-focused.

Rick Melero (24:04.878)
Thank you.

Rick Melero (24:09.794)
Thank you so much. It’s an honor to be here. And again, these are the things that I love doing is imparting into people. just came back from Ukraine, hanging out with people and loving on them. And so that is one of the biggest things for me is to give back plant seeds because that’s the only way you’ll ever expect to harvest.

Erika (24:23.342)
That’s awesome. And like you said earlier, purpose behind everything you do. For everyone listening, if you found value in this episode, make sure to subscribe to the Real Estate Pros show. We’ve got more conversations lined up with experts like Rick who are out there making it happen. Until next time, keep growing and we’ll catch you on the next episode.

Rick Melero (24:28.824)
Yes, ma’am.