Why Smart Real Estate Investors Choose Cash Flow Over More Rental Doors

Cody Crabb (00:00)
Yeah.

Eric Panecki (00:00)
100%. I mean, we just

got back from a conference and there’s a lot of brokers that are talking about, should I become an originator? And I was like, yeah, if you want to chew glass for a year and a half, like freaking go for it. But it is hard.

Cody Crabb (01:47)
Welcome back to the Real Estate Pros podcast. I’m Cody Crabb with Investor Fuel and today I’m joined by Eric Panecki. He’s a partner at Leverage Companies and founder of Brick City Capital. He and his team are doing around 40 million a month in DSCR loans for real estate investors, primarily focused on one to 10 unit residential properties. So we’re going to talk about…

scaling, how he’s been able to do that. And ⁓ when finding deals isn’t the problem anymore, what do you do? Because that’s what everyone’s so focused on early on. ⁓ Eric, thanks so much for joining me.

Eric Panecki (02:21)
Cody, awesome to be here. appreciate you having us.

Cody Crabb (02:25)
Of course, yeah. So I guess my first question is ⁓ tell us a little bit about the origin story. mean, it’s not, you don’t usually see on the, you know, what do you wanna be when you grow up? You know, the real estate isn’t typically on there. So I’d be curious, how did you get into real estate and this specifically?

Eric Panecki (02:43)
Yeah. I mean, starting from, I guess, the beginning, I’ve always been a hustler, right? I’ve always made money in one way or another, whether that was vending machine businesses or selling stuff online. My first job out of college was I was working for a private lender doing loans for real estate investors flipping houses, right?

And I went there, you know, probably for the same reason most people get in real estate was Googling how to make a lot of money. And it’s like real estate is the answer. So I was like, every time, right? You find bigger pockets or whatever, and you just, and so I’m like, let me get into real estate. And so I got my first job, didn’t know anything. I’m not even really sure why they hired me, to be honest. You know, did an interview and then I didn’t feel like I got the job and I just showed up the next day and said,

Cody Crabb (03:17)
I that literally almost every episode about when people get it. Yeah, that’s true. Yeah.

Eric Panecki (03:38)
I’m here, like, let’s do this thing. And they gave me a job. ⁓ So.

Cody Crabb (03:42)
That is that’s

wild behavior and I love it that’s pure chaos that’s awesome

Eric Panecki (03:47)
Yeah. I was like, look,

I know I don’t know everything or, like, I’m going to work hard and I’m here and nobody’s showing up the next day. So I tell you, I got my first shot in real estate and, um, you know, was doing these fix and flip loans and I’m just watching the numbers, right? And I’m seeing how much money these guys are making and fix and flip. I’m like, you know, making maybe a thousand dollars on a loan. These guys are making a hundred grand on a, on a deal. I’m like, I need to get in that business. Right. Um,

So while was there, started flipping a house in Montclair, New Jersey, which is like a high-end market. It was probably way over my head. ⁓ Partnered with a guy and he put up all the money, but I had to carry the payments. then ultimately got fired from that job as a lender. ⁓ Probably was a little too all over the place. And so in the process, I started doing math. I was like, look, ⁓

You know, my monthly, need to make 12 grand a month to cover the hard money loan and my expenses. Right. And so I’m like, how am I going to do that? Right. And I started getting calls from my old clients and my old job.

And they’re like, you know, we know you’re not there anymore, but we still want to work with you. So I started doing math. was like, I can make a point on a loan. Average loan amounts like 400,000 in New Jersey. So was like, really? I only have to do like four of these.

a month and I can cover my expense. I’m like, that’s one a week. I was like, I could probably do that. So I started brokering loans while was flipping my first house. Fast forward, met my business partner. We started everything that everybody does. We had a call center, text message campaigns, trying to find houses. And I would funnel all of the proceeds from the brokerage business, the loan brokerage business to funnel marketing for the real estate business.

And that’s kind how we started. And one thing led to another and started making hires. And one funny story I remember early on is that we went to open a bank account. One of the questions they ask you when you open a bank account is like, much money is going to come in and out of this bank account? And I’m there dressed in a t-shirt like I am today and my partner is in like a cutoff hoodie or whatever. And we’re like probably like a hundred grand. And the banker literally laughed at us.

And I still remember to this day, yeah, she’s like, yeah, right. And so for a while, every time we would have a big check from a closing, I would go and just slam it on her table and be like, let’s go. So that’s how we did this thing. And then, you know, one thing led to another, you know, we started buying up properties. Right now we own 300 doors in New Jersey and New York. I’m less involved in that side of the business. And then on the debt side, which is Brick City Capital,

Cody Crabb (07:03)
It’s like you’re joking.

You

Eric Panecki (07:28)
we do strictly DSCR loans. do rental loans for real estate investors. So we kind of saw a gap in that market, you know, as we were brokering loans and as we were buying properties, there wasn’t anyone that really understood, you know, rental loans to that extent. I would say that’s not the case now, but at the time, ⁓ it was a big opportunity. So we raised the fund around it. We got about $200 million worth of warehouse lines of credit and started originating and selling loans on the secondary. ⁓

That was about three and a half years ago. last month was our best month. We did 45 million in loan originations. It was about 120 loans. And we do everything from DSCR bank statement, DSCR seconds, short term rentals, really anything that is a rental loan, all business purpose for real estate investors. That’s what we do and we do it well.

Cody Crabb (08:22)
Gotcha, wow. Okay, how big, just give me a picture of how big is the team over there because I’m sensing it’s not a big team.

Eric Panecki (08:30)
⁓ In all, on both sides of the business, have about 50 people.

Cody Crabb (08:35)
Okay, yeah, for that amount of volume, that’s massive. That’s awesome. ⁓

Eric Panecki (08:39)
Yeah, yeah,

on the lending side specifically, we got about 25.

Cody Crabb (08:43)
Cool, okay, so you built this big acquisition machine, you’re buying properties, you got stuff. ⁓ Now you’ve kind of shifted your focus to the lending side. Because you said, ⁓ hey, I can do this myself, right? You’re like, can just kind of do a few, I can do a few loans a month and still kind of break even. ⁓ So at what point did you see the lending side become something you wanted to scale instead of, ⁓

Instead of like did you just have a particular do you have a deal that you remember that was like? Okay, this is at this point now. I should I should really just focus on this

Eric Panecki (09:23)
Yeah, I mean, it was a long time coming. ⁓ So, you know, my business partner comes from private equity. My business partner is David Choi. He’s on Instagram. He’s got like a million followers. I’m really the operational minded guy of the two of us. But he came from private equity and, you know, in real estate private equity, typically you have both debt and equity. And the reason for that is

It’s a hedge, right? Typically when equities are really good, debt is not so good. ⁓ And then typically when debt is great, equity is not so good. So we kind of built it from like that real private equity model as a hedge, right? And then just naturally he’s like a deal junkie. So he’s very much negotiating deals, structuring deals. And then on the lending side, I was always the finance guy. I finance our deals, I would finance.

I would broker the loans to cover payroll and that’s just kind how it evolved over time.

We used

do bridge loans and the problem with bridge loans is that we could get really comfortable with a loan, but we had a small fund to lend out of. And I think to be a really good bridge lender, you have to be able to balance sheet. So there’s many times where it was, I liked the loan, I liked the sponsor, I believe in the collateral, but

I don’t have anybody to buy this paper. And so because of that, I couldn’t originate the loan or I would have to cut LTV. And our whole thesis is, you know, white glove service at scale. So how do we deliver white glove service? And I didn’t feel like that was a market that I could deliver that level of service to our clients in. Whereas the DSCR was more or less,

it’s a box and doesn’t

fit the box and you can finagle

to

make it fit the box, but it’s like, yes or no.

Like it does hit or it doesn’t.

And so right now we originally all of our loans on our balance sheet, we sell them within 30 days. And what makes us a little bit different is on the backend, we’d sell to really 10 different parties. So most of the time you’ll see shops that are originating loans and they’re selling to one person called Blackstone. Well, we have eight different outlets with different guidelines. So these fringe deals, we have different ways to make happen. We can do bank statement, we could do short term rental, we could do DSCR second.

I mean, and we’ve had every issue you can imagine in the process from raising a fund to SEC limitations and learning all of that and getting warehouse lines of credit and every bump and bruise that you can imagine through the process. It was not like overnight, hey, let’s start a fund and start originating. It definitely took time.

Cody Crabb (12:45)
Yeah, mean, sometimes it takes the rough lessons to actually get you to the part where you’re really making it happen.

Yeah.

Eric Panecki (12:55)
100%. I mean, we just

got back from a conference and there’s a lot of brokers that are talking about, should I become an originator? And I was like, yeah, if you want to chew glass for a year and a half, like freaking go for it. But it is hard.

And the same is true on the real estate side, right? We’ve probably a thousand transactions at this point and anything you can imagine has gone wrong, right? And so I think the key for us is just

getting smarter, getting better, surrounding yourself with really smart people that you can ask questions. Because ultimately, if you can ask the right questions, you can avoid some of those pitfalls. But ultimately, along the way, you’re going to make mistakes. And it’s just whether or not you can weather the storm and learn from your mistakes and keep pushing forward.

Cody Crabb (13:43)
Yeah, all right, so kind of shifting gears now. So from your seat as a lender, you deal with a lot of real estate investors, right? Like a lot lot. ⁓ So and you said almost exclusively, right? ⁓ So yeah,

Eric Panecki (13:52)
100%. Yes.

Only up, yeah.

Cody Crabb (13:59)
so I feel like you have ⁓ maybe a unique perspective on this. I would love to hear what do real estate investors consistently get wrong or mess up or they think they know and they don’t when they’re trying to

scale up or come to you or things like that. Like what are they missing that you kind of see that they maybe don’t?

Eric Panecki (14:19)
⁓ I guess one thing we see, right, so from a DSCR perspective, service coverage ratio, To get these loans approved, really only you need is a one-oh DSCR. Basically, that means the income from the property is enough to cover the principal and interest, taxes, and insurance. And it’s a one-oh, right? But if you’ve done real estate, you know that’s just not true. You have things like vacancy, maintenance.

things that pop up. And so I think what’s important is like, what’s the goal, right? A lot of times the goal is just, you I want to have, you know, 10 doors or 20 doors or 30 doors, right? But I’d rather have two doors that cashflow than 20 doors that don’t. And so consistently we see guys building large portfolios that almost see no cashflow, which I guess could make sense in an appreciating market.

But right now where we’re at in the market, most of the

the MSAs that we’re doing business in are either stable or declining. ⁓ We’re in New Jersey. New Jersey might be one of the exceptions to the rule where there’s ⁓ massive undersupply and it’s really just a constraint on actual land. But if you look at places like Florida, Texas, lot of the places that were super hot a year or two ago, they’re all declining markets. So banking on appreciation is a mistake I think a lot of people make.

and then not factor in maintenance, vacancy, potential issues that could pop up, water, sewer. So, ⁓ you’re making sure, not rushing to get the first deal, not going after the vanity metrics, right? As much as making sure you have a solid foundation that you can build on.

Cody Crabb (16:46)
Hmm.

Gotcha. Wow. Yeah. Bunch of good little tips in there. ⁓ I also, ⁓ I also want to call out to, ⁓ you know, the, I’ve, we’ve, we’ve had lots of different people on this podcast that have said, you know, you can predict the market, you can’t predict the market. ⁓ what that just tells me is no one really knows anything. Like I, you know,

so I feel like if you’re banking on something that may or may not happen, then that’s, that’s inherently way more risky than, you know, if you, like you said, the cashflow part.

If you’ve got that down, you know that’s happening. ⁓ So shifting gears here again, ⁓ if someone walks in your office and you’re like, okay, this is slick, they know what they’re doing, what’s a couple of green flags that you see that are like right away, they’re good sign.

Eric Panecki (17:38)
I mean, an obvious one would just be like financial stability,

right? If you have some cash in the bank, right? Are you maxed out on your credit cards? know, like solid foundation, right? We just want to see they’re not overstretched, right? ⁓ Knowing your market. When we bring in a loan, typically, borrowers give us an estimation on value, an estimation on rent, and estimation on what their insurance is going to be. If they’re way off on those,

Probably a bad sign.

⁓ Every borrower is going to think that their property is worth a little bit more than it actually is, as typical. But having a solid foundation in your market and knowing your market well, knowing values and knowing rental income, I think is very important. And that’s not to say you have to be a pro with a thousand dollars. You’ve done the research, you’ve done the work, you’ve looked at deals, and you’re not going to overstretch yourself just because you want to get your first deal under your belt.

So I would say that, right? I would say making sure that you’ve done your research, really understanding ⁓ what makes a rental property worth keeping, right? What not banking on appreciation, then having a solid foundation, having partners if you need to on the first few deals that have some financial wherewithal. You know, I always say in the beginning, you’ve to make somebody else rich, right? And that’s for your own benefit too. God forbid something, a boiler goes out.

It’s 10 grand and you don’t have it. What are you gonna do?

Cody Crabb (19:10)
Yeah,

exactly. Yeah. wow. That was an insane answer for like just being off the top of your head. That was like such a, you wrote like wrote a little book right there. So yeah, that’s really good.

Eric Panecki (19:19)
Hahaha

Cody Crabb (19:21)
so, okay. So, ⁓ you mentioned earlier, we, we, mentioned this in the beginning. ⁓ we were talking in the pre podcast and you were saying one of the biggest challenges you’ve, you’ve been facing is actually too many deals. ⁓ I think a lot of people are hearing that and kind of rolling their eyes like, okay, yeah, you know,

no, my steak is too juicy. So first of all, what are the problems there? And then what are some solutions that you’ve been able to implement?

Eric Panecki (19:42)
Yeah.

So I’ll

talk from two perspectives.

Everyone from the lending side,

right? We built a good brand and a good reputation. So we see a lot of deals ⁓ come through the pipeline. And we’ve also built a reputation for getting deals closed, right? Our motto is closers closed. That’s a double-edged sword, I would say, right? Because maybe we’re not getting the best deals through the pipeline. And then on the flip side, we see a lot of deal flow on the acquisition side, right?

10 acquisition guys consistently bringing us deals. And a lot of times we’ll see something that is profitable, but it doesn’t meet our guidelines. So having the financial discipline say, ⁓ we’re only 20K off of where we need to be on purchase price, but it’s a good deal. And saying, sorry, go get it cheaper. ⁓ That becomes very, very difficult. discipline for us is extremely important. ⁓

We’ve had to implement investment committee once a day. So I spend an hour to two a day reviewing deals that were either buying or loans that were about to fund, ⁓ reviewing appraisals and reviewing values. And we have an entire valuation team that I fight with for an hour and a half every single day. ⁓ And these are controls we’ve had to put in place literally because of mistakes we’ve made, right?

We didn’t do the right diligence upfront, we funded a loan. Loan goes bad, the values aren’t there. Now we have a negative asset on our balance sheet. Or we bought a property, it seemed good from all underwriting metrics, we closed on it, we forgot that East Orange, New Jersey is impossible to get permits on and the deal took 12 months longer than we thought it was going to take. as you grow and as you scale, you just got to make sure that you don’t

lose the discipline because you’re going to have other people in the company making decisions for you and they might not think the same way that you do.

Cody Crabb (21:54)
⁓ All fantastic advice.

You’re pretty good at that, just being like, hey, here’s the

Eric Panecki (21:59)
Hahaha.

Cody Crabb (21:59)
best advice you’re ever gonna hear, just off the cuff. ⁓ So let’s say someone’s listening and they want to actually build a real portfolio, not just kind of collect doors or do vanity projects. They want to actually start doing this for real. What’s one thing that you would say to them as we kind of wrap up? is probably our last question here.

Eric Panecki (22:17)
That’s

a tough one. What would I say? I would say patience is key, but also getting started, right? Like go make some offers. ⁓ I think as a lot of people say

they want to do this, but they never

make a phone call or they never make an offer, right? Be conservative, right? Maybe one out of a hundred offers gets accepted, but that’s your first deal. I think also,

Cody Crabb (22:37)
Yeah.

Eric Panecki (22:46)
I touched on this earlier, partnering with other people ⁓ that maybe have some experience is key. mean, the hardest part is finding that first deal. It really is. If the deal is good, everybody says this, if the deal is good, the money will come. ⁓ Everything else will become easy. You’ll find a lender, you’ll find a partner. So going out, finding that first deal, the resources are out there. You got things like your podcast, ⁓

which I’m sure is great. And there’s YouTube and videos and courses.

Ultimately, nothing’s going to be a substitute for hard work. And I would also say stay in markets that you’re familiar with, at least at first. Stay in close proximity to where you live so you can actually look at these properties until you get your bearings and make some freaking offers, man.

Cody Crabb (23:33)
Yeah, I love that. Go get some offers made. Yeah, they’re not all gonna be good ones, but you gotta do some bad ones sometime. ⁓ This has been really, really helpful. So if people are hearing you and your wise little ⁓ fortune cookie real estate quips and they wanna work with you or they wanna learn more about you, ⁓ so where do they need to live if they actually wanna work with you? And then also, ⁓ where can they find you online?

Eric Panecki (24:00)
Well,

we lend in 45 states, so pretty much anywhere besides the Dakotas and some random weird states. We’re based out of Jersey. All the property that we own is in New Jersey and New York. Upstate New York or Westchester County, not really upstate, so we’re a little bit away from New York City.

If you have deals in New Jersey and New York, we’d love to see

And if you’re buying properties really anywhere in the country besides North and South Dakota, we’d to work with you. ⁓ I’m on Instagram, Eric Panecki. I’m on LinkedIn. You can find me really anywhere. My business partner is David Joy. You’ve probably seen him. He’s the crazy Asian guy beating up interns in our office. ⁓ We shouldn’t be too hard to find.

Cody Crabb (24:51)
gonna say that sounds

like a worthy follow

there. ⁓ Eric,

Eric Panecki (24:53)
Hahaha!

Cody Crabb (24:55)
thanks

so much for joining us today and listeners thank you for also joining us. If you got something out of today and I know you did, go ahead and hit subscribe, like, comment, all the things and until next time ⁓ we’ll see you later. Eric, once again thank you so much for giving

us your time.