JF1009: Need Money for Your Deals? Talk to This Guy!
He connects investors to the big money, and he is on track to fund $1 BILLION in private equity! Hear where he sources his capital and what deals he funds!
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Lee Arnold Real Estate Background:
– CEO at Secured Investment Corp & Manager of the Secured Investment High Yield Fund
– Secured Investment Corp is one of the fastest growing companies in the private money marketplaces in the United States
– Lee connects investors to lenders from all over the United States and Canada
– Featured as an investment strategy expert by Forbes, the Boston Globe, Market Watch, Reuters and Business Week & taught for Donald Trump Companies
– Based in Coeur D Alene, Idaho
– Say hi to him at: http://www.securedinvestmentcorp.com
– Best Book Ever: How to Win Friends and Influence People
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Joe Fairless: Best Ever listeners, welcome to the best real estate investing advice ever show. I’m Joe Fairless and this is the world’s longest-running daily real estate investing podcast. We only talk about the best advice ever, we don’t get into any of that fluffy stuff.
With us today, Lee Arnold. How are you doing, Lee?
Lee Arnold: I’m doing fantastic, thanks for having me, Joe.
Joe Fairless: Well, my pleasure, and looking forward to diving in. A little bit about Lee – he is the CEO at Secured Investment Corporation, and manager of the Secured Investment High Yield Fund. He connects investors to lenders from all over the U.S. and Canada. He’s been featured as an investment strategy expert by Forbes, The Boston Globe and a whole bunch of other publications. He is based in Coeur d’Alene, Idaho. With that being said, Lee, do you wanna give the Best Ever listeners a little bit more about your background and what you’re focused on?
Lee Arnold: Yeah, I started investing in real estate about 22 years ago. At that time I was a penniless broke grocery store bag boy making $3,90/hour, and finding deals was easy, but for an investor it’s always about “Where do I get the cash?” So as I had success finding and fixing and flipping houses, I quickly moved into the lender role where I was doing private money loans. From there I started traveling and doing seminars across the country, meeting a lot of real estate investors that we kind of in the same boat as I was, which is I’m finding all these great deals but I don’t have any money. That’s why, Joe, we put together our Secured Investment High Yield Fund 1 and High Yield Fund 2, so that we could lend directly to real estate investors nationwide, so that they could get their start in investing or maybe take their business to the next level. Even those that are utilizing some of their own cash reserves to invest with could be leveraging that cash through our private equity fund, which would allow them to double, triple or quadruple their current volume.
Joe Fairless: Okay, so you are a lender and real estate investors come to you, they get loans and you on the backside make profits from the loan origination, and then whatever interest you make and your investors do as well who invested in the fund?
Lee Arnold: Correct.
Joe Fairless: Cool. So how large is the fund?
Lee Arnold: To date, the fund has done over 100 million dollars in deployed capital for our investors, and we’re on track to do a billion dollars in private money loans.
Joe Fairless: Holy cow! Alright, 100 million dollars in deployed capital in what? What did you say?
Lee Arnold: And we’re on track to do over a billion dollars in private equity loans in the next 36 months.
Joe Fairless: One billion in private equity loans… But as far as the hundred million, how did you define the hundred million? A hundred million in deployed capital?
Lee Arnold: 100 million dollars in deployed – so we have lent out over 100 million dollars to real estate investors across the country.
Joe Fairless: And then a billion in private loans?
Lee Arnold: They’re all private loans, so we’ve lent out over 100 million dollars so that investors could buy a house, fix it up, and sell it for a profit.
Joe Fairless: Got it! So the second number, the billion, is the valuation of the properties in total, but you’ve lent out of pocket 100 million to get to that billion, right?
Lee Arnold: Well, we’ve lent out 100 million and we’re on track to lend an additional one billion dollars.
Joe Fairless: Got it, I’m with you. So it’s the same thing, but you’re just increasing it. I’m with you. So you’re at 100 million, you’re gonna get to a billion… Where is this money coming from?
Lee Arnold: That’s the best part, it’s coming from private investors, or other people across the country that maybe at one point were real estate investors themselves, did very well, and are now looking for more of a passive income. Private money creates a great vehicle for them, because they can deploy 50k, 100k or 200k either into a private one-off note where they are the lean holder lender and they’re getting a check every month and we service that for them, or if they are an accredited investor, they can come into one of our private equity funds where we essentially do all the work, it’s hands off, and they get a check every 90 days.
So what we do, Joe – we actually have a process within our company that we call “The Circle Of Wealth”, and “The Circle Of Wealth” is this – we will take anybody… Anybody who’s listening right now – we can literally take that listener, teach them how to find great deals, give them the money to buy those great deals, give them the money to fix up those properties so that they can sell them for a profit, do that a couple of times a year or ten times a year… It’s really how motivated they are to get to that next level, but our first tier, the first goal we have for every listener is to help them achieve $250,000 in liquid capital. I believe that most investors are missing the mark because they continually have to go back and borrow again and again, and let’s be honest, private money, though great, it’s not cheap; it’s not a bank financing at 4,5%-5%; these notes are gonna run 9%-12% interest. So as quickly as we can, we wanna get our clients off of private money, so that they can retain and keep more of those profits for themselves.
Once they get to that quarter million dollars, now our next goal is to get them to a million, and once they have a million dollars in liquid investable assets, now they become an accredited investor. Now they can start diversifying – they can be buying real estate, they can be buying private equity loans, or they can be investing in one of our private equity funds. So that’s our process or our plan for each one of our clients.
Joe Fairless: 100 million dollars in deployed capital so far – roughly how many accredited investors does that comprise of?
Lee Arnold: Hundreds.
Joe Fairless: Hundreds… So 500-ish?
Lee Arnold: Our minimum investment amount is $50,000. People can invest as little as $50,000; there’s no limit. We have some investors that are coming in at $50,000, some that are coming in at a quarter million, some that are coming in at a million… There’s no limit. There’s a minimum, but there’s no maximum.
Joe Fairless: So 100 million dollars… I know with my investors — my average investor, when I remove one investor who’s invested 20 million, because that would influence the numbers greatly… If I remove him, then my average investor invests about $126,000, I believe. So let’s just say you’re right around there… That means you’ve got 800 or so investors, and these are just rough numbers. How do you find 800 investors?
Lee Arnold: Predominantly through our education. So as we’re outputting on real estate investment seminars across the country, teaching people how to buy these types of investments and how to do it properly, inevitably in every room 5% of the room is somebody that’s recently retired, has a 401k, a self-directed IRA… They’re looking to get better returns that what they’ve been getting in their CD or even what the stock market’s been producing – which has been pretty good lately, but now there’s a fear that it’s gonna turn and go the other direction, so they’re trying to get their profits out so they can get in something safer.
But in every room, there’s at least 5% of that audience that’s going to want a more passive investment experience, so for them we have our one-off loans where they can invest and lend directly, or our private equity fund.
We’ve been in the education space for 15 years and we speak to tens of thousands of people every year. Over the years, the accumulation of those relationships is to where now our database is in excess of over 500,000 people.
Joe Fairless: That makes sense. The education piece, if you’ve been doing it for 15 years, what did it start out with and how has that education piece evolved, either content-wise or structurally, with logistics, like maybe from meeting in a hotel conference room to something else now?
Lee Arnold: In 2002 I was doing a lot of short sales. Now, short sales really didn’t become in vogue until 2009-2010 post-crash, where home owners were literally upside down on their homes – they owed $300,000 on a house that was now worth $180,000. So short sales became household terminology in 2008-2010.
In 2002 my office was located in Salt Lake City, and we saw the Olympics come in. The Olympics came in in 2002, and when they left, they sucked out about 30% of the value of that market, because it’d been overheated in anticipation of this three-week event. So when the Olympics left, we had a lot of properties that were overvalued, and I was doing a lot of short sales. I literally had 400-500 clients at a time that I was in the process of negotiating short sales for them.
Of course, in doing this, we were the largest short sale [unintelligible [00:10:42].01] in the entire state of Utah; I was approached by a marketing company and I said “Hey, we put on seminars. Can you write a book and a tape for us on the right way to short sale?”, which I did. And we took that concept and started putting on events around the country. That then led to short sales, to foreclosures. As the market heated up, foreclosure options were a great opportunity. Then we went into tax lien sales, and then we went into rehabbing, teaching people the proper way to rehab; now we have seminars on the proper way to retail sale, how to market your homes, to sell them in 48 hours or less every time… So there’s so much involved in the process of buying, fixing and flipping a house successfully that there’s all of these niche concepts that come up around it, and we create seminars and training programs around those niches, because as you and I both know, “There are riches in niches.”
Our ultimate goal is to teach our clients the strategy that will allow them to find these really good deals, because ultimately we want to be their preferred lender. So our education feeds our lending arm.
Joe Fairless: Yeah, it all comes full cycle. You do that education, you educate people on how to do these things, then they find deals and they borrow from you, which helps your backend investors make money, and then eventually if they do it long enough and they’re successful, then they become accredited investors and they start investing passively, and it just goes full cycle.
Lee Arnold: You got it. That’s exactly right. That’s what we call our Circle of Wealth.
Joe Fairless: What has been the most recent challenge that you’ve had as the CEO?
Lee Arnold: The most recent challenge has been the market itself. When we started doing a lot of lending — in the 2002-2008 it was me and some investors and we were doing a couple million bucks a year. In 2010, most areas had really hit rock bottom. That’s when we started seeing a lot of investors coming into the marketplace, buying this real estate, and there was such a demand for private equity that we couldn’t raise money fast enough. Now, fast forward seven years, there’s an abundance of money. The stock market continues to close above 20,000, and investors are rich with liquidity, and they are yield-starved. And when investors and hedge funds and private equity is yield-starved, it becomes desperate money, and desperate money will do things for 5%, 6% and 7% margin. So our greatest challenge as a CEO is getting our money deployed and still being able to retain earnings North of 12%.
With all of this available capital, we’re seeing substantial yield compression, where it wasn’t uncommon to get a 14%-15% yield; now we’re excited if we get anything above 9%. So that’s a good message for the listeners to know – if you have an opportunity that an investor could put money into, it’s not longer you being beholdened to the lender; I really believe that the market has flip-flopped to where now the lender is beholdened to the borrower, and that’s an unpopular message for Wall-Street to hear, but that’s true. Wall-Street needs investment opportunities more than borrowers need capital.
It’s a great time to be out looking for capital for larger projects, for commercial construction, for large development opportunities… Capital is cheap, and it’s readily available.
Joe Fairless: And on the “capital is cheap” part, what type of expectations do you set with the accredited investors before they’ve done a deal, in terms of projected returns?
Lee Arnold: Well, our fund is structured in that we give our investors a 9% preferred return, and then we split any upside. We as fund managers are motivated to produce a greater than 9% yield because it’s the only way we’re going to be able to participate in any of that upside.
Joe Fairless: What’s the upside split?
Lee Arnold: The upside split is 50/50.
Joe Fairless: Okay.
Lee Arnold: So we just finished Q1 and our investor payout was 11.3%. The fund produced 13,5% annualized return, investors get 9%, and then we split 4%, so they get 11% and we keep 2%.
Joe Fairless: And then everything above that is 50/50. Is there some sort of provision later down the road when you exit that they get paid their money back that they originally put in and there there’s a split above that?
Lee Arnold: No, because we pay out quarterly, so we’re not sitting on any retained earnings. All earnings are paid out quarterly, based on investor participation… Which is really nice for a lot of people, because we have a lot of investors that are literally living off of their earnings from participation in our fund. Where other funds are growth or accumulation funds where they get a letter every quarter that says “Hey, your account went from 100k to 112k”, our letter is “Your account is still 100k and here’s 12k… Great job last quarter.”
Joe Fairless: What would you say is your number one talent as a business person?
Lee Arnold: You know, in all my years I don’t know that I’ve ever been asked that question. I always turn it into a core competency, and I think it’s the same question. But my core competency is the ability to communicate to the least common denominator and make it understandable. I think that that’s a core competency because I started investing in real estate when I was 18 years old, while attending community college. Once I flipped my first house and got that first check and I was hooked, I decided “I don’t even need college. I’m just gonna be a full-time real estate investor for the rest of my life”, and that’s what I did. So I don’t have the four-year degrees, the BAs, I don’t have the pedigree the Wall-Street wants to see, with the Yales and the Harvards on the wall. I am a community college dropout turned hedge fund manager. Because of that, I can make complex things easy to understand. I would say that’s probably one of my greatest strengths.
Joe Fairless: Lee, what would you say is your best real estate investing advice ever?
Lee Arnold: Don’t be in a hurry to buy anything. The way that you avoid getting yourself into that situation — a lot of people do this; they say “I wanna invest in real estate, I’m gonna become a full-time investor, so I’m quitting my job and I’m just gonna do this. That’s the worst thing anybody could ever do.
You hear it in a similar fashion where somebody quits the job because they wanna go be a real estate agent, so they get their license, and 86% of all new agents will be out of the business within six months. So to be in a situation where you have to make money is a very bad spot to be as an investor of anything, whether it’s real estate, stocks, bonds or mutual fund. You can’t be in a situation where you have to make money tomorrow. So my recommendation to anybody that’s interested in investing is to keep your day job. Do this on the side. Begin to amass a small sum of capital that will continue to feed your investments. And I don’t recommend anybody quitting job to do this full-time until they’ve got at least two years of their current salary saved in some type of an account where they can continue to draw down whatever their current income is, so that as they leave job to go do this business, there’s still that consistency of income. That’s how you avoid getting into a desperate situation where you just negotiate bad deals.
Joe Fairless: For a Best Ever listener who has some deals that they’re putting together and they want to raise money from accredited investors, what would you recommend their approach be when trying to find the investors?
Lee Arnold: Well, there’s so many crowdfunding places now you can go… There’s Kickstarter and some others where you can go and in a short period of time you can raise money. Those platforms have made the process of raising money relatively easy. The problem is raising money is not the challenge. The challenge is taking raised money and getting it to produce returns. I’ve seen a lot of investors that are like “You know what? I’ve gotta put a million dollar fund together” and they can do it pretty quickly. I’ve seen people raise a million bucks in a week, first [unintelligible [00:19:01].24] Kickstarter or some of these other crowdfunding platforms. But now you’ve got this million dollars and the clock’s ticking, because your investors are now waiting for returns and they’re looking to you as “How are you going to manage my money and how are you going to manage and lead the team that you have assembled to develop and deliver returns?” and that’s the part that’s missed.
The first time I put a fund together, I formed a simple LLC – this was back in the late ’90s. I formed a simple LLC and I allowed people to come in at a minimum of $5,000. I spent more time managing investor expectations than I did actually investing investor capital. What’s fascinating is the lower the amount of contributed capital, the bigger the pain in the rear the investor is… Which is why your minimum is $50,000.
Anybody where $5,000 is literally a lot of money, that investor is gonna be a problem. That’s one of the reasons that we’ve never gone the crowdfunding route. We didn’t want to make it available to those that were not accredited, simply because they need to go cut their teeth on buying, fixing and flipping houses successfully, and buying a couple of notes and making a profit successfully. I believe that the ability to make money is learned. It is not a skill that you are born with or you inherit, it’s learned, and you only learn it through doing it.
Joe Fairless: Great points. You mentioned earlier the education piece has been the primary component – in addition, I’m sure, to referrals… But as far as outside people, who aren’t within your sphere of influence yet, the education piece, doing these courses has been the primary component to help you bring in investors. How many courses do you have in this calendar year, roughly?
Lee Arnold: By courses do you mean event dates?
Joe Fairless: Help me define that question.
Lee Arnold: Okay, so to us an event is either a Friday, Saturday, Sunday event at an event city throughout the country and we hold them all over the nation. An event can also be specialty classes where people fly into our corporate office here in Coeur d’Alene, Idaho, and we will put on a three or four-day event here, Monday-Wednesday or Monday-Thursday. Either of those will be referred to as an event, and we have 47 event dates booked this year.
Joe Fairless: What is the cost involved to putting on a three-day event in a city? I know it varies, but just generally what number are you looking at?
Lee Arnold: Our average cost for an event runs somewhere between $35,000-$60,000… Per event, per weekend, per location.
Joe Fairless: $60,000 for a three-day event?
Lee Arnold: Yup.
Joe Fairless: Huh… Do you charge tickets?
Lee Arnold: No, those are free.
Joe Fairless: Those are free… Wow. And clearly, you have a lifetime value of a customer identified… What is your conversion rate roughly for a three-day event where you’re investing $60,000 in putting in together?
Lee Arnold: We look for a 4:1 conversion.
Joe Fairless: So 25% of the people to attend do something with your company?
Lee Arnold: Yeah, that’s about accurate. But when I say 4:1 I’m referring to if we invest 60k, we want to at least generate a quarter of a million dollars from that audience.
Joe Fairless: Oh, okay.
Lee Arnold: And $60,000, a lot of that is gonna be on marketing spend. We’re spending a lot of money on radio, television, direct mail, to bring awareness to that market that “Hey, we are a private equity fund that wants to lend you money. Come and see us and we’ll teach you how for free.” So from a unique selling proposition, I know of other groups out there that are putting on a very similar event and they’re charging $25,000. We’re doing it for free.
Joe Fairless: So $250,000 is your goal for dollars invested in either on the frontend to loan them the money, or on the backend for accredited investors actually passively invested, right?
Lee Arnold: Correct.
Joe Fairless: Okay. Are you ready for the Best Ever Lightning Round?
Lee Arnold: Let’s do it.
Joe Fairless: Alright, first a quick word from our Best Ever partners.
Joe Fairless: Best ever book you’ve read?
Lee Arnold: How To Win Friends And Influence People.
Joe Fairless: Best ever deal you’ve done?
Lee Arnold: Converted 20 duplex lots into 40 single-family homes and made $480,000 in three weeks.
Joe Fairless: Will you elaborate?
Lee Arnold: Sure. I had a builder that was selling lots; he’d developed in these duplex lots. Duplex lots are worth less money than a single-family lot, because single-family homes typically bring a higher marginal return. So I bought them, went into the city, got them rezoned to be single-family and sold them to another builder as 40 single-family home lots.
Joe Fairless: [laughs] When did you have the a-ha moment that you could switch them over? Do you remember having that idea?
Lee Arnold: I put them under contract thinking I could do it, but I made the contract subject to inspection, and my inspection was not inspecting the dirt, because that was pretty obvious; my inspection was going to the county and seeing if the zoning would allow it, and they were voting on a blanket rezone the next week I knew that the builder didn’t.
Joe Fairless: Best ever way you like to give back?
Lee Arnold: My wife and I had a nonprofit ministry called HesTheSolution.com. It’s a non-denominational Christian organization, and we have a church at all of our events. So if there is an event over a Friday, Saturday, Sunday, we will have church services at our event.
Joe Fairless: What’s a mistake you can think of on a deal that you’ve done?
Lee Arnold: Moving too quickly, always.
Joe Fairless: Can you elaborate on how you got burned in a specific instance?
Lee Arnold: You make money when you buy, you realize your investment when you sell. It was 2006, the market was crazy hot, and I swung for the fences. I started developing three 15,000 square-foot homes that were gonna be [unintelligible [00:26:04].23] on the backside of a ski resort in Utah. My post-construction appraisal was 21 million, my construction cost was 7 million, and [unintelligible [00:26:15].06] and came to market July of 2008. [laughs] I should have read the market better, and I didn’t. I got caught up in the same euphoria as everybody else, going “Okay, what’s driving this thing?” And I don’t think we have the same bubble presently that we did then. I know that there’s a lot of talk that there’s a bubble – that might be true on the stock market, but I’m not a stock guy so I can’t speak to that. But on the real estate side, I believe this thing that’s driving value and why the market remains hot is there’s such a shortage of inventory because we had five years where nothing was getting built. I believe that that trend is gonna continue.
So where I got burned was not looking at common sense indicators that would have told me immediately that this is the bubble that can’t sustain itself.
Joe Fairless: Where can the Best Ever listeners get in touch with you or your company?
Lee Arnold: CogoCapital.com is our lending arm. If you need some capital, let us know. If you’d like to look at being one of our investors, you can enquire there. That’s the best place for them to go.
Joe Fairless: Lee, I really enjoyed our conversation. Thank you for being on the show. Thanks for talking about the business model that you all have and the cyclical nature of it, where you teach people how to get deal, then they go get deals, they lend from you, and then eventually (hopefully), assuming things go well, they end up being investors in other people’s deals down the line, and it just keeps on perpetuating itself.
Then also talking about the number one talent that you mentioned, the ability to communicate to the least common denominator and make it understandable. It’s important to ask that question, because your team is achieving at a high level, so we’ll wanna know what’s the CEO’s strength to help propel that business and the team – that’s why I asked that question.
Then also the deal that didn’t go too well, the one you just shared, and the one that did, with the builder developing the duplex lots, then you got it rezoned to single-family and you made I think a little over $400,000 in three or so weeks. So thanks so much for being on the show. I hope you have a best ever day, and we’ll talk to you soon.
Lee Arnold: Thanks, Joe.