'Deal, Debt, Then Equity': How These 23-Year-Olds Made $25M With This Real Estate Strategy

23-year-old Cody Davis and his business partner, Christian Osgood, own around 180 apartments in Texas and Washington, and they used debt to create this growing $25 million real estate portfolio in four years. They now earn a gross revenue of nearly $300,000 monthly.

They also bought a resort called Robinhood that overlooks the Hood Canal in Washington. The 90-year-old resort across 12 acres of land has 18 cottages, a beautiful waterfront, and tons of space to host events. They hope to bring in $1 million in revenues from the resort by 2025.

On UpFlip's YouTube podcast, the dynamic duo said they follow the principle of deal, debt, and equity, where structuring a real estate deal is the most crucial part, whereas sourcing money is the easiest.

They leverage the seller-financing strategy, an agreement where the buyer purchases a property by directly signing a mortgage with the seller, not conventional banks. Since sellers handle the mortgage process, a buyer can minimize closing costs and time and secure flexible debt terms.

Cody said seller-financing is a promissory note you pledge to pay over time. The promise is as good as what backs it, so there's a deed of trust against the property, which says the seller trusts you to pay them. If you don't, they can take the title back.

Seller-financed deals mostly happen when there's trust between the parties, and if the lender risk is higher, they have to know you are a good operator. So when scouting for deals, the duo tries to understand how the potential seller built the business rather than just buying the property so that they can apply those practices towards running their properties. This approach helps build trust and is the foundation of their success.

Cody said the results are more deals, lower down payments, and much easier transactions.

How Did They Get Started?

Four years ago, Cody started investing in real estate at the age of 19. He dropped out of college with only $3,000 in savings. By 21, he had bought 30 apartments but needed to make more money as a real estate agent.

Cody recalled an initial investment experience where he got the seller to finance 12 "plexes" for over $1 million, and the remaining $125,000 came from an investor for a very high 12% interest rate. Over time, he learned from his mentors how to work with attorneys on deals that fit in with the business model. During the process, he learned that investors care about what they are investing in (debt or equity), where the money is going, the stability of what is backing it, and how they get paid back.

Soon after, he met Christian Osgood, who had more experience in real estate. He did college and a regular 9-to-5 job. In time, he Ianded a job at the CoStart Group, the Internet of commercial real estate, where he worked for four years. Christian saved up enough money to buy two duplexes and understood that if he needed to scale his investments through real estate, he had to avoid using cash out of pocket. That's when he met Cody.

What happened next was fast and big. Christian bought 30 units through seller financing and realized that with his own money, he would have been able to buy only four houses in that period.

Then, they partnered and closed their first deal for 38 units worth over $2 million. The number of apartments they owned reached 90 within a year. They also added the waterfront resort to their portfolio. In the first year they worked together, the duo was in real estate markets in Washington's Moses Lake, Renton, and Tukwila areas. Later on, their portfolio expanded to cover markets in Texas.

What Were The Biggest Challenges?

Pondering over the initial challenges, the hardest part for Christian was when they bought several properties in late 2023 and were struggling with bookkeeping. Going from "I have a duplex and a W-2 job to 55 units" needed proper accounting and timely payments of taxes, he said.

Cody said if you are in a situation where your cash flow is affected, you could learn to do the bookkeeping yourself.

However, the most significant setback in their first deal was "drugs," mainly emanating from several non-paying tenants. They could only overcome it with time, money, and kindness. They had to do some evictions and even try the "cash for keys" strategy.

Cody stressed that if you are paying cash to get them out of the property, they must be certified funds, which is verifiable at the bank level. Otherwise, some rough tenants would say they were never paid.

What Was Their Guiding Principle And Their Views On Refinancing?

Christian reiterated that they would return to their fundamental principle of focusing on the deal structure, securing debt, and a long-term equity roadmap whenever there was uncertainty in deals.

He added that whenever you are worried about the money and the opportunity and have investors ready to inject capital, you always start with the deal and never violate that principle.

While there's also a concept of making money from refinancing real estate rather than selling the property, Cody argued that real money comes from holding real estate and not over-leveraging it. While you could refinance and pull out cash, he said, you should keep the money and the deal to improve your cash flow over time.

"Folks that leverage forever are always at risk," Cody added. "Folks who own their stuff" can buy real estate and pay them off to make real money because they minimize their obligations.

How Do They Manage Properties Across Counties and States?

They also started a property management company together to oversee operations across geographies. Christian traded up a building for the company and runs the firm today. They focus on individual hubs to avoid having to oversee ten deals in multiple markets, which gets messy, and people naturally get sloppy in bookkeeping and property maintenance.

They noted that the cost of property management in most markets is between 8%-10% of the rent. However, Cody and Christian can lower them for their portfolio, which they own and manage. For instance, they were able to manage a unit for $50-$60 per month. It costs $75-$85 per unit if they consult a third party.

What Were Their Goals When Starting?

Cody wanted to help his mom retire, and Christian wanted to do the same for his wife. They successfully built the business in 11 months but needed to buy 100 rental apartments to reach those goals.

Cody's parents split in 2008. His dad was able to retire well, and Cody wanted the same for her mom so that she could do what she wanted without having to go to a job.

Meanwhile, Christian's wife was a kindergarten teacher. They had a 10-year retirement goal, but the pandemic and an injury she suffered turned that 10-year goal into a 1-year one because she couldn't go to work any time soon. At the same time, he had already left his job to pursue real estate.

What is The Biggest Misconception people have about real estate?

That real estate is complicated. Cody says real estate is a straightforward model. "People own stuff, and they rent it out to people. They confuse 'hard' with complicated," he explained. Real estate can be complex and time-consuming, but it is simple to understand.

What surprised them most when they entered the real estate market was that everyone was broke. They didn't have or hold any money. They also felt focusing on capital first was a backward strategy. Most people need to learn how to buy a costly property since they don't have money, but the money depends on the deal.

You go for a deal where cash flows from day one on a long-term fixed-rate debt. They said that the deal part in real estate financing ultimately dictates the terms of debt and equity, and the goal is to structure the deal in a way that makes you an owner.

How Do They Locate Markets?

Cody said he likes playing Monopoly. He suggested finding a market, picking an asset, and buying that neighbourhood. When you own all the neighbouring properties, your cash flow and margins find a better ground to grow.

They bought the Robinhood resort for $4.5 million, with $1 million in down payments. The seller carried a note for $3.5 million over eight years. The ongoing debt cost for the property is $154,000 annually, but they are bringing in revenues of $100,000 a month, especially in the summers. In their first year of operating, they raked in $730,000 in revenue through enhanced marketing and shifting from an exclusively business model to more of an events venue.

Cody's initial mistakes would be not closing deals that made sense to his criteria. For Christian, it was staying in the 9-5 jobs too long and buying too small. Both their reluctance stemmed from the fear of scaling too quickly.

The duo believes that "commercial-residential" properties (apartments) are the most stable asset class. They pay themselves $60,000 annually and reinvest the rest into optimizing and upgrading their assets and expanding into new markets.