Ari decided to take more control of his financial destiny, so he began investing in real estate. We’ll hear his story of working full time at a job while working on a real estate portfolio part time. For most of us, this is how we get started, and hearing a successful example to follow can help anyone who wants to be in the same situation as Ari. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!
Ben has been building his real estate portfolio since 2010, and is here today to walk us through his process for evaluating and underwriting a value-add syndication. As an aerospace engineer, Ben is very thorough and methodical in his approach to underwriting, which is a fantastic as a listener looking to learn more about the value-add apartment syndication process.If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!
“One thing I stated that I would clarify, regarding being conservative on rental upside. I underwrite to a lower upside until I have more experience in a given market, or have collected a sufficient quantity and quality of data to increase the statistical confidence in the rental upside estimate.”
His revised “Biggest Mistake Ever in Real Estate” answer:
“Buying a fixer upper house, under the condition with your wife, that you’ll renovate it to what she wants, and then having two more kids.”
List and manage your property all from one platform withRentler. Once listed you can: accept applications, screen tenants, accept payments and receive maintenance tickets all in one place – and all free for landlords. Go totryrentler.com/besteverto get started today!
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, Ben Risser. How are you doing, Ben?
Ben Risser: Good! How are you doing?
Joe Fairless: I’m doing well, and nice to have you on the show. A little bit about Ben – he is a syndicator of commercial real estate and a business consultant. He began building a real estate business in 2010 and has syndicated seven million dollars in commercial real estate. He’s currently managing nearly 10 million dollars in projects, we’ll get specifics on that… And he’s based in Pennsylvania. How do you pronounce that town that you’re in?
Ben Risser: Lititz.
Joe Fairless: Lititz.
Ben Risser: Lancaster County.
Joe Fairless: Lancaster County, Pennsylvania. So with that being said, Ben, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?
Ben Risser: Sure. My background is aerospace engineering; it could be more different than commercial real estate. I went to school for it, I worked at Boeing for quite a while. I left aerospace engineering about a year or so ago, and went with my real estate business full-time, that I, as Joe mentioned earlier, started in 2010, and focused in earnest on multifamily syndication maybe a little over a year ago. So that’s my main focus right now – multifamily syndications, as well as we do underwriting for private equity folks, for other syndicators on a consulting basis, as well.
Joe Fairless: And when you say “we”, who’s we?
Ben Risser: I have a couple of gentlemen that I work with as independent contractors who kind of have the same background as I do; they have the same educational background, and also one of the things I like is I’m a chartered financial analyst candidate, so I managed to find a gentleman who also is pursuing that too, so we think alike, and he makes an awesome underwriter.
So I have about two underwriters helping me out with all the deals coming across my desk right now.
Joe Fairless: You all sound like a bunch of smart cookies, first off… [laughs] Secondly, one thing that I’ve seen in my business is it’s better – I’ll speak for my business – for me to have business partners who have complementary strengths, not necessarily the same background, same educational approach that I have, otherwise we’re replicating things and I’m not able to bring in others who can compliment me. You mentioned that you’ve got all the same stuff, so educate me on why that’s a good thing.
Ben Risser: Absolutely, that’s a great question. So I agree in terms of business partnerships we definitely want to have somebody who is a complement; a lot of the times it’s a polar opposite. My partner on the North Carolina deals, Matt Faircloth – we test out as polar opposites. Me and Matt are great partners, because he’s strong where I’m not, and I’m strong where he doesn’t care to be strong… So the two individuals that I have working for me are working as underwriters.
My background being in engineering, I’m just addicted to analysis. I can’t help but analyze things to the nth degree, and then my law for business and economics is a really good fit also. These guys are basically helping me scale up my capacity for acquisitions activity, and after I get more assets under management, I’ll probably scale up to support asset management activity… So I’m really trying to set myself up to scale, and not get overrun with working in the business and always give myself some bandwidth to work on the business.
Joe Fairless: That makes sense. Thanks for elaborating on that. The seven million dollar syndication – is that one deal, or is that multiple deals?
Ben Risser: That is one deal currently, and that would be the deal I’m doing a partnership with Matt Faircloth and [unintelligible [00:04:40].11] North Carolina, and then that’s also the ten-million-dollar project which we’re in the beginning phases of the value-add stage of the project… So we’re working very closely with the construction management, the property manager to really change the branding of that product on the market and make it competitive and everything it can be in the submarket it’s in.
Joe Fairless: Oh, wow. Alright, let’s talk about that. Just so I’m super clear – the seven million dollars is also the ten million dollars? Help me understand this.
Ben Risser: The purchase price was 6.65 million, and the project value, the all-in project cost is almost 10.
Joe Fairless: Got it. Alright, I’m with you. Cool. So what can you tell us about this project? I’d love to learn more and hear what you’ve got going on.
Ben Risser: Sure. This property consisted of two multifamily products that were adjacent to each other, and we’ve purchased them both together and rebranded them as a single property, [unintelligible [00:05:37].07] It was a very under-performing asset; it had very poor property management, so it basically checked all the boxes as far as what us value-add syndicators look for – the management was under distress, the property was under distress, and it was basically a D, C- property residing in a B market. It was just ripe for value-add.
So far, I’m the guy that crunches the financial performance numbers and all that, and it looks like we’re on track to exceed our expectations.
Joe Fairless: Wow, outstanding. How long ago did you all buy these properties?
Ben Risser: I started underwriting this June of last year, and we closed on it in January 2018, so it was quite the marathon to get through closing… But we did finally close on it in January of 2018. It took us a little while to get going, and I can speak to that in the best investing advice ever, about some of the lessons learned. Now we’re kind of in full swing on the value-add.
Joe Fairless: I would love to hear them in a bit when we talk about your best advice ever. As far as the two properties that you bought, you said they’re adjacent from each other, and you rebranded as one… Why rebrand them as one, versus keep them separate?
Ben Risser: Well, I think the products – they were originally built and owned by the same developer, and somewhere along the chain of title they got separated, they got into different ownership, and I think they came back together. So they were trying to operate it as a joint property, and they had a nasty barbed wire and razor fence going right through the middle of the property, but yet they still had this concrete pad that connected the two properties… And when you walked the property, it just made sense to join the two properties.
So we were ripping out all that nasty fencing, which is also a safety hazard – no insurance company wants to ensure a property with razor wire… But the properties are similar enough, and just the layout lends itself to market it as a single asset.
Joe Fairless: They’re similar enough in terms of unit mix as well?
Ben Risser: And the appearance. The shingle color, the brick, the structure… It all just seems like it was almost built as a single property, and for some reason it was parceled as two.
Joe Fairless: When you looked at the exit, and knowing you’re next-level aerospace engineering background in underwriting, when you looked at the exit I’m sure you modeled it based on two individual exits, versus combining the portfolio. One argument for keeping them separate would be you can sell one off and keep the other, versus if you consolidate, then you have one sell, and it doesn’t give you as much flexibility… How did you think about that from an underwriting standpoint?
Ben Risser: When we underwrote the property, we combined the financials and we just viewed it as a single asset, and really the upside in this particular value-add — actually adding the value is not from appreciation, so we did not model selling them out separately, although I can see what you’re saying, that it gives you a little bit more versatility to sell off half of it and keep the other. But the deal structure, the equity structure, the financing – all of that was done by viewing the two properties as one.
Joe Fairless: When you mentioned earlier underperforming and property under distress, management under distress – can you elaborate on that, just in case a Best Ever listener is not familiar with what that might mean?
Ben Risser: Sure. I think we had about 60k-70k in delinquency, which is unpaid rent. There were a lot of people — they’ve put a lot of warm bodies in units that pumped up the occupancy, but they really weren’t paying the rent.. So there was all that kind of tricks going on, and there were verbal, uncontracted agreements between the people in the office and the tenants, and there were just all kinds of shenanigans going on.
Joe Fairless: [laughs]
Ben Risser: And there was some drug activity, and I think the police were instructed by the prior owners to stay away… So it really allowed the property just to degrade, and the clientele in that property just got worse and worse. We rolled out the red carpet for the police department and they just had [unintelligible [00:09:48].18] for like a week or so.
Joe Fairless: The police were instructed to stay away from the property…
Ben Risser: Yeah. This is a place where — we didn’t really know this when we took ownership of it, but pizza shops didn’t deliver there, people just didn’t wanna go in there.
Joe Fairless: Do you remember the physical occupancy and the economic occupancy when you took over?
Ben Risser: Yes… It was better when we took over versus a month or so later, because those things got larger. So the occupancy I believe when we took over was right around 20% vacant, and then we had more on economic loss – I think it may have been like 30% economic loss… But after we took ownership and did the whole new sheriff in town, a bunch of people just kind of excused themselves, and when we’d file evictions, they’d skip… And we went to 40% economic loss, but that’s okay, because that’s not the tenant base we’re going for; we’re looking to build a safe, clean, family-friendly, workforce housing. That’s what we’re looking to bring to the market there, and I think the market is going to reward it.
Thus far, the interest that we’re getting on the renovated units and the rent surveys we’re taking – it’s all looking very good.
Joe Fairless: That is great to hear, especially for those residents who are living there and just looking for exactly what you’re providing, and would like some safety.
Ben Risser: Yeah, there’s the residents that are grumpy that things are changing because they don’t like change, and then there’s the residents that are grateful and happy that you’re doing what you’re doing.
Joe Fairless: Yup, absolutely… As with all things in life, right? [laughs] Okay, let’s talk a little bit about investor structure – how do you structure that with your investors?
Ben Risser: This particular deal was a 70/30 split, where the limited partnership (the investors) owned 70% of the asset, and the GP owned 30% of the asset. We have a 6% pref starting year two, and an 8% pref starting year three and thereafter. That was the general deal structure, and we purchased the property with a bridge loan, and all in all it involved about 3.2 million in equity raise, which my partner Matt Faircloth accomplished within his own network, and then I did all the underwriting and helped along the road to closing, and I also help with asset management now.
We kind of had a GP split worksheet where each person kind of takes ownership for various responsibilities in the GP, and it [unintelligible [00:12:05].22] That’s kind of how we operate.
Joe Fairless: On the investor structure, the 70/30 split makes sense. As far as the preferred returns – 6% in year two… So year one, because there’s so much heavylifting, there’s basically no returns, or no preferred returns either?
Ben Risser: Right, so for this particular deal, since it was such a heavy lift, we went out for our investors and basically said “Hey, year one, if we can bring you a return, we will, but don’t count on it, because this is the situation of the property. It’s truly a big value-add, so there’s not a lot of cashflow in year one because you’re reorganizing things and kicking out the tenants who aren’t paying, and spending a lot of money on various things to improve the property.”
Joe Fairless: Got it. And then year three and thereafter it’s 8% – is that correct?
Ben Risser: Correct. That’s how we structured it, just to pick it up, and then we’re looking to refi as soon as possible. We underwrote the refi into year three, but we might be able to refi before that.
Joe Fairless: I think you all will certainly do a refi before that. What is your best real estate investing advice ever?
Ben Risser: Well, I would say – and this is based on my lessons learned from this first syndication for me; Matt’s done several syndications already… But I would say underwrite conservatively; you’ll thank yourself. I have a few different bullet points here. I’d say validate the cap-ex estimates as soon as possible; have your cap-ex team ready to roll on day one. Have your marketing strategy ready to go day one. Work with the best property management company you can find. It’s super critical.
Joe Fairless: Yes. Amen to all of those things. Let’s dig in. Underwrite conservatively – what do you mean by that specifically?
Ben Risser: If you get emotional or start to find yourself rationalizing the rental upside, you need to step back and pour a cold bucket of water on yourself, because you’re gonna hate yourself if you underwrite to an upside that is too optimistic. And then expenses – we underwrote to expenses that are greater than the expenses we’re realizing right now, and it’s a good thing, because it’s giving us some breathing room because [unintelligible [00:14:16].06] So when you’re conservative on the income side and the expense side, you don’t know exactly how it’s gonna shake out once you’re in the deal, but you’ll be glad that you were conservative on both sides.
Joe Fairless: As far as underwriting to an upside that is too optimistic – optimism is subjective… So what specifically with your underwriting would be too optimistic versus just right? How can we quantify that?
Ben Risser: I would say there’s the upside that you’ll find in the OM. You kind of take that one with a grain of salt. Then what’s really important during your due diligence process is go out and do your actual boots on the ground rent surveys with your competitors, and do your online research and see what people are asking, and to the best of your ability find out where things are actually running, because what they’re asking for isn’t necessarily what they’re all getting. And then whatever you get, subtract $30-$50/month off of that.
Joe Fairless: Wow. How come?
Ben Risser: That was just out of conservatism. We underwrote pretty close to what we saw on the market, and thankfully, after we’ve taken ownership, we’ve realized that the market will rent for significantly more than what we underwrote to based on the product that we’ve been bringing to market. So it’s a double-edged sword, because if you underwrite too conservatively, you’ll never close on a deal… But there’s this line that you have to draw, and it comes from experience; the more experience you have, the tighter — or I should say the less personal error you can kind of assume in your underwriting, because you can be a little bit more sharp on it.
We underwrote to slightly less than we estimated the market to be, and it turns out it’s working out alright and we were able to close. I understand sometimes that eliminates a lot of deals.
Joe Fairless: Can you give an example of the expenses, where you were being conservative with expenses — maybe one particular line item…?
Ben Risser: When you get the financials from a broker, they all have things bucketed and broken out differently, and they’re not always clear. Sometimes service contracts are included in the RNM, sometimes they’re not, or sometimes some are and some aren’t… So to the best of your ability you’ve gotta parse things out. We actually underwrote with a lower RNM per door expense during the renovation period, and then we ramped up our RNM expense after the renovation period, and I think that’s in addition to a $250/door operating reserve we’ve put in there, and a lot of lenders like to see that anyway.
But I think the service contracts – we ended up underwriting to a little bit more than we were actually gonna get under contract, because after we took ownership, we have an amazing maintenance supervisor who is the best negotiator ever, and he’s talked down a lot of our initial contract estimates, so we’re actually doing better on service contracts than we underwrote to.
Joe Fairless: As far as validating cap-ex (capital expenditures), as far as getting the cap-ex started day one – what can you tell us about those two things?
Ben Risser: We had some challenges getting our bids assembled on time. We have a great construction management company, but they had some HR issues that slowed us up ahead of closing, and it kind of delayed our schedule on pooling together our budgets and getting all of our bids unsigned, so that right after closing we could get all of our contracts signed and get the boots on the ground as soon as possible. So we just kind of ran late on getting all the contracts signed… It just didn’t start as soon as we would have liked it to, and the same happened on the marketing end, where I had every intention of pulling together the marketing strategy, and having the signage, a good concept, where pretty much right after closing I could almost set a signage company to start building and get them on the calendar to install.
So the validation – after closing we found there were knicks and knacks, and this and that, that added to our per-unit cost on cap-ex… And I’m just thinking, was there something I could have done ahead of closing where we could have understood, like “Oh yeah, actually it’s gonna cost you $1,500 more a unit than you’re underwriting to.” The earlier you can discover those things, the better.
Joe Fairless: We’re gonna do a lightning round. Are you ready for the Best Ever Lightning Round?
Ben Risser: Sure.
Joe Fairless: Alright, let’s do it. First, a quick word from our Best Ever partners.
Break: [[00:18:36].18] to [[00:19:19].19]
Joe Fairless: Best ever book you’ve read?
Ben Risser: Rich Dad, Poor Dad.
Joe Fairless: Best ever deal you’ve done that we haven’t talked about?
Ben Risser: That we haven’t talked about… This was my first real estate transaction, so I can’t tell you of another deal like this…
Joe Fairless: Fair enough, fair enough. What’s a mistake you’ve made on this transaction that you haven’t mentioned yet?
Ben Risser: I would say — I can’t think of one I haven’t mentioned yet, because I think I aired my laundry pretty–
Joe Fairless: [laughs] Fair enough. What is the best ever way you like to give back?
Ben Risser: I am passionate about fighting human trafficking and anything I can do to support organizations that combat that, I’m all ears.
Joe Fairless: Best ever way the Best Ever listeners can get in touch with you?
Ben Risser: My e-mail, firstname.lastname@example.org.
Joe Fairless: Ben, thank you so much for being on the show and giving us a very detailed analysis and overview — maybe not overview, but a detailed walkthrough of your property that you’re doing right now… The 6.6 million dollar purchase, overall when all said and done – looking at around a 10 million dollar property. The two properties that you bought adjacent from each other, why you all chose to group them as one versus leave them as individuals, and then the four lessons learned, and perhaps maybe not learned, but just lessons that are reinforced through the process, because it sounds like you are underwriting conservatively… So number one, underwrite conservatively. Two, validate cap-ex asap. Get the cap-ex stuff started day one, and get the marketing started day one. Those are the four things.
And just talking through how you structured it with your investors, and just the overall value-add play. Really grateful you were on the show. Lots of good stuff, especially for apartment investors, and then also just for real estate investors to hear how a big project is done.
Thanks again for being on the show. I hope you have a best ever day, and we’ll talk to you soon.
Raising money to buy debt, that’s correct… Sounds strange but it pays off! Our guest has been a previous guest on the show and he is a successful investor with many hats, and today he is sharing with us how it’s possible to raise millions of dollars to purchase notes. You don’t want to miss this!
– President of PPR Note Co., managing several funds that buy, sell, and hold residential mortgages nationwide
– Over 30 years of residential and commercial real estate experience
– Also is a Blogger, national speaker, and founder of Strategic Investor Alliance (SIA)
– Began as a contractor and has done everything from fix and flips to Raising Private Money
– Based in Philadelphia, Pennsylvania
– Say hi to him at http://www.pprnoteco.com
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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 don’t talk about any fluffy stuff, we only talk about the best advice ever. I hope you’re having a Best Ever weekend.
Because it is Sunday, we’re doing a special segment called Skill Set Sunday. By the end of our conversation you’re gonna come away with a skill that maybe you didn’t have before, or perhaps you’ll hone your skill. The skill that we’re gonna be talking about today – I love this topic – raising capital.
We’ve got our Best Ever guest, Dave Van Horn, who is going to raise at least 50 million dollars this year, and has already raised 50 million dollars. Dave, how are you doing?
Dave Van Horn: Hey, thanks for inviting me to the Best Ever podcast, Joe.
Joe Fairless: My pleasure. Well, if you recognize Dave’s name, you are a very loyal Best Ever listener, because Dave was on episode number 39, way back 12th October, 2012. You were one of the first episodes that I did when I started doing this thing daily. I started being a psycho about it, and I was like, “You know what? I’m gonna do the podcast daily and see how it shakes out.”
In episode 39 he talks about his best advice ever and more of his background. We’re not gonna talk about that in detail, we’re gonna talk about raising money and what he raises money for. He’s based in Philadelphia, Pennsylvania. You can say hi to him at his website, it’s in the show notes page.
Dave, do you wanna give the Best Ever listeners a little bit about your background, just to get some context?
Dave Van Horn: Sure, Joe. The last podcast was more about my real estate background. I started in construction, became a realtor when I was 26, then became an investor, and then did fix and flips and buy and hold. Then I became a lender, and then got into notes. My primary role in the notes space is as a fundraiser. Then I did a bunch of stuff in-between: I sold insurance, I did property management, I traded options, and then I had a wife and two kids, too… But all those things played a role into what I can do today.
My actual fundraising started over time through the real estate side. I started out with the typical real estate investor, where they’re raising money for one deal, or eventually drift into private money or hard money, and then it just morphed and morphed and morphed, and I eventually got into raising commercial real estate capital. I did that, and then off into the notes space. So it kind of evolved.
Joe Fairless: Right now, in your role, you are raising money for what?
Dave Van Horn: Primarily – I wear a few hats, but primarily I’m heavily into the notes space, which is one of the four family residential mortgages nationwide, and we buy from the big players and the banks. We buy large quantities of distressed mortgages mostly, and we don’t deal in commercial and we don’t deal in unsecured or student loan debt, or that type. So we’re in the debt space, basically.
Joe Fairless: Let’s add some context to that for perhaps some Best Ever listeners who aren’t familiar with note buying. I’ve never done note buying, so I don’t have direct experience in it. When you raise a million bucks and you buy a million dollars worth of residential mortgages, it’s different from, say, when I raise a million dollars and I buy an apartment community, because I’m raising a million and I’m putting a loan on it, whereas you’re raising a million and you’re buying the loan, is that correct?
Dave Van Horn: Yes, you’re right. We can’t really leverage like you could. When I raised capital for commercial real estate in the very beginning, I was doing it with mobile home parks, for example. We bought 32 million dollars worth of mobile home parks and we raised 8 million dollars for down payments, closing costs and fix-up. So you can see, you’re able to leverage to financing – whether it’s owner financing or bank financing; in the resident note space, you’re putting it up cash, but you’re buying it at a big discount.
Some loans can be releveraged; first mortgages are easier to releverage for the bank, but it is much more difficult buying distressed assets and saying, “I want a loan on that”, because think about it – they wouldn’t get their mind around “How can you collect on what they can’t?”
Joe Fairless: So you’ve raised money for mobile home parks, and you’re primarily raising money for notes. Who are your business partners who are bringing the equity? I’m not looking for names, I’m just looking for — yeah, I want their social security number, they bank account number… No, I’m looking for how you know them, that’s the root of the question.
Dave Van Horn: It’s funny that you say that, because my fundraising started in the real estate side, and in the very beginning I actually started a group called REING (Real Estate Investor Networking Group), and actually it still runs today. There’s a branch in Chicago and one in Philadelphia. When we first started, it was 12 people at lunch, and over a six-year period, we ended up in five states and six cities, from Baltimore to New York. Obviously, it grew, and we have about 8,000 people in our database. That was before the crash, in around 2008.
We had this real estate group, and one of my roles in the group — we did networking, we had dinner, people would bring their deals to the meetings that we did monthly, and I used to interview the speakers. What would happen over time was people would come to me saying, “Can we present to your group?” and a lot of times I’d get an opportunity to raise capital for them. I had a large network, so they would say, “Hey, would you help us raise money for mobile home parks [unintelligible [00:07:59].15] and commercial offers, condos, and things like that. That’s how it started.
Then one of our speakers happened to be a gentleman out of New York who was raising capital for pools of distressed mortgages. Of course, he came down and spoke, and everybody thought it was a great idea, and of course I didn’t do anything for like three years… But I had a partner who did, and then around the time of the market changing, we were like — my one partner today was a former lender and I was a real estate guy, and we were like “Hey, which side of the fence do we wanna be on in this downturn?” We reached out to the guy in New York and he showed us the collection side of the mortgage space; he knew we can raise capital, because we were doing it for commercial real estate.
So it’s definitely a little bit harder to raise money, especially… We started out in second mortgages, so I’ll give you an idea, Joe… You know what it’s like with an apartment space, for example – it’s much different to raise money for apartments or mobile home parks than it is to raise it for delinquent upside down second mortgages with no equity in bankruptcy. [laughter] If you can raise money for that, you can raise money for anything.
But I was fortunate and really blessed that I was able to learn from this one company who was in New Jersey and they were raising money for mobile home parks in Michigan and Indiana, and they did have one place in Pennsylvania. The beauty of that was by raising capital for them, I was able to learn how to raise capital and get paid to do it. That part was really cool.
It was a situation where the deal was good, but their partnership turned bad. But I learned a lot… The new venture appeared in the REING group with the note space. It was like a blessing in disguise. I think the reason I have the success I have today was through some of the hiccups along the way earlier on.
Joe Fairless: I wanna focus on the delinquent upside down mortgage in bankruptcy raising money part, but I do have a question just to close the loop on the mobile home stuff. How were you compensated? How did you know what to charge them for helping gather everyone to raise the money for their deals?
Dave Van Horn: Most of the time it’s through points or a salary plus bonus, that was typically how we were set up. We have different entities. The one deal was like four mobile home parks, and then some of the other mobile home parks were individual parks, but they were all over a hundred units. Then one storage center sat by itself, and the other storage center was part of a park.
There’s a lot of owner financing in that space. That’s a fundamental difference I see today between mobile home parks and apartments – the apartments are easier to get financing on. It’s kind of the same way in the note space… I said seconds are hard to leverage, but first mortgages are easier to leverage; well, it’s the same way if you compare mobile home parks with apartments – apartments are much easier to leverage (the banks can get their mind around that), whereas mobile home parks, it’s a little riskier, it’s a motor vehicle title, it has all this nuance to it, so it’s a little different animal.
Joe Fairless: Just to give a Best Ever listener an idea of what they could make… An example where you raise money for a mobile home park and you’re part of the LLC and you get a salary plus bonus or points – how much is that? How do you know to say “Yes, I’m worth this much because I’m gonna help you raise a million bucks”, or whatever you did?
Dave Van Horn: Well, I was pretty naive back then. We were typically paid points, or… What we were really doing was a lot of times the minimum investment was pretty high – a quarter million dollars was the minimum investment in some of these vehicles… So we didn’t always have a quarter of a million dollars, so we would start our own entity and maybe create 11 shares at 25,000/piece, but the 11th share is my share, and I didn’t really put any capital up. That was one way.
Then sometimes we were bonused from the company for raising money from them, so it was a combination of things. Sometimes we were paid for our marketing expense, and then on the other side we were paid through a piece of the action by putting the deal together, so to speak. So you can get paid both ways… We were fundraisers and investors as well, me and some of the other people raising capital for the group.
Joe Fairless: Now, I love how you said earlier “If you can raise money for delinquent upside down mortgages in bankruptcy, you can raise money for anything”, and I agree. Tell us what insights have you acquired that help you raise money for the perception of what I just said?
Dave Van Horn: [laughs] It’s kind of like “what’s the best advice on that”, right? It’s kind of like honing in on what you’re best at, and that took me a while to figure out in my life. At the time, I did all these crazy things… You’re like “This guy’s unbelievable, how can he do all these things?”, but it was really like a search to figure out what you were good at. What it turned out was that I was really good at this capital side of things… It’s not so much what I do, but how I do it, and it’s about focusing on my strengths, not my weaknesses. I’m not very good at guitar or speaking French, and I could study my brains out and I’ll probably be mediocre at best…
So it’s focusing on what I’m good at, and it’s really about the way I do it – I think it’s by helping people. In the beginning I almost went down the path of the typical guru at first, and gladly switched gears, because what I realized was it’s really about me sharing and helping other people build and preserve their wealth, that type of thing, whether it’s through education and things like that, or low-cost information, books…
It’s really that “give value first” type of thing. I think if you focus on what you do best… And the typical business of raising money is really “Me, me, me, me, me! Hurray for me! I wanna make a lot of money”, or something like that, whereas if you notice, the people that really are good at raising capital have a bigger purpose a lot of times in themselves.
Even when we were doing the mobile home park thing, they were actually building a Christian academy and they were funding it from the proceeds of the parks. So they had a purpose that was bigger than them. You’ll see that today with some businesses, startups where they’ll be digging wells in third world countries. Actually, my assistant’s doing that – she’s going to Nepal this summer. It’s part of the business model, and the charity is built into it. That’s always a cool thing, if you can do that right at the outset.
I think sometimes there’s some good ways to do things to raise money, because it’s much easier to raise money for charity, for example, than to raise money for Dave or Joe. But it’s really about giving value first and helping others, and I think with all the different experience I’ve had, it’s easy for me to do that. It’s really through this content creation and experience that I share with others, and I think people get to know you and it builds trust and confidence. People start to become more comfortable, they become more confident.
Joe Fairless: Okay. I’m taking notes, and I’m hearing that, and I also want to dig in a little bit deeper, because I would love to know… People are investing in delinquent upside down mortgages that are in bankruptcy… So I hear you that you’re adding value first, you’re creating content, you’re educating people, you’re building the relationship; the bigger purpose – I understand how that can be positioned and hold true, where you’re helping people work out their mortgage so they stay in. You don’t wanna repossess it, so you’re doing what you can there – so you do have an altruistic angle that you can talk about. That being said, delinquent upside down mortgages in bankruptcy – how do you position those conversations specifically when you’re talking to people?
Dave Van Horn: Well, obviously you have to do a little bit of education, because people are only gonna invest in what they know. In the beginning, we would relate notes to real estate, and most [unintelligible [00:16:07].03] an investor, and we have three types of investors. We have an investor who would invest in a note, and then we have people that invest in a fund, and then we have people that need more information, and you provide free or low-cost information. It’s really to get them to understand the investment.
In the beginning it’s kind of simple because everybody’s in the note business already, they just don’t know it. You have a credit card, you have a student loan, you have auto debt, you have medical debt, you have mortgages… The country is just loaded to the gills with debt, but people don’t think about receiving a check, they just think about writing checks every month. I’m talking in general… I’m sure the Best Ever listeners are a lot more savvy, you get the idea.
Joe Fairless: I get it, yeah.
Dave Van Horn: So it’s really about “How do I come across the aisle and start to think like the bank, or becoming the bank?”, and what are the advantages of that. And one of the things that intrigued me from the investment side was if I could buy something at a discount with a high yield that’s backed by a piece of real estate, “Hey, that’s pretty intriguing.” And by the way, it fits one of Maslow’s hierarchy of needs, because everybody needs a place to live, right? So there’s more to it than just equity, for example.
There’s things like emotional equity, for example. With a junior lien, why would somebody stay if their house was upside down, and the reason is because they need a place to live. It doesn’t have to make sense, other than what do they pay monthly and what would it cost me to move from here. Or there’s emotional equity – “I raise my kids there, I finish the basement, I know the neighbors, what will my family think, it would cost me more to move into another place with first month/last month security, pay for a mover… Or do I just figure something out on my junior lien and stay here?” So there’s all that going on.
I always describe emotional equity as “Joe Fairless at his mid-life crisis, buying a red convertible. He drives it off the lot, it drops ten or twenty grand in value, but he looks cool… The girls like it, so he buys it.” Now, does it make sense financially? Hell no! [laughs] That’s emotional equity, right? When you apply that to a house, it’s even more powerful.
Joe Fairless: The number one thing – for a lack of a better word, because I can’t think of a better, bigger word than that – that investors want to make sure of in their investment is they don’t wanna lose money. Studies after studies prove that out, that if you ask someone or do an experiment with someone and you either take 50 cents from them or give them 50 cents, they’re much more pissed off if you take it, than they are happy if you give them 50 cents. And if you give them 75 cents but take 50 cents, they’re still pissed off about the 50 cents. How do you address that with your business model? Because that has to be a question that comes up continuously, or at least the thought process of “I don’t know if I wanna invest in upside down mortgages that are in bankruptcy…”
Dave Van Horn: Well, first of all they’re not all upside down, and they don’t always stay upside down. There are assets that are covered with equity, like first mortgages, and then there’s assets that are partial equity, and then obviously there are some assets that are no equity, but they’re priced accordingly and they have different yields. And then there’s different ways to spread the risk.
One of things you mention is how do you sell an asset that’s partial equity or upside down, and what we found was we listened to the buyers and they were concerned, too. Part of it is track record, and part of it – we actually have a warranty on our performing notes. The warranty puts some people at ease. Now, the warranty is only as good as the company, because if the company goes out of business, then the warranty would be very valid, right?
The other side is some people will go “You know what? I have a portfolio of 20 notes, and 15 or 18 of them all have equity (I feel good about that), but here’s a note with partial equity. It’s a lot cheaper, it has a lot higher yield – maybe I’ll take a flier and invest that. Or I’ll invest 10% of my portfolio in this crazier asset class with more yield.”
Then other things happen too, like for example phantom appreciation. If you had a note that was partially covered by equity, and the market comes back. Maybe it’s a note in Phoenix, or Florida, or whatever, and the real estate market comes back, and now all of a sudden that note I got a great price on, the equity comes back and the property behind that note, and all of a sudden the note’s worth more, and I didn’t really do anything, the market did that. And I was collecting payments all along, and I could sell my note for the same or more than what I bought it, and I might have been collecting on it for three or four years. That’s a neat phenomenon, too.
Joe Fairless: If I buy a note that is upside down, what’s the warranty cover me for?
Dave Van Horn: Our warranty was investment principle minus payments received, and still is, when you buy a performing note. It could be first or second mortgage.
Joe Fairless: When you buy a performing note…
Dave Van Horn: Yes. Now, if you buy a non-performing note, we only warranty the lien position and that it’s a valid lien, and it’s in the lien position as advertised.
Joe Fairless: Okay, got it. So if you buy a non-performing, then it’s…
Dave Van Horn: You’re a more savvy person, usually you should know what you’re doing. It’s a little more dangerous game.
Joe Fairless: Okay, that makes sense. What else, if anything, should we talk about as it relates to raising capital?
Dave Van Horn: I guess it’s really about focusing on your strengths, getting to know your true self, what you’re good at – for me it was raising capital. I think a lot of it is how you do it. When I think about my best ever deal – on the raising capital side it has been where people have invested a couple million dollars or something, and I haven’t really met them yet. That’s just a testament to the systems and processes you have in place as far as your web presence, your profiles, your content creation that you do, the stories that you tell, the experience that you show… Because you know how it might take several touches for someone to feel comfortable, to move forward with an investment; it makes sense, right? But if you can become more efficient at that, maybe…
It’s sort of like a podcast is – a podcast is more efficient than me flying on a plane to a hotel in Ohio, so I can reach more people, potentially. So it’s kind of like that… It’s “What can I do more efficiently to provide information, comfort, advice, everything from paperwork — it’s really the systems and the process of facilitating investors, giving them the information they need in a more efficient way, maybe that’s what I’m saying.
It’s really not a salesy type thing, it’s finding ways for them to get to know you better, sooner. It’s kind of interesting when some people invest with us…
Now, the other thing is we do provide outlets to connect with them, though. We do make ourselves available, whether that’s Q&A conference calls, or actually have events for our ideal customers, so to speak. I run a group called Strategic Investor Alliance, and that group is really a venue for high net worth investors to meet with me and people that I know, and also to look at other investment vehicles and other experts. It’s like a group that I put together — it’s different than what I used to do with that real estate group years ago. I used to facilitate and network with all these real estate investors.
Today, it’s a little higher level group, but very similar in the concept of we just share resources, and we vet investments, and I bring in other investment vehicles, other funds. Some people look at me kind of strange and they go “Well, why would you do that? Why would you bring other investment vehicles? Aren’t you raising money?” and the answer is “Yeah, but my investors – and myself; I’m an investor – like to look at a lot of investment, and I like to vet them”, and we all have different strategies. Our group acts like a Yelp for various funds, investments and other types of alternative investments that we all like.
Then we bring in experts, too: lawyers, accountants, asset protection, legacy planning and all that stuff. We do all these things that we have in common, and I think that by sharing that type of value, that shared values approach – I don’t know if I raise more money from that, but I think people see the value in it. We don’t sell anything at this group, for example; it’s just information and shared resources.
I think a lot of investors like that because they can validate their investment strategy, they can help to build a solid portfolio of investments, and they can see what other investors like them are doing. I think it’s a unique way to do it.
Joe Fairless: Dave, where can the best ever listeners learn more about you and get in touch with you?
Dave Van Horn: Probably the best way is through my site at pprnoteco.com. Anybody can reach out to me direct at biggerpockets.com/users/davevanhorn.
Joe Fairless: Dave, thank you for being on the show, talking to us about the lessons that you apply to raising money in a perceived difficult area of raising money (that’s for sure)… How you help people first, through education, content creation… I love this money quote: “Find ways to get them to get to know you better, sooner.” I think that’s really the epitome of — well, adding value… I think there should probably be an added value part in there too, in that quote. What you’ve talked about before, that’s great stuff.
Also, identifying your core audience – as you said, you have three: an investor who will invest in a note, an investor who will invest in a fund, or an investor who needs more information, and seeing where they are in the marketing funnel, and then giving them what they’re looking for.
Lots of great stuff… If you’re raising money for delinquent upside down mortgages in bankruptcy, then you can raise money for anything, and that’s why I’m grateful that we had our conversation, to share that with other Best Ever listeners who are raising money as well.
Thanks so much for being on the show. I hope you have a best ever day, and we’ll talk to you soon.
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