November 18, 2021
Ramsey Blankenship hosts Perry Zheng, the CEO of Cash Flow Portal, as they talk about how techies can invest in real estate while keeping their full-time jobs.
Here’s a breakdown of what to expect in this episode:
Listen to the full podcast here or read the shortened transcript for a condensed version.
Ramsey: Today’s guest is Perry Zheng, the CEO, and Founder of the Cash Flow Portal and a former engineering manager at Lyft. He’s got six single-family houses up in Washington, and he’s also involved in 1500 units through syndications, and another 580 units, in which he’s the lead syndicator. Welcome to the show.
Perry: Thank you for having me.
Ramsey: You came to America when you were 11 years old, so why don’t you tell me a little bit about where you went to college, how you got started? And then what made you go from the tech industry to the real estate world?
Perry: Yeah, good question! I came here when I was 11 years old. My parents had an American Chinese restaurant back in Atlanta, Georgia. I went to high school in Georgia and Louisville, Kentucky. Then I was in college from 2006 to 2010 and graduated with a computer science degree and econ degree, and a minor in math. Then I moved to Seattle, Washington, for my first job there. I worked as a software engineer in a few companies, including Amazon and Twitter. And then eventually settled on with Lyft. I have been with Lyft for about five years. Then I became an engineering manager, managing a team of eight to nine people.
Ramsey: So, how did you come into the real estate? What did you buy as a piece of property?
Perry: I started by house-hacking. I bought my first condo in San Francisco back in 2015. I decided to purchase it because I calculated that I would be paying less in rent. I rented out the rooms, which effectively paid the mortgage. At that time, I did not think about real estate investing and didn’t even know what IRR was. So then I moved back to Seattle, Washington. I started buying one house at a time, every 12 months-ish. I bought a five-bedroom house and rented out four bedrooms while I lived in the master one. Ten months later, I bought another house. It was easy. Because every time I moved out, I was making about five hundred dollars of cash flow on each.
Ramsey: What made you get started? I mean, did you jump straight from owning six single-families to syndications as a limited partner?
Perry: Yeah. Good question. We first doubled on small multifamily before going full steam into syndication.
My business partner and I bought a seven-unit-plex in Tacoma, Washington. We bought it for $540,000. Sold it 18 months later for $900,000. We spent $120-$130K renovating the place. It was small syndication, and we actually were the “GPs.” The LPs were getting about 68% return over the course of 18 months. Honestly, I think that was just pure luck because the market was going crazy.
So we tried to scale up from seven-unit to like 60-unit, and then a 100-unit, but we scaled up a little bit too fast. We went from a seven-unit to the next deal that was a 172-unit. And then the next deal was a 408-unit.
My advice is don’t go from 7 units to 17 and then to 27. Go from 7 units to 100 units and then go for 300-400 units.
Ramsey: Did you know you were syndicating that 7 unit? Or it just happened like, “we need some money; we’re going to borrow from some people.”
Perry: I didn’t know that we were syndicating, and truth be told, it was more of a Joint Venture.
Ramsey: Investors were probably pretty happy. Let me ask you this because you have syndicated as well. I have been told that anything at about 2 million dollars or below is like the threshold between joint ventures and syndications. If it’s above $2M, it’s got enough meat on the bone to justify doing a syndication. What are your thoughts on that?
Perry: I think there are two components. One is the legal component, and another is the business component. From a legal point of view, technically, everything you do when trying to raise money is called syndication. It means you must have a PPM (Private placemen memorandum) and a legal contract because you’re essentially selling securities.
So either way – below two million or above, it’s still considered a syndication. That’s the textbook definition.
Now, let’s look at it from a business point of view. If it’s below two million, you just don’t have the money to spend on drafting a legal document. It’s a waste of time. So from a business point of view, sometimes people just call it a joint venture. It’s a gray area, and I’m not an attorney. So, going forward, even if it’s a $100K deal, I will still do a proper PPM. That’s my opinion.
Ramsey: Let’s talk about how expensive it is to have those limited partners. Do you pay more to them? Or would you pay more to a bank that holds the debt?
Perry: I will pay more to the bank that holds debt because the bank is a soulless entity. If, as long as you don’t get into trouble, you don’t have a reputation risk. Right? Unless you go for closure and go bankrupt with the bank, they could care less because they’re getting paid, and their upside is not that high.
Whereas especially with your first deal, if you’re going with passive investment and don’t know what you’re doing exactly, and you’re not that confident, suppose you promised a 15% annualized return. You hit 9%, which is way better than the stock market. However, passive investors will still get pissed off, and so there’s reputation management. So be careful when you are not confident, playing with fire, and playing with other people’s money.
Another example: during our first syndication, we had a large capital expenditure for the first three months and had to do a ton of work. It was going slower than I thought. And because of the renovation going on, we saw a big dip in our occupancy level. That winter, I was freaking out. I was prepared to send this email and was expecting a lot of backlash and investors asking me why is the occupancy dropping again this month? I send it to everybody. Nobody said anything, some people wished me a Merry Christmas, and then they just said, I don’t care, I give my money to you, and I trust you. My point is that even if you’re passive investors do not complain – you feel that immense pressure when you’re dealing with investors.
Ramsey: So jumping from 7 units 172+… Mentally, how did you make that decision? Did the deal fall in your lap, or were you looking for 100+ units? Were you brought in on that deal? Or were you the lead syndicator on it? Tell me a little bit about
Perry: We were the lead syndicators. We found it, and we closed it. We fought for it. It’s just my business partner and I were involved. So we’re really proud of it. If you look at how much the sponsors earn, we earned more than what we should be earning our second or third deal. Most people don’t make it this big on their first deal. I think it’s a combination of dumb luck and persistence. The dumb luck was that we were trying to go after 60 units and 80 units. We kept getting outbid on those Deals. The problem with those 60-70 units is that every new investor thought that those are what they should be doing. So there is more competition among the 60 to the 80 units.
After six months of that struggle, we said to ourselves, “what’s the difference in underwriting between an 80 and a 172-unit?” What is the legal work involved? What is the property management company hunting involved? It’s the same management company, probably. It’s the same legal team. It is the same due diligence. You just have more units. From an asset management perspective, there’s almost no difference in work between an 80-unit and a 172-unit. Then we said to ourselves, “why are we looking at 80 units? Why don’t we look at 150+ units?” Yeah, if we gonna lose, we’d rather lose in a big arena than trying to lose in a small arena.
It’s the same way I think about my startup. Most people think of their startup as “I’m gonna create a white label tool that helps syndicators raise more money.” But that’s a small arena. It’s a saturated market. Why do I even compete in the small arena?
If I want to die, I want to put my best effort into the biggest arena. Even if I lose, at least I make a small attempt on it.
So the expected value of spending your time on a 150+ unit is more because if you win it, your reward is higher. The persistence is that you don’t give up after six months.
If you would like to learn more about Cash Flow Portal, you can jump straight to 21:10
Ramsey: Let’s transition to talk about what it is that you’ve created with your tech background for syndicators to make their life easier. So you’ve got this syndication software called the Cash Flow Portal. You showed it to me a little bit before the show. I think the analogy I made is it looks like social media for syndicators and passive investors. I don’t know how accurate that is, but it definitely had a great dashboard. It looked like it would make life easier. In the least technical terms that you could, can you explain to us what it is and what it can do for
Perry: You can think of it as a real estate investor portal, a dating site for syndicators and passive investors. The goal is to allow passive investors to discover new syndicators. Syndicators cannot go out and just keep banging on the passive investor’s door. It is a one-way discovery. Passive investors can look at who those syndicators are on the platform and connect with whichever they like.
We tried to solve two problems for real estate syndicators. Their number one desire is to be able to raise enough equity and to expand their investor network. That’s a burning desire for new syndicators. And for experienced syndicators as well.
The second problem we are trying to solve is that I know 100% percent that upper-middle-class people like myself, like my friends. Like the people I interact with every day. They have a reasonable amount of cash that they can only put into the stock market and crypto. That’s it. They desperately want to put something into real estate. The only way to in real estate right now is to wait until they have $400K or so in cash so that they can buy a single-family. Or $200K in cash so that they can buy a single-family in Seattle, San Francisco, or Austin. And even if they do that, they don’t have the energy or the expertise to manage. I do not understand why they need $200K to invest in real estate. Those are the problems that we’re trying to solve.
So I want these people to get to know real estate and this world of real estate syndication more. They are smart. They know the numbers, and I want them to meet more trustworthy syndicators. So Cash Flow Portal is almost like a dating website where passive investors cans discover syndicators. The reason I’m not doing the other way around is that syndicators should never be poaching others syndicators’ investors. So there’s no way for you to discover the passive investors. They have to find you.
Ramsey: It kind of sounds like the Bumble, where the girls have to swipe right on the boys, and then the boys finally get to talk to them. So kind of the same concept, right?
You know, it makes sense to me. Let me just say this, I’ve not been an LP in a syndication, but I can tell you one thing. I hate feeling like is that I’m being sold. I feel like I hate when people are selling something to me, even though I buy things I want, but the moment I feel like somebody’s selling me something in there, in my inbox – I don’t open any of it. I don’t know how they get to me. But if I feel like I can snoop, and I can check you out on the back end… and then I approach you – two things happen.
I’m a hot lead because I want your business. I feel like I’m in control of the decision because I’ve found you, and I feel like I need your help. I cannot stand whenever somebody comes trying to sell me something, which sounds like a pretty decent approach. If you’re a passive investor, you don’t put your name into something to get 40 different syndicators trying to contact you.
How long has Cash Flow Portal been up and running?
Perry: We have been in operation for a year. And just to be clear, the feature that we are trying now is in beta, so contact me for access. We built out the logistics of raising equity. So we can integrate with documents, e-signatures, create a landing page, and get soft commitments. We can run distributions, share documents as well as send emails about monthly updates. So, those are the things we have done. We have not made it into a social platform yet. But this is our roadmap in the next couple of months, and that’s currently in beta.