How Does a Small Developer Actually Make Money?

Monte Anderson of Neighborhood Evolution and Options Real Estate in Duncanville, Texas joins me to talk about extremely practical matters: making money in real estate. That is, as a small developer, how is it actually done? What are the pros and cons of different approaches, such as buying and holding vs selling?

We start this by discussing a YouTube video from The Real Estate God. Yes, that’s the real channel. Titled, “The best way to 3x your money in 2024,” the video is a good jumping off point for how to structure deals in an ideal world. And, it goes over the differences between general partners and limited partners.

Monte talks about why nothing ever works as quick as he thinks it should, and the realities of development fees. We discuss the challenges, but also the joys, of working in development.

Find more content on The Messy City on Kevin’s Substack page.

Music notes: all songs by low standards, ca. 2010. Videos here. If you’d like a CD for low standards, message me and you can have one for only $5.

Intro: “Why Be Friends”

Outro: “Fairweather Friend”

Episode Transcript:

Kevin K (00:01.733)

Welcome back to the Messy City podcast. I'm Kevin Klinkenberg. Got our returning champion, Monte Anderson in the house here today. Monte, it's always great to see you and talk to you. Where are you in Dallas? Are you roaming around the country somewhere?

Monte Anderson (00:16.022)

Yeah, I am in Dallas today. Glad to be here with you, but I am in Dallas. I'll be in Lafayette, Louisiana tomorrow morning and Elkhart, Indiana next week. So lot of traveling coming up, but I'm home for this afternoon. It is. It is. We've been going down there for, this is our second year. And so yeah, there's a lot of good food down there. Yeah.

Kevin K (00:26.257)

Cool, Lafayette's a really cool town.

Kevin K (00:39.449)

Yeah, was going to say amazing food, fun people, it be a great time.

Monte Anderson (00:43.647)

Yeah, they are fun people. lot of entrepreneurial spirit down there, know, they've had to do a lot with a lot of things against them, know, hurricanes and, you all the things that you've got in that part of the country.

Kevin K (00:53.627)

Yeah. Yeah.

That's right. That's right. Well, guess depending on where you are, you've got something. like we don't have hurricanes, but we've got tornadoes and floods.

Monte Anderson (01:06.668)

Yeah, yep, that's right. There's something always out there, the unknowns.

Kevin K (01:10.245)

Yeah, I know. I think I texted you a couple of weeks ago, we were up in Dubuque, Iowa, where I know you're also doing some work and they were dealing with the Mississippi is flooding this year. It's been very, very high. And so they've had some flooding in different portions. So in fact, we were going to take like one of their riverboat cruises and we couldn't do it because the river is too high.

Monte Anderson (01:28.705)

my.

Yeah. my, that's because that town is right in between the river and the bluffs. The downtown is right there in the valley, if you will, between the two hills. Yeah.

Kevin K (01:37.67)

Yeah.

Kevin K (01:42.063)

Yeah. It's really cool. had not spent a lot of, I've driven through, I'd driven through before, but I hadn't really spent any time there. And it's really a neat, neat little town with like incredible bones and, just a really pretty setting there on the river.

Monte Anderson (01:52.802)

Yeah.

Yeah, the great thing is it doesn't have any major interstates that go through it.

Kevin K (01:59.569)

But they had a lot of urban renewal. I'll say that. For a small town, boy, did they have a lot of urban renewal that was done to them. anyway, Monty, I wanted to talk to you today. We were exchanging some emails. I sometimes subscribe to these just kind of random YouTube channels or blogs or whatever that touch on real estate or design or planning or whatever.

Monte Anderson (02:03.544)

Yes.

Monte Anderson (02:07.554)

Yeah. Yeah.

Kevin K (02:27.953)

this is one, that I shared with you that is a YouTube channel, from somebody who calls themselves the real estate God, which, of course kind of made us laugh, but it was a really interesting short video. has some pretty interesting content, especially for, newbies, in this video that, I wanted to talk about today, the email, called it the best way to three X your money in 2024.

but really it was like a seven minute video that was about a basic investment strategy for real estate that I think is real, that is similar to what you teach. And I wanted to kind of walk through this and talk about it because I think it is, it's interesting. we've talked about financing before we've talked about different aspects of development. It's interesting to take it kind of step by step.

and help people understand how, you know, where you put money in, how you get money out, how you make money doing some of these smaller projects.

Monte Anderson (03:30.506)

Yeah, that's a really big deal for people getting started, you know, in this business. I mean, how do you get money out? Right? You put it in, but where does it go? And how does it come out fast? And it doesn't come out fast unless you buy and sell. That's basically the bottom line. If you don't buy and sell, it doesn't come out fast. You know, because if you buy a, you know, if you buy a property and you get a loan and you restore that property,

Kevin K (03:37.969)

Yeah.

Monte Anderson (03:59.286)

and you run it and you get it leased up over time. It's not going to cashflow really great in the beginning. It's going to take, it's going to take a while where I find myself these days and making money as far as making, pulling money out is, and this is what the big, developers do, buying something, fixing it up, getting it all rented up or, or, or buying something and getting it ready to sell, you know, and then selling it. And that's where.

A small developers have to do more like buying and selling. And in my case, you know, I charged myself, you know, brokerage fees and management fees and things like that. So my operating company, you know, gets commissions and gets development fees. And that's how we live. And big, big companies do the same thing. You know, the big developer will buy, you know, build a 200 unit apartment complex, lease it up and sell it to the Ohio state teacher pension fund.

You know, and that's where the money's made. That's where the big quicker money is made. But it's, it is really difficult as a small scale developer to buy a property, fix it up, build it and get, and I mean, you're building wealth. Okay. Because usually the property is going up in value, but you don't get a lot of cash flow out of it really quick. It's just, that's just, I think in my opinion, and you know, of course, I don't know everything. It's kind of unrealistic thinking. It looks good on paper.

but it's unrealistic thinking.

Kevin K (05:29.967)

Yeah, it seems like so generally when we talk about making any money in real estate is either you're making money off of the cash flow of the project itself, whether it's a residential project or a commercial project, you know, it's producing more income than your expenses. So you're making a little money year after year on that, or you make money when you sell it to somebody else, assuming you've added value along the way and you're selling it for substantially more than what.

you put into it.

Monte Anderson (06:01.614)

That's correct. And then depending on how much equity you put in in the front and how much leverage or how much debt, how much loan you put on the property, you know, will depend on what your cashflow is going to be. So if you've like in the, I've always been one for putting as, you know, having as little debt as possible because you can go through the times like we just went through in the last year or two when interest rate, like on one of my properties went from four and a half to seven and a half percent.

like it renewed and just went up. mean, they could have went up to 8 .5%, but my bank lacked me, so they did 7 .5%. But if you have much debt, if you have a lot of debt, first of all, you're not going to probably cashflow for a while. And then secondly, when the markets change, when the markets change or when interest rates go up or when vacancy goes up, then you're going to be in trouble.

And that's when you see foreclosures and that's when you see, like right now we're seeing a lot of properties on the market right now, either not so much in foreclosures, but people just needing cash. So they're selling their properties. So.

Kevin K (07:13.233)

Yeah. So like, you know, let's just say if you, random project that you're a small developer and you scrape together $50 ,000 and you, you put that into a deal and then you have debt on the back of it for the balance of the project. You're, you're either getting that 50 ,000 back to you when you sell it. Hopefully plus a profit or you're getting it like drip, drip, drip over time, over a number of years.

Monte Anderson (07:43.211)

Exactly.

Kevin K (07:43.429)

which like you said, at that small of a scale, that might be maybe make a few thousand bucks a year, but you can't make a living off that.

Monte Anderson (07:52.47)

Right. Well, you can't make a living off the drip, drip, drip part. You can't really make a living off that, but you can if you have a hundred units then. Okay. Then you have it. And you can, if you're in the real, if you have a real estate operating company, like I do, where we do our own leasing and management and development and construction. So we pay ourselves to do those, do those things. If, if the money is available, you know, if there is enough, you know, to do that, but

And many times these days, I put myself in better positions. You know, I should have learned after 30, you know, 35 years, I should learn, but I put myself in better positions where I can get those fees mostly. So even if the property is dripping, I'm still getting the fees for operating the property. Now I've got a big one that I'm sitting in right now in Duncanville, Texas. It's called Wheatland Plaza, which is an old strip center, know, with some townhomes I'm going to put on the parking lot.

And right now I've got all my fees into it. got, you know, I've got, I sold another property to, you know, make the cash calls to keep this thing going because I didn't want to get more debt right now while interest was high. So I made a conscious decision not to add more debt on. In fact, I may not have even been able to get more debt on because I'm in a leasing upstage and I bought a

Kevin K (09:06.673)

Mm

Monte Anderson (09:17.87)

strip center that was 60 % least and it went down to 28%. Now I'm back up to 80, but I'm still not up to really breaking even, know, nearly up to breaking even. And when I put the 20, the 19 townhomes on the parking lot, you know, I'm to have a mixed use building. And then now I've got something that's operating, but it takes, it takes time. So that'll probably take me, what I just described is probably take me four or five years to get that done. So you got to last that four or five years.

Kevin K (09:47.589)

Yeah, yeah. Yeah.

Monte Anderson (09:47.736)

you know, negative cashflow and you've got a cash negative cashflow has got to come from from somewhere. So it's, it's funny to hear like in the, the podcast or the, the YouTube we were talking about, it's funny to hear some of the people talking about this stuff because they, this would be the way I would put it on paper to show you a deal. I would show you that in reality, it's just not that easy. And you're constantly having to,

You're constantly having to look for new ways of financing or finding another property to buy and sell to make cash flow or buy and sell something you've already got or raising capital from what we call community impact investors who don't expect huge high returns but are also, they expect a little return but they're as interested in the community impact as they are the return. They're interested in both.

Kevin K (10:45.541)

Yeah. Well, so let's look at a couple of the basics that he talked about just to clarify. He described the way he looks at it as like being a real estate private equity company. I think, I mean, that's clever, but I think it's just basically kind of the way a lot of real estate deals happen. And that is you have general partners and you have limited partners. And I wonder if you could talk a little bit about like in your experience, how those, what's the difference between the two?

What roles do they play?

Monte Anderson (11:16.29)

Yeah, like I'm the general partner or the managing partner in, in, you know, nearly all the deals I do. And I have partners, limited partners or, or members. These days we call them members of the LLC. Same thing, same, but they're passive, passive investors. And so in any real estate deal, you really need two things. And this is what I talk about in all small scale developers need two things. Really. We need really a good, decent loan from a bank.

And I always say a bank, bank servers are still our best partners. They're going to be the probably lowest interest rate. They're also be the toughest to underwrite you, know, looking at your paperwork and, you know, looking at you closely and asking you questions. And then you need, you need affordable equity. You're either providing that equity or the down payment or your investor partners are providing that down payment.

Kevin K (12:09.617)

Right. Just like if you're buying a house and you have to put 5 % down, 10 % down, 20 % down, whatever it is. For a real estate deal, it's the same way. And a bank is probably going to require 25 % down pretty typically or more. Yeah. Yeah.

Monte Anderson (12:14.079)

same thing.

Monte Anderson (12:23.726)

or 35 % today, or you may want to put 35 or 40 % today at seven and a half or eight, eight and a half percent interest. I can remember years ago that used to be not be that bad of a rate, but we got used to this low rates. we kind of, you know, below 5%, I kind of call that free money. It's kind of free, you know, really. So it really makes deals easier to do. when they go up, but

Kevin K (12:45.265)

You

Monte Anderson (12:51.822)

Yeah, it's the same thing. You you buy a piece of property, you need a loan, you need equity, whether it's 5 % on an FHA loan to buy a house or whether you got a commercial loan at a bank and you need 25, 35%. We used to say 20 % down on commercial loans, but now these days I would say it's minimum 25 to 35 % down that banks are requiring. Not such a bad thing either, to tell you the truth, but it's kind of going back like a hundred years ago when we didn't have financing.

Kevin K (13:21.211)

Mm

Monte Anderson (13:21.678)

Cause if you think about most of you're in my friends, not wealthy, you know, we didn't grow up with extreme amounts of wealth. 35 % might as well be, you know, might as well be a hundred percent, know, we got nothing, you know, you got nothing, you know, it's still a, still a lot of money. But once you get your, your, your investors, your limited partners, your, your members of your LLC, your passive investors, the passive investors don't, don't operate.

Kevin K (13:33.859)

Yeah.

Monte Anderson (13:49.806)

on a day -to -day basis. They're just like they have stock in your deal. And they need to be accredited investors, which means they have to have a certain amount of knowledge or net worth or wealth. They have to make a certain amount of income. They have to be sophisticated and accredited investors of sophisticated investors. In fact, it's a business person that it's not like a little old lady with their last $50 ,000 in the bank.

That's a non -accredited investor or somebody that makes less than a hundred thousand a year. That would be non -accredited investors. So you want accredited investors and these accredited investors, that means they're sophisticated and if they lose their money, they're big boys and big girls. they, buyer beware kind of beware. So they're going to be passive partners. The general partner or the managing partner operates the real estate venture.

hires the contractors, hires the leasing agents, hires the property managers, hires the architects, negotiates with the bank. Quite often in my case, the general partner would personally guarantee the real estate notes, which I do just about on everything I do. I hear people talk about not personally guaranteeing these commercial real estate deals. It's not in my world, really. That's just not realistic. I have to personally...

Kevin K (15:14.949)

Yeah, how does that even exist? Who gets away with not guaranteeing a deal?

Monte Anderson (15:21.514)

I hear people talk about it on YouTube and things like that. But it's just not realistic. there are different kinds of loans where a lender looks at a bigger real estate deal, big, where the asset is so strictly regulated by the bank or by the lender that you may get.

Kevin K (15:25.125)

Hahaha.

Monte Anderson (15:48.098)

you know, a situation that we, know, that you don't have to personally guarantee. So the asset is lots of equity. You know, it's the lender is really looking at everything you do, commissions paid, finish out, you know, construction, you know, things like that. They're approving everything, approved leases. They might as well be the owner. That's the only time I see that where you don't personally guarantee, you know, your real estate in that case. But.

Generally speaking, is general partners got to guarantee the loan, got to run the operation. Also it's got to get, can get paid for running the operation. We get paid a leasing fee, a property management fee. We get paid a development fee. We get paid all these fees if there's enough cashflow. And since I'm the one putting the deals together, I always feel responsible when there's not enough cashflow and end up leaving my fees in.

because I feel responsible if I didn't make the projection quick enough. it seems we just never make the, nothing ever works as quick as I think it should. It never works as quick. It's the nature of the beast. There's so many different things that can happen, whether it be.

building permits or zoning or platting you know, a supplier, subcontractors, or didn't get a tenant, you know, early enough. mean, these days in most cities have hard trouble, have a hard time with building inspectors. So you may not get, you know, inspections as quick. We used to get building permits in two weeks and, you know, we could build a building in six months. That's just no longer the way it is. You know, it just takes a lot longer than that.

You know, it just, and I used to go to California and they'd say, well, it only took me two years to get a permit. And I said, well, we're from Texas. We got a permit in like two weeks. You know, well, we're like California now. It takes us forever. It takes us forever to get things. So all of those things compile up and can cause you delays and stuff like that. And delays are going to cost you money, you know, and, and

Kevin K (17:51.985)

Yeah.

Monte Anderson (18:07.692)

You know, I'm always changing things too. My projects are done incrementally. So we might start in one end and by the time we get through, it's different than what we originally conceptualized. And that's, it's got, it's good and bad. mean, bad is that it's changed and it's different and likely costs more. Good is it might be a better project because we're more curating the type of businesses or people that are there than we are just filling spaces.

Kevin K (18:33.615)

Yeah. I mean, just like on a personal note, the town, like as an example, the townhouse project that I'm working on with my partners, you know, we, as we have progressed through construction, we have found a lot of things that we decided we wanted to change. And a lot of that was really based on, we know like the price we're going to end up selling these at.

And so it kind of changed our minds about who we think like the buyers are. It's a, it's a more expensive, home now than, it was originally. so, you know, we, for example, during the course of construction, we're like, well, you know, maybe we should change that kitchen. maybe that pantry should be different. Maybe we should have a different kind of countertop or finish. And, you would think that all that would be figured out ahead of time. But like you said, during the course of the project,

Monte Anderson (19:04.589)

Yeah.

Monte Anderson (19:14.98)

Yeah.

Kevin K (19:28.355)

you know, especially something I'm at take two or three years, things change.

Monte Anderson (19:32.908)

Yeah, they do. know, time, time happens so fast these days and with AI and other things, mean, the, the speed of, of everything that's happening is, you know, if you're copying something somebody did yesterday, you're already behind. I mean, you've got to be figuring out, you've got to understand this business and know where it's going rather than copying where somebody's been. can, you can learn from someone, but you really can't copy from place to place. know, you principles are the same, but

Kevin K (19:48.027)

Hehehe.

Monte Anderson (20:02.318)

Yeah, like in the center I'm working in now, it's a 90 ,000 square foot shopping center built in the 60s. And we, you know, it was, we're converting it to mix of uses from retail and restaurants to coworking, you know, school and, you know, state of Texas lease and things like that. And we start off thinking we're going to get, you know, $16 a square foot or $18 a square foot. And we'll put a little lipstick on it here and a little, you know, fix some roofs here and stuff. What we find is if we

If we cut the spaces up smaller and we really gut them out and really make them nice inside, we can get $24 a foot. So $24 a square foot versus 16's a lot of money, you know, to the bottom line, which makes the property a lot more expensive. It's just what you just described with the townhome. You got a better kitchen in, you know, we're going to, we can get more money. In fact, if we keep the cheap kitchen in, we may not sell it.

because we found out that the market was a little bit different. And by being an incremental or a nimble type developer, you can make those decisions on the fly and adjust and hopefully profit, you know, hopefully profit from that. In the meantime, you got to get more money somehow. So where do you get it? You either get it from your equity partners or you get it from your, from your bank. And this is a good reason to have community at your partners you want to have. You don't want to have poor partners.

Kevin K (21:17.521)

Yeah. Yeah.

Kevin K (21:30.907)

Yeah.

Monte Anderson (21:30.958)

You want to have rich partners because poor partners can't help you if you get in a situation.

Kevin K (21:34.362)

Yeah.

Kevin K (21:41.297)

Well, and I like your point about the fees part of it, because I think that was something I didn't really know anything about related to development 15 years ago, was that, if I'm the managing partner or the developer of this project, then I essentially pay a percentage fee to myself, and that's part of the construction loan and everything. And I remember in the first workshops that John Anderson did that I

paid attention to, he was like, you know, it's kind of 5 % of hard construction costs in the ballpark. And so I was like, that sounds good. You start to bookmark that. then, you just like you said, that can evaporate during, you know, if things go a little bit sideways. And like on our project, we had budgeted a development fee for all, for the three of us who are managing partners and the construction costs changes and the inflation that's happened over the last few years have really caught up with us.

And we basically having to contribute those fees back to the project to cover other things that we would like to do to it. So we hope to get paid out at a later date, but the reality is we're not going to make that fee during the course of the project.

Monte Anderson (22:53.218)

Yeah. And that's, I would say that's more normal than not. I would just say that's more normal than not. Cause I don't know something about in the idealistic stage, you remember when you were getting ready. I remember when you were getting ready for the townhomes and stuff. And it's the idealistic stage. It's fun during that stage, you know, it's like, it's like new love, right? It's like falling in love and you're in love, you know, all of sudden and everything is, you know, right. Unicorns and rainbows, you know, and then, and then all of sudden, you know, the reality.

Kevin K (23:07.483)

Yeah.

Yeah.

Monte Anderson (23:22.414)

the reality kicks in. But I think that's more normal than not. In fact, I'm embarrassed to say this, but in my one, I had a hotel project in Dallas up here and the, was paid my development fee. I did the project in 2004 and 2005 and I sold it in 2015. And that's when I got my development fee in 2015. And it was my own fault.

Kevin K (23:46.233)

Yeah.

Monte Anderson (23:52.586)

In fact, my own arrogance, my own thinking I knew everything when I started that project that caused that to happen to me. And I wanted to do the project no matter what. I was just going to do it no matter what. I just wanted to do it. And that, and I was like kicking the can down the road, but that own arrogance.

I tell Bernice and I talk about this all the time, Bernice Riedel and I, don't fall in love. She says fall in love with these projects. I say, don't fall in love with them until you own them. Don't fall, because it excuse your, and I fell in love with this project before I did it. And so I just had to do it anyway. Sometimes you just, you and I were talking earlier, sometimes you just, and if you're going to do that, that's fine. Just know that the pain is coming. Just know the pain is coming with it.

Kevin K (24:32.145)

Mm

Monte Anderson (24:51.178)

I understand it. I understand loving a project more than anything and you want to do it. I understand it. Just be prepared, you know, for the stress and the high level of anxiety that will come with that.

Kevin K (25:02.481)

So, Monty, that begs the question then. If you didn't get paid your development fee for 10 years, if that's more common than we'd like to admit, how do you live? How do you make a living during the course of doing these projects? Because you have to have some cash flow to pay the bills on.

Monte Anderson (25:21.774)

Yeah. Yeah. So, you know, I started off as a real estate agent leasing and selling space, you know, and buildings in my commercial real estate agent. And so all in the beginning days back in the early years, 100 % of my business was third party broker. I was doing this for somebody else, you know, and that was easy. You know, I had an easy life back then. And then I decided to be a developer.

Kevin K (25:48.667)

Yeah.

Monte Anderson (25:51.406)

So, but what happened now today, I have about 80 % is my own stuff and 20 % is other people's about 80 % today. And so you still need to be working. We call it working in the flywheel or working in the area. You're still working to crank that flywheel to move your company along, to move your own personal life along. You still got to make income. So I always kept brokering space for others.

people. And if you're an architect, so you would still keep doing architectural work for other people or doing your podcasting or doing your, you know, if you're an IT guy, you still, you know, you're working on your IT in these buildings, you're doing, you're doing work in other buildings, you know, but you're doing in hopefully in your farm or in your community, or anywhere you're where you're, you know, you're committed to where you're committed. That's a really key to this is, is working in an area that you, you know, that you commit to as a small scale developer, you need to

You need to stay close to home and not try to be working in, you know, Kansas city and St. Louis and Oklahoma city and, you know, Dubuque, you know, you'll be, you'll, that's a good way to go broke. You know, it's being too scattered out, you know, like that. You, and some people may can do it, you know, I'm just not capable of doing that. You know, you have to stay close and that's how I make a living. And I keep my, another thing is, you know, you want to keep.

I mean, it's just silly stuff to say this, you know, live on half of what you make, try to get used to that, you know. That's a really hard thing to tell people and that's, you know, try to live on half, you know, try to really live, you know. I've had to sell my houses before. I've had to sell my cars. I mean, I've had to, you know, when the going gets tough, you know, sometimes you got to do what you got to do. Now, on wood and thankfully.

And by the grace of God, I've been able to build my net worth continually. But when you sell a property and you make a lot of money on it or you make a profit, you've got capital gains, you know, then. And so the only way not to pay those capital gains is to do, you know, to trade that property or do a 1031 tax deferred exchange and put the money into another property. So I sell a property and I get some money and I either pay a bunch of taxes on it or I have to re -spend it.

Monte Anderson (28:17.826)

But if I respend it, hopefully I can get a brokerage fee, an architectural fee, construction fee. And so I end up living on these fees. You know, I'll end up in these fees I pay myself. I'm able to pay myself. they're not, you know, they're market fees. They're fair to my partners, fair. You you always want to put these fees and stuff in your partnership agreements.

You want to put what you're going to get paid. You always want to put that in your partnership agreement. So your partners know what you're getting paid. You want to have that upfront. You don't want that to be a surprise. You know, as you're putting, I've got partners for like over 20 years, financial partners, and they just, trust me. It's whatever you want to do, do it. You know, and because they're used to me, you know, taking care of them. And that's really important as you take care of, you know, your

your people that invest with you like that. gotta take, I would, if I had to, would sell everything I had to make sure my people are whole and my banks are paid if I had to. And I'd just start over again. I haven't had to, but thankfully, but I've sold things along the way when I really didn't want to sell them, you know, to be able to keep on going.

Kevin K (29:31.323)

So, I mean, I think it sounds like then, if this is a fair way to say it, that if you're doing this sort of thing, first of all, it's probably, especially for a lot of people, it's better to think of it as like a side hustle, at least initially. But more importantly, it's it's great to be able to have one of those people in the flywheel that you would normally pay a fee to.

it would be great to be able to replace yourself with at least one of those. So whether that's brokerage, property management, design, engineering, anybody that you might normally be cutting a check to, if you have an expertise in one of those areas and you can claim that fee, then that is a way to keep getting yourself paid.

Monte Anderson (30:13.302)

Yes.

Monte Anderson (30:18.538)

Yeah, yeah, think about this. Think about this in your farm up there and your Kansas City farm up there. You're working on this project right now. You're having to put your fees back in, but you're also working on a project for another guy, John Doe and Jane Doe down the street. You're doing the same things. You're still improving the neighborhood. So it's really, I don't look at it as a side hustle. You're doing architecture for yourself and you're doing it for Jane and John and these other people.

Kevin K (30:39.91)

Okay.

Monte Anderson (30:45.42)

And then every third or fourth or fifth deal is your deal. And every third or fourth or fifth deal, it's your deal. And then the more you get going over time, every other deal is your deal. And then every two deals is yours and one is somebody else's. And every three deals is yours and then one is somebody else's. So over time, it becomes, but I think it's good as a small scale developer to have.

the term used, side hustle, is true to be able to start right now. Because right now you can adopt a place, start doing your architecture in that place, stop building, know, start working on hospitals all over the country, just work in your own farm, and do small jobs, do storefronts, come and help people do their lettering on their windows if you're an architect. You know, help them just fix things up.

You you make enough money to make a living and at the same time, now you're working on your townhomes. You know, you're working on your townhomes and now you find another project and I'm always looking for an opportunity. Because if I can find an and what is an opportunity? An opportunity is where something is below the market. Like the shopping center I bought, 90 ,000 square feet, 60 % occupied, the rates were like six or $7 a foot per year. You know.

When I get through, it's 90 ,000 square feet. The rates are 22, $24 a square foot. So I bought it. It was way below the market, but the market site is a $6 building. The market didn't see it as a $24 building because it had the cheap kitchens. Like you say, in the townhouse, had, so we put good kitchen, you know, we did better and we had to do, we had to spend more, but it was, we were able to make a lot more money.

And in the long run, it will be. I can tell you this on all of my projects, all of them, just a hundred percent. If I keep it long enough, I will get all my fees and a really good return because what I'm doing is improving a farm. I'm improving a community together. And as they say, it's the tide rises, so to all chefs. So every time I'm improving something in that farm, the one I've got is going up in value.

Monte Anderson (33:10.412)

And over time that'll go up. If we look at it at three or four years, that's where the problem is on the YouTube video that we talked about is looking at stuff that could get rich quick scheme is, don't know. There's guys who flip houses and do things. Gals that flip houses and do things that probably they get rich. They get somewhat rich, you know, I guess. And some of them get rich, I guess. And you know, you can do that.

Kevin K (33:22.523)

Yeah.

Monte Anderson (33:38.552)

That's just never been my goal in doing real estate. My goal has been one of a townmaker, you know, of making our lives better. And I know you have the same goal in mind. So do most of our friends have that goal. We want to make the built environment better. Money's important, but it's not always the only important thing.

Kevin K (34:02.363)

Yeah, I think it's, kind of took the words right out of my mouth. That's like, you're not, you're not describing a, get rich quick scheme at all. But you're describing something that has a different kind of reward that somebody had. Obviously your, your goal is still to make money and make good money if you, know, if you're smart about it, but you're not going to be rolling up in a brand new Maserati in two years or something like that. It's because your goal is really to improve.

Monte Anderson (34:08.93)

Yeah.

Monte Anderson (34:28.098)

Yeah. Yeah.

Kevin K (34:31.525)

your place and lift your own community up and do really good stuff along the way.

Monte Anderson (34:39.084)

Yeah. And, and like you said, make making money. always tell people wherever I go these days, making money is the most important thing. Doing good is equal, but I didn't say doing good is the most important thing first. And then make it my, you know, I said, making money, said most of them, because without making money, you can't continue. You're going to be stuck. You know, if you build those townhomes.

all your money's gone and all your credit's tied up and you weren't able to sell them or you weren't able to get the rents, then everything you got's tied up. And I can't tell you how many friends I've got all over the country right now that are one time, developer and out. They're one deal and out, you know? And so when I get stuck on a project and I do, I'm on one of those right now, it's just big and it's bulky, you know, and it's hard.

So I've got to continue to do these littler projects around that keep me. That's what keeps me making, know, my own salary, you know, making, you know, got to, we, had a meeting with my staff this morning and said, okay, what are we going to sell right now? What's, what's on the board that we can sell? You know, what can we do? That's when we make our fees, you know, brokerage fees and development fees when we sell these properties. And then we can do another one. We'll fix them up. And hopefully we get to.

sell them to somebody good, you know, that hadn't been the case always with me. I sold some stuff to some people I didn't, I wished I wouldn't have, but sometimes I have no choice. You know, sometimes I have no choice. have to do, but the difference too, in what you and I are talking about today, you're in the middle of it yourself right now. And I am in it all the time constantly is that we're in the middle of this, you know, of

very difficult, you know, complex, you know, maybe more complex than somebody doing a big, you know, $100 million building over here. Because a $100 million building, you've got lawyers and lobbyists and architects and planners and engineers and contractors, and you've probably got a big bid and you're going to build it all at once and it's going to be over and it's financed by the Ohio State Teacher Pension Fund.

Monte Anderson (36:57.602)

know, has financed it and it's probably easier because the developer didn't have to be the developers more of a financial architect, more of a financial wizard, you know, if you will, whereas a small scale developer like us, you know, we're the, you know, we're everything. Yeah, we're quite often we're the contractor, you know, handling leases, we're going to raise the money, we went to the bank to sign the note, you know, if the plumbing's broke, you know,

Quite often I might be the one that's called depending on when it is, if it's in the middle of the night or something like that. We're very close and these are personal. We know the names of our tenants or our buyers. kind of, know our people. That's the big difference. And so you gotta be, you gotta really be, I think more knowledgeable sometimes about building, about developing and building. And I would think that this is the way people were a hundred years ago. I would think.

100 years ago when there was no financing, or maybe a little longer, but 100 years ago when there was no financing and you're building these projects in towns with all cash or borrowed money from the attorney in town who had a little money, or that's quite often who's building those things back in those days. Quite often it was bankers and attorneys back then, bankers built.

We're developers. can't do that these days because of the laws, but quite often bankers and things were developers. And you were raising all cash and you're doing it. That's why all of the buildings are small, a lot smaller back in C. And they were built incrementally. When we talked about incremental development, we didn't invent incremental development. That's the way the beginning of time. Yes.

Kevin K (38:48.143)

Yeah. Yeah. That's the way all development was until really fairly recently. I'm curious about if you could talk about some of the ways things go wrong. So you mentioned you have some friends who are like one project and out. What's going on? How does something like this really go wrong for somebody where, or are there a couple of key mistakes to just really watch out for?

Monte Anderson (38:55.5)

Yeah, it was.

Monte Anderson (39:16.748)

Yeah, the biggest mistake is humility, not enough humility. I mean, really to have that open mind to really look at the reality and the facts, know, really have your ego checked and the reality of facts. You really need to look at those facts. Do not try to, you know, cherry coat it. not try to do that.

What happens in these cases is be a guy like you or me was starting out, you you put together a deal and you put all your money in, you put all your money in just to get the plans done and, you know, know, down payment on the property and engineering and, you know, bank fees and attorney's fees. And you put all your money up, you got your money. And then now you got a couple of partners and you've promised these partners. You've promised them certain things, you know, that are probably too good to be true.

Kind of like the guy on YouTube. Probably too good to be true. If it sounds too good to be true, it probably is. And we've promised those. And we've promised those things and now it's not the right, we said it was. Or we want to upgrade the kitchens. Or I want to change the spaces. In fact, I have a meeting this afternoon at four o 'clock after this to talk to one of my partners about this exact.

Kevin K (40:21.903)

Yeah, if it sounds super easy, watch out.

Monte Anderson (40:44.318)

banking today and saying we need more, we need more money. And then you, then you, can't get much more money. You, you, you spend two or three years getting their project together. You used all your money, you used all your in -laws money to part of your investors. You got your credit tied up. You finally did get, say that in the best cases or in some of the best cases, you got it all built. It's built and you're not, you're for one thing, you're brain dead.

your brain dead, you're just deal dead. And secondly, you've got no more money. You got no more credit. You've got to go back to work wherever you are, doing whatever you can to make money. Because you still had your house and your wife and your kids. You still had to, and so that's actually best case in some scenarios, you didn't go broke. But in many cases where the deal maker, the promoter, the developer promises things.

They might even lose their interest because they can't, especially if it depends on how they promise the payback to the investors. You could actually lose your interest. call that, you there's a preferred return. A preferred return is when you would maybe guarantee an investor return. You would guarantee them maybe a 6 % preferred return, which means you're going to get 6 % from day one in the deal. And if you can't pay me back, that's 6 % plus a percentage of the profit.

then I take your interest. And that happens, that happens a lot. And that's not as bad as a bankruptcy or a foreclosure, but you ended up doing all this work and you end up with nothing. And so I never do preferred returns with anybody. I never do those, just don't do them. There's too many unknown things. There's just too many things that can happen. Preferred returns sometimes it's like having a bad credit card. You can't get the interest, you know, paid.

And it just keeps going every day while you're having delays or not getting the project done quick enough.

Kevin K (42:51.697)

So then for your, do you have a recommendation then for dealing with investors so that you don't have to do the preferred return? How would you structure, recommend structuring?

Monte Anderson (42:59.246)

Yeah, I do. I do. have a, what I call the whole pie. I'd say it's the promoter. And this is, I'm going to oversimplify this, promoter, the developer, you put up the money to pursue all the money to do the deal, the architecture, the due diligence, the earnest money, the legal money, and you sign the note. And then the investors, which you may be an investor in your own deal. If you put cash in your own deal, your investors get 50 % of the deal.

And they put up 100 % of the cash needed, the equity needed. And as the cashflow is there, they get their equity, they get their equity back first. No percentage return. They get their equity back first. And once their equity is all paid back, then you split 50 -50. So you're 50 % going in, you're 50%. But they get all their money back. And here's the thing about investors. Most of time, once they get their money back, they're very...

They're very flexible then once they get their principal back. And then in the meantime, you say, well, I got no fees. How am I going to make a living? Well, you make your living off the development fee, the leasing fees, the management fees. So you're making those fees back. then, then if you get the building leased up and this is what I'm doing here at where we speak right now, is I'll get this thing leased up and stabilized with no more construction going on. Then I can go out on the market and get a better loan.

So I can get a better loan. know, lenders during construction, you know, you've probably experienced this. You lenders are very nervous during construction.

Kevin K (44:35.218)

yeah, that's the riskiest time period.

Monte Anderson (44:38.252)

Yeah. And so they're in, this way, this way people get back, they get back to their percentage when they get it here, when it comes back, you're going to get it when it comes back. Now I got to treat them right. And I got to do my best to get their money back. And that taking me time to build relationships where I can, where I can get this done. And these are also community investors. And I would say, what is a community investor? It's a person that's, it's typically a baby boomer, generally speaking between.

It's worth between three million and $20 million net worth. That's gotta have 100, 200, 300 ,000, 1 ,000 they can put in one of your projects. Maybe there's three or four of them if you need a bigger amount. they're gonna be like around, it's somebody you can have coffee with and talk to. No, they're gonna be...

more empathetic with you, you know, if you're honest with them, you know, always be honest with them. Always telling the bad news and the truth. Always. Don't hold, don't hold back and surely don't hide it. Don't hide. Don't, don't do that. Don't do that. People are, people are, people are forgiving and better when, the truth, when you're, when you have a true, you know,

You have a true relationship that's not full of hidden things and it's just a, it's better. And it always comes out in the end. It always comes out better for you. And they know you're committed.

Kevin K (46:21.263)

Yeah, was gonna say eventually you might be able to hide something for a little bit, but it's gonna come out.

Monte Anderson (46:26.604)

Yeah. Yeah. You're not going to be able to be careful with your numbers. And I've done this. mean, I've, you know, I've been too optimistic on my numbers, you know, I mean, cause I wanted to do the project, you know, and, I have people around me that keep me balanced in that place. said my long time CFO here, he's an old banker back when he he's been with me forever, I always give him proformas and stuff. do. said, look,

Kevin K (46:46.16)

Ha

Monte Anderson (46:56.27)

shoot holes in this, really, just really take my stuff apart. Really look at it, critique it, challenge it. Tell me I can't lease that space for this much, or I can't resell it, or I can't know why I can build a restaurant for $100 a square foot. It's gotta be 150, no matter how you look. Tell me those things. Tell me I can't manage this thing for $5 a square foot. It's gotta be, critique me.

Yeah. Keep me balanced.

Kevin K (47:27.867)

So yeah, I think that's great advice. Always have somebody that you have a relationship enough with that you can ask them to poke holes in what you're doing. So I mean, we've talked about some of the downside, there's also, mean, the reality is we're interested in this and a lot of people are interested in this because there's a ton of enjoyment that comes out of it as well. Some financial, but a lot of it non -financial. I think one of the things just

Monte Anderson (47:37.88)

Yeah.

Kevin K (47:57.243)

For me personally, I'll never be able to shake loose the architect inside me and I just love seeing buildings going up. the incredible reward you have to know that you worked on something and you can see it manifested physically is pretty awesome. So there's all those things and it kind of like we were talking a little bit about earlier, I think one of the things that I remind myself of.

Monte Anderson (48:16.92)

Yeah.

Kevin K (48:26.845)

frequently is that sometimes you just have to make a decision to just go and to just do it. And you can definitely get paralysis analysis here in this always hoping for the perfect timing and the perfect deal. But there's never really any such thing. at some point, you want to do your homework and everything. there comes a point where you just got to pull the trigger and try it and do something, right?

Monte Anderson (48:33.186)

Yeah.

Monte Anderson (48:54.402)

Yeah, yeah, I'm very instinct guided by instinct. I mean, I'm very guided by instinct. Now, mean, you've seen me before work on numbers and stuff, you know, I'm constantly running numbers. When I see projects, I can see it with numbers. I see the numbers and the spaces and the sizes and what the rents should be and.

operations that cost and stuff like that. yeah, at some point, there's no way you're going to be able to prove it and you just got to go for it. You just got to. And to your right to see a project go from like you've seen, you know, go out of the ground to see it come up. mean, to watch the framing and, know, from the plumbing, watching the plumbing stick up and the framing. mean, there's, there's something so great about that, especially when you're doing a project that's worthy, you know, worthy project. It's something.

I mean, we were meant to be builders, think, as humans, especially. I mean, we were meant to build and to do good things upon the earth. Hopefully we could do better things than we've done upon the earth, than some of the things we've done, but we were meant to be builders. And there's nothing like it to see.

project. have photos all around my office of projects and things that and it's just so good to see all of that and to also have made a decent living and built some wealth you know and today I have my daughter and my granddaughter both work with me and to have that that legacy or that start of something is

It's like there's no way any amount of money could make me feel as good as looking at some of these projects and just seeing businesses thrive and people have decent places to live. There's something so special about that. Otherwise, I'd just be a broker today, just brokering deals and wouldn't care. I think there's something in us that wants us to be townmakers.

Kevin K (51:00.581)

Mm

Monte Anderson (51:00.704)

It wants us to make our towns better. And maybe it's you're not the developer. Maybe you're just one of the champions, the community champions, or you're just an activist in the community that supports this. It's nice to have people like that. Those are very important people to me. People that cheer me on and don't just criticize me. They're very important, you know, to me. They're just as important as anybody, you know, but that, but there's something so good about that. And then, then you will, if you can, if you can.

If you can commit, here's why committing to your neighborhood or your farm or your place for the rest of your life is so important. Because once you commit to that place like that, you commit. The universe changes around you. It makes things easier. Well, I don't know about easier. It makes things doable. It gives you resources. It gives you things that you wouldn't have had when you make that.

when you don't have that commitment. gives people come to you and they want to sell you a property cheaper or they want to, you know, people will invest with you. People will do things with you when they know that you're a true, you're champion like that. And then you will make money. And I think people and my partners and stuff, they want me to make money. They allow me to make money on these projects. They want me to make money. You know, I have to make them money too, but, and to...

see all the small businesses that I deal with and the people that I've seen in housing that may not have had housing and subcontractors and welders and carpenters and know painters and people that around me help them build their businesses and stuff I'm involved in all of that there's I mean I can't imagine doing anything better I don't know what it would be maybe I could be a missionary or something do better work or something but I don't know this is good stuff well this is just good

Kevin K (52:49.563)

Yeah. Well, you're a missionary of sorts. You're a certain.

Monte Anderson (52:57.312)

It's good stuff, it's good, you and it helps you help people. You help build a better, you hope you do. Not everything I've done is always the best for sure, because I've made a lot of mistakes, but that would be the hope that you are able to leave something decent. By the way, my other granddaughter just graduated from Stephen F. Austin in Texas to be an architect.

Kevin K (53:24.729)

wow. All right.

Monte Anderson (53:25.644)

So that was really cool. she's, you know, I got kids, so there's family trees, you know, starting to be architects and developers and stuff. it's a good.

Kevin K (53:36.625)

I feel like we're starting to brainwash our kids in that regard too. We've got them, you know, all those like HGTV type shows. We got them watching those and they're really enjoying them. And it's fun to watch with them. The latest one that we found, which I guess is not a new show, I guess it's like seven years old, but there was a show called You Can't Turn That Into a House. And it was actually three guys from Kansas City who

Monte Anderson (53:40.994)

Alright.

Monte Anderson (53:46.396)

yeah.

Monte Anderson (54:01.6)

Yes.

Kevin K (54:05.821)

made the show and they take these things like, you know, they'll take a couple of school buses or a grain silo or a horse trailer or whatever, and turn it into like a little house. and it's just like the coolest thing. And they do it on these ridiculous schedules and ridiculous budgets, but that act of creativity is so just, you know, incredible. And I remember actually, I think the first one we saw that it was like this, this stuff kind of reminds me of Monty because.

Monte Anderson (54:20.78)

Yeah.

Kevin K (54:34.489)

you have done some really cool, creative, unique stuff with your projects that are way outside the box on what people would normally look at, especially for your retail stuff.

Monte Anderson (54:44.15)

Yeah. Yeah. Yeah. Yeah. We use a lot of trailers and stuff like that. love buses and trailers and things. Yeah. Kind of cool. Yeah.

Kevin K (54:49.435)

Yeah.

Kevin K (54:52.977)

So it's fun work and I agree it's fun to share it with others and everything else.

Monte Anderson (55:00.111)

Yeah. We do need to make more money as small middle class developers and stuff. We do need to make more money. So we need to continue to teach each other and help each other. That's another thing about the friends that you and I have. I think we all pay it forward. We're all always trying to help each other, I think. And that's a good thing.

Kevin K (55:21.477)

Yeah. Well, Monty, where can people find you next? Or you mentioned earlier some places you're going to be roaming around to. Where else are you working these days?

Monte Anderson (55:34.934)

Let's see, South Bend, Indiana, Elkhart, Indiana, Denton, Texas, Regina, Canada, Dubuque, let's see, Lafayette, Louisiana, getting ready to start in Orlando, Florida. Of course, Bernice Riedel is working in Buffalo and Jim Cooman in Minneapolis, Minnesota. And then we've done a little bit of work or still doing work in Kansas City or in Grandview.

Missouri with an abandoned golf course down there that you remember. We're still working on that. They got their financing and bought that, the people that were helping. And then you can always reach us at neighborhoodevolution .com and optionsre .com. And we're always here. We do, we only do development, you know, in my farm, in my local area of Southern Dallas County. Southern Dallas County is where I work. And then we...

Kevin K (56:11.867)

Good. Good.

Monte Anderson (56:32.022)

Then we coach and teach and train, help cities create ecosystems all over the country through neighborhood evolution.

Kevin K (56:44.571)

Well, we just ran into Bernice recently. was here in Kansas City giving a keynote speech for a Missouri Main Streets Conference. So that was kind of cool to see. terrific. All right. We'll say hello.

Monte Anderson (56:51.916)

Yeah, and she's right outside my door right now here in Texas. She's riding with me to Lafayette tomorrow. yeah, we're meeting Marcus. Marcus King in Detroit will meet us in Lafayette. So Marcus is coming.

Kevin K (56:59.451)

Good, good. All right, Monty.

cool, good, good. All right, well I'm jealous. Sounds like a fun crew. So. All right, Monty, thanks so much. This was great, very informative and I'm sure we will do it again.

Monte Anderson (57:09.218)

Yeah.

Monte Anderson (57:17.762)

Yeah, thank you, Kevin. See you soon. Bye.

Kevin K (57:19.205)

All right, take care.

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