JF951: The Big Boy Passive Approach to Investing
Accredited investor? This episode is for you! Our guest only works with accredited investors who want to inject capital into a passive machine that renders returns! Realty Shares executive will walk us through the types of opportunities they offer and who’s investing, so learn about debt raising an equity raising and turn up the volume!
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Amy Kirsch Real Estate Background:
– Director of Investor Relations at RealtyShares
– Over 10 year of financial services experience
– Worked in wealth management for Merrill Lynch, Dearborn Partners, and JP Morgan’s Private Bank
– Based in San Francisco, California
– Say hi to her at www.realtyshares.com
– Best Ever Book: Shantaram
Click here for a summary of Amy’s Best Ever advice: http://bit.ly/2p9uLnZ
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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 fluff.
We’ve spoken to Barbara Corcoran from Shark Tank, Robert Kiyosaki, the author of Rich Dad, Poor Dad, a whole bunch of others… With us today – Amy Kirsch. How are you doing, Amy?
Amy Kirsch: I’m doing well.
Joe Fairless: Nice to have you on the show, and looking forward to getting to know you a little bit. Amy is the director of investor relations at Realty Shares. She has over 10 years of financial services experience. She worked in wealth management for Merrill Lynch, Dearborn Partners and J.P. Morgan’s private bank. Based in San Francisco… With that being said, Amy, do you wanna give the Best Ever listeners a little bit more about your background and what you’re focused on?
Amy Kirsch: Absolutely. Thank you so much for having me today, it’s great to be here with you. I had been working, as you mentioned, about a decade in wealth management, and I learned a bit more about real estate crowdfunding. I was very excited about the opportunity, got to know Realty Shares a bit more, and just was very excited about all they were offering to investors, the opportunity to invest in a whole new way, and that’s what brought me over here.
Joe Fairless: Cool! So what do you do? What’s investor relations mean?
Amy Kirsch: I work with investors pretty much all day long, answering their question, helping them to understand real estate better, helping them through both the sales and the relationship process as they go through in any investments that they have with us on the platforms.
Joe Fairless: Can you get a little bit more in detail as far as maybe what are your specific responsibilities, what are some challenges that you came across, things like that?
Amy Kirsch: We have a team of seven; as we’ve grown, our investor base has become several thousand, so as you can imagine, we have all realms of the spectrum of investors. We’re guiding them, and often times just introducing them to real estate investing, and helping them to understand what it might look like if they did purchase a piece of an investment, what the returns would look like, what the risks are inherent in this sort of investing… That would be the introductory part.
Then, over the life of the investment, keeping them updated, helping them to understand if things are going well, if they’re not going well, if they are payoffs, and keeping them informed over the life of it. So it’s really a combination of both a sales and relationship management role for me and my team, and we have probably a thousand inbound questions a week from various investors that we’re responding to, which really completely range from about the company to about a specific investment. Anything you can imagine, we’re answering it pretty much every day.
Joe Fairless: A thousand inbound questions a week.
Amy Kirsch: Oh yes, easily.
Joe Fairless: Seven people.
Amy Kirsch: Seven people, a thousand questions.
Joe Fairless: Sounds like a blog post title, right?
Amy Kirsch: [laughs] A little bit, yes.
Joe Fairless: Seven people, a thousand questions a week… Everything from guiding them as far as the pros and cons of real estate, and then also working with them and communicating with them throughout the investment. This is interesting stuff, because you basically do what I do, and I’d love to learn more because you’re doing it on a much higher volume than I’m doing.
Let’s talk about who you’re speaking to. Are they all accredited investors?
Amy Kirsch: They are. Everyone that’s on the Realty Shares platform right now is an accredited investor. We have non-accredited investors asking us questions, and we’re hoping that we’ll be able to show them an offering sometime in the near future, but for now we’re only working with accredited investors.
Joe Fairless: Okay, so they’re all accredited investors. It sounds like you’re at the front end of the deal before they sign up to fund a portion of the project or you guide them in real estate investing. Are you giving them input on the actual investment itself, or the pros and cons of investing in real estate?
Amy Kirsch: A bit of both. As I mentioned, we have people who have never invested in real estate before in the platform, so they often have more rudimentary questions… They haven’t seen a waterfall before – what will that mean for them? What does a preferred return look like? Those kinds of questions, trying to understand the sponsor a bit more and the ABCs of real estate… So we’re talking about the platform at large, and then also specific investments, helping them to understand… Honestly, we can get into “What is the difference between debt and equity?” We answer that question all the time.
Joe Fairless: So your role is both the particular investment, as well as just education in general, on real estate?
Amy Kirsch: Absolutely. It’s absolutely a combination of both, and we really take a lot of stock in making sure investors are educated. We want them to really understand what they’re investing in prior to getting into an offering.
Joe Fairless: You said one of the common questions that’s asked is “What is the difference between debt and equity?” What’s your response to that?
Amy Kirsch: Wow, you’re getting me on my toes here… [laughter] [unintelligible [00:07:03].19] like you’d see at a bank, where you’re receiving… You’re acting like the bank; you can expect an interest rate payment monthly. It looks like a balloon mortgage, where you can expect a principal after the life of the loan. So that’s how I explain debt.
On the equity side, you look more like a business owner. You’re participating in the upside or the downside participation of the property, and should things perform well, you’ll have unlimited upside. Should things go poorly, you will part-take in that as well. With that comes a lot more risk, but a lot more reward, whereas on the debt side you know exactly what the outcome is likely to be, because there is a stated interest rate and you’re not gonna earn any more than that.
Joe Fairless: Are they secured the same way with debt and equity?
Amy Kirsch: That’s a great question. The debt is secured by a first lien loan, where should something go wrong, we’re able to foreclose on the property. If our assumptions are in line, then we should be able to fully recoup all investor money. On the equity side there is no lien on the property. Our measures are a bit different in what we could do should something go wrong. We would maybe able to kick out the partnership, we may be able to take over the property… It truly depends on what the underlying property is.
Joe Fairless: Okay, it makes sense. After I did my first deal, I was talking to some people and they were like, “Did you raise debt or equity?” I was like, “Um, I just raised money. I have no idea.” [laughs] I was so stupid at the time. I had already done one deal, that shows how green I was at the time… And people like you have educated me along the way, thankfully.
Amy Kirsch: Yeah… Like I said, it’s important for investors to understand the worst-case scenarios, just as it is the best-case scenario, when people are first participating in real estate, and we encounter a lot of people like you.
Joe Fairless: What are the most common risks? I mean, sure, there is about 20 pages in a PPM that outlines some obscure risks… But what’s the most practical couple risks that could come up in a real estate investment?
Amy Kirsch: I think the risks are a bit different for the different types of products, like I mentioned before for debt… And truly, our debt holders are often a little bit less experienced than our commercial, which can be great and bad, because we have that foreclosure opportunity should something go wrong. But what would happen there is that the sponsor (or the borrower, in this case) is not able to execute, and what happens then? They’re not able to sell it for the price that we thought, so they can’t pay off the loan in full. That would be the risk there, often times.
I think almost all of the time we have personal guarantees on our debt, so if they do not return money in full, then we can pursue them personally. So I think that’s a risk – the sponsor is not able to execute. A more likely risk is that the market turns around, so the market isn’t able to deliver what we had expected.
Joe Fairless: Let’s talk about equity, going into an equity example. I really think this applies to both debt or equity, it doesn’t really matter how it’s structured. Let’s just say the borrower isn’t able to execute and perform under business plan, and let’s just say – because I know you do different asset classes – it’s a single family house. What is a common reason, based on your experience, that they’re not able to execute the business plan? What do they overlook or not account for most of the time?
Amy Kirsch: I wanna start by saying that we have done – I believe the number now is 550 deals, and in that time we’ve had under ten where we’ve had significant issues with borrowers or sponsors on any side of the fence, debt or equity. So what we’re talking about now is very rare… But to your point, the reason I think sponsors most often don’t execute is simply from inexperience. They thought costs would be X, and they ended up being Y, and they were significantly more. I’d say that that’s what most often accounts for not being able to execute, and the way that we try to avoid those sorts of situations is by our due diligence process upfront, where we account for track records and look for the kind of experience that they have in the past, both with either their current company or in the past, as well as getting to understand what their business plan is.
Joe Fairless: Yeah, thanks for putting it into perspective. I was curious about why it wasn’t working, but thanks for giving some context as far as “Hey, this isn’t happening very often.” But as I know you know, that’s just a question that comes up for all of my deals – “Hey, what are the risks here?”, so I was just curious how you discuss those.
Now, on a different path, what’s the most common reason why an investor doesn’t decide to invest with you all?
Amy Kirsch: You know, I hadn’t thought about that too much. I’d say the most common reason is because the parameters of the offerings that we have in a marketplace at that time don’t meet their investment objectives. That’s most often what — the hurdles often find upfront that we’re often able to overcome are the inexperience of the investor… So getting them to understand (as we’ve talked about earlier), educating them properly. But I’d say that’s most common – they’re looking for a 12-month offering, and we’re showing something that’s 8 years; they’re only looking for debt, we have equity…
Mostly, what we find is people take a month or two to review the platform if they don’t have any real estate experience, and then they invest after, in 30-40 days.
Joe Fairless: One thing I’ve found with investors who don’t invest is they wanna be active and not passive. They want control, they want to have their hands in it, they wanna be more involved, and I’m just not set up that way. They are passive too when they invest in your stuff, right?
Amy Kirsch: Yeah. We have heard that from investors before, but I hadn’t really thought about that as a common objective. What we find more often is that people are tired of being actively involved in the investment process. They don’t wanna manage the property, they wanna do it, so that’s why they’re coming to us. But I could see it on both sides… If they do wanna have a heavier hand in the process, we don’t offer that as well.
For pretty much everything else, if you are looking for passive investment, you can come to us and get whatever kind of offering you’re looking for.
Joe Fairless: You’ve just hired employee number eight on your team, congratulations! What do you wanna make sure that they know?
Amy Kirsch: What’s very important to us is that we went through a broker-dealer, and compliance is extremely important to us. Making sure an investment is suitable for an investor is, from day one, what we’re talking about. The second thing is getting — some of the members of my team have real estate knowledge, some don’t, so getting them up to speed on what kinds of deals we’re offering… We work very closely with the investments team, so working together with them to get a really good understanding of what we’re offering to investors – those are both imperative to being successful on the team.
And of course, being able to be patient, getting the same question over and over again. That takes a lot of… You have to be steadfast for that.
Joe Fairless: Yes, especially if you’ve got a thousand coming in per week. As far as the compliance goes, maybe I’m not thinking of it properly, but isn’t that already set up through your software, so if they come to you and your team, then they’ve already been qualified through the software?
Amy Kirsch: To a certain extent they are qualified up front; a part of it is qualification, but the other part is suitability, so making sure they’re an accredited investor is just 50% of the equation. We have investors that make very substantial investments with us – half a million, a million dollars concentrated in a deal. With that comes a lot of risk, simply because of concentration risk. So if they’re making a million dollar investment but they have 50 million dollars, we’re less concerned about that than if they are making a single one million dollar investment and they have two million dollars.
We’re really just trying to understand the objectives of the investor, and that they are properly suited for that particular offerings. That’s what we’re focused on when we’re reviewing deals or reviewing investors. It’s very important.
Joe Fairless: What would be the pros and cons when comparing investing in a crowdfunding platform like your company, versus a syndicator who has his own company, like mine? So if an investor were to come to you and be like, “You know what, Amy? I’ve got 100k and I wanna invest in one thing. I’m trying to decide between the deal that Joe’s got, where I know I can go directly to him and he is a one-company thing, versus a crowdfunding platform like yours.” What are you saying that would be a pro over what I’m offering?
Amy Kirsch: The largest pro is that we’re gonna have a more diverse set of offerings, because we’re dealing with sponsors all over the country in diverse product sets. So while a syndicator may specialize in a particular asset class or a particular geography, we’re gonna see that same thing repeated over our offerings, 20-something million dollars worth of opportunities over the course of a month, with a very diverse background of sponsors, geographies, asset classes, product classes. I think that’s a major differentiation you’ll see, and we’re being a low-fee provider… So with some of that relationship where you know the syndicator probably a little bit better, maybe you’re willing to pay a bit of a premium for that. We offer pretty low fees to our investors across other crowdfunding platforms, or one of the lowest.
Joe Fairless: And what are your fees?
Amy Kirsch: We charge 1% asset management fee across the board, and that goes to investors. On the sponsor side we charge in origination fee between 3% and 4% on equity and 2%-3% for debt.
Joe Fairless: And you don’t take any cut of the deal?
Amy Kirsch: We don’t take any cut of the deal, we take no participation fees.
Joe Fairless: So 1% asset management fee, and 3%-4% on debt that’s paid by the sponsor.
Amy Kirsch: Right.
Joe Fairless: And did you say something else? Was there another fee? Or is that it.
Amy Kirsch: Just the 1% asset management fee that’s charged to investors annually, as we provide the services… For updating you, K1’s, managing the property after the fact, after you’ve invested.
Joe Fairless: Those are very good fees.
Amy Kirsch: Yes.
Joe Fairless: What’s the plan for your company from this point forward?
Amy Kirsch: The plan is to expand what we’re currently doing. We have a lot of opportunities to grow in the various marketplaces that we’re in; I think that’s very important to us. The other thing that we’re really focused on is automation and tech. We’re a financial technology company; a lot of what we bring to the table is breaking down a business that’s pretty archaic and bringing it to the future. I think both of those things are what we’re really focused on, and we’re really excited about some of the new expertise that we’re bringing into the marketplace in 2017. Those are our two major focuses.
Joe Fairless: What is your best real estate investing advice ever?
Amy Kirsch: I would say… Let me think about this for a second. My best real estate investing advice ever is to think about your investment objectives and diversify. If you execute in that regard, I think you really have a great shot at being very successful in real estate investing.
Joe Fairless: Are you ready for the Best Ever Lightning Round?
Amy Kirsch: Oh, sure! I guess so…
Joe Fairless: [laughs] Well, we’re doing it either way, so I’m glad that you guess so. First though, a quick word from our Best Ever partners.
Joe Fairless: Best ever book you’re read?
Amy Kirsch: Shantaram.
Joe Fairless: What’s that about?
Amy Kirsch: It’s about a criminal who gets lost in India. I was just there, and it was so incredible to see what he had — just kind of hiding throughout the streets of Bombay. It’s the coolest book ever and it’s based on a true story.
Joe Fairless: Shantaram… Okay, cool. Best ever personal growth experience and what did you learn from it?
Amy Kirsch: That would be moving from traditional wealth management into the fintech space. It is kind of exciting to go from the most archaic business of all time into breakthrough measures of doing everything. I’ve learned so much in the last two years… More than I have in the previous ten in the same(ish) industry.
Joe Fairless: What’s one specific thing you’ve taken away from it?
Amy Kirsch: That you don’t have to think small; there doesn’t need to be so many levels of red tape, and if you’re working with the right people, you can get a lot accomplished in a short period of time. You don’t have to do things the way they always have been done just because that’s what people say needs to happen.
Joe Fairless: Are you an investor? Do you invest in real estate, too?
Amy Kirsch: I do… I own property, but we’re limited from doing it on the Realty Shares platform.
Joe Fairless: Oh, of course. [unintelligible [00:20:26].10] Well, best ever deal you’ve done personally on a real estate front?
Amy Kirsch: I have flipped out of apartments in Chicago, and I think that’s because that’s where I’ve lived, and I’ve been successful in that regard.
Joe Fairless: Best ever way you like to give back?
Amy Kirsch: Part of the reason that I was in India was that I’m involved with a national philanthropic organization that gives money all over the world to help people recognize that they can be successful. This particular group gave money to women in India to help them be independent, so that their kids could go to school. It’s called the Gabriel Project and I’m really happy to be associated with it. It’s just doing wonderful things for empowering women in a very impoverished area.
Joe Fairless: Thinking about some of the deals that you’ve personally done, what’s been a mistake you’ve made on a particular deal?
Amy Kirsch: I think one of the things I’ve learned is to not be too emotional. This goes to investing in general, but very particularly with real estate. You can get too involved, hold on too long… Something I’ve learned over time is to try to be less emotional when it comes to any kind of investing. I was investing in the markets in 2008 – not in real estate – and then found that some of my clients as well were making decisions because they couldn’t see through the trees… I think that’s good to overall investment advice.
Joe Fairless: Where can the Best Ever listeners learn more and get in touch with you?
Amy Kirsch: They can come to RealtyShares.com, or e-mail us at email@example.com. We answer a thousand questions a week, so we’d be happy to answer a couple hundred more.
Joe Fairless: [laughs] Pile them on, baby! Well, Amy, thanks for spending some time with us talking about your role and the challenges you come across, as well as your responsibilities, from you and your team — what were you gonna say?
Amy Kirsch: I just wanna say thank you so much! It’s so exciting to talk to others in the similar space, and it’s just great to be here!
Joe Fairless: Yeah, especially with your particular role… It fascinates me, because I’m doing similar things to what you’re doing, but not on your volume – by no means am I doing the volume of a thousand inbound questions/week; that’s insanity. But because you’re doing the volume, it’s interesting to hear the varying degrees of questions, from what is a waterfall and preferred return, to the difference between debt and equity, all the way to the risk associated to it, and maybe more sophisticated things like “How is my money secured if this scenario does happen?” and you talk through all that… As well as your focus on compliance when you hire a new team member, and just getting them up to speed on the business model and the different opportunities.
Thanks for being on the show. I hope you have a best ever day, and we’ll talk to you soon!
Amy Kirsch: Thanks so much, Joe.