JF1205: Lessons On Raising Money For Any Venture with Victor Menasce
Victor literally wrote the book on raising money for any venture. As an active real estate investor, he raises money for that business, but got his start in the technology field. Currently Victor lives in Ottawa, Canada and invests in Philadelphia. Hear how he is able to raise money and invest in another country. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!
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Victor Menasce Background:
– Managing partner of US Real Estate Partners LP
– Spent the first 25 years of his career in the high tech industry, for last 9 on real estate
– Current specialty involves building new apartments in an infill urban setting across multiple domestic and international markets.
– Author of Magnetic Capital: How to Raise All the Money You Need for ANY Worthy Venture.
– Has raised more than $300 million in his nine-year real estate career
– Based in Ottawa, Canada
– Say hi to him at: http://www.victorjm.com/
– Best Ever Book: Speed of Trust
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Joe Fairless: Best Ever listeners, how are you doing? 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 fluff.
With us today, Victor Menasce. How are you doing, Victor?
Victor Menasce: Great to be here!
Joe Fairless: I’m glad you’re here, and looking forward to having our conversation. Victor is the author of a book called Magnetic Capital: How To Raise All The Money You Need For Any Worthy Venture. Ain’t that intriguing… We’re gonna talk about that.
He has raised more than 300 million dollars in his nine-year real estate career. He’s based in Ottawa, Canada. With that being said, Victor, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?
Victor Menasce: Absolutely. Let me correct a little bit of that intro. A lot of the money that I raised was actually in technology, which was in my prior career. What I discovered when I transitioned into the world of real estate investing is that the process of raising money is essentially the same; it doesn’t matter whether it’s for a technology venture or for a real estate project, the process is almost the same.
My path into real estate is maybe not the typical one. I started out as a microprocessor designer, and designing processors that were used in telecom networks and things like that. Half the phone calls in America, for a decade, were processed by a chip that I designed. So not your typical career path into real estate development.
Joe Fairless: No, not at all. Before we get into the raising money part, what real estate investing are you focused on right now? What type?
Victor Menasce: Today we’ve got about nine projects under way. These are a combination of both infill and greenfield development projects, mostly multi-unit residential. We like to go into communities — right now we’re very active in Philadelphia, where we’ve purchased a lot of land North of the downtown, and however much land we can assemble… If it’s three properties, that will be a nine-unit; if it’s five properties, we’ll probably put 13. It’s however much land we can assemble at any given point in time… And great valuations on the finished product.
We’re also very active in Louisiana, along the Gulf Coast, where there are tens of billions of dollars of natural gas and petrochemical plants under construction… So we’re in the shadow of many of these megaprojects, with massive population growth, and they need everything – they need workforce housing, they need storage, they need everything.
Joe Fairless: You’re in Ottawa, you’re investing in Philly and in Louisiana, and you’re not only investing, but you’re doing ground-up development. How are you able to do that?
Victor Menasce: It’s like any business – you’ve got to have the right people in the right chairs. We obviously have very good boots on the ground people, folks who have great relationships in the local markets… So you can imagine places like Louisiana where there’s a ton of history, who you know and who you can connect with and how quickly makes the difference, so having those local relationships is of vital importance… As well as having the management skills locally. I do a lot of the investment management, but I also leverage my engineering background and make sure that a lot of the on-the-ground work is being done correctly. Your average investor, who doesn’t know how to ask the deep questions, might miss some details. So it’s a combination, but it really relies heavily on the team on the ground.
Joe Fairless: Okay. I’d love to learn more about those two aspects of how to be successful in those areas. You said local relationships and local management skills, so basically you’ve gotta know the right people in those markets, and they’ve gotta be skilled and aligned with your interests. Specifically, let’s talk about Philly – how did you come across those people?
Victor Menasce: I came across two guys — it was actually an introduction from my business coach, who said “There’s two guys in Philly that I think you should talk to, Victor. You know how to raise money, and they’re doing some good work.” So I flew down to Philly, and they were at that time (2010 rehabbing houses) North of the downtown and they were doing good work. Clearly, the thing that was holding them back was they needed more money.
So I was impressed with them, and I said “You know, if you partnered, you’d obviously have to give up an equity position, but if I brought capital to the table, you’d more than make it up on volume.” That’s what we did, and 72 properties later we’re still hard at it.
Joe Fairless: The structure that you have with those two partners, what type of structure — do you say “Okay, you’ve gotta give up equity, and this is how much you have to give up in exchange for scaling your business”?
Victor Menasce: We would typically put together special purpose entities for each project, so that if there’s a handful of investors, or often just one or two investors on a given building, they are firewalled from the other projects. So we’ll typically put together some kind of joint venture, special purpose entity (it might be a limited partnerships) and then we put together the capital structure for that project. It will be comprised usually of some equity, usually some mezzanine debt, and then of course bank financing for the construction and for the permanent financing.
Joe Fairless: Okay. And one either typical example, or a specific example… Just what do they own, what do you own, what do the investors own, is there a preferred return? Just those details.
Victor Menasce: For example, we’ve just completed a nine-unit building back in June. I’ll give you the numbers… The total construction cost for those nine units, and that’s land, hard construction, all the soft costs – all in, that project was a $1,460,000. It’s appraised at 1,96 million, and we got it leased up in about eight weeks from start to finish. We had one investor who took an equity position – I think she had 9% ownership. My partner on the ground has 50%, he’s also the principal signer on the bank debt, and then I have the balance.
Now, what our deal was – basically, half the money goes to him, half the money goes to the money side of the equation, which is me. I allocate typically a quarter of half of the money side – meaning a quarter of the project – to the equity partners. If I can raise the money without giving up equity, then we split the difference. So we only gave up 9% equity, and then the rest we managed to raise as secondary finance and just debt at a premium rate of interest.
In fact, the one equity partner who’s in the project has actually agreed to be bought out, so we will actually in the end have no equity partners in the project, we’ll simply have paid out some debt and that’s that. So it’s a good position to be in.
Joe Fairless: And then the 9% that she originally owner, where does that go? Does that go to you, or did you say you split it with your partner? You split that, right? Okay. So then your 41% will go up 4,5%, and their 50% will go up 4,5%. Okay, got it.
With the buyout, is there a certain return that you have projected to her, so that she’s then comfortable with exiting?
Victor Menasce: Yeah, so she gets, in addition to having her money in the project, while her money is tied up, we’ve been giving her a preferred return – I think it was 5%, if I remember correctly. So she would get her preferred return plus her share of the property; in this case, it’s gonna be a buyout, so she’ll get a healthy return on her money over the course of the project, between the buyout and the 5% that she got in simple interest.
Joe Fairless: And are you able to pay the buyout by putting new financing on it and doing a cash-out in some way, to then pay her a portion of whatever was the cash-out?
Victor Menasce: Yeah, it’ll either end up being a refinance, or potentially a sale. We haven’t decided on this particular project, but it’ll be one of those two. In either case, we’ll be able to recover… Think about it, we’ve built a project for $1,460,000, it’s valued at 1,96, so almost 2 million, so there’s almost half a million of equity that we’ve created out of thin air by building this project in the right area and buying it at a deep discount to the market.
That’s our formula, by the way. What I’ve just described you, that particular project is as close to textbook as you can get in terms of our repeatable formula for all of our new projects.
Joe Fairless: Great stuff. Well, I’m glad that we’re going through this case study then. The total construction cost you said was 1.46… How much did the investor bring in this example?
Victor Menasce: In that instance she brought $100,000, and then we had two others… One brought $70,000 and another one brought $40,000, but that was straight debt, so the total contribution was a little over 300, and then the bank made up the rest.
Joe Fairless: So you didn’t put any of your own money in this one… And what’s your fee structure? Is it just the equity, or do you have additional fees on top of that?
Victor Menasce: I’ll usually take a 1% management fee, calculated on the hard construction. So there was just over a million dollars of hard construction, so I took roughly $10,000 in fees out of the project, largely just to pay for incidentals on this particular building.
Joe Fairless: But then the big payday is the refinance, or hold on to it long-term, or sell it.
Victor Menasce: Correct.
Joe Fairless: Got it, okay. It leased up in eight weeks… How long did it take from start to finish, from investors have funded the $300,000 to it being able to start the lease up period?
Victor Menasce: There was one thing that was atypical about this particular project. It started in 2014, and the city of Philadelphia was making a fairly large claim of eminent domain; they were gonna expropriating a total of 1,344 properties… So there was a period of uncertainty where we were not sure if we were gonna be on that list or not, so we decided to wait until that claim of eminent domain went through and it was clear that we were gonna be able to retain the property. So once that was clear, then we started construction.
She brought her money in initially at the land acquisition back in 2014, and then the rest of the money we brought in in August of last year, August of 2016. So the project from the commitment of the construction, which was last August, to June – the whole project took about 10 months once we pressed go.
Joe Fairless: So the 5% preferred return on her was paid out after the lease-up period – is that correct?
Victor Menasce: No, that was paid out during the entire life of the project.
Joe Fairless: Oh, so how does the project support the preferred return when it hasn’t started?
Victor Menasce: We put a budget line item in the project. It’s an interest reserve for that purpose, just like you would have an interest reserve for your construction lender. It’s a budget line item alongside drywall and paint.
Joe Fairless: And have you done preferred returns on ground-up development deals where you don’t have that line item, but instead it’s accrued until the lease-up period and the property can support itself to pay it?
Victor Menasce: We have done that, but it’s less common. For whatever reason, investors often seem to take comfort of getting that check once a month, once a quarter, even though it really doesn’t make any difference whether it would be accrued or paid out, but often times they just like the comfort of seeing that money come in, so it’s just as easy for us to put it in the budget.
Joe Fairless: How did you find your business coach? That seems like an important person to make the connection between you and the two Philly people who you’re doing deals with.
Victor Menasce: It’s interesting, I’ve actually had several business coaches over the years, and outgrown a few, and today I actually have someone that I really focus primarily on just mindset… Because as you know, business is a mental game. I’ve got another mentor who I have a monthly mastermind with; he’s a little bit of a famous guy, but he has 60 years of business experience. He was actually Mr. Trump’s right-hand man, you might remember him on The Apprentice TV show.
Joe Fairless: Who is it?
Victor Menasce: Mr. George Ross.
Joe Fairless: I probably should know that name… I didn’t watch that show, but regardless, I probably should know the name. George Ross – alright, I’ll look that up. I’m sure that the Best Ever listeners know who that is.
Victor Menasce: He’s extraordinary. I listen to him, I ask him very specific questions about my business, and I just get amazing advice from him. So when you have someone who’s got that depth of experience looking over your shoulder, it really makes a difference. He’s saved me from countless mistakes that I might have otherwise made.
Joe Fairless: When do you know it’s time to switch business coaches?
Victor Menasce: That’s a very good question. I don’t know that there’s any set answer, except in my case I felt that I was reaching a plateau and that I really wasn’t making forward progress with that particular coach and needed to elevate my game.
Joe Fairless: Louisiana – let’s go South, from Philly to Louisiana. How were you introduced to your on-the-ground people there?
Victor Menasce: These are folks that I’ve known for five or six years, and we had actually tried to do a project in Lake Charles, Louisiana – this is the community on the I10 corridor, halfway between Houston and Baton Rouge. We’d known for quite some time that there would be strong demand for workforce housing… That particular project never came to fruition, but we kept in touch and we had a lot of very frequent dialogue over the years, so we came across another couple of opportunities and decided to engage on it.
They’re very good people, folks that I get along with very well, and most importantly, we complement each other extremely well from a skillset standpoint. So it’s been a very good relationship, we’re executing well on the projects, and I’m very happy to be investing in that community.
Joe Fairless: And I think I missed it – do you remember how you initially met them five or six years ago?
Victor Menasce: I’ve probably met them at a conference, actually.
Joe Fairless: Do you remember which one?
Victor Menasce: I don’t, no.
Joe Fairless: Cool. Alright, what specifically are you developing in Louisiana?
Victor Menasce: So right now we’ve got a 199-unit workforce housing RV park, which you often find with the construction workers. These are skilled workers – they’re welders, pipefitters… Because they’re building very large natural gas plants. And they’re there on contract for three months, six months, sometimes a year, and they get a per diem allowance, but rather than stay in a man camp or stay in a hotel, which is above their housing allowance, many times they’d rather just go buy an RV, put it on a payment plan, and at the end of their contract they have an RV that they own. So there’s tremendous demand for RV parks in the area.
We managed to put a deal together where we got a 15-year ground lease, so that’s what we’re currently building. That’s one. The second one is a larger multifamily project on a 14-acre parcel.
Joe Fairless: Is that affordable housing?
Victor Menasce: No, it’s gonna be B+ with nice amenities. The interesting thing about that market is that you often have tenants with a household income of $90,000 or more, and that’s not your typical tenant profile. The reason that they choose to be tenants is they’re not there for the long term. They’re gonna be there for a three-year contract, or something like that. They don’t necessarily wanna buy a house, but they also wanna live someplace nice. And when they leave, someone else will come in behind them.
So it’s a little bit of a different market dynamic, but there’s a tremendous amount of population growth, so we’re very confident that when you have 25,000-30,000 population growth, that a couple hundred units will be easily absorbed.
Joe Fairless: What type of internal rate of return does the larger B+ apartment community have?
Victor Menasce: It’s gonna be a range, depending on the ultimate valuation that we get for it and what we’ll be able to refinance it at, but somewhere between 16% to 23%, somewhere in that range.
Joe Fairless: And is that project IRR, or is that to investors?
Victor Menasce: That’s to investors, yeah.
Joe Fairless: That’s to investors, okay. And what would you say is the projected project IRR?
Victor Menasce: You know what, I don’t remember.
Joe Fairless: That’s fine, no biggie. What city are you developing in?
Victor Menasce: This is Lake Charles, Louisiana.
Joe Fairless: Lake Charles. The RV park – is that hard to get permitting for?
Victor Menasce: It’s very hard. In fact, this is a process that was started a couple of years ago by a gentleman who met with a land owner and convinced a land owner to get it rezoned and all of that, and then he didn’t have necessarily the skills to raise the capital, so he ended up partnering with us. So that was kind of done for us.
What we’ve noticed is that other RV parks that have tried to get zoning recently — in fact, there was one earlier this week that was denied… So getting zoning for an RV park is difficult. Very difficult.
Joe Fairless: Good for you all. Congrats on that.
Victor Menasce: Yeah, we feel like we’re in a great position, because every park within a 40-minute drive is at 100% capacity.
Joe Fairless: Now let’s go more high-level, and I won’t ask you project IRR’s anymore… And by the way, on the project IRR – what was that projecting, a five-year exit, a seven-year, ten-year?
Victor Menasce: That’s was a five-year.
Joe Fairless: Okay, cool. How can we learn to raise money for any worthy venture?
Victor Menasce: I guess the first thing is that a lot of people are very uncomfortable asking for money, and often they’re looking for money in the wrong places, so you’ve gotta think of it almost like a pair of shoes. When you go to the shoe store and you see the most beautiful pair of shoes, even if they’re deeply on sale, if they don’t fit, you’re not a buyer; it doesn’t matter how lovely they are or how deeply discounted they are, they’ve gotta fit. It’s like that with money as well. Money has an agenda, and it’s gotta be that perfect fit between the goals for the money and the goals for your project. If you don’t have that fit, then don’t try and force it. That’s probably the number one mistake that people make.
Second is that they’re often looking in the wrong place. What I talk about in my book Magnetic Capital – and this is what I’ve noticed – is there’s a few fundamental principles that when you meet those principles, raising money is remarkably easy. And when one or more of those are missing, it’s very hard to raise money. So if you just have that awareness of what are the things you need – and there’s only five of them, really, and you hit all five of those, it’s actually quite straightforward.
Joe Fairless: And what are those five?
Victor Menasce: Number one – relationships.
Joe Fairless: You knew I was gonna ask you that…
Victor Menasce: Yeah, absolutely. [laughter] Number one is relationships. Most people are not gonna part with hundreds of thousands or millions of their hard-earned savings with folks they don’t have a relationship with… So it really starts at that level.
Number two is trust, and this is not just “Am I dealing with an honest person?”, it’s a more complex psychological contract. “Can I trust you to put together a good plan? Can I trust you to execute the plan? Can I trust you to communicate in an open and transparent way? Can I trust you with my money? Can I trust you to hire the right team?” and on and on and on. If any of those elements are missing, it starts to chip away the trust. But when that trust is present, decisions get made fairly quickly, and if you have a funding partner that’s saying to you, “Well, I don’t know… I’ve gotta do another three or four weeks of due diligence”, there’s a clue that maybe that trust isn’t there yet. But when that trust is there, decisions get made fairly quickly.
Number three is results. “Show me your track record, show me that you know how to make money and you know how to do it consistently.” Now, your listeners might be saying “Well, wait a minute… How am I gonna raise money if I don’t have a track record? How am I gonna get a track record if I can’t raise any money? I’m stuck.” Well, remember, this is business; this is not like your grade three math test, where if you look on your neighbor’s paper you’re cheating. Business is a team sport. So if you’re lacking that experience, go work for somebody who is doing the kind of work you wanna do, it could be for six months or a year, and gain that experience. Now you can legitimately claim that because you’ve earned it. You can borrow some of their credibility as well.
Think about the folks the folks that have worked for Ken McElroy, in the MC Companies. Ken is Robert Kiyosaki’s real estate guy.
I know so many people that have done that specifically to gain that, either with Ken or with anybody, working with someone of a high caliber so that they can build their credibility.
Number four, you’ve gotta have a compelling opportunity. There’s a lot of people going out there thinking “It’s all about the deal… The deal, the deal, the deal” and you know what, the deal is important and it’s gotta be compelling, but it’s gotta be compelling also in the eyes of the beholder. A number of times I hear someone say “I had a great deal, but I couldn’t get it funded.” Well, there’s a clue in that. Maybe it wasn’t that compelling to somebody.
The number of people that I see out there trying to do projects for 10% or 15% margin, I think they’re nuts, because you can make one mistake and now you’re up to your neck in the water, and two mistakes and you’re underwater. I like projects that have fat margins, I like projects that have that financial resilience, so if you do have one or two mistakes or more – because guess what, it’s the real world, and mistakes happen – you can survive that.
I wouldn’t even start a project unless I feel pretty confident I can achieve 25%, 30% net profit margin. Those are hard to do, they’re hard to find. Sometimes we don’t find them, we create them. That makes it a little bit easier. That’s one of the reasons why we do ground-up construction, because today if you look at multifamily, most multifamily projects when they go on the market have multiple offers. If there’s 20 bids on a project, I don’t wanna be the winning guy, 19 guys behind me. I never wanna do that. But if I can build for 25%, 30% less and things are selling in the open market, I’m willing to wait a year to create that amount of value.
And then lastly, you’ve gotta have alignment, and this is a basket of things where the goals for the money and the goals for the project have to match… That is “What’s the size of the investment? What’s the term of the investment, meaning how long is it gonna be tied up for? What’s the rate of return? What’s the security? What’s the risk? What is the control structure? What’s the tax consequence?” It’s a bunch of smaller questions like that, and you have to get a pretty close to perfect match on those. When you do, like I said, raising the money is relatively easy, but the thing to do is make sure you don’t force it.
For example, I have a guy who likes to cycle his money on a short-term time scale. I’m not gonna put him in a project that’s gonna tie up his money for five years. On the other hand, I’ve got a guy who wants his money to be at work for five years; I’m not gonna give him a six-month flip, it doesn’t make any sense. You’ve gotta match the goals. And when you hit all of those, like I said, raising money is relatively easy.
Joe Fairless: Relationships, trust, results, compelling opportunity and matching up the goals.
Victor Menasce: Yeah, exactly right.
Joe Fairless: Great stuff. Based on your experience as a real estate investor, what is your best real estate investing advice ever?
Victor Menasce: A good deal badly managed is no deal. So it always comes down to the quality of your team, because deals are everywhere. It’s like an all-you-can-eat buffet, you’ve gotta be selective, make sure you don’t get indigestion, but make sure you’ve got the right team, because that’s the only thing that will save you.
Joe Fairless: Are you ready for the Best Ever Lightning Round?
Victor Menasce: Absolutely.
Joe Fairless: Alright, let’s do it. First, a quick word from our Best Ever partners.
Joe Fairless: Best ever book you’ve read?
Victor Menasce: The SPEED of Trust by Stephen M.R. Covey, Stephen Covey’s son.
Joe Fairless: Best ever deal you’ve done that you have not mentioned?
Victor Menasce: Wow. I was involved in a project where we actually acquired a stadium about an hour outside New York City. It’s a 28-acre parcel of land, 4,200 seats, and we bought it for $250,000.
Joe Fairless: And why was that the best ever deal?
Victor Menasce: It was originally built in 1994 for 11,5 million dollars, so we bought it for the equivalent of about two or three cents on the dollar.
Joe Fairless: Okay, and then…?
Victor Menasce: We managed to flip it a number of months later for about 800k, but… Even the idea that you could buy something for three cents on the dollar was outside the norm of what we considered reasonable.
Joe Fairless: At least just buy the dirt for that, right? [unintelligible [00:27:14].12]
Victor Menasce: Exactly. We knew we were buying it for less than the breakup value of the asset, so it was a very easy decision.
Joe Fairless: What’s a mistake you’ve made on a transaction?
Victor Menasce: Hire the wrong people, not check on what they’re doing, and then have them come back and ask for more money… I’ve made that mistake more than once.
Joe Fairless: And now that you’ve made the mistake more than once, what safeguard do you have now in your process to mitigate that from happening again?
Victor Menasce: Probably number one is spend a lot of time negotiating the contracts upfront, and we hire slow and fire fast.
Joe Fairless: Best ever way you like to give back?
Victor Menasce: I love to see people grow, so I do a little bit of coaching. This week I have to answer that one a little bit differently… Just witnessing the devastation that’s taking place in the Carribbean, I’ve got a bunch of friends that I’m working with to raise money to rebuild some of the British Virgin islands, because the devastation there has just been unbelievable. So we’ve already raised a bunch of money, and I’ve got a friend with a manufacturing facility for modular buildings, and we’re looking at moving some of that capacity to help rebuild some of those communities.
Joe Fairless: How can the Best Ever listeners get in touch with you?
Victor Menasce: They can reach out to me directly. My website is VictorJM.com. They can e-mail me, I’m Victor@VictorJM.com, or they can contact me through a form on the website.
Joe Fairless: Victor, thank you for talking about your business model, how you structure it with joint venture deals, with investors, the fee structure, a typical deal, and even walking us through a case study with that Philly example, how you get up and running by meeting local experts in the area, have those local relationships, to some projects you’re working on, why you’re working on those projects, types of returns, projected returns for them, and then the five ways to bring equity to any worthwhile venture.
Thanks for being on the show. I hope you have a best ever day, and we’ll talk to you soon.