JF2744: Raising Rent? Here’s 4 Ways to Keep Tenants Happy ft. Sia Senior

What’s the best way to navigate raising rents with your current tenants? Sia Senior, Principal and asset manager at Arrowhead Capital, shares with us the best ways to work with tenants during rent raises to avoid turnover and sour relationships among the community.

Sian Senior | Real Estate Background

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Slocomb Reed: Best Ever listeners, welcome to The Best Real Estate Investing Advice Ever Show. I’m Slocomb Reed and I’m here with Sia Senior. Sia is joining us from Upper Marlboro, Maryland, one of the Maryland suburbs of DC. She is the principal and asset manager at Arrowhead Capital, which acquires multifamily assets in the mid-Atlantic and the Southeast. She is an LP on 134 units, she self-manages over 20 single-family and small multifamily units, and she has a smaller asset acquired through a JV partnership. She came to real estate investing as a high school math teacher. Sia, can you start us off with a little bit more of your background and what you’re currently focused on?

Sia Senior: Sure. Thanks for having me. I really appreciate it, Slocomb. As you said, I am a former high school math teacher. I started in real estate in 2003, with the encouragement of my husband. I did that part-time, doing real estate on the weekends in the summer. We got our first long-term rental when we decided to house-hack and move into the house we have now and rent the property that we had when we first got married. So recognizing all the benefits and the nice income that came from that, it didn’t require a lot of work, didn’t require me teaching, we continued to add properties to our portfolio. We did some flips, about eight, in the DC area and Baltimore as well, and just kept adding to our portfolio until we got ready in 2020 to start scaling up and adding multifamily.

So we joined some communities to get a better understanding and education on that, did some networking, and connected with people to be able to take down a 16-unit at the end of 2021. Now we’re focused with Arrowhead Capital, which is our real estate investment firm, where we’re focused on adding more to the portfolio, but also connecting with passive investors and people who don’t know they can be passive investors. We’ve got an educational piece of our real estate firm that wants to inform people who may be not aware of the benefits of real estate investing and may not have the time like we do, managing our own units, that can still benefit from it. Our goal is to get people on board and educated about this, so that they can grow their generational wealth, as we are doing right now.

Slocomb Reed: Awesome. Tell me about the 16-unit that you recently acquired?

Sia Senior: Sure. It’s a 16-unit townhouse asset in Johnson City, Tennessee, connected with a couple of other partners who have found that asset through their networking, brought it to us, and we just thought it was a good asset to start with, particularly because we were really focused on really growing our wealth and connecting with people who have similar values and guidelines that we do. That worked out really well for us, because it’s a smaller unit; right now, we’re managing over 20 ourselves, so it was a great way for us to kind of test the waters and see what skills I have in managing our single-family and our four-unit, what can translate over to that 16-unit, to see how it’s different. Obviously, with 20 units plus, different buildings and that kind of stuff, it should be easier, we would hope, managing a 16-unit, or at least managing the manager. We have a third-party property manager on the 16-unit in Tennessee.

So I’m excited to join, and it was a great opportunity too for us to get out of the two of us being a team, and open ourselves up to other individuals, to get different perspectives, and just unite and connect in that way. That’s how we’ve found that, and it’s been good so far. We’ve got great returns on it so far, we’ve got 100% collection, which is great, we always like that, and we’ve got some great potential for what we plan on doing with the property. It was actually self-managed by the owner who had actually built it in the early 2000s. So we feel that inviting in a third-party managed to kind of improve the efficiencies of it, that that can be really beneficial for us. We’re excited about all the potential with that.

Slocomb Reed: How big are these townhouses?

Sia Senior: They’re two-bedroom/two-bath, they have a garage, they’re three levels, so they’ve got the two levels up top and the garage on the bottom. They’re really nice, actually. They were kind of overbuilt for the area, which is great for us because the rents are under-market, so we have great potential to just maintain it, taking care of little maintenance here or there, and bringing it up to market rent. That’s what we’re excited about.

Slocomb Reed: Gotcha. So two-bed/two-bath townhouse apartments, with garages, that were built just around or under 20 years ago. Give us an idea of the numbers on this deal. What did you buy it for? Is there any money that you had to put into it? What kinds of returns were you projecting, and what’s happening right now?

Sia Senior: We purchased the asset at 1.5. It is still a finance, lease financing.

Slocomb Reed: Nice.

Sia Senior: Very nice. They did a good job negotiating that 1 million, so we had to come with the rest as a group. The projected return – so right now we’re projecting an equity multiple and a seven-year hold, so we’re like 2.3 is the goal. And we’re pretty much considering that the properties were really under-market in the beginning; we’ve been able to re-lease, resign, renew some of the tenants, increasing some of the rents. We are actually responsible landlords, which I enjoy, and owners in that, because we could significantly raise the rents and be at market. But we recognize and see that humanity in our tenants and recognize that this could be a shock for them, so we’re working to do it responsibly. If it’s not a place where they’re able to stay because of the rents, working with them with the property management that’s there to facilitate a good way of working together to get to everybody’s goal, where they have some place to live that they can afford and we can also still improve the asset and get it running in a performance peak that we like. That’s kind of what we’re doing right now with it.

Slocomb Reed: Gotcha. It sounds like especially with your experience as an owner-operator with the single-families and small multifamilies that you were buying before you started looking at larger deals, it sounds like you have a lot of experience in hands-on property management. I’m an owner-operator too, so I am the management company. I’m in too much of the nitty-gritty right now. Question for you, for our owner-operator listeners, but also for our listeners who are planning value-add business plans that they need to execute on… When you acquire an asset like this, when you know that you’re going to raise rents on the tenants who are currently there, how do you go about that? How do you make sure that the good tenants you want to stay in their townhomes will want to stay after the rent goes up?

Sia Senior: Right. It is a challenge to have the asset perform at peak performance while also recognizing the humanity and the fact that really, real estate is about people. There are people that live in the property, we want to recognize that they need shelter, just like anyone else. So what we’ve worked with – at least on the 16-unit asset, and now I’ll talk about what we do with our personal portfolio… Like I said before, we’re really working on performing them. The truth of the matter is that if you’re under-market, it’s not like people can’t really afford it, they just haven’t had the benefit of having to pay less rent. But if the markets are increasing, that’s also because people can afford to pay a little bit more. So you kind of find that balance where you inform, you educate, you give them time to either decide, “Yeah, I’m willing to pay more, because I see this as a great deal, and increasing my rent is still worth it for me to stay here.” Or if not, giving them two to three months renewal, two to three months to manage and look for other places to live. That’s kind of what we’re doing with the 16-unit.

As it pertains to our single-families and small portfolio that we have, the same idea. When you self-manage, sometimes you get your [unintelligible [00:10:41].20] and you try to work with the tenants. But what we learned, especially coming into the multifamily space, is that that is great, but also, you can do well by doing good as well. We have increased our rents with our tenants, but recognize that we try to balance what they can afford when we look at in terms of their income coming in, getting a good idea about that, and what makes sense. So we try to balance us being profitable with them also having a place to live that they can afford, that works for everybody. If that’s not the case, we give them enough time. Sometimes we give them resources on other locations that might better fit them in terms of what they’re willing to pay for. Sometimes they just don’t want to pay more, and that’s okay. We’ve worked with them to get them transitioning to a new place and giving them the time they need to do that, while also recognizing that we are also in this for making a profit. We want everyone to have a win-win situation.

So that’s going to be it for us – the key for us is really communicating with the tenants. We’ve had great relationships with all of our tenants from before the pandemic happened. We had a very little turnover; in fact, we only have one that we had to evict, because she just refused to pay. But everyone else, we were able to work with them, we got them the assistance that came through.

I credit our relationship with them and working with them before the pandemic and recognizing that this is a relationship to get us to where we are right now. We’ve been fortunate in that sense. So they don’t mind when you raise the rent, especially if it hasn’t been a while and they recognize that you’ve given them value. Addressing all their needs appropriately, in an adequate amount of time, and just communicating with them, so they know you’re not just this figurehead, but you’re a human being too that has kids and has regular issues that they have. We’ve been fortunate in that sense.

Break: [00:12:16][00:14:13]

Slocomb Reed: Communication is absolutely vital for sure. In my experience as an owner-operator, I have a lot more of C-class properties right now. I know you have a third-party property manager there in Johnson City, you’re in Maryland, but you also have your own portfolio in Maryland… As an owner-operator, I do fully agree that good communication and frequent communication, if not over-communication is absolutely vital. In my experience, every issue that a tenant has falls into one of two categories. It’s either maintenance, they need a place to live where everything works, everything functions, there is heat in the winter, there’s cool air in the summer… But the other category – everything is not maintenance, in my experience. If it’s not a maintenance issue, it’s a respect issue. It’s about tenants feeling respected by their neighbors, by their property manager, and by their landlord. I cannot overemphasize the value of communication.

I wish I was buying townhouse apartments built 20 years ago. Unlike the brick bunker, three stories, built in the 1960s or 70s, cramming as many apartments in a building as you possibly could 50 years ago is the stuff that I’ve been buying recently. So we end up having to do probably more value-add than you do. But one of the things that I do is when I take over management, I open with, “We’re the new game in town, and we are making this a better place to live.” Over-communicate, but also make sure that tenants hear from us, that we are improving their home. We do some of the major capital stuff, resurfacing parking lots, replacing windows, adding Wi-Fi, the big stuff, finally having the common areas professionally cleaned… The carpets have been sitting there just soaking in everything for five years… We do that stuff first, while talking about making it a nicer place to live, and then we raise rents.

Sia Senior: Exactly.

Slocomb Reed: Because to your point, Sia… You put this really well – it’s about this business doesn’t work without profit. We’re still in the business of providing a home and treating people with dignity and respect. There’s a balancing act that you referenced there that’s absolutely vital in what we do. For those of our listeners who don’t get involved in the day-to-day operations, I hope what you’re getting from this is that the people who are in your day-to-day operations, your property manager, the people who are creating your business plan, that they have this in mind, treating people with dignity and respect. Absolutely. Sia, the 16-unit in Johnson City is a joint venture. What is your role within the partnership?

Sia Senior: So I’ll be doing a little bit of the asset management with the team. A majority of the people on the team are either former or current military, and so we have a potential for being deployed. There’s a lot of overlap where we kind of cover each other in case that happens. I’ll be using my experience and skills from the asset manager part to kind of play a role there, and just to see. I’m also going to be looking at the finances, because obviously, we need to make sure that financially, the property is doing well, so that when we’re ready to do a refinance, that we can do that and that the property is performing well. So I’ll be looking at the metrics of it and all the finances, looking over it, and then comparing it to see what we can do in terms of exit plan or refinance, if that happens to be the goal. The good thing is that I actually have an MBA in economics and finance, so that will help me in that a little bit, too. So yeah, I’ll be doing that with my main two roles, basically, and helping with that.

Slocomb Reed: That degree sounds very valuable. Mine’s in philosophy in Spanish. I’ll tell you what, the Spanish is coming in clutch right now. It’s a lot easier to get my rehab done with the Spanish. Philosophy is helpful in other ways, but not as directly correlated as your education. Sia, you developed a skill set as an owner-operator and with your portfolio there locally before you started looking at other deals… Which of those skills are proving to be the most valuable now that you are investing at a distance with joint venture partnerships?

Sia Senior: I’ve developed a lot of skills while I’m working with the tenants. I think being a former teacher and just recognizing that they’re different personalities, and knowing how to approach that, whether it be with your tenants, whether it be with your coworkers, your colleagues, whether it be working with maintenance, or the construction crew and trying to get them to work with you, I think that is a skill that I have in terms of trying to relate to people and letting them see the sincerity about how we’re approaching things. I think that’s one great skill, because then they recognize that it’s not me against them, but it’s how can we work together and let’s get our goal together.

I think that’s really important, because if you recognize that you’re all on the same team, then it’s easy to work together to get to the goal. So I try to keep that in mind with the tenants, with my coworkers, with my colleagues, partners, and things like that. And then I think just having experienced so many different units, even though they’re pretty close together… A majority of our units are in Baltimore, but we have some in the DC area as well. Just being able to organize and manage all of that… I’ve used our property management software to help me keep that stuff organized, so that I know the rent’s coming in, I know what’s going out, I know the expenses, and I can have a good handle on that. So I think those are the two main skills that I bring, that can help benefit the teams that I join.

Slocomb Reed: Awesome. What kinds of deals are you guys looking at acquiring now?

Sia Senior: Two types of deals. In particular, we want to still do joint ventures, and we’re looking in the Baltimore area because it’s in our backyard. But we’re also looking at places like North South Carolina, Indiana, and Ohio, because we like the cash flow that is a potential there. For me, I’m focused on those types of deals that we could keep in our portfolio with other partners and help us grow wealth-wise generationally, for our family, our friends, and kids.

But we’re also looking at deals that have nice upside, that more kind of syndication plays, larger units. Particularly, because I feel like there are a number of people in our community that doesn’t really have access to those types of deals. So we are looking at deals that can bring them that potential, where we could syndicate and bring in partners who didn’t really even know about this, as we didn’t years ago, and provide them opportunities to invest in these types of deals, whether it be a 506C, 506B, or maybe even a title III, which we’re also looking at joining. That will allow people who may not have those accredited qualifications, but still want to invest and have funds, want to learn, and be able to develop and increase their wealth as well. We’re open to all of those.

Slocomb Reed: Awesome. Well, Sia, are you ready for the Best Ever lightning round?

Sia Senior: Yes.

Slocomb Reed: Sia, what is the Best Ever book you’ve recently read?

Sia Senior: I have two. The first one is The ONE Thing by Gary Keller, and the other one is The Millionaire Real Estate Investor. I think they go hand in hand, particularly because The ONE Thing helps me focus on my goals and make sure I have the priorities straight, so that I can be a little bit more productive. The way we built our current portfolio was based on the Millionaire Real Estate Investor. So getting the goals, making a plan, and then acting on it. Those two I think went hand-in-hand in really helping us. I like to review them even though I’ve read them before, just to kind of solidify and keep me on task. Those are my two good ones.

Slocomb Reed:  The ONE Thing is fabulous. The Millionaire Real Estate Investor was the first book I read that gave a proper 30,000-foot view of everything that real estate investing can be, and figuring out how to invest in real estate in a way that will help you achieve your own goals. It’s also the only book I’ve ever read that includes the metric return on equity. Especially when we’re experiencing as much appreciation as we have the last two years – this is being recorded in February 2022 – return on equity is a vital metric that I had never even heard of until I read that book. So those are both great. Sia, what’s your Best Ever way to give back,

Sia Senior: My husband I tithe to our church, and we give to charity, which is part of who we are and our value system. We also like to give our time. In terms of real estate investing, I’ve done a couple of webinars with family, friends, and people that are familiar with me to inform them about real estate. I’ve also started a Facebook group that is called Sage & Steward Real Estate Investing, that talks about the wisdom and wise types of investing, along with stewardship and taking responsibility and managing the assets and the people in the assets in a responsible manner. Those are two ways that I like to give back.

Slocomb Reed: Awesome. What’s the Best Ever lesson you’ve learned while investing in real estate?

Sia Senior: The Best Ever lesson… I think, for me, having been in this for a long time, the best lesson is to be consistent with what you’re doing and stay persistent. It’s really just being focused and recognizing that wealth is not built overnight, and that it takes some time to work on, but you can do it. There are times when we’ve had some interesting times with tenants that we’ve had to work through, but in the end, we end up working it out. And it’s because we’ve been consistent with what we do, and trying to add to our portfolio each time, meeting the needs of the tenants, and growing in that manner, so that we even get referrals now. That’s probably my best lesson.

Slocomb Reed: Gotcha. What’s your Best Ever advice?

Sia Senior: My best advice is, I think the things that I learned from the two books, which is to set a goal for yourself, make a plan, and then just take that first step forward. I talked about the two books – they’ve really helped me to really move forward. It’s not easy, but it’s simple, and if you keep that in mind that you’ve got a goal, you make your plans to attack those goals, and then you take a step in moving towards the actions, then that’s going to be really helpful to you.

Slocomb Reed: Awesome. Sia, where can people get in touch with you?

Sia Senior: You can find me on LinkedIn. I try to do a post every once in a while. As I said, I mentioned the Facebook group that I have, Sage & Steward Real Estate Investing, so you can find that there. You can also reach me at sia@arrowheadcap.com.

Slocomb Reed: Great. Well, Best Ever listeners, thank you for tuning in. If you’ve gotten value from this episode, please subscribe to our podcast, leave us a five-star review, and please share this episode and this conversation with Sia Senior with a friend, so that they can receive value from our podcast, too. Thank you and have a Best Ever day.

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JF2695: 3 Advantages to Investing Multifamily in Opportunity Zones with Nick Simpson

It can be hard to find good deals in a competitive market, but Nick Simpson has found a possible, profitable solution: Opportunity Zones. Opportunity Zones are low-income areas that are set up to encourage an increase in economic growth. For Nick, these areas hold a lot of possibility for multifamily value-adds. In this episode, Nick breaks down two of his deals and shares why we should look to Opportunity Zones for investments. 

Nick Simpson | Real Estate Background

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Slocomb Reed: Best Ever listeners, welcome to The Best Real Estate Investing Advice Ever Show. I’m Slocomb Reed. This is the world’s longest-running daily real estate investing podcast. Today, we have Nick Simpson with us. How are you doing Nick?

Nick Simpson: I’m well. Thanks for having me.

Slocomb Reed: Great to have you here. Nick is the founder and CEO of Mentis Capital Partners which focuses on value-add multifamily, classes B and C, and ground-up development of multifamily and student housing that is Class A. The current portfolio of 60 million as a GP, he has 10 years of real estate investing experience. He’s based in Salisbury, Maryland. Are you doing most of your investing there in Maryland, Nick, or are you investing elsewhere?

Nick Simpson: Maryland and Atlanta recently, and then looking throughout the Sunbelt.

Slocomb Reed: Looking throughout the Sunbelt. Gotcha. Investing in Maryland because the market fundamentals are solid in comparison to other markets, or because it’s your backyard?

Nick Simpson: It started as the backyard, and we do all of our development here. I do think the market fundamentals are strong, otherwise, I wouldn’t waste my time or direct capital here. But we choose to do our developments closer to home because they take a lot of political connections, they take a lot of zoning connections, you really need to be kind of boots on the ground, unless you have a much larger firm and you can bounce around and monitor these projects pretty well. Right now, we have a 101-unit 14-story student housing project going up in downtown Salisbury. That has taken three years of planning and a lot of local connections just to get that done. But then doing the value-add multifamily picked two up in Atlanta, and continuing to try to search for properties but not overpay in this market.

Slocomb Reed: Salisbury, Maryland – looking at it on a map, most people would assume that’s Delaware. What kind of market is Salisbury? Is it close enough to DC or Baltimore to be a suburb?

Nick Simpson: No, it’s not quite that close. You’ve two to two and a half hours to the center of DC, depending on traffic in Northern Virginia. We did see during the pandemic, a lot of people come across the Chesapeake Bay Bridge and kind of come over to the shore of Maryland, call it the Eastern shore of Maryland. I think as far as Salisbury is concerned, the market here is focused primarily on agriculture, you have student housing with Salisbury University, [unintelligible [00:03:34].05] which is a driver of probably a few of the student housing projects around here. Then you also have hospitals, biotech, and tech companies. But the big thing that people don’t realize is you have Fortune 500 companies that maybe people don’t think about too often, like Purdue Chicken or Tyson, and they’re right here in our backyard and they bring a lot of employments therein.

Slocomb Reed: Solid employment base, nice. What got you into real estate investing, Nick?

Nick Simpson: I started about 10 years ago, right after the recession. I knew I wanted to get into business, but I didn’t know what. I picked up Rich Dad Poor Dad one Saturday, ended up reading it in one day; hell-bent on buying a house after that. And then one became two, then 10, then 20, then eventually into multifamily and commercial, and here we are today.

Slocomb Reed: Yeah, Rich Dad Poor Dad had a similar effect on me. I ended up a house-hacker just a few months after reading it. You do most of your development there in your backyard because you have connections. What led you to the Atlanta market?

Nick Simpson: Well, of course, you have population growth, all the normal things that we all talk about, the normal demand drivers. But I like the East Coast markets really, the Raleigh, Durham, Charlotte, Tampa, and Atlanta markets. While they’re very difficult to find deals in right now, I still think there’s yield there. We had a couple of contacts down there, so we were able to close on a deal that we think is going to do quite well.

Slocomb Reed: Tell me about that deal.

Nick Simpson: Well, I guess the most recent ones are in Decatur or DeKalb County, and they are right around the corner from each other, so it’s going to be one of those classic plays where we can have a little bit of economies of scale between the two properties. Both value-add; we always pretty much look for heavy value-add or very obvious value-add, something that we can actually truly force the appreciation on. In this market, we’ve just gotten frustrated with some of the bids that we were seeing on other properties that clearly just don’t have that type of yield built into it. But maybe they have a 1031 situation, or just have maybe a back office that’s extremely efficient. I’m not sure exactly how some people are getting them done. But we’re trying to really remain conservative on the underwriting, and make sure that, first and foremost, we feel comfortable putting our own money into the deal, putting our family’s money into the deal, and then of course, breaking it out and putting it in front of investors.

Slocomb Reed: Nick, what counts as true forced appreciation for you?

Nick Simpson: For me, you have to actually physically fix the asset. For instance, the parking lot in one of the projects is absolutely horrible; the trees are ruining the parking lot, so get rid of the trees, fix the parking lot, do the grounds… All of a sudden you have new curb appeal; paint the buildings, new windows if necessary, adding washers and dryers. The other property needed new roofs, again, paint the exteriors… A lot of just cosmetic stuff. But of course, on the interior of the unit, we’re going to be doing kitchens, the bathrooms, flooring, painting, lighting fixtures, whatever might be necessary. But truly making that a better place to live, so that the rent increases are not just based on an assumption that we’re always going to go up. Multifamily has obviously done very well over the past, but when you look at an untrended yield, that’s really what’s going to be a telling story, and I just want to be able to bank on the fact that we’re going in there fixing it and truly being able to demand a higher price because it just is a better product.

Break: [00:06:50][00:08:30]

Slocomb Reed: Give us an example of a time that you’ve done that.

Nick Simpson: I’ve been doing that from the beginning, whether it be from the very first house I bought, to properties we’re working on right now. The very first house I bought was $35,000, it was a foreclosure, and we put about $35,000 into it. It was a lot of sweat equity, but by the time it was done, we were able to sell it for $120,000 after I rented it for, I don’t know, five or six years. The lot next to it actually came with the property, and I was able to sell it that off for another 15 grand. But by literally making the property better, I learned early on that even if the markets going to go the wrong way, we’re going to be in an okay position. That’s no different for one house, for 90 units, for 250 or a thousand. You really just have a better product, and people are going to be interested in that better, less headache product.

Slocomb Reed: Give me some numbers on one of those deals, like one of the ones that you did there in Maryland or one of your Atlanta deals. What you bought it for, what the rents were at the time, how much you had to put into a property to get the rent growth that you got, and what that rent growth was.

Nick Simpson: So I think bringing it to more right now, in Atlanta, we’re putting roughly two and a half million dollars total asset value between the two properties, a little over 20 million. So we’re doing a decent amount of work to improve these properties. We’ve already seen rent growth; it’s more aggressive than we expected, but we’ve already seen rent growths of $200 to $250 more than what was the going in rental rates. We really think that’s just going to do quite well over the long term. If it does slow down a little bit and we go to more of a two, two and a half, 3% standard increase year by year, just by starting so strongly, we feel that we’re kind of ahead of where we would have already ended up.

Slocomb Reed: Where in your value-add multifamily deals, your B and C class stuff, where are your average rents right now?

Nick Simpson: Right now, for like a one-bedroom, you’re talking $950 to $1,200; two-bedroom, two-bathroom, probably $1,050 to probably in the neighborhood of $1,400, depending on how nice the unit is. And then the three-bedroom, two-bathrooms, I think we have a couple in the neighborhood of about $1,400 or $1,500 a month. They’re all in about that range.

Slocomb Reed: Gotcha. That’s now. We’ve seen crazy rent growth across the board the last two years. In your experience, what do you think rent growth is going to look like in the next couple of years? Should we expect the type of growth that we’ve had? You know, there are several underlying economic factors here, Nick, like when you look at what COVID did to the employment market. When you’re talking about affordable rents, you’re also talking about the sectors of the economy with the highest wage growth. Do you think that trend is going to continue, or are you expecting to go back to that 3% rent growth year over year?

Nick Simpson: I can’t say that it’s going to slow down anytime soon. Based on what I see, I don’t think it’ll slow down anytime soon. However, that is not what I’m underwriting to. I just don’t think it’s wise to pretend like anybody knows. I do think that rent will continue to go up just by the sheer fact that inflation is going to make things more expensive, and people are going to be paid more, and therefore able to buy more, and will afford a higher rent. It all flows through the economy. I think people don’t talk about value enough. I think when we look at the exchange of dollars, what we’re really talking about is an exchange of value to somebody, and somebody is getting paid based on the value that they are providing to that company, or the company believes that they’re worth, or the employee feels that they’re worth, and then they go and spend it on things that they find of value.

If we’re talking in terms of value, things haven’t really changed in terms of value. People still value things at a certain amount. But of course, you’ve got to pay more for them now, because the inflation has caused that to happen. I’m not sure if I explained that very well, but basically, what I’m saying is, I’m not underwriting to an increased crazy amount of rents down the road. I think that’s an unsafe way to get into a property. I am bullish on what rents will do over the next few years, and I do think that will be the narrative that we’re hoping to go back to our investors with, is “Hey, we’ve way outperformed. Are you ready to go for the next one?”

Slocomb Reed: Nice. What led you to get into ground-up construction?

Nick Simpson: I like to have something that makes me excited to come to work. So all the books, all the experts in our industry – if you look at the top titans of our industry, the Sam Zell’s of the world, all those guys would say that development is riskier. But they all admit that there is something about seeing a building come out of the ground that you’ve worked on, or you’ve dreamed up, or you know is going to change your community, that is fun. It can also provide a really risk-adjusted return if you do the project well. So we saw an opportunity in Salisbury, Maryland and there was no high-rise in downtown, or at least there was nothing above seven stories, so going into that 14-story high rise type construction really is going to offer something that’s new, and make a placemaking in the downtown historic area. We also were able to use the opportunity zones, which we have an opportunity zone fund for the project, which allows for investors to have the tax savings that were offered by the federal government for doing projects in areas with lower incomes. That was a good way for us to find yield in some of the markets that aren’t as hot as say DC or some of the ones that we’ve talked about already, like Raleigh, Charlotte, Durham, all the typical Texas markets. You understand what I’m saying.

Slocomb Reed: Yeah. It’s this building that’s in the downtown area?

Nick Simpson: That’s right.

Slocomb Reed: It’s twice as tall as anything else there?

Nick Simpson: Yeah.

Slocomb Reed: What’s the unit mix?

Nick Simpson: This is a full student housing, so you have four-bedroom four-bathroom, or two-bedroom two-bathroom mixes. The property is a purpose-built student housing, so it’s slightly different than multifamily. You do have a slightly different property manager, you’re going to have a slightly different amenity mix, because it’s going to be geared towards the students; you’re going to have furniture included, you’re going to have utilities included… Everything’s going to become that turnkey — it’s a little bit different than what you’re going to see in the multifamily space, but it’s not much of a stretch; it’s pretty similar. And we were able to see that the students were coming to the downtown Salisbury area. That’s where all the restaurants, the bars, the energy of the town is. They were coming there, but there was no student housing anywhere near it. And it was an opportunity to work with a local government that was very bullish on building new housing and really revitalizing Main Street as the malls begin to die, which – the malls killed Main Street, so it’s ironic how it’s coming back. But we just saw an opportunity to work with the local governments and to do a project that’s going to be quite substantial for the Salisbury area. We have a couple more that are coming.

Break: [00:15:34][00:18:31]

Slocomb Reed: That’s awesome. Nick, talk to me like an accredited investor who’s considering putting my money either in value-add multifamily, the bread-and-butter play that we all understand. I want to know, so far as my own risk and potential reward is concerned, how is ground-up development going to compare?

Nick Simpson: There are a couple of things that go into that. If you’re going to be doing ground up development in downtown Boston, you’re going to expect one type of return, versus a ground-up project in a tertiary market like Salisbury, Maryland. Now, to help increase the returns, that’s where the opportunity zone investments come in. If people haven’t really taken a deep dive into the opportunity zone investments, I really think it is something that an accredited investor who has capital gains should really look at. If you haven’t sold anything, [unintelligible [00:19:20].15] the opportunity zones won’t work. But if you have capital gains and you have sold off any type of properties or stocks that you want to shelter your taxes from, you’re going to be able to increase your returns on a property by two and a half to 3% on top of what is offered to you based on an IRR basis.

The other side of it is with this very cap rate compressed market, you can see higher cap rates in the surrounding markets, smaller markets. And if you’re really working with the people in those markets who are the main contacts and the ones that really are the movers and shakers in that market… I know plenty of people who work in these types of small markets who are absolutely killing it. I would look to work with those type of people, and it really just has to be a fit for your capital. If you’re looking for that tax savings, long-term hold, and you would maybe look at a deal where you have an opportunity zone investment involved with it, which of course, I haven’t explained, but to use the opportunity zone, it’s best if you have a development project, so that’s kind of a natural matching. But if you have just capital you want to deploy, you want to do a shorter timeline, you want something that’s already got cash flow, you’re really just kind of looking for a standard play, then you could look for probably a lower return, which is certainly going to be a lower return than a development deal, and you can look to do a value-add project. But of course, risk/reward, it’s the nature of the market.

Slocomb Reed: What is your Best Ever advice?

Nick Simpson: I think people listening to this podcast should be honest with themselves on where they’re at if they’re looking to be a syndicator or if they’re looking to be an investor, and they should just be okay with where they are at that moment. I think a lot of people get caught up in the hype of trying to go from zero to being Joe Fairless overnight. It doesn’t happen that way, and it’s okay to take one step at a time and just continue the education along the way. I just have people who reach out to me, and what I think they’re looking for is that quick fix to get into the real estate market. But you really need to surround yourself with quality people and just take a step every day to get better over time. With good decisions, you’ll get to where you want to go.

Slocomb Reed: Well, Nick, are you ready for our lightning round?

Nick Simpson: I’m ready.

Slocomb Reed: What is your Best Ever way to give back?

Nick Simpson: I recommend you pick a charity. My thing for this year is a lot of networking that is unasked. I like to connect people, literally just send off an email at the beginning of the day, “Hey, I thought you two would be good together,” and just let them take it from there.” Just let them build their networks, I think it’s just a great way to kind of give it back. Because sometimes, I spent a lot of time just spinning my wheels, looking for the right person to talk to. I’m blown away with how many people are sending me back people to talk with.

Slocomb Reed: What is the Best Ever book you recently read?

Nick Simpson: Sam Zell’s Am I Being Too Subtle?

Slocomb Reed: That is a good one. What is the most money you’ve lost on a deal?

Nick Simpson: $150,000. I built a house — I was building houses at one point back in my career, and we didn’t have the ground surveyed correctly, and we didn’t have somebody watching the mason, who ended up taking two blocks out of the foundation, the house was built too low, and long story short, we basically built a house with a backyard that became a pond, so we had to pick the house up after selling to somebody, and had to move them out, and moved them back in after the house was picked up, and we moved a whole bunch of dirt in there… So I don’t recommend that one.

Slocomb Reed: What’s the most money you’ve made on a deal?

Nick Simpson: I don’t know. Probably over a million at this point. But it’s not something I’ve tracked.

Slocomb Reed: Yeah. When Joe asked me that when I was a guest, I wasn’t sure how to answer that one either. That’s great. Nick, where can people get in touch with you?

Nick Simpson: You can go to our website, mentiscapitalpartners.com. You can email me directly at nick@mentiscp.com. I’m pretty attentive and look forward to talking to you.

Slocomb Reed: Awesome. Well, thank you, Nick. Best Ever listeners, thank you for tuning in. If you enjoyed this episode, please be sure to leave us a five-star review and share this episode with someone you think could benefit from the best real estate investing advice ever. Don’t forget to follow and subscribe to our podcast so you don’t miss anything. Thank you and have a Best Ever day.

Website disclaimer

This website, including the podcasts and other content herein, are made available by Joesta PF LLC solely for informational purposes. The information, statements, comments, views and opinions expressed in this website do not constitute and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action. Neither Joe Fairless nor Joesta PF LLC are providing or undertaking to provide any financial, economic, legal, accounting, tax or other advice in or by virtue of this website. The information, statements, comments, views and opinions provided in this website are general in nature, and such information, statements, comments, views and opinions are not intended to be and should not be construed as the provision of investment advice by Joe Fairless or Joesta PF LLC to that listener or generally, and do not result in any listener being considered a client or customer of Joe Fairless or Joesta PF LLC.

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JF1682: Private Securities 101 Common Mistakes & How To Avoid Red Flags with Steve Rinaldi

Steve is a long time attorney who specializes in private offerings and securities. A huge insight he drops on this episode, state securities agencies are like profit centers for state governments, and one of the easiest ways for them to make money is go after anyone who didn’t follow security laws. That is an eye opener, and gives you a great idea of what you are up against. You may also be surprised to learn that a lot of investors are actually offering a security, not filing with the SEC, and could get in some trouble because of that. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

Best Ever Tweet:

“The consequences of violating securities law are astronomical” – Steve D. Rinaldi

 

Steve D. Rinaldi Real Estate Background:

  • Attorney specializing in private offerings of securities
  • Has handled private offerings of securities for 29 years
  • Based in Bethesda, MD
  • Say hi to him at http://stevenrinaldilaw.com/ or (240) 481-270six
  • Check out his services for syndications & private placement deal sheet http://bit.ly/2UKSRo7

 


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TRANSCRIPTION

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 of that fluffy stuff. With us today, Steve Rinaldi. How are you doing, Steve?

Steve Rinaldi: Very good, very good.

Joe Fairless: I am glad to hear that, and looking forward to our conversation. Steve is an attorney specializing in private offerings of securities. He’s handled private offerings of securities for 29 years now. He’s based in Bethesda, Maryland. His law firm – you can go check out their website, stevenrinaldilaw.com, and we’ll put that in the show notes as well, so you can just click the link.

With that being said, Steve, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?

Steve Rinaldi: Yes. I’ve been focused on private offerings of securities, including but not limited to real estate syndications for over 29 years. I handle all the business law aspects of the syndication, including obviously the formation of the Delaware LLC, the writing of the operating agreement, the writing of the private placement memorandum, writing the subscription agreement and the filing of Form D. Recently in my practice I have gotten more and more into the formation of opportunity zone funds.

Joe Fairless: Yes, that is a hot topic, that’s for sure. So you’ve got 29 years of experience. Clearly, you’ve seen a whole lot in the industry… What has changed from what you do from a legal standpoint, over the last 15 or so years?

Steve Rinaldi: I think the biggest change is obviously Rule 505 is no longer there.

Joe Fairless: What was that?

Steve Rinaldi: Rule 505 was a rule that allowed the private offering of securities to 35 or fewer unaccredited investors with a dollar limit of five million.

Joe Fairless: Okay.

Steve Rinaldi: Not too many people made use of 505, and more people seemed to be using 506(b) anyway. So that’s kind of more of a technical change… 506(b) is superior in that it allows the same 35 or fewer unaccredited investors, an unlimited number of accredited investors, but an unlimited dollar amount.

We’re seeing a lot of 506(b) offerings. I am seeing the occasional 506(c) offering as well, which is an offering to accredited investors only, that permits some limited advertising.

Joe Fairless: How would you describe your client profile who chooses to do 506(c) versus 506(b)?

Steve Rinaldi: I would say 506(c) tends to be a much larger dollar amount, and they have relationships with people who are able to invest 200k, 300k, 400k, 500k. The 506(b) offerings tend to be 10-15 people investing about 50k, which gets you a total of 750k, and the project sponsor or the syndication is going out and getting a bank loan for 1,5 million. The 506(c) deals tend to be much larger, and they may be buying multiple multifamily complexes.

Joe Fairless: I know with 506(b) you need to have a pre-existing relationship with anyone who sees your opportunity… How is pre-existing relationship defined?

Steve Rinaldi: The SEC refuses to define it.

Joe Fairless: Isn’t that fun?

Steve Rinaldi: It’s kind of like the Supreme Court when they decided the pornography case in 1971 – they kind of know it when they see it.

Joe Fairless: Right, yup.

Steve Rinaldi: Most attorneys, and even if you ask the SEC people [unintelligible [00:05:11].10] if you talk to somebody in a REIA for a couple of months, that’s fine. If you’ve gone together with the person before, say as co-owners on a property, you bought it for, say, half a million dollars, you each put up 75k and you borrowed 350k from a bank – that’s fine. If you’ve done a transaction with somebody before, that’s fine. But they have not really defined it, and it is a murky, grey area.

What we’re seeing in the 506(b) realm is intended to be family and friends, or people in the same investment group, who have been pursuing different deals, but they’ve been talking about deals among themselves for years. I’ve never really ran into a red flag, even though it’s very ill-defined.

Joe Fairless: What about if someone who runs in your circle — or let’s even go one step further; what about if it’s your second deal, and you have investors from your first deal who are very pleased  about what you’re doing, and they say “Hey, I’d like to refer my best friend Kim”, and they copy Kim on an e-mail with you… Is that a pre-existing relationship? I don’t think it is, but if it’s not, then how do you establish that with Kim?

Steve Rinaldi: If you’ve been talking to Kim over a course of about two months or so about your deals, what you’re doing, “This is what I’ve done in the past”, then at that point you might be able to argue there’s something.

Joe Fairless: What are some errors you see investor make from a legal standpoint? Of course, they’re not your clients, so if they were, then they wouldn’t be making them, but… When you just shake your head and you’re like “Oh my god, seriously? They did that? They didn’t know they couldn’t do that?”

Steve Rinaldi: The biggest mistake I’ve seen somebody make is saying something is not a security when it is. That is probably the most colossal blunder you can make, because the consequences of violating securities law are astronomical.

Joe Fairless: What are they?

Steve Rinaldi: Well, even if you’ve raised less than a million dollars, the state securities agencies will come in and they will demand that you refund money to all the investors, whether you have it or not. And  obviously, if you don’t have it, they will go after your house, your bank accounts and everything you have. And it’s an obligation owing to the state, so the state comes first in line, not your mortgage company. So the moment your mortgage holder on your primary residence sees the state securities agency coming after you for something, they’re gonna panic, like crazy. That’s for starters.

It is a fraud action, it’s non-dischargeable in bankruptcy. And obviously, actions filed against you by the state are not dischargeable in bankruptcy either, so you have to pay the money back… And in addition to that, the state is going to fine you. That fine will easily be in the amount of their attorney’s salary, healthcare, pension, 401K contributions related to that time period…

Joe Fairless: Paid vacation…

Steve Rinaldi: Yup. State securities agencies are very much profit centers for state governments… And one of the easiest ways for them to make money is go after anybody who didn’t follow securities laws. To be a security, you have to  have four things – an investment of money, a common enterprise (which it obviously is) with the expectation of a profit (nobody invests money unless you expect a profit) and to be derived in whole or substantial part from not the investor’s effort, but rather from the promoter’s effort. And obviously, derived in whole or substantial part meaning if the promoter is the one negotiating the mortgage with the bank, if the promoter is the one leasing the apartments or leasing the office space or leasing the warehouse space, the promoter is the one talking to the attorneys; he or she is the one opening and closing the bank accounts, talking to the real estate closing attorney… Then you’ve definitely got a security. At that point, you have to comply with one of the various private offering exemptions.

Joe Fairless: So that gets violated tons, because tons of people who I talk to, they bring on investors and they’re not registering the security. I agree with you, that’s something that happens. For the record, all of our deals are registered, just so I get that out there.

With a security, when you register it, there are costs involved in order to register it. If you can, think of yourself as a real estate investor for a moment. You don’t have a specific deal yet; you are looking at deals. And you need to decide when does it make sense financially, knowing that there will be costs involved in order to register a security – when does it make sense financially to bring in investors passively, so it would be a security, and I need to go to register, versus doing a joint venture with some other business partners, and it is not a security that needs to be registered?

Steve Rinaldi: I would say it’s not so much the money, it’s the psychology, and the dynamics between the people. If you’re bringing on five or six people and you’re gonna give them the type of control that would be in a joint venture, where every single person has the right to veto a lease, every single person has the right to veto the refinancing of a bank loan, or any single person has the right to veto the plumber coming and making $1,000 in repairs… Basically, if starts to become a cackling henhouse, you’re better off spending the money on a securities attorney to go through a full-blown registration.

You can use the Rule 504 exemption, which is still somewhat costly. You can use 506(b), you can use 506(c)… You could even use crowdfunding, but that’s the most costly and the most restrictive.

Joe Fairless: Good point. This is a little fuzzy in my mind, but I believe I heard this once from someone… I think they did a joint venture, and I don’t think I’m getting it exactly right, but maybe you can talk about the concept of this. They did a joint venture, they said in the operating agreement that such and such management company would handle those decisions, and then either they owned that management company, so really it was this one partner was handling the decisions, and they had full authority over management decisions, or they were overseeing the management company… So basically it was a roundabout way of saying “All you other partners, you don’t have to weigh in on these decisions, nor do you have the ability to, because it’s this management company, and then I’m the one person who has control over that.”

Steve Rinaldi: That’s a security, because that sounds awfully lot similar to the Howey case. Howey was leasing orange groves in Florida, and it was actually Howey’s management company who was operating them. The SEC and the Supreme Court saw right through that and said “No, the control is coming from Howey and Howey’s management company.” These people out in New York, and in Ohio, and wherever, who bought into these orange grove interests, what control do they have? They’re not deciding when to fertilize the ground, when to water, when to pick the oranges… So there’s no control.

Joe Fairless: Yeah. And it’s just common sense. You said the Howey case, but does it pass the sniff test? [laughs]

Steve Rinaldi: Exactly.

Joe Fairless: Yeah, it didn’t pass the sniff test.

Steve Rinaldi: The moment a state securities agency sees the term “management company” and sees the management company making all the day-to-day decisions, that’s a total red flag.

Joe Fairless: Cool. What are some other things that you’ve seen people do to either violate security law, or any other interesting things that you’ve come across?

Steve Rinaldi: The misdefinition deciding something isn’t a security when it is is number one. The other thing I’ve seen is people try to hire someone to be a finder to go get investors, and the person is not a licensed broker-dealer, and they offer to pay that person a commission based on the money raised; that starts to run afoul of the Exchange Act of ’34, because the only person who can get a commission on the sale of a security is a licensed broker-dealer. And that one’s really easy to remedy – you can just make the person your director of investor relations and you can just give him 1% or 2% profit stake. You’ll be completely in the clear if you went that way. But I see that a lot.

Sometimes I’m starting to see now in the case of funds you have to do an investment advisor filing with about 35 to 45 of the states, depending on how the private fund is structured. I see that a little. The penalties for that one aren’t as astronomical as the first two. State agencies will just say “Okay, go ahead. You did everything else in compliance with the law. Just get yourself an investment advisor and file Form ADV.”

Joe Fairless: Okay. With doing a fund compared to doing a one-off 506(b) offering, what are the costs involved in each of those?

Steve Rinaldi: Well, the fund is gonna be more expensive, because if you look at the federal laws and regulations you’re gonna be okay, because invariably a lot of the private funds that you and I are talking about have less than 100 investors. Far less. They’re down below 35 in almost all cases. So you’re not gonna be running a mutual fund; you don’t have to worry about compliance with that whole area of law. But you do have to comply with the state laws and the state regulations, which means in addition to all the work I mentioned earlier – forming a Delaware LLC, writing the operating agreement, writing the private placement memorandum, writing a subscription agreement and filing Form D, you’re also gonna have to have an investment advisor agreement, and you’re going to have to have that investment advisor file Form ADV.

Now, there are exceptions. Some states, if there are fewer than 5-6 investors and they’re all accredited, you don’t have to go through that whole rigmarole. Some go as high as 15. One exemption – New York will let you go up to 115 million without having to file. But most states, if you’re doing a fund, you’re looking at an investment advisor and having to file Form ADV. You’re probably looking at about another $1,000 in costs.

Joe Fairless: So all-in, what’s the range to do the legal work for a 506(b)?

Steve Rinaldi: 506(b) all-in is probably about $8,500, maybe a little higher if you have investors in a lot of different states.

Joe Fairless: Okay. And all-in, what’s the range for doing a fund?

Steve Rinaldi: Closer to $10,000.

Joe Fairless: That seems really cheap. So when you’re saying $8,500 for 506(b), what does that include?

Steve Rinaldi: It includes forming the Delaware LLC and all the Delaware filing fees, plus your state qualification fee. It includes the operating agreement, it includes the private placement memorandum, it includes the subscription agreement, and it includes filing Form D in every state in which you have investors.

Joe Fairless: And then once you close on the deal, don’t you have to file it with the SEC?

Steve Rinaldi: 15 days from the day you raise your first dollars from an investor.

Joe Fairless: Okay. That is included in this?

Steve Rinaldi: Yes, that is included.

Joe Fairless: What you were just saying, all those things – what part is that part of?

Steve Rinaldi: That’s the Form D part.

Joe Fairless: The Form D, got it. Form D in every state. Got it. And then the 10k for the fund – what does that include?

Steve Rinaldi: That includes all the above services that I just mentioned, plus the investment advisor agreement, and usually the investment advisor will go ahead and file Form ADV, which they’re doing on their own anyway. So that extra amount reflects one more agreement that I have to write.

Joe Fairless: Did I hear you correctly with the fund, that you’re saying usually there are under 35 investors?

Steve Rinaldi: Yeah, I’m saying in a private fund under 35. Now, remember, with a fund you’re gonna have to meet not only the 506(b) exemption, or 506(c) exemption if they’re all accredited, but 506(b) exemption has 35 or fewer unaccredited investors… But you also have to meet the standards of the Investment Advisor Act and the exemptions of the Investment Company Act.

Joe Fairless: Yeah, I would think that for a 506(c) it would be the opposite… I’m thinking about our business –  I’ve always done 506(b), and if I did 506(c), the only reason why I would do it is to be able to publicly advertise an opportunity; that way it would bring in more investors, and likely at a lower amount… So that means I’d have even more investors in a fund, or like a 506(c), so I would have 100, or 200, or 300 investors, versus if I was doing my normal 506(b).

Steve Rinaldi: Well, you just hit a big [unintelligible [00:18:39].19]. You just hit a couple rocks. If you go at or over 100 in your fund, you now become a mutual fund.

Joe Fairless: Wow, okay.

Steve Rinaldi: The Investment Company Act. You don’t go over 100.

Joe Fairless: Huh.

Steve Rinaldi: You don’t wanna go over the 3(c)(1) exemption. There’s also a 3(c)(7) exemption for real estate funds, but most of those as a back-up tend to stay under 100. Private offering securities for 29 years – anytime it’s been a fund type situation, I’ve never had someone even come close to 100.

Joe Fairless: Okay. Because they don’t wanna–

Steve Rinaldi: Don’t wanna be a mutual fund.

Joe Fairless: Because then – tons of red tape, and…

Steve Rinaldi: In addition to complying with the exemptions under the 33 Act, the 506(b) and (c) or 504 exemptions, you also have to comply with the Investment Company Act as well. So now you’re throwing — basically, yeah, it’s all securities law, but it’s too radically different areas of securities law. You’re just complicating your life tremendously.

Joe Fairless: [laughs] I don’t wanna do that. Okay, that’s helpful. That’s new information. As you might be able to tell, I’ve never done a fund before; we always have done 506(b)–

Steve Rinaldi: Yes, that’s why you’ve had no issue.

Joe Fairless: Right. Interesting. Okay. One question that comes up with 506(b) is if you choose not to take on non-accredited investors… So no sophisticated investors, no non-accredited, even though you could take up to 30-35, if you choose not to take on any, does that benefit you from a regulatory standpoint in any form or fashion, if you’re only taking on accredited investors in 506(b)?

Steve Rinaldi: Where it can really benefit you is under the fund, if you’re doing a fund. That’s where it can really benefit you, because in about 15 states you can argue you don’t need an investment advisor.

Joe Fairless: I’m talking about just 506(b).

Steve Rinaldi: You still wanna give people the same private placement memorandum. If you look at the black-letter of the regulation, it says “Unaccredited investors have to get a private placement memorandum”, but if you look at the securities act itself, or the authority where the regulations come from, it says all investors have to receive all material information. The practical matter – if you have to give all investors all material information, you’re not saving yourself any time or money by saying “Oh, I’ll limit this to accredited only, and not pay for writing a PPM.” Because if the deal goes sour, the accredited investors will sue you anyway under the securities act, saying “You didn’t disclose all material information to me. You didn’t tell me what the rental rate was, you didn’t tell me that you had to pay pre-payment penalties on the mortgage, you didn’t tell me that the inspection said you needed a new roof…” They’ll find something, anything, and it’s pretty easy in real estate investment for a judge to say “Yeah, something is material, and you didn’t tell them that.” You don’t derive much benefit.

Joe Fairless: Okay. So if you are doing 506(b), assuming that you have the disclosures in there – which you should, if you’re doing 506(b) – you don’t really have an additional benefit from a regulatory standpoint by only bringing on accredited investors. You could also fill in some of the non-accredited spots.

Steve Rinaldi: No, none at all.

Joe Fairless: Oh, sophisticated.

Steve Rinaldi: Right.

Joe Fairless: Yeah, sorry. I forgot I was [unintelligible [00:22:04].10] Sophisticated investors –  you can fill in those 35 spots of sophisticated investors.

Steve Rinaldi: A trick on that is sophistication has never clearly been defined.

Joe Fairless: [laughs]

Steve Rinaldi: What my practice has been – if a person knows something about real estate investing, they’ve done some flips before.

Joe Fairless: Yeah, but how do you qualify someone… If you have a 506(b) offering and they say “Hey, I’m a sophisticated investor”, how do you qualify them?

Steve Rinaldi: Okay, are you an attorney who’s dealt with either business law or real estate law in the past? Are you an accountant who’s had business or real estate clients? Do you have any investment properties? Have you participated in any investment in the past? Have you at least gone to a REIA actively, openly, and gone through all their educational sessions the last couple of months?

Joe Fairless: Does it have to be recent? Or if they’re like “Yeah, I went to one 2-3 years ago.”

Steve Rinaldi: Developments change. I would feel more comfortable with recent.

Joe Fairless: Okay.

Steve Rinaldi: Usually, what I’m encountering is most of the people who are investors in these deals have invested in past deals, or if they haven’t, they own investment properties.

Joe Fairless: Sure.

Steve Rinaldi: They’re basically looking to up their game.

Joe Fairless: Yeah. Because most of the attorneys I come across are accredited, and accountants… Well, most of the investors I come across are accredited, because they know we only work with accredited investors, but I’d say owning investment properties – that’s gonna qualify a whole lot of people to be sophisticated… Because usually, from my experience, you don’t wanna passively invest in an apartment community or some other 506(b) offering unless you have some sort of real estate experience, because you won’t know what the heck that is… If you don’t have some sort of real estate experience, you won’t even be having the conversation with the syndicator… From my experience.

Steve Rinaldi: Exactly.

Joe Fairless: Cool. Well, this has been so informative… Anything else that you think we should mention as we close out here, that we haven’t discussed?

Steve Rinaldi: Yes, the new development in opportunity zones. I’m starting to see people coming in, requesting that I set up opportunity zone funds. That is obviously — you’ve got in addition to securities law you’ve got the tax law [unintelligible [00:24:22].08] as well. I’m starting to see that more and more, getting more and more questions.

Joe Fairless: Yeah, and that will keep on coming at you, I’m sure. So you do set that up, for anyone who’s looking to create a fund, or something…?

Steve Rinaldi: Absolutely. If you wanna go the opportunity zone fund direction, I can definitely assist them.

Joe Fairless: Well, how can the Best Ever listeners learn more about what you’ve got going on and get in touch with you?

Steve Rinaldi: Obviously, they can e-mail me at my e-mail, stevendrinaldi@msn.com. An even better way is to go on my website, StevenRinaldiLaw.com, and look at the private offerings of securities page, and see all the work I’ve done. My recent deals are on there.

And definitely, another thing is obviously to call me directly at 240-481-2706.

Joe Fairless: Great stuff, I learned a lot. I loved this conversation. I’m sure anyone who is passively investing or actively putting together deals got something from this, probably many things. Steve, thank you so much for being on the show. I hope you have a best ever day, and we’ll talk to you soon.

Steve Rinaldi: Thank you very much, Joe.

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Joe Fairless's real estate podcast

JF910: Why He PASSED on a $17MM DEAL, or Was It?

$17 million development deal? Well, you’ll have to hear what happened. Just remember that trusting your gut may be a good thing…especially when developing and speculating market conditions.

Best Ever Tweet:

Brooke Kaine Real Estate Background:

– President & CEO of Kaine Homes, Inc. & Kaine Investments
– Over 30 years experience in real estate business
– Land & new homes builder, built over 1,500 homes, private money lender $6M capital, 20-25 loans at one time
– Has 86 residential rental properties as partner with BOA Partners, LLC Jared Sleeth
– Real Estate Investor, Investment Manager at Kaine Investments, a private money lending company
– Investing for over 4 years all while working full time job, in August 2016 quit full time job to invest full time
– Based in Baltimore, Maryland
– Say hi to them at http://www.kainehomes.com/
– Best Ever Books: The Millionaire Real Estate Investor by Gary Keller

Made Possible Because of Our Best Ever Sponsors:

You find the deals. We’ll fund them. Yes, it’s that simple. Fund That Flip is an online lender that provides fast and affordable capital to real estate investors. We make funding your projects easy so you can focus on what you do best…rehabilitating homes.

Download your free copy at http://www.fundthatflip.com/bestever

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real estate pro advice

JF867: From Rabbi to Zillow Competitor Helping Landlords Fill Vacancies

That’s right, he wanted to be a rabbi. He later developed a platform that is becoming very pro in filling vacancies for landlords. He even states that he would love to compete with and eventually become the new Zillow. Hear how he got to this point and how he’s growing the business.

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Ben Schwartz Real Estate Background:

– Founder of VacancyFillers.com, a tenant placement company
– To date have helped sign 287 leases and brought in $3,602,482 of rent revenue for clients
– Success of his company stems from the online platform of unique marketing and systems
– Based in Baltimore, Maryland
– Say hi to him at http://www.vacancyfillers.com/
– Best Ever Book: The 10x Rule by Grant Cardone

Made Possible Because of Our Best Ever Sponsors:

You find the deals. We’ll fund them. Yes, it’s that simple. Fund That Flip is an online lender that provides fast and affordable capital to real estate investors. We make funding your projects easy so you can focus on what you do best…rehabilitating homes.

Download your free copy at http://www.fundthatflip.com/bestever

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JF852: How to Transition to from Pen and Paper to a CRM #SkillsetSunday

It’s time to update your process of lead generation, capture, and follow up. Throw out your pen and paper and let’s start automating! Of course this is done through an electronic program or software known as a CRM. You’re about to hear one of the best CRM’s on the market, turn up the volume and take some notes!

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Carlos Zamora Real Estate Background:

– Account Manager & Managing Partner of InvestorFuse, a lead management CRM system for investors
– Began wholesaling 3 years ago
– Graduated from the University of Maryland, College Park in 2013 with a degree in Communications
– Based in Baltimore, Maryland
– Say hi to him at www.investorfuse.com

Made Possible Because of Our Best Ever Sponsors:

You find the deals. We’ll fund them. Yes, it’s that simple. Fund That Flip is an online lender that provides fast and affordable capital to real estate investors. We make funding your projects easy so you can focus on what you do best…rehabilitating homes.

Download your free copy at http://www.fundthatflip.com/bestever

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Best Ever Show Real Estate Advice from experts

JF792: How You Are Missing Out On THOUSANDS by Not Creating This Experience for Your Tenants

Are you ready to 10 X your return? You are a few professional photographs and some excellent customer experience pointers away from maximizing your income from your cash flow properties. Today’s guest is a pro in creating the hotel or vacation experience for her residents. Hear how you can set it up in your own real estate business and why it definitely makes sense.

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Susan Colwell Real Estate Background:

– Principal Partner at TriStar Group, A Real Estate Investment Firm
– Host of Real Estate Investor Radio podcast
– Spent five years managing two successful vacation-rental companies
– Based in Baltimore, Maryland
– Say hi to her at http://tristarinvesting.com
– Best Ever Book: The Alchemist by Paulo Coelho

Want an inbox full of online leads?

Get a FREE strategy session with Dan Barrett who is the only certified Google partner that exclusively works with real estate investors like us.

Go to http://www.adwordsnerds.com strategy to schedule the appointment.

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no fluff real estate advice

JF683: Selecting the Right Partner and Refining Your Biz Model #situationsaturday

Our guest has been on the show before and he is going to share some sticky situations! He, like many investors, has needed to refine his business multiple times until he got it right. He also shares how he selects the right real estate investing business partner. This is not an episode to miss!

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Jason Balin Real Estate Background:

– Founder of Hard Money Bankers
– Hear Jason’s Best Ever Advice on episode JF645
– Based in Columbia, Maryland
– Say hi at hardmoneybankers.com

Listen to all episodes and get a FREE crash course on real estate investing at: http://www.joefairless.com

Made Possible Because of Our Best Ever Sponsors:

You find the deals. We’ll fund them. Yes, it’s that simple. Fund That Flip is an online lender that provides fast and affordable capital to real estate investors.

We make funding your projects easy so you can focus on what you do best…rehabilitating homes. Learn more at http://www.fundthatflip.com/bestever.

Subscribe to Joe’s YouTube Channel here to learn multifamily and raising money tips:
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Best Ever Show Real Estate Advice

JF645: Why the four C’s are critical to get funded

Ever wonder what criteria a hard money lender or uses to approve you for a loan? There are many, but today’s Hardmoney lender dubs himself a hard money banker and uses the 4 C’s. Tune in to hear what he is doing now and how he approves loans!

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Jason Balin Real Estate Background:

– Hard money lender who has funded over 1,000 transactions
– Been in business for over 10 years
– Author of The Whiteboard
– You can reach him at hardmoneybankers.com

Listen to all episodes and get a FREE crash course on real estate investing at: http://www.joefairless.com

Made Possible Because of Our Best Ever Sponsors:

You find the deals. We’ll fund them. Yes, it’s that simple. Fund That Flip is an online lender that provides fast and affordable capital to real estate investors.

We make funding your projects easy so you can focus on what you do best…rehabilitating homes. Learn more at http://www.fundthatflip.com/bestever.

Subscribe to Joe’s YouTube Channel here to learn multifamily and raising money tips:
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JF622: How He Flipped 80 Properties and Lost $1.5 MM in Two Years

He lost $1.5 MM and shares how he did it. He has also completed over 80 flips and building systems to support your real estate business. Hear how someone remains resilient even when he was robbed by the market!

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John Newman real estate background:

  • Realtor since 2003 and runs both a successful real estate investment company and a large residential real estate team
  • Personally has done 80 flips since 2002
  • His team is currently ranked in the top .05% of Realtors nationwide having sold over $100M in residential real estate
  • Based in Crofton, Maryland
  • Say hi to him at thinknewman.com

Listen to all episodes and get a FREE crash course on real estate investing at: http://www.joefairless.com

Do you need more leads for your real estate business and a platform to grab more leads?

Danny Johnson has a solution for you, go to leadpropeller.com set up your website for success and get more leads!

Subscribe to Joe’s YouTube Channel here to learn multifamily and raising money tips:
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Joe Fairless