JF2422: Finding & Landing Real Estate Investors with Terry Painter

Terry is the author of the Wiley publication “The Encyclopedia of Commercial Real Estate Advice.” Since 1997, he has been the chairman of Apartment Loan Store and Business Loan Store, two mortgage banking companies specializing in commercial loans in all 50 states. He has worked as a top producer for Lasalle Bank and Lehman Brothers, and he is well-known for his excellent investment consultations and strategies. Terry has been speaking about commercial real estate investing and lending to commercial real estate investor groups and real estate experts worldwide for the past 18 years. In today’s episode, Terry will be going into details about the ways to find investors in real estate.

Terry Painter Real Estate Background:

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“Don’t talk about what-ifs. Talk about it from what you’ve either done in the past or what you plan to do.” – Terry Painter


Ash Patel: Hello, Best Ever listeners. Welcome to The Best Real Estate Investing Advice Ever Show. I’m Ash Patel and I’m here today with our guest, Terry Painter. Terry is joining us from Portland, Oregon. He is the president and founder of Apartment and Business Loan Store. He’s owned real estate investments for over 40 years. His portfolio currently consists of two rentals and he is seeking multifamily properties. Before we get started, Terry can tell us a little bit more about your background and what you’re focused on now?

Terry Painter: Yes, thank you for having me, by the way. Just so you know, most of my background comes as a mortgage banker and a commercial mortgage broker. Over the past 24 years, I have financed hundreds of commercial real estate deals. I still, to this day, can’t wait to get to work. I’ve been doing it for 24 years, and I get to look at a lot of deals, and that’s fun for me.

Ash Patel: What are some of the challenges with what you do now?

Terry Painter: Well, there are always challenges. Basically, when you’re working with investors, they have already fallen in love with whatever they’re going to do, and they are behind it. So you don’t really want to be the bearer of bad news. What makes it difficult is — we’ve been around a long time, so we get a lot of inquiries; I have a staff that for the most part takes care of those, but I still work on the phones once in a while and I’ll tell you, it’s just that they’re so excited and you just don’t really want to put their fire out.

So I’m very busy, but I’ll tell you, if somebody has a dynamite property, something really good, I will drop everything and work on their deal, because that’s how we get deals done. But it is challenging, because some people have no money, they have no experience, their credit isn’t good, and so on. And yet, maybe they’ve found a great property. Well, if they have the property, it’s really the key here.

Ash Patel: So let’s dive into that. When you said commercial real estate, does that mean multi-family as well as non-residential commercial?

Terry Painter: Correct. I would define commercial real estate as any property that is occupied by a business or it’s five units or more if it has residents. So that’s commercial. And it’s also zoned commercial.

Ash Patel: Okay. Again, a retail shopping center – same thing, you’ll do those loans?

Terry Painter: Yes. It’s the same thing.

Ash Patel: Okay. So let’s dive into that. If I find a great property and I want a loan from you, how do I get my ducks in order?

Terry Painter: Okay, that’s a very good question; that’s really what it’s all about. I sell money for a living – how good is that? That’s pretty cool. But on the other hand, if you’re going to expect somebody to finance 75% or even more of your investment, you better have your ducks in order. What that means is you have to actually have the actual financials of the properties. A lot of people go for financing too early and they have not actually seen the actual rent roll, the actual P&L statements on the property, and they really don’t even know the physical condition of the property.

So if you really want to get your foot in the door, like I mentioned earlier, if you find a property that has cashflow today, it’s got a great upside, maybe the rents are under market, and you also have the financials for that property, that really will make a difference.

Also, you want to have your personal financial statement prepared. It’s really important that if you don’t have much money or experience, that you have somebody join with you; bring in a mentor, somebody that can actually fit in those shoes and help you look really good. Keep in mind, you’ve found that property, and that’s key. It’s going to be your deal because of that alone.

Ash Patel: I’ve got so many questions based on just what you’ve said. Okay, so I find this great property; do I call you right away and give you a heads up and say, “Hey, I’ve got this. I’m working on getting all my documents to you.” Do you want that heads up or do you just want the whole packet at once?

Terry Painter: Actually, I would prefer the heads up. I would really like to get into a dialogue with this person. This is not something I would recommend doing just to get rich. You’ve got to really love real estate. You’ve got to love putting deals together. You’ve got to love sometimes faking it until you make it.

So I’d rather get to know the person a bit. I’ll tell you, people get in the door with me sometimes because [unintelligible [00:04:54].15] My book has over 500 real estate terms in it and it’s amazing that if you just start talking some of the lingo, like throwing a cap rate, cash on cash return, and so on, you’ll get the attention of real estate professionals and lenders… But also be prepared — have some excitement behind your presentation and be prepared to tell the lender why this property is going to be successful.

Ash Patel: So pitch the whole narrative, not just your book of documents. You’ve got to sell the story of why you want to do this, and essentially sell yourself as well.

Terry Painter: Exactly. Because, let’s just say you’re even just applying for a loan at a bank. In your bank, you know some of the people there. Maybe you have a business; a lot of my clients who invest in commercial real estate already own a business. So you might know somebody. But what you want to do is go in and get them excited about your deal. Because bank employees are underpaid and overworked; they have more deals to look at, more heartburn than they care about. So if you bring in something and get them excited, they’re going to enjoy their job more, and you’re also going to be selling your deal at the same time. That’s a great recipe.

Ash Patel: That is an epiphany, because when most people think of bankers, they probably think of the blue suit that is just heads down looking at numbers, and I didn’t know that this narrative was that important… But it makes sense. It keeps you fresh in their mind. Maybe it builds some of the excitement in their mind in helping you get this deal done. What types of creative things have you done for somebody who may not qualify on their own, but the deal isn’t just right? How can a lender actually help them secure the deal?

Terry Painter: Well, I’m going to give you an example of my favorite one, actually. In 2004 – this is a while ago – I got this call from a lady named Kelly Fabras; she was an LAPD officer in Los Angeles. She told me she had found this great property called River Walk Apartments in Wichita, Kansas, and that she was going to buy it. I always have two qualifying questions. How much money do you have, and what’s your experience? Because usually if people don’t have the money, you’re just not going to take the time to work with them. I had already asked her what the price was, and the price was $6.8 million. She said that she had about $160,000 and she owns one rental property. I said “I’m really sorry. But this is not the property for you. What you should do is find a fourplex or something you can afford and you have the experience to operate.”

She would not have any of that. She said, “No, this is the property that’s right for me.” She actually had taken this course called Maui Millionaires – it’s still around – where they taught her how to raise investors, and if you find the right property, you could do that. Well, that was something that I had, at that time, not had much experience doing. But she had so much enthusiasm – that’s what I’m talking about – and she was so crystal clear. She knew the numbers on the property, which impressed me.

I told her, “Okay. Well, you’re going to have to bring in some more people.” She brought in a very high-powered executive from Intel, some other investors… And my gosh, she got the price lowered and that was her first syndicated deal. It was way sophisticated; something that a newbie could not really do. But I’m going to tell you her secret. She did not frigging know that she couldn’t do it. Most of us think about “Oh, no. I can’t do that. That’s beyond me.” But she didn’t know that, so that’s how she got it done.

Break: [00:08:15][00:10:16]

Ash Patel: That is a great story and a great example of how the narrative really helps in getting this loan secured. One of the things that I often tell people is to get with a lender before you start looking, and establish a relationship. Would you prefer that people come to you and say, “Hey, listen. This is what I’m looking for. Here’s my personal balance sheet, here’s my goals,” and establish that relationship, so that when they do find the deal, that part is already done.

Terry Painter: I actually really stressed that in my book. I think it’s really important, because so many new investors and commercial property, or for that matter, residential investment property, do it backwards. What they do is they try to put the deal together, they tie up the listing brokers’ time, maybe their brokers’ time, and time of investors without actually knowing that they have a loan. If you really think about it, the most important thing in this transaction is having the money to close the deal. So actually knowing what you qualify for and being able to fill in the holes where you don’t qualify is really essential. So you absolutely do that right out of the gate.

Ash Patel: Okay. And part of the underwriting process — so I’ve got my balance sheet, I get as many of the numbers as I can on the property… What if a lot of those numbers are hypothetical? What if there’s a fair amount of vacancy in, let’s say, a shopping center? How do I convince you that these are the right numbers?

Terry Painter: Okay. Well, here’s the thing – in the lending world we don’t deal at all with potential hypothetical numbers, proformas. A lot of real estate professionals, especially in this market — with the exception of retail, hotel, and hospitality properties, all other properties — there’s just such a low inventory, that realtors are really pushing a lot of properties based upon their pro forma, not based on actual. So you’re just going to be wasting the lender’s time and your investors’ time if you do not get the property financials together. You really need to convince the listing broker, even prior to signing the purchase contract, to give you some of the financials. A lot of times they won’t do that.

What you really want to do is deal with actual numbers, we need to know what those are. Okay next, go ahead and put a proforma together; absolutely enhance those numbers based upon fact. Show that market rents are higher; this property is $150 a month less than the market, that’s a multifamily. All you have to do is spend 4000 per unit and you could bring it up to the level of where these other apartment buildings are, renting at these higher rents. Show them what you’re planning to do. Don’t talk about what-ifs, talk about it from what you’ve either done in the past or what you plan to do.

Ash Patel: What if you’re a newer investor with limited capital, but you find a deal that’s just over your reach? What can you do to help them, or what would you recommend that investor do to get the deal done?

Terry Painter: Well, there’s a lot of people that fit that category. Once again, I’m going to go back to what we started this conversation out with – if you have a really dynamite property, in other words, what you want to know, and you’ve got to be able to prove it, based on financials – the cash on cash return, the internal rate of return, how much money you need to put into the property, and how much is that property going to sell for in five years if you’re going to fix and flip it down the road. What you want to do is money returns speaks to investors; you’d be surprised. Make a list of absolutely everybody you know, some of the people who you don’t think have much money, they’re just sitting on some money and they want to diversify, and they’d love to invest some money with you. The key is really having a really great property and knowing it, and then you can bring in an investor or two to fill in that gap.

Ash Patel: Terry, earlier, you mentioned variable down payments. What determines if I get to put 20% down, or if I have to put 30, or even more percent down?

Terry Painter: Well, we’re talking about commercial property. Commercial property is a cash flow-based system. We’re talking about net operating income, which most people probably know what that is. It’s just gross rental income less expenses. Okay, so we look at that number, and then we’ll take a look at two other items – you take a look at what’s the interest rate going to be on that program, and what’s the amortization. From that, we could compute the debt service coverage ratio.

Let’s just say for multifamily properties today, we’re looking for an extra 25 cents for every dollar of a loan payment you’re going to be making. That’s a 1.25 debt service coverage ratio. So cash flow really [unintelligible [00:14:49].28] so often today because it’s so competitive and properties are overpriced, commercial properties, especially multifamily. In the lending world, we look at some of these properties that just don’t cash flow the loan that they want. It’s just not going to happen, and you’ve got to put more money down. It’s so important when you talk to a lender to really know that ahead of time. Find out what a lender’s top numbers are, what can they lend. If they go up to 75%, then find out what their debt service coverage ratio is. Then take a look at actual financials and see if you could cash-flow that property out of the gate.

Ash Patel: So you’ve seen a lot of deals, and you’ve mentioned that multifamily is overpriced. What asset class do you think is the most attractive right now from a return standpoint?

Terry Painter: Well, here’s the thing… If you go after multifamily in any category — some of my best clients cannot find A or B properties and they’re looking at C properties right now that are over 40 years old. They’re in good shape, but they’re priced almost as high as a B property. So what you’re really going to be looking for I would say on this market right now is actually a repositioning opportunity; that would probably be the best. Or a repurposing property would be even better. But it’s really hard to find properties. Repositioning is basically doing value-adds, using your ingenuity and your intelligence to actually find the value that the seller hasn’t cared to implement. So finding properties with value-adds is really number one, and number two is actually repurposing.

An example of that – with so many hotel properties right now that are just tanking… Let’s just say you find one in a college town, and an opportunity could be to –we’ve done this many times– actually repurpose that. Change the purpose of a property to student housing. You could have a lot of single occupancy rental units, which a lot of college students are looking for.

Ash Patel: That would be a high-risk investment. What would the terms look like on a deal like that?  Taking a hotel — there’s going to be some period of vacancy while you’re doing renovations. To me, that’s a pretty high-risk deal. How would you fund that?

Terry Painter: That is so important that you brought that up… Because we’ve really got to take a look at risk here [unintelligible [00:16:57].25] for the opportunity. There’s a lot of hotels out there that could be repurposed into apartment buildings, or student housing, or something like that. In order for this formula to work, you do have to find the property at a really good price. You’ve almost got to steal the property, and that’s not easy to do. But just like any business, if it’s not earning income, what is it worth? Let’s say you wanted to buy a tire shop, and they just haven’t been running at a profit. Well, you’re not going to pay much for that business. You’re only going to pay the depreciated value of the real estate or something. So it’s really important to get it for a good price, and then to mitigate the risk, you’re going to have to really know what it’s going to cost to renovate that property, change the use, and so on. You’re gonna have to get an actual construction bid and you’re going to have to know how long it’s going to take. So it’s best to get a bridge loan for a property like that.

Ash Patel: What would the buyer have to put down on a deal like that?

Terry Painter: We do a lot of bridge lending or temporary loans. So just bridge a gap between what you want to do today on a property that’s not bringing in the income that it needs to cash flow to loan payments, to when the property’s doing great and fully occupied. Our best programs actually take a look at what the property is going to be worth once it’s stabilized; that means that it’s occupied at market occupancy. And that’s going to be about 75% loan to value, but we might be able to loan you up to, for a really great property in a good location, up to 85%. Because we’re in a recession right now, 80%, I would say, of the total cost of the project. We’re talking about the purchase price, the closing costs, the renovations, payment reserve perhaps will be likely in there. We would lend you up to 80% of that amount, but it will be constrained by 75% of what the appraised value is in today’s market.

Ash Patel: Okay, that helps a lot. So I have my balance sheet, I have my relationship with you, I have my great story on the property that I’m about to purchase… What else will help me in getting this deal done with you, or with any lender?

Terry Painter: Actually, if you’re kind of a newbie, just bringing in a partner that actually has the experience. If you don’t show enough net worth and liquidity, enough cash, you want that person you’re bringing in as a partner to represent that as well. You also want to bring in a dynamite team of professionals. We’re talking about a commercial real estate attorney, we’re talking about a really solid property management company… Because this is a business. The reason that businesses fail is not that they don’t necessarily have a great business going on, it’s because they probably aren’t managed well. That’s the same thing for commercial real estate. So if you could bring in a management company that fits those shoes, then it’s going to really help sell the deal to a lender.

Ash Patel: That’s really helpful. So I would imagine having the whole team, the property management company, the contractor, you’ll be able to put together a great narrative for the lender.

Terry Painter: [unintelligible [00:20:00].10] a great executive summary. It could be three pages, but not much longer than that. The lender wants to take a look at the deal and you want to get them excited about it. You could use the same executive summary to get investors excited. If you’re going to be doing a syndicated transaction, you’ll have a private placement memorandum that will cover that. You can show that to a lender, too. Then they really know you’ve got your stuff together if you have a PPM.

Ash Patel: That’s a good way to think about that… Pretend you’re pitching investors that are putting their own money in, versus a banker that’s just lending the bank’s money. You’d have to be more convincing, convincing somebody to put out money of their own. That’s a great way to look at that.

Terry Painter: I just remembered that excitement sells, and also great numbers sell, too.

Ash Patel: Yeah. And again, an epiphany, because we don’t think about bankers as exciting people.

Terry Painter: No. We don’t.

Ash Patel: Great epiphany. Give me an example of a deal, Terry, that didn’t go so well, and why. Maybe a loan that didn’t get funded.

Terry Painter: Do you want me to bring up one where…

Ash Patel: Let’s do both.

Terry Painter: Okay. There was the chiropractor that took a course from one of my colleagues, Peter Harris, who wrote the book Commercial Real Estate Investing For Dummies. He and his partner had a seminar circuit, and I would be part of that. I would mostly give my spiel on commercial lending. Anyway, this guy – he just studied, he just did everything right to find a property that needed to be rehabbed in Oklahoma.  What happened is I did this bridge financing for him, and then he was out of state, so he unfortunately did not manage the property well. Somebody drove by it and said there was like an old mattress in the driveway, and there were dead leaves in the swimming pool, and so on. So what happened is that I was also working on a perm loan at the same time for him. He did a lot of the renovations and spent this money with our bridge loan, but then the property went the wrong way. Why? Because the guy was out of state, he didn’t drive by the property, he didn’t see that mattress in the driveway, he didn’t see the leaves rotting in the swimming pool, and the bicycles on the patios that were rusting, and so on… And what happened is that he didn’t realize that his investment was going down the toilet. He was still doing his chiropractor business mostly.

So the truth of it is that if you’re going to be a deal sponsor, you’ve got to be hands-on. This is your baby; you’ve got to think about it; it’s taking care of your baby, and the buck stops with you. This guy did everything right, except for being out of state. So he lost the property is the end of the story.

Ash Patel: Was that because he wasn’t able to make the payments to the lender?

Terry Painter: Ultimately, yes. But what happened is actually his bridge loan matured and we no longer had a perm loan for him.

Ash Patel: So it’s not set in stone.

Terry Painter: An 18-month bridge loan, he had plenty of time — this property had very little occupancy and needed a rehab, but he had plenty of time to get it all done and occupied. But just once he got the rehab done, he had poor management… So you’ve got to really have all your ducks in a row to be successful on something like that. He was such a great guy, and he poured his heart and soul into it. So it broke my heart. It’s like it was my failure as well.

Ash Patel: Terry, a lot of our Best Ever listeners have transitioned into becoming full-time real estate investors. When they do that, they no longer have a W-2 income, they don’t have a job. I see a lot of these people on forums, and they’re saying how do I get a loan if I don’t have income and I don’t have a job? How do you address that?

Terry Painter: Well, fortunately, our firm – we represent Fannie Mae, Freddie Mac, CMBS; these are all securitized loan projects, HUD. We also have some private debt fund money. So income to a bank – that’s the most important thing. Bank examiners even, they want businesses and commercial properties to actually have two sources of income. Basically, what we would be doing is looking to get you a securitized loan. Those loans start at about a million dollars and go up from there. But that’s the key. Because we don’t look at personal income, we look at the income of the property and we look at your financial strength. There are plenty of loans out there that do not require tax returns, and for the most part, we have a lot of people in business who just don’t want to pay a lot of tax, so they don’t show much enough on tax returns to actually get a bank loan.

Ash Patel: Terry, if it’s a three, four, or $500,000 loan, what options does that individual have?

Terry Painter: In that case, their options are more limited. If it’s a loan of that size, what they are going to have to do is bring in a partner.

Ash Patel: That has an income.

Terry Painter: That has an income. Right.

Ash Patel: At what point does a high net worth or large balance sheet usurp the need for an income?

Terry Painter: Well, actually with a bank, it doesn’t. It’s quite shocking. We’re members of the Oregon Bankers Association and the Mortgage Bankers Association… And basically, it’s quite shocking, but we have clients that have actually tried to get a loan at a bank with millions of dollars in the bank. But their money was in the stock market, or let’s just say in treasury bonds, which don’t produce enough income. Two million dollars is not that much if you’re making less than 1%. So they can’t get a bank loan. So if the loan is only 300,000 or 400,000, they’re going to have to take out a private money loan. There’s soft or hard money these days, but it’s going to be probably at about 7% to 9%. So ouch; that’s what they’re going to qualify for.

Ash Patel: What’s the difference between soft money and hard money?

Terry Painter: In some ways they’re similar. Hard money really is, I would say, 10% and above. We’re talking about 10 to 12% on average, sometimes they go up to 14%. We’re not seeing such high rates with hard money lenders today, because there’s so much hard money out there. Soft money is actually, I would say, between 6% and 9.9%, somewhere in that range.

Ash Patel: So it’s just the rate.

Terry Painter: It’s really the rate, and also the points involved as well.

Ash Patel: So, Terry, you see these phenomenal deals every day for many, many years… Have you gotten the bug to go after some of these deals yourself?

Terry Painter: I do all the time. My passion is actually new construction. We’ve done many loans that have been 30 to 40 million dollars. We do a lot of the big stuff these days, although it didn’t start off that way. When I started out, if I got to 100,000, that was a big loan.

I love working with developers, and that’s where there’s a lot of opportunities there, but it’s a big learning curve. That’s where the opportunity is today, I would say especially in multifamily, where you can actually build a property for less than what you could buy it for. So when I see land, and so on — but the thing about it is that I’m an older guy. I don’t know if this is going to be on video or just on audio, but I’ve got to think about every moment in my life, and what I want to do with it. It’s really fun just to evaluate deals, but I do see deals all the time that I would love to participate in, and sometimes I do. Not if I’m making a loan out; then it’s a conflict of interest, so I cannot.

Ash Patel: Sure. I think what drives you is your passion for what you do. That gives you enough fulfillment on the real estate bug to satisfy that.

Terry Painter: Yeah, I love it. It hasn’t been easy. I’m on my third marriage, which I’m not proud of, and I finally learned to live a more balanced life that I used to. I’m the kind of person that couldn’t wait for the weekends to be over so I could go back to work. That’s not good when you have a family, you know…

Ash Patel: Terry, what’s your best investing advice ever? Whether it’s yourself or real estate this time.

Terry Painter: My very best advice is to really get to know the property and do not make a decision based upon having fallen head over heels for that property. You won’t believe how many times people do that. They go by looks; it’s like you’re dating, it’s the same thing. In my book, I give an analogy where one of my clients actually thought she was almost like online dating… It’s the same thing is looking at properties.

I’ve had clients that have overpaid for their properties. It’s not that they haven’t bought them in the right place and at the right time, but they just paid too much, and they have had to spend years to get the net operating income up to where it really made sense. The best action you could take is… Well, first of all, let me back up. Nobody buys a property to purposefully overpay for it. They only do it because they have an emotional attachment to that property. So you’re going to make some bad business decisions sometimes because of looks. So be careful.

Ash Patel: That is great advice. Terry, are you ready for the lightning round?

Terry Painter: Sure, go ahead. I’m not sure what it is, but…

Ash Patel: Let’s do it. First, a quick word from our partners.

Break: [00:28:10][00:28:47]

Ash Patel: Terry, what’s the best book you recently read?

Terry Painter: The best book is actually Passive Investing in Commercial Real Estate by James Kandasamy. What makes this book unusual is for those who want to invest in other people’s deals. Okay, well, what I love about this book, and I recommend it to some of my deal sponsors, is that you can reverse engineer it. It tells you exactly from an investor standpoint what are they looking for to protect themselves. This would be a great book for Joe Fairless to pitch to his clients, because if we reverse the advice in it, it tells you exactly what you need to accomplish and how you need to sell your deals to investors.

Ash Patel: Good to know. Terry, what’s the Best Ever way you like to give back?

Terry Painter: I’ll tell you what I love to do… And I don’t get too much opportunity, but I’ve done it a number of times, I’d like to do it more. I like to actually help new entrepreneurs in developing countries that have no opportunity. Currently, I have a home in the Dominican Republic, it’s my winter home. Somebody who’s working there, he’s Haitian. I said, “What’s your dream?” He said, “I would love to own my own store.” So my wife and I helped to invest in his store, and he’s now very successful today.

Ash Patel: That’s a great story.

Terry Painter: Now they have another store. So that’s what I’d love to do, is more of that. Help people actually get in business, that have dreams, in developing countries.

Ash Patel: Good for you. Terry, how can the Best Ever listeners reach out to you?

Terry Painter: Okay, well, if you want to learn just about everything on commercial real estate, I recently had a book published by Wiley. They published the dummies books called the Encyclopedia of Commercial Real Estate Advice. That book has all my web addresses, but you don’t have to buy the book. But otherwise, you could just google apartmentloanstore.com and you can reach me there. That’s my online business.

Ash Patel: Terry, thank you again for your time today. You’ve given us some great advice, sharing some of the inside tips on what lenders look for. I’ve certainly learned a lot and I had no idea that the narrative in having a team in place, but with the deal itself, was that important. Thank you for sharing all of your advice today and thank you for being on the show with our Best Ever listeners. Terry, have a great day.

Terry Painter: Thank you. It’s been fun.

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Joe Fairless serves as director of investor relations with Ashcroft Capital, a real estate investment firm. Ashcroft Capital is not affiliated with Joesta PF LLC or this website, and is not responsible for any of the content herein.

Oral Disclaimer

The views and opinions expressed in this podcast are provided for informational purposes only, 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. For more information, go to www.bestevershow.com.

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JF2107: Brothers Working Together With Chris & Ashton Levarek

Chris & Ashton are brothers and the owners of Valkere Investment Group, LLC a multi family real estate investment firm. These brothers explain how they were able to grow their business through raising capital, to doing their first deal, and tips on being able to overcome inexperience. 


Chris & Ashton Levarek  Real Estate Background:

  • Owners of Valkere Investment Group, LLC a multifamily real estate investment firm
  • Currently have 42-units
  • Chris is from Phoenix, AZ
  • Ashton is from Portland, Oregon
  • Say hi to them at:https://www.valkeregroup.com/




Click here for more info on groundbreaker.co

Best Ever Tweet:

“Networking is very important, find the person who is connected and it will make your job easier.” – Chris & Ashton Levarek


Theo Hicks: Hello, Best Ever listeners. Welcome to the best real estate investing advice ever show. I’m Theo Hicks, and today we’re speaking with Chris and Ashton Levarek. How are you guys doing today?

Ashton Levarek: Good. Thanks for having us.

Chris Levarek: Doing great. Good to be here.

Theo Hicks: Absolutely. Thanks for joining us, looking forward to our conversation. A little bit about Chris and Ashton – owners of Valkere Investment Group, a multifamily real estate investment firm. They currently have 42 units. Chris is from Phoenix, Arizona, Ashton is from Portland, Oregon, and you can say hi to them at ValkereGroup.com. Do you guys mind telling us a little bit more about your background and what you guys are focused on today?

Ashton Levarek: Go ahead, Chris.

Chris Levarek: Okay, so as you said, we are brothers; we got started in 2018, started with a duplex, and just investing in multifamily ourselves. We partnered a lot with private lenders, we did joint ventures, and did some LLC joint ownerships, and we scaled up to now doing syndication. We just did a 16-unit in North Carolina, and right now we’re focused mainly on scaling up to the next level, so doing just bigger and better apartment syndications. 30 to 60-unit is our next target. Is there anything you wanna add, Ashton?

Ashton Levarek: No, that’s about right. It’s a good summary.

Theo Hicks: So for the duplex – was that a house-hack situation? Did you guys live in it together, or did you guys just buy it and rented it right away?

Ashton Levarek: We bought it, we joint-ventured with another individual. We bought it, rehabbed it and then rented it out. Initially, we started trying to BRRRR (buy, rehab, rent, refinance, repeat), but then we got into the syndication. The first few were all purchased and then rehabbed and rented out.

Theo Hicks: How did you meet the JV partner?

Chris Levarek: I’ll take that one. It was actually a co-worker of mine, nice guy, and we had an existing relationship, of course. I’d known him for about five years. I started getting into the Bigger Pockets scene, and getting more involved in real estate. I didn’t have all the funds I needed to pull an acquisition of over 150k or 200k cash, which is what we were trying to do just to be able to renovate it… So I started that dialogue, I started presenting “Well, here’s how we would do it”, started showing how an attorney, and a deed of trust, and a promissory note might work… And just giving that credibility, and then it kind of expanded from there and we worked together.

Theo Hicks: What were the numbers of that deal? What did you buy it for? Was it all cash? What did you put into it, what did you sell it for? And then maybe tell us a bit about –there’s of you on the deal, so tell us how the profit structure worked.

Chris Levarek: Sure. On the first one – yeah, it was a private loan arrangement. We did 70% funded by a private lender; it was an all-cash purchase. The purchase price was 209k, and then we did 172k or 170k private lender, at 9%, promissory note. They got a deed of trust and a promissory note. And we actually did a joint venture agreement just to get all the lines crossed.

Then my brother and I, we got HELOCs (home equity lines of credit) on our house; we used that money to fund the rest of the renovations, as well as the down payment, the difference between 170k and 209k. I think we did get an additional private loan, and used some of our Roth IRAs as well, distributions. We pulled out of Roth IRA and were able to use those tax-free.

Theo Hicks: What were the profits on that, and how are those split?

Chris Levarek: So the private lender got a 9% interest for about eight months… The renovations were done in 4-5 months, but it took about 7-8 months to get that refinance back out. They refinanced out… So we bought them at 209k. It was two duplexes, actually, so each duplex was 104.5k, and then when they were done with renovations, renovations totaled about 95k, so it was a good 47k each. So when all was said and done, their ARV value was 240k each, so a total of 480k ARV, which means we were able to refinance to get a loan of about 336k. That covered all our costs, so we were able to pay back the private lender, we were able to pay back our HELOCs, and basically have a  cash-flowing asset. It wasn’t amazingly-cashflowing for us, but we were the sole owners on that deal, so… It was something like $300 cashflow after everything is said and done with that new mortgage.

Theo Hicks: Just to confirm – the private lender was the co-worker, correct?

Chris Levarek: Correct.

Theo Hicks: Okay, perfect. So from there you did a 16-unit next?

Ashton Levarek: 16 was the biggest deal. Then we did a couple duplexes, a five-plex, a 13-unit, and then the 16.

Theo Hicks: What was your first syndicated deal?

Ashton Levarek: It would be the 16-unit. That’s officially syndicated. We partnered with other people’s money on every deal, actually… But our  first official syndicated deal was the 16-unit.

Theo Hicks: Let’s talk about that deal. We’ll first focus just on the acquisition aspect, and then we’ll focus on the raising money. Same question – what did you buy it for, how did you find it, and what was the business plan?

Ashton Levarek: So how we found it was we had been building up relations with commercial brokers in the area. He had actually brought us the 13-unit prior to that one, and we could close, and he brought us the 16-unit. I think initially they were asking 1.1, after negotiations we got it down to 960k, and then after we got it under contract, we closed it for 950k, I believe that’s right. And then – what was the last question?

Theo Hicks: What was the business plan after acquisition?

Ashton Levarek: It’s a value-add play. There was a lot of deferred maintenance, rents were below market, so it was kind of an easy, age-old strategy of just buying it, making all the repairs that needed to be done, repainting, that kind of stuff, and then raising the rents as we go. We’re still in the process of doing that, so… We have 3-4 units finished right now, because we’ve only just bought it in February.

Theo Hicks: This would probably be a better question for that 13-unit, because this 16-unit deal came from a broker… And the reason why they brought it to you was because they knew you could close, because yo closed on another deal… But how did you win that deal, and if it involved building a relationship with them, what were some of the things that you did to build that relationship, to show them that you had the credibility and the ability to close?

Ashton Levarek: Well, I know they’d seen that we’d done a bunch of smaller multifamily – a 5-unit, two duplexes, and then two other separate duplexes prior to that… But I’d also been to several meetups, been talking to him, and talking about how we raised money… Additionally, thanks to my brother, he’s really strong and we have our own website, we had our Facebook page, Instagram, and just building credibility that way on the social side as well. I think that helped out a lot. And then being able to secure those loans, and talking to the right people as far as building the team on the backside. We had the property managers, the contractors… All the people that had the experience that we didn’t have, that we could really rely on to make those good decisions. He saw that when we were asking the right questions, and when we were looking at the property.

Theo Hicks: I’m gonna back-track again, because you mentioned something that brought up a question that I was gonna ask earlier… So on those first two duplexes – it sounds like it was a pretty hefty renovation. Do you mind telling us a little bit about how you were able to find the right contractor for that job? I know an issue that’s kind of recurring is finding that right contractor, that right GC for your deals. It sounded like it worked out well for this first deal, so maybe give us some advice on how the Best Ever listeners can replicate that success.

Ashton Levarek: Absolutely. And I can speak to that, because I was there the day we interviewed five different contractors, two different property managers… So we had them all come to the property at different times, and I was there all day, and we walked the property, and let them take measurements, putting together quotes for us, really. But what really helped us was finding the property manager. The property manager had all those connections already. When we found that rockstar property manager, it was five different contractors, one of which never talked to me again or answered my phone calls, and two – I think they sent me quotes, but they were way above what I wanted… And then – I can’t remember what happened on the last two… Maybe two didn’t show, or something like that. But it was kind of disappointing at first. But Chris found a property manager on Bigger Pockets, and he’s the one who came through… He recommended a couple of contractors, and we went with his recommendations actually.

For anyone starting out, I think that if you can find the right people that know the right  people, that’s the way to go. Networking is the way to go. You don’t know what you don’t know, and relying on those people that work in that field all the time is the way to do it. So developing those relationships – that’s how we did it.

Theo Hicks: Exactly. You find one solid team member, and then let them find the rest. It’s a good strategy. Alright, going back to that 16-unit deal… I understand that you’ve raised money in the past, so maybe you can apply this to all of your deals if it wasn’t different, but maybe tell us a little bit about your money-raising process… Again, overall, or for that specific deal. For that specific deal, what was the compensation that you offered to those investors, for that 16-unit deal?

Ashton Levarek: Chris, do you wanna take that one?

Chris Levarek: Sure. For the money-raise it was pretty important for us — on the 13-unit we had done a co-ownership LLC with a single investor, and we started to see that if we’re gonna scale up to these bigger properties, we need to build that pipeline of connections and that network for investors before we find the next deal. So I really started doing that; we started systematizing how we’re in-taking those calls from people interested, or reach outs on Bigger Pockets, and we really built out about — I wanna say we built out about 100% of what we needed, and then we tried to build up to about 150% of what we thought we needed. So if we thought we were gonna close on a million dollar property, which was our target range, we needed to come up with either 500k on that raise, just to be safe. So we aimed at that, and then when we hit that number we started pulling the trigger on some of these offers on bigger properties, and that’s kind of how we structured it.

Did everyone we had in the pipeline close? Not really. I would say more than half, when the deal was getting fully documented and ready to go, to be signed upon, we had quite a few people lose interest at that time, or we didn’t maintain the contact, or they went a different direction. This was all happening actually over the holidays, so that was a great time to do a capital raise. So we learned a lot in that process, but we were able to continue to offer the deal up to different people through our network. It was a 504 syndication, so we actually weren’t advertising, of course.

What it turned out to be – what was projected was a  13% return. We were very conservative, so this one will probably go up to a 15% return… But we added in a lot of numbers. We got confirmation on market rents from three different property managers, and really checked our numbers on the renovations, of what we could hit, accurately… But it was more about building in those buffers, the reversion cap rate, really making sure we’re selling at a cap rate a lot higher, just to be able to ensure what’s gonna happen in a couple months, or a year, or two years, after we get this deal done. So we really built it in as 13%, and our investors were comfortable with that, but I believe we’ll hit around 15.7%, actually.

Theo Hicks: Okay. And then all these investors – did you know them, or were they friends and family, or were they people that you found… Because you mentioned that you had a process on Bigger Pockets – was it through that? And if so, what was that process?

Chris Levarek: Sure. I’ll speak, and then I’ll let Ashton… So Ashton at the time was stationed in Fort Bragg, North Carolina, so it was good that he was close by, but he was also building his network (I’ll let him talk on that). On my end, it was co-workers, friends, family, it was people I met at meetups… I’d go to three different meetups a month. I’m very active on Bigger Pockets, and I think there were about 3-4 different people from Bigger Pockets alone on this deal… In total, about 14 different investors. So that’s kind of how we built that connection. Not all the friends and family that committed joined along, so we actually had to just keep going through meetups and Bigger Pockets and getting new connections as we were even doing the process, so… Do you wanna speak to how you did it, Ashton?

Ashton Levarek: Yeah, I think something we’re leaving out too is while we had only done so many of these smaller deals – and I’m sure there’s a lot of guys that are gonna listen to this that have done bigger ones, but… When you walk into a room when you have the confidence to talk about what you’re doing, people wanna work with you. We had done a lot of studying, a lot of looking at markets… Joe Fairless’ book was a big guiding factor in that, of course… But that’s what really built it up.

So I know that my brother in the Phoenix market, and then myself over in North Carolina – we’d been going to a bunch of meetups, we’d given talks on how to BRRRR and how we’re doing different things with real estate, and that really helped out a lot as far as credibility, and then people wanting to work with us on this deal. But it was the same for me, and it was friends and family, of course, and then co-workers… A lot of co-workers actually got involved, which is really cool to see… But yeah, networking.

Theo Hicks: And then the last question before the money question – I thought it was interesting, because I know it’s very important to confirm the market rates with your property management company, but you mentioned that you got it from three management companies, and I’m assuming you don’t have three management companies working at the properties, so how did those conversations go?

Chris Levarek: Myself and one other partner, actually — we just had them come over and walk the property with us to give us their opinion on what we could get for rents, and what we would have to do to get them up to those market rents… And we just set appointments with three different property management companies. Is that best practice? I don’t know, but it really helped us out, because we didn’t know the market as well as they did, and we didn’t wanna just rely on one property management company. We wanted to see how they work… Not only their opinion, but how they work, what management software they’re using, how many contractors they’re working with, how they turn a unit, that kind of stuff. So it was really important to  us to talk to as many experts in that market as possible.

Theo Hicks: I think that’s a fantastic approach, because I think most people will interview management companies – three management companies, let’s say  – and then pick the best one, but they do this before they have a deal… You guys had a deal and then you interviewed them, so you could get a lot more information out of them, to help you not only with that specific deal, but also learn “Hey, which one should I choose?” I think that’s a really good strategy.

Alrighty, so what is your best real estate investing advice ever?

Ashton Levarek: For me, I like that quote, “No one is smarter than all of us”, so I really think my best ever advice is to really get out and network with the people that are down in the business you wanna get into, and learn as much from them, and then bring them in on your team. Try to build up that team of people you’re gonna work with.

Chris Levarek: Yeah, I agree with that. I think you’re only as strong as the people that you’re surrounded with. They’ll not only elevate you, but they’ll support you in your weaknesses. I would say — I’m in IT in my W-2 job as well, on the side, so I do love the systems and the processes, and I think a big part of it is if you come into an area that you’re weak, or you hit a roadblock, it’s fine to get through that roadblock and that challenge, but how do you correct it in the future? You’ve gotta create some kind of process or system that then in the future will either simplify that challenge, or make sure that doesn’t occur at all. Then you’ll be able to get through to whatever goal you’re trying to achieve without hitting those same roadblocks every time.

I think that’s a big part of it, because a lot of people just “Oh, well, I’ll get to that next time. I won’t worry about it.” And then when it comes up again, they’re like “Dang it! I wish I had corrected this from the last time. I forgot how I did it.” So just creating those minor tweaks in those systems and processes are huge for investing in real estate, so you don’t keep repeating the same mistakes.

Theo Hicks: Okay, are you guys ready for the Best Ever Lightning Round?

Ashton Levarek: Let’s do it!

Chris Levarek: Let’s do it!

Theo Hicks: Okay. First, a quick word from our sponsor.

Break: [00:18:33].01] to [00:19:22].24]

Theo Hicks: Okay, what is the best ever book you’ve recently read?

Ashton Levarek: Vivid Vision.

Chris Levarek: The One Thing.

Theo Hicks: If your business were to collapse today, what would you do next?

Ashton Levarek: Start over. Keep pushing.

Chris Levarek: Pivot. Try something new.

Ashton Levarek: Yeah. Failure is not an option.

Theo Hicks: Perfect. I’m gonna change this one up a little bit… So it’s gonna be either the best ever thing, or if you want the worst ever thing in regards to working with your brother. [laughter]

Ashton Levarek: You can’t control him. And the competitiveness.

Chris Levarek: Yeah… The unpredictability. I like systems and I like that predictable, and I like repeated consistency, and Ashton is fun because he keeps it unpredictable. [laughter]

Theo Hicks: He keeps you on your tones. Some of the guys definitely complement each other very well.

Ashton Levarek: Exact opposites, yeah, on the — what is it, the DiSC profile?

Chris Levarek: Yeah.

Theo Hicks: Okay. What’s the best ever way you guys like to give back?

Ashton Levarek: Right now, talking to new investors. We’re still fairly new, but super-motivated, and I really like seeing other people get involved. I’m finishing up 20 years in the military, and talking to a lot of military members. If I could do it again, I would have started a lot sooner, while I was in the military. So that’s where I focus a lot, giving back to or teaching other military members how they can get involved and start building up that extra stream of income.

Chris Levarek: Yeah, I would agree on that. We give out a lot of content. I’m probably posting on Bigger Pockets five times a week, and even now I’m working with two investors on a duplex, just a side project, and just constantly teaching in that regard… We do like to do veteran charity projects; we’re doing [unintelligible [00:20:55].12] here in Phoenix, Arizona, so just doing a fundraiser for that… But yeah, we really like to spread the knowledge, because both of us didn’t have any idea about this kind of thing until 2-3 years ago, and we’d like to let everyone else know that this is an option, and stocks and 401K’s are not the only way to go.

Ashton Levarek: Yeah.

Theo Hicks: And then lastly, what is the best ever place to reach you?

Ashton Levarek: You can reach out via our website, but we’re also on Facebook, we’re also on Instagram, and then Bigger Pockets.

Chris Levarek: If you just look up our names, Chris Levarek on Bigger Pockets, or Ashton (same last name). Otherwise, our handle on Instagram, Facebook, at Valkere Investment Group. We’re pretty active on those, and we’re on LinkedIn as well… But the website probably is the best just to get an access to all that, so just go to the website ValkereGroup.com.

Theo Hicks: Alright, guys, thanks for joining us today. I enjoyed this conversation a lot, and I learned a lot as well. Just to summarize some of the things we’ve talked about – we’ve talked about your first deal, two duplexes; it was a JV deal with you two, and then a  private lender who was a co-worker of Chris’s. You bought the deal all-cash; to  renovate it, the lender funded 70%, and then between a HELOC loan, as well as your IRA, you funded the rest. ARV allowed you to get a loan for 336k, which covered all the costs. You paid back the lender, you paid yourself back, and you have a cash-flowing asset.

We’ve talked about your 16-unit, your first syndication. You got the deal through a broker you had done a deal with previously. It was a value-add deal, and you were able to knock the purchase price down from 1.1 to 950k. The value-add was deferred maintenance and below-market rents, so bread and butter value-add… And again, you mentioned that in that 13-unit deal you were able to get on the broker’s side by the fact that you’d done a lot of smaller multifamily deals, you had the experience aspect, but you also talked to them a lot in-person at meetup groups, as well as the branding side of it – your website and your social media presence all portrayed your ability to close on the deal.

We talked about your process for providing contractors… You set up appointments for five different contractors – and this is those duplexes – and had them come out, and that’s how you were able to narrow down which contractor to use, but you also mentioned that you guys had a lot of success finding a property management company and then using them for all the connections you needed thereafter… And you found them on Bigger Pockets.

We talked about the money-raising… On your 13-unit deal you had one investor, you realized you need more, so you systemized a process to make sure that you were able to get 150% of the money you needed to close on the deal. It was from co-workers, friends, family, and people at meetups.

I’ve done three interviews today and every single person I’ve talked to today has had some massive success from meetups groups… So people, get out there and go to meetup groups. There’s a lot of opportunities out there.

You also mentioned that the fact that you’d done previous deals and done a lot of research, your confidence in presenting the deal also was able to convince a lot of people to come on board and invest.

And then lastly, we talked about your best ever advice, which was 1) all about the team, so “No one is smarter than all of us”, and you’re only as strong as the people you surround yourself with. You talked about how you wanna go out there, network with people who are doing what you wanna do, and then bring them in on your team. And then the other best ever advice was if you ever face some sort of issue or challenge, figure out a process to put in place so it just automatically doesn’t happen again, as opposed to pushing it down the road and letting it potentially happen again.

Again, thanks Chris and Ashton for joining us today. Best Ever listeners, as always, thank you for listening. Have a best ever day, and we will talk to you tomorrow.

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.

The information, statements, comments, views, and opinions expressed or provided in this website (including by speakers who are not officers, employees, or agents of Joe Fairless or Joesta PF LLC) are not necessarily those of Joe Fairless or Joesta PF LLC, and may not be current. Neither Joe Fairless nor Joesta PF LLC make any representation or warranty as to the accuracy or completeness of any of the information, statements, comments, views or opinions contained in this website, and any liability therefor (including in respect of direct, indirect or consequential loss or damage of any kind whatsoever) is expressly disclaimed. Neither Joe Fairless nor Joesta PF LLC undertake any obligation whatsoever to provide any form of update, amendment, change or correction to any of the information, statements, comments, views or opinions set forth in this podcast.

No part of this podcast may, without Joesta PF LLC’s prior written consent, be reproduced, redistributed, published, copied or duplicated in any form, by any means.

Joe Fairless serves as director of investor relations with Ashcroft Capital, a real estate investment firm. Ashcroft Capital is not affiliated with Joesta PF LLC or this website, and is not responsible for any of the content herein.

Oral Disclaimer

The views and opinions expressed in this podcast are provided for informational purposes only, 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. For more information, go to www.bestevershow.com.

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JF2077: Coronavirus and Asset Protection With Brian Bradley

Brian Bradley is a returning guest from episode JF1811. He has been in law for over a decade and in this episode, he wants to help you understand the best ways to protect your assets and also give some advice specific to today’s coronavirus pandemic.

Brian T. Bradley Real Estate Background:

  • Asset Protection Attorney for Investors, Self-Made Entrepreneurs, Business Owners, High-Risk Professionals, and Affluent Families
  • Sets up systems and strategic teams for our client’s asset protection and wealth management
  • Based in Portland, OR
  • Say hi to him at https://btblegal.com/
  • Best Ever Book:

Click here for more info on groundbreaker.co

Best Ever Tweet:

“Plan before you need it, don’t wait till after an attack happens.” -Brian Bradley


Theo Hicks: Hello, Best Ever listeners and welcome to the best real estate investing advice ever show. I’m Theo Hicks and today, we’re speaking with Brian Bradley. Brian, how you doing today?

Brian Bradley: I’m doing great, Theo. Thanks for having me back on and I look forward to jumping into a little bit of a different talk about asset protection today.

Theo Hicks: Absolutely. So as he just mentioned, he is a repeat guest. So if you wanna check out his first interview and hear his best ever advice and the best way to protect your assets, check out Episode 1811. So this is going to be a Skillset Sunday. So we’re gonna talk about a specific skill that will help you in your real estate investing journey. So we’re going to talk about all things asset protection, and more specifically, we are going to talk about how the advice that Brian can give today relates to the Coronavirus. So before we dive into that, Brian, do you mind giving the Best Ever listeners a reminder about your background and what you’re focused on today?

Brian Bradley: Yeah. So a little background about me – got into law and practice of law around 2008 back when the economy tanked, and I just had to sort of jump into court and figure it out how to sink and swim on my own. So I spent the first three years just purely in court, representing clients for free, which was a great experience. So I got more trial experience and litigation experience in those first three years than most people have in 25 years of experience, just because if you’re representing people to organizations for free, who’s not going to use you?

So then that just trickled down into – well, I like money, I like financing, I like investing on my own, and I got tired of seeing problems walk in the door when it was too late. So I started incorporating asset protection into my practice because I wanted to help people keep what they have and have a stress-free life, knowing when something bad were to happen or negligent happened, that they can sleep soundly, a little bit better, knowing they have the system and teams in place beforehand. So I started building a secondary portion of my practice around asset protection, but higher levels of asset protection for investors and doctors and real estate investors, higher net worth clients, generally around that million-dollar net worth mark or more, or for people who are trying to be full-time investors and how to scale them up to that protection level down the line. I just wanted to get ahead of the problems for people so that they know that there’s solutions for them.

Theo Hicks: Perfect. Thanks for sharing that. So one of the questions I have for you is about lawsuits that you see coming down the line for business owners and investors due to the Coronavirus. So maybe we could talk a little bit about that, but more specifically, in addition to that, maybe you can mention some of the things that people haven’t done that they should have done leading up to this moment that is the result in them being affected by these types of lawsuits.

Brian Bradley: Absolutely. It might be a little long-winded answer to cover some of that, but I’ll try to jumble through it without boring anybody. But it’s a great question and it’s obviously a really big topic, and it’s a really polarizing issue, but people are gonna have to go to work and have to invest at some point, and whenever these regulations start getting lessened, you’re just gonna have to do it the right way. So the key in any crisis is first, you’re gonna have to weather the storm; and what’s obvious is that if income goes down without expenses going down in the same amount, then you’re gonna start depleting your assets. You’ve gotta have some control over your expenses. What’s also critical though, is your assets, and especially your hard assets like real estate, because they give you the ability to subsidize and reduce income to ride out of that crisis. So the last thing that you need is to have a creditor attach a lien or tell you how you’re going to use that asset, when you potentially need to use it to ride out a bad crisis.

So the sad thing is that we now also have to add the liability and cause of COVID-19 to the list of things that investors and business owners need to start planning for. So you want your assets and equity safe. You want to protect your future and your legacy. You didn’t spend all your time building this for it to just go away, but a lot of us just don’t know how to do it. It’s a common pattern that pandemics and recessions or fear of recessions bring on substantial increases in lawsuits. Just look at how many lawsuits were filed in 2008 to 2010 during that recession.

So what we’re looking at through legal bar associations and the litigation arena is a really big concern of a substantial rise in what’s called casualty claims and employee claims, and there’s going to be supply chain disruptions and that’s going to cause projects to not be completed, or just money not be available to pay… So you’re gonna have those lawsuits coming there through breach of contracts, and inability to perform… A lot of other breach of contract claims and administrative claims and internal liability claims of businesses.

For example, we have general liability claims that alleged negligence for failing to protect a customer, or invitee or a tenant, especially if a death is involved, and that can be extended to a family member, not just that individual employee or guests. So what we’re talking about is also a potential rise of casualty insurance claims for negligent acts, and we’re also preparing for a possibility that the insurance industries may experience what’s called negative coverage. So as some carriers are already excluding COVID-19 from general liability coverage because it’s been classified as an epidemic and global emergency, so that gives them that wiggle room out. So that’s going to put you on the personal liability hook because of the World Health Organization classifying COVID-19 as a global health emergency. That’s also going to affect your employer’s liability coverage, and you’re most likely not going to be able to use that as coverage in an event of an illegal incident happening.

So all this makes asset protection and preventative planning even more important, because you don’t want to wait around for something bad to happen. You can’t be ahead of the game; you want to protect yourself before something bad happens and mitigate the risk. So what asset protection does, in this case, is it creates the legal barriers that you’ll need. It levels the playing field if you ever were attacked, and what you need to do as investors or syndicators, landlords or general partners or high-risk professionals like doctors or if you have a high net worth, is talk to an asset protection attorney and start practicing conservative methods of protection and be preventative. Plan before you need it; don’t wait for after an attack happens.

So a breakdown of a few steps that you can take are to recognize if your income is reduced and your expenses aren’t. That’s going to shorten the amount of time that you can meet your obligations, like paying bills and paying payroll and things like that. So next, you need to take steps to protect your hard assets, because those are critical to giving you the ability to weather any storm. You can’t afford, like I said, to let a creditor decide how to use those assets. You need to be the one deciding what you need to do with them.

The final step is to create a plan. So first, you need to reduce your expenses quickly and efficiently, but don’t handicap your business to the point that you’re not even going to be able to give yourself a chance to evolve and thrive. You don’t want to deplete yourself of revenue coming in to actually have a business that can function. So these first few steps you can do on yourself.

The second step is legally securing your assets and protecting them from having a claim attached to them, and that’s asset protection – that involves legal professionals. So some good questions to think about and ask yourself are – do you have employees that are located or traveling to areas where there’s been documented and diagnosed cases of COVID-19? Most likely everyone’s going to say yes to that. Does your business increase the probability of employees exposed to infected individuals? Most likely, yes. Do your employees work in close proximity with vendors or other partners who have given employees a greater potential to contract COVID-19? Potentially, yes. Most likely, yes.

So if your answers to any of those or all of those are yes, then you need to come up with a potential contingency plan on how you are going to manage your business to mitigate these risks. You’re going to have to think about these and talk to some experts and start making a plan to go forward to stay in compliance with the federal guidelines in your state and local guidelines, so that you can decrease these negligent claims. At the end of the day, you want to be able to keep doing business, but you need to keep doing business smartly.

Theo Hicks: Well, thank you for all that. That was all great information and I appreciate how you broke down it. Because I was gonna ask you, “Well, what’s the next step?” So you told us that. “What’s a question to think about?” Well, you told us that too. So I guess my follow up question would be – so you mentioned those three steps, which is, number one, to determine if your income is reducing more than your expenses are, step two is to protect your hard assets so that you’re able to decide what you can do with them, and step three was to create a plan to reduce the expenses, but making sure you’re not handicapping your business. So steps one and three, you said that people can do on their own. Step two, you need to find someone. So how do you find this someone, and then also, can you just find anyone who does asset protection, or is there a certain question that you should be asking these types of people to make sure I’m finding the person who is the right fit for me?

Brian Bradley: That’s a great question. So you’re not going to go to a general estate plan attorney, like someone who just is drafting revocable living trusts and wills, and medical directors, because that’s not asset protection; that’s just traditional estate planning. So you’re going to want to find an attorney who specializes and specifically does asset protection, which is using asset protection trusts, LLCs, business organization type of structures, but specifically to protect your assets.

You just want to find out what percentage of their business is purely asset protection, or are they just dabbling in and then dipping their toes in it? I really wouldn’t want to recommend someone go to a person who does 20% of their practice as asset protection, because they’re not going to be really familiar with the language and the liability and how to mitigate all the risks properly. You want to go to someone whose main focus of their practice purely is asset protection, and then what type of clients do they have. Do they have clients similar to your level of assets that need to be protected, your specific circumstances? If you’re a doctor, how many doctors do they have? If you’re a real estate investor, how many real estate investment clients do they have? What kind of different systems do they use for each? Or are they just trying to sell you one size fits all systems? Nobody’s one size fits all, everybody has a personal issue. So everything has to be created personally.

So I would just say, ask those type of questions and make sure you go to a specialist, just like you would a doctor. You’re not going to go to a general doctor for brain surgery, you’re going to go to a brain surgeon.

Then one of the things we were talking about back before we started recording was the potential recessions and what to do, and it ties into COVID-19 because people have no idea. Are we going to go into a recession or not? I can’t tell you, I don’t know. Half my wealthy clients think that there’s not going to be a recession. Some of them do. Some of them are over panicky and conservative. I see a mix, so I can’t really tell you personally what I think, because I see a different spectrum of opinions… But I’d say it’s just human nature to panic when things are uncertain. But the first thing is just stay calm, don’t make rash decisions based off of news clips.

We’re in a geopolitical instability, but there’s nothing new. We also have things going on with oil in Saudi Arabia, trying to push a lot of cheap oil to hurt Russia out there and take them out of the market. Combine this with COVID-19 and Corona, and we have a really crazy, poisonous geopolitical cocktail going on. So even when you think the world and economy is on fire, like it was just a little bit of time ago, what did we just learn? We can throw a monkey wrench in it for things that we have no idea who saw COVID-19 coming. Then all of a sudden, the economy’s on hold; no one’s working.

So the issue is just be proactive, protect your assets beforehand, even when times are good. And when times are potentially bad, and we see recessions, to recession-proof our assets, one, talk to your financial advisor. Diversify – that’s a great thing, but diversification doesn’t protect your assets. You’ve got to put them into mechanisms like asset protection trust that we talked about in the past, or business organizations, or combining the two of them together to actually give you the protection that you need. It’s not a matter of if a claim is against you, it’s a matter of how collectible you are. So that’s something that you can control, is your collectability. No matter if there’s a recession or good times or bad times, that’s something that’s in your control.

Theo Hicks: Perfect. Then going back to those steps that you can take. So create a plan, reduce expenses, but don’t handicap your business. I’m assuming you work with real estate investors, correct?

Brian Bradley: Oh, yeah. Most of my clients are in real estate.

Theo Hicks: Okay. What types of expenses do you see them focusing on reducing the most?

Brian Bradley: Right now, their biggest concerns are potential financing issues or supply chain issues. Most of them are all business as usual, especially the syndicators and large developers, and my clients that have apartments. Honestly, I haven’t had a single client that hasn’t been able to collect a rent check yet, and we’re not really seeing anyone slow down. Every one of my clients– and we have, I think, overall in the whole system, over 3000 clients, and I haven’t had anybody yet say that they’re having an issue building or collecting rents. So what they’re looking at is just potential supply chain issues with current developments, and what they can potentially do to alleviate that concern right there. Some people are talking about force majeure arguments, and that’s not really going to work. That’s like acts of God, and trying to use COVID-19 as a pandemic as an act of God. That’s going to be a state by state argument, but even those are going to potentially fall through. That’s a whole other episode of a conversation right there – a dive into force majeure as a legal argument.

So I would say other steps that they would do is just practice social distancing, making sure that tools are clean, worksites are safe… Whenever you’re sending out an employee to go, just make sure that you’re sending them out with the equipment that they need, to make sure that they potentially mitigate the contact that they have with COVID-19, and then start working on your supply chain, making sure you stay ahead of it… Because one of the things with  litigation is always, “Well, what did you do to mitigate your risk?” So you’ve got to be planning on this down the line. So that would be maybe talk to your contract attorney on that and come up with some alternatives to your supply chain in case it gets disrupted.

Theo Hicks: Perfect. Is there anything else as it relates to asset protection and the Coronavirus that we haven’t talked about already that you want to mention?

Brian Bradley: Not really about the Coronavirus, specifically, but there is one principle I think real estate and any investor needs to understand. It’s just about legal authority over practical authority, because this is what it comes down to when you ever do get sued… And just the reality is that a judge can do and does do whatever a judge wants, whether you have an LLC or LP. Yeah, they’re governed by state statutes, but those state statutes don’t transfer to other states. So you hope that everything works out in theory.

For example, I have a Nevada LLC and I’m being sued in California – you would hope that those internal shields would hold up, but theory and practicality don’t really ever work out. Practical authority is the power a judge actually has to make decisions, and judges have very, very broad powers and they have a superpower called the court of equity, and they can reach into your assets and seize them, place some liens on them, foreclose them, ordering sheriff’s sales, clearing title… There’s a lot of things a judge can do, and the problem is judges even without legal authority do these things all the time, and even if it’s in direct contradiction to statutes and case law, especially when they’re exercising their magic power, the court of equity.

So the solution to this really is to just try to level the playing field and then hindering the judge’s practical authority over your assets, so that they can’t circumvent the legal process. And you do that with just preventative and strong asset protection planning and having asset protection trusts in place and different layers of protection. So that would be my last caveat of why we really care – the legal system’s messed up. It’s not what it was 30 or 40 years ago. Things we did 30 or 40 years ago don’t apply today, because we’ve had this massive litigation shift by attorneys being able to take on clients commission-based for a percentage, which wasn’t allowed in the past, and attorney advertising, which wasn’t allowed in the past… So it turns the legal field into a business and an industry with a billion-dollar (B) market point. So we just need to realize the system’s not what it used to be anymore, and you need to protect yourself against the dysfunctional system now.

Theo Hicks: Thanks for adding that. So if the Best Ever listeners want to learn more about what we talked about today, learn more about the services you have to offer, what should they do?

Brian Bradley: They can jump on my website, www.btblegal.com, and I have lots of educational videos on there, and pamphlets and brochures to browse through. They can just email questions to me brian [at] btblegal.com. I do free consultations, just because I’d rather have people get educated on what their liability is, and different options; even if you don’t use from me. Most people are afraid to talk to lawyers because they don’t want to pay a consultation fee when they want to shop around, and I just find most people just become google lawyers and are getting bad advice, because they’re not getting advice. So just start reaching out to lawyers and don’t be afraid to contact them, and most lawyers will do free consultations, and that’s what I do, just to educate people.

Theo Hicks: Best Ever listeners, make sure you take advantage of that. Brian, I really appreciate coming on the show today and talking to us about asset protection and Coronavirus. From my perspective, one of the biggest takeaways is that obviously, right now you want to try to do what you can to weather the storm, but at the end of the day, the people who are going to do fine or better during this time are the ones who, as you mentioned, were proactive and protect their assets when things were all fine and dandy, when everything was going smoothly, as opposed to trying to do it now.

So you talked about a few steps we can take – creating a plan to reduce expenses, because obviously if income goes down and your expenses don’t go down, that’s where people get into trouble… But really, as I said, at the end of the day, it sounds like the assets need to be protected. So I guess, do that now, while you still have the chance, because as Brian mentioned, he expects there to be an increase in lawsuits coming down the line, which is typical for recessions and pandemics like this. So Brian, again, I really appreciate you taking the time to talk to us today about this asset protection advice during the Coronavirus.

Best Ever listeners, as always, thank you for listening. Have a best ever day, and we will talk to you tomorrow.

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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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JF1959: Owner Carry Financing 101 & Purchasing Heir Rights with Amy Lingenfelter

Amy is an active investor who – along with her husband and son, is buying properties through seller financing, and leasing them out as well. They also do fix and flips, wholesales, currently dealing with a mobile home park, and purchasing heir rights. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!


Best Ever Tweet:

“When I could focus on the people and let them know I was on their side, they were able to let go” – Amy Lingenfelter


Amy Lingenfelter Real Estate Background:

  • From hairdresser to real estate millionaire
  • Bought first property at age 24
  • Is involved in a 147 unit syndication, currently negotiating her first mobile home park
  • Has flipped over 24 houses
  • Based in Portland, Oregon
  • Say hi to her at amyling2007ATgmail.com
  • Best Ever Book: You Are A Badass At Making Money


The Best Ever Conference is approaching quickly and you could earn your ticket for free.

Simply visit https://www.bec20.com/affiliates/ and sign up to be an affiliate to start earning 15% of every ticket you sell.

Our fourth annual conference will be taking place February 20-22 in Keystone, CO. We’ll be covering the higher level topics that our audience has requested to hear.


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JF1941: Growing A Real Estate Investing Business With Family & Friends with Rome Lingenfelter

We’ll hear Rome’s investing story today, he has been  a full time real estate investor for the last year. His wife is also full time investing with him and they are growing the business together. We’ll also hear what Rome is doing with his 12 year old son to teach him some of the business. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!


Best Ever Tweet:

“We follow a checklist when we got to purchase something” – Rome Lingenfelter


Rome Lingenfelter Real Estate Background:

  • Real estate investor, growing business with family and friends
  • Has a passion for educating others and helping them reach financial freedom
  • Is involved in a 147 unit syndication, currently negotiating her first mobile home park
  • Has flipped over 24 houses
  • Based in Portland, Oregon
  • Say hi to him at romeling2007ATgmail.com
  • Best Ever Book: The Creature From Jekyll Island


The Best Ever Conference is approaching quickly and you could earn your ticket for free.

Simply visit https://www.bec20.com/affiliates/ and sign up to be an affiliate to start earning 15% of every ticket you sell.

Our fourth annual conference will be taking place February 20-22 in Keystone, CO. We’ll be covering the higher level topics that our audience has requested to hear.


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, where we only talk about the best advice ever, we don’t get into any of that fluffy stuff. With us today, Rome Lingenfelter. How are you doing, Rome?

Rome Lingenfelter: I am excellent today, thank you for having me on.

Joe Fairless: My pleasure, and glad to hear it. A little bit about Rome – he is a real estate investor, has been growing his business with family and friends, has a passion for educating others and also helping reach financial freedom. Based in Portland, Oregon, and his wife has been on the show as well… So they have a 12-unit building, also have been involved as a limited partner on a 147-unit syndication, and they’re negotiating their first mobile home park, as well as they flipped over 24 houses. With that being said, Rome, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?

Rome Lingenfelter: Sure, absolutely. Originally, my wife and I started our business about seven years ago. We have made the majority of our growth in both the size of our business and our profits mostly because we’re in an equity market… So in fixing, flipping and wholesaling. But I would say that we’re repositioning now into more multifamily, and as you’ve mentioned, the mobile home park. And we’re looking more and more into the multifamily markets.

Joe Fairless: Okay, got it. Are you full-time in real estate? And if so, what were you doing prior?

Rome Lingenfelter: I am full-time in real estate now. I stepped away from a corporate position. I was a manager with a national grocery store chain for about 16 years, and my wife and I started our real estate business and just built it up over time. She stepped away about three years ago, and I stepped away about a year ago… And this will be our best year so far.

Joe Fairless: How did you determine when it was time to leave the corporate world?

Rome Lingenfelter: I didn’t have enough bandwidth to do both. The corporate world was easy compared to this, but just balancing time — I was scrambling on every break and every lunch to field calls… And we are not the traditional pair; my wife tends to be the contractor and negotiates the deals, and I tend to be the numbers and kind of contracts, back-office type stuff… And I was spending way too much time trying to catch up, and not enough time with my family. I have a great son, Max, that we just all enjoy doing stuff together as a family… From working in our business, to camping, hiking, and all that great stuff.

Joe Fairless: How old is your son?

Rome Lingenfelter: He’s 12 now.

Joe Fairless: What are some things you’ve done to teach him  the business?

Rome Lingenfelter: It’s a really good question. I’ve really gone to his strengths. Because he’s an only child, he’s always been around adults, so he relates to adults as well or better than he does with kids his age. So we did lots of door-to-door sales with him, so he’s very confident in those circles. I’ve had him help me on some rehabs… Things that are adequate for his age. But he started getting into social media, so he’s started to do some work on our social media, which is still growing, still pretty rough…

I would say one of the things that was kind of a sea change event for me was not just reading Kiyosaki’s stuff, but playing his Cashflow 101 game. I’m a hands-on guy, so I started Max at a very young age – probably about 4 or 5 – on Cashflow. And even tonight we’re gonna go to one of the local REIAs and play Cashflow. It’s something he really enjoys doing. And he sent out his own  mailings this last year, and got some good responses. We haven’t bought any properties from it, but he had really good responses from it.

Joe Fairless: So you mentioned among a lot of things door-to-door sales, and that to me – holy cow; adults have a hard time — I would have a hard time with that. Tell me about that process with him. So in our neck of the woods the way the Cub Scouts (before they go to Boy Scouts) raise money is through Christmas reeds sales. When I was a kid I think they had us sell candy. But I’ve just gone around with him, and he’s incredibly courageous. He loves people, so just going up, knocking on the door, practicing his little script, getting it wrong, getting it right… And it’s hard to say no to a Boy Scout who’s in a uniform and whatnot…

I think the second year in he had one of the highest sales of anybody in his troop, and his last year that he was in, he won. He was the top salesman for selling Christmas reeds. And he’s actually taking on his own. So now, being a Boys Scout, they grind up Christmas trees, but he has still continued on, because he has so many faithful clients who are like “Please come around.” So even now he raises money that way.

Joe Fairless: Taking a look at the properties that you’ve worked on, what has been the most challenging one for you?

Rome Lingenfelter: Boy, we’ve had lots of challenging ones. I would say probably the one that we learned a lot from was my wife and I – and we had a third partner – went in on a property that was almost a million dollars. It’s in one of the hottest areas in the Portland market, and our third partner just raved about this, and it looked like the numbers were gonna pencil out. So we borrowed some money to put a down payment on it, which we never recommend that you do… And not only did we have to pay interest on the borrowed money, but the person who was selling it to us – even though we said “Hey, we went through the inspection period” and we [unintelligible [00:06:33].18] money back – the doctor who owned the property decided to sue for the earnest money; he thought he deserved it. So of the 25k that we put down, I think we got 10k back. And then we had to pay interest on the rest of it, so… That was ugly.

Joe Fairless: Given a scenario where you’re in that situation or about to be in that situation again, what are some things you’d do differently?

Rome Lingenfelter: I’d make sure that the numbers were more correct going in. I would make sure that things were tighter. If I didn’t have the money to put down on it, I would put  a lot less down, and if they weren’t interested, I would walk away. I think everybody says it’s not the deals that you don’t get that [unintelligible [00:07:13].16] it’s the ones that you get and shouldn’t have. And this was definitely one of those. So I would just walk away from it. If you’re not willing to take 5k or 10k down, then we’re not willing to continue forward. That was my big lesson there.

Joe Fairless: What’s been a challenge growing the company, now that you two are full-time and have been full-time for a little while?

Rome Lingenfelter: I would say our biggest challenge has been marketing, and just getting our systems up and running. I think that’s what we still struggle with. We know where to get deals and we know how to work through it, but I think our plate gets so full… I think right now we have about five projects going on right now, and when we’re neck-deep in projects and getting things out to market, which is where you realize the money that’s coming in, that our marketing wheel kind of grinds to a halt. For this winter, if things kind of quiet down, that’s really where I’m gonna put a lot of time and energy – just getting the systems so it’s just that smooth-running wheel, which I don’t have at the moment.

Joe Fairless: What are some things you plan on doing?

Rome Lingenfelter: I’m going to break my processes up so no one person has access to all of it. I’m going to hire a VA, or maybe two. I really think that because of how busy my wife Amy is, I think we’re gonna get an assistant for her. And mostly, just breaking it up into pieces and just being clear of every step, and then assigning those, and then revisiting. I have good experience managing, but designing systems is not something I’ve ever done before.

Joe Fairless: And you mentioned you have good experience managing that… I imagine it comes from your corporate experience prior to doing this full-time.

Rome Lingenfelter: Yes, correct.

Joe Fairless: What are some tips you have? Or better maybe, what are some things you implement that you learned in the corporate world, that you do now?

Rome Lingenfelter: I think clarity is super-important. Making sure that everybody knows what their role is. In the beginning Amy and I used to bump up with each other, like “Hey, stay out of my lane.” She is a much better contractor; she has really good vision, so making sure that I let her do what she’s incredible at, and stay focused on my parts.

I’m a hands-on person. I tend to like to swing a hammer, I tend to like to do physical work, and I have to step back from that and really look at jobs that would be better for us to hire out. So that’s one thing – let people do what they’re good at, so putting the right people in the right positions I think is definitely someplace that that’s been helpful.

And again, customer service. Always taking care of people, whether you’re buying houses, or selling houses… Communication followthrough – I think that’s huge. I think a lot of people miss out on that. They get so caught up in the numbers that they miss out that it’s a people business.

Joe Fairless: From a management side, what are some ways you bring the people business component to life?

Rome Lingenfelter: I always do my best to [unintelligible [00:10:09].00] somebody, regardless of — if I’m selling a house, I usually give a basket, or some thank you gift. I think the last impression — I think somebody a lot smarter than I said “The last impression is a lasting impression.” Making sure that there’s just a pop of “Hey, that was a really good experience.” Even if the rest of the experience was bad, if your last contact was really positive, I think that’s good. And then just follow through and follow up.

I think there’s so many deals that we’ve landed that have come years after initial contact. Just that follow up, follow up, follow up. And I think Amy is really brilliant at that. That’s something I’ve learned and gotten better at from a management, but — just those systems in place, of making sure that those things we do do well are done on every project.

Joe Fairless: Based on your experience as a real estate investor and entrepreneur, what’s your best real estate investing advice ever?

Rome Lingenfelter: Making money when you buy. I would say in the beginning if you can find somebody who wants to lend you money or be a part of it, you probably have a deal. If you can’t find somebody, it’s probably not a deal… And there have been so many times that we’ve been learning new aspects of our business, that we were able to fall down and make some big mistakes because we got such a good deal on the front side.

So I would say make your money when you buy; just always be aware of what you get it for, and don’t be willing to walk away from something that you want to be a deal, but may not be a deal.

Joe Fairless: And what are some of those big things that happen that you could recover from because of how you purchased it?

Rome Lingenfelter: We bought a property out in the middle of the country. It was an old 1930’s cabin. We picked it up for 40k, and we initially thought we were going to owner carry finance it, and that didn’t work… And it ended up that we needed to sell it for cash, but there were so many things wrong with the property we didn’t know about. It needed a septic system, and everything that was involved with that… It was pier and post construction, rather than on a foundation… And because we had bought it for such a screaming deal, when we turned around and sold it for 140k, because of all of the money we had dumped into it, we were still able to walk away with about 40k in profit on it. Whereas if we would have bought it for a “reasonable” price of 100k, we would have lost our shirts.

Joe Fairless: And what part of your due diligence process now will attempt to uncover that? Or maybe what have you done to enhance your due diligence process, to try and mitigate some of those things from creeping up again?

Rome Lingenfelter: Sure. Just making a checklist. If you’re gonna buy in an area that you don’t know, figuring out the right questions to ask… I had never bought a property with a septic tank before, and the person who sold it to us said “Oh, the septic tank was new in 2000”, and we didn’t go back and check. So just having a due diligence checklist. When somebody tells  you – it’s not new advice, but it’s meaningful advice – listen to everything that people say, but just follow up and do your due diligence.

So just having a checklist and checking the septic system; pier and post – other houses in that area, do they have pier and post? Because then it’s not as big a deal. But definitely following a checklist when we go to purchase something.

Joe Fairless: What’s the most recent thing you’ve put on that checklist?

Rome Lingenfelter: The most recent thing… Let’s see. Making sure that I am insulated from lawsuits. So setting up either a good relationship with a lawyer, or an accountant, and making sure that every way that I can protect myself, I am. Because much like California [unintelligible [00:13:48].18] becoming more and more of a litigious environment, and even when you do the right things and you take care of people, people will sometimes wanna come after you, so… That due diligence list is make sure you have a good lawyer in place.

Joe Fairless: We’re gonna do a lightning round. Are you ready for the Best Ever Lightning Round?

Rome Lingenfelter: Absolutely.

Joe Fairless: Alright. First,  a quick word from our Best Ever partners.

Break: [00:14:11].13] to [00:14:49].01]

Joe Fairless: Best ever book you’ve recently read?

Rome Lingenfelter: Recently read… I really liked the Creature From Jekyll Island. I thought that was an incredibly well done book.

Joe Fairless: What’s the best ever deal that you’ve done?

Rome Lingenfelter: We wholesales a duplex and made about $160,000. So that was pretty incredible.

Joe Fairless: Yes, that is. Tell us how you found it and how that went down.

Rome Lingenfelter: Sure. We found somebody who was way behind on their taxes, and they also owed money to the local municipality. And just through [unintelligible [00:15:16].01] and the only contact information for this person was — I believe it was in New Mexico. So we had mailed to them, and the mail had bounced back to us… And I would say any of those things that bounce back – those are gold. So I dug into it, I did some skip tracing, I followed relatives, I finally tracked this guy down…

He lives in California and he hadn’t seen the property in over ten years. He had had a lady who lived there most of that time. Seriously a cat lady – she had over 30 cats. She had poked a hole from one side into the other side, and the cats lived in the other side. And for him – he had left his old life behind, ex-wife and all that… But my wife was able to negotiate a deal with him, and he was happy with it, and then we negotiated down with the city on the liens, and it penciled out. It worked out incredibly well.

Joe Fairless: Best ever way you like to give back to the community?

Rome Lingenfelter: I really love to educate, so I started with my son, and we’re doing more and more stuff with Cashflow. I think the future for people to be wealthy is to think bigger, think that they can, and think like an entrepreneur, rather than an employee. So I think Cashflow is a great way to adjust people’s brain, especially at a younger age. So definitely financial education.

Joe Fairless: And how can the Best Ever listeners learn more about what you’re doing?

Rome Lingenfelter: You can visit our website, we’re at www.rmrealestatesolutions.com, or you can reach out to me at romeling2007@gmail.com. We always have new and interesting projects coming up, and we absolutely love to help people learn more about real estate. We’re passionate about it.

Joe Fairless: Well, thank you so much for being on this show and talking about – from a management side of things – how you take your corporate experience and how that translates into now you being a full-time real estate investor. Some challenging projects along the way, and things that you do to mitigate the risk moving forward, as you build that due diligence list, some things that you’ve added recently.

Thanks for being on the show, Rome. I hope you have a best ever day, I enjoyed it, and we’ll talk to you again soon.

Rome Lingenfelter: Thank you  so much.

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JF1811: Protect Your Assets! #SkillSetSunday with Brian T. Bradley

Brian is here today to tell us how we can best protect the assets that we work so hard to acquire. He’s an asset protection attorney, so he’s seen first hand the consequences of not properly setting up your business from the beginning. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!


Best Ever Tweet:

“If I’m not adding value for my clients, they don’t need me” – Brian T. Bradley


Brian T. Bradley Real Estate Background:

  • Asset Protection Attorney for Investors, Self-Made Entrepreneurs, Business Owners, High Risk Professionals  and Affluent Families
  • Sets up systems and strategic teams for our clients asset protection and wealth management
  • Based in Portland, OR
  • Say hi to him at https://btblegal.com/


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Joe Fairless: Best Ever listeners, how are you doing? Welcome to the best real estate investing advice ever show. I’m Joe Fairless, and this is the world’s longest-running daily real estate investing podcast, where we only talk about the best advice ever, we don’t get into any of that fluffy stuff.

With us today, Brian T. Bradley. How are you doing, Brian?

Brian T. Bradley: I am doing great, Joe. Thanks for having me on, and the Best Ever listeners, and putting this podcast together. This is really gonna be a good, hot topic for everybody, from your newbie, to the person with 1,000 doors, and I just hope that I can add some value here.

Joe Fairless: Asset protection is very important, and that is our focus today. Best Ever listeners, first off, I hope you’re having a Best Ever weekend. Because today is Sunday, we’ve got a special segment, Skillset Sunday. That skill is talking about asset protection. A little bit about Brian – he is an asset protection attorney for investors, self-made entrepreneurs, business owners, high-risk professionals and affluent families. He sets up systems and strategic teams for clients, for asset protection and wealth management. Based in Portland, Oregon. He works with clients all over the country.

With that being said, Brian, first do you wanna give the Best Ever listeners a little bit more about your background? And then let’s roll right into some things we should know about asset protection.

Brian T. Bradley: Yeah, let’s do it. As you said, I’m an asset protection attorney, and I got into asset protection from the litigation side of things. A lot of these guys come into it from estate planning. I got into asset protection from the attack side, and just having a lot of clients coming into my door who a lot  had insurance, and a lot had revocable living trusts… And it gave them a false sense of security, and the next thing you know they were getting sued and their lives were just turned completely upside down. They were shell-shocked that they weren’t protected, and everybody was starting to distance themselves from them.

What I wanted to do was start providing something better, that added value for clients, and try to get them on the front-end of things and set up systems before they needed them and before they were being attacked.

So just like an investor, my goal here with what I do is just to add value to the client. If I can’t add value to them, they really don’t need me. And there’s nothing that I’m doing really that’s special, it’s just the way me and my network look at things and the way we work at things. So what we really want for clients is to not just educate them on what they don’t know with what they’re doing – that’s the easy part – but what we really strive for is to educate and teach clients on what they don’t know that they don’t know, because that’s where real problems come into issue.

So what we do for our clients is, like you said in the intro, is set up strategic teams and systems for more advanced estate planning. And then using our acronym ECCM, which stands for Effective Control Cost and Maintenance, all while trying to keep in mind the overall goal of lifestyle preservation, because that’s really what asset protection is all about – preserving their current lifestyle, creating peace of mind and then changing the way a potential predator is gonna actually view you, while trying to pick up and build in some secondary goals of tax benefits, and decreasing your taxable estate and taking risk off the table.

Joe Fairless: You said you help set up systems before they are being attacked… What are some systems that you’ll set up for your clients, more often than not?

Brian T. Bradley: More often than not we’re trying to put people into asset protection trusts. We also use LLCs, or Delaware statutory trusts. There’s different versions of trusts. The trust that we’re trying to do here is separate the client’s personal liability, using our acronym ECCM. We can break this down a little bit, if you want, so that the listeners have a better idea of what they’re trying to get when they go and talk to their lawyer.

When we’re setting up effective systems, what we mean is that any attorney can make an argument to pierce a corporate veil. I think you’ve had an episode in the past with another lawyer about piercing veils… So depending on the state, like California, which is a non-asset-protection-friendly state, the worst thing that you can do is own anything in your personal name. So effective systems are actually gonna use what we call exemption planning first; and this is before you go and set up an LLC, or some sort of corporate structure or a trust. And this is just because an exemption is a legal right. So before we do anything elaborate, we wanna see what assets we can stuff into an exemption.

Then after that we move into more advanced estate planning, which would be an asset protection trust, and then we would be going into picking the best jurisdiction to establish that trust in. We like the Cook Islands, or at least having that as an option in the backpocket, but we would always prefer to link that option, if we needed to, with something domestic based here in the U.S.

Then, continuing with the ECCM acronym, your Best Ever listeners are gonna want a system that actually gives them control. Control doesn’t mean in your personal name; it just goes to what the rich are doing. The rich don’t own things, they just use them and they get the benefit from them. So they don’t wanna own the assets in their personal name, they want to really just separate the personal liability out. And then when they’re getting into these systems that they’re gonna go talk to their lawyers about to set up, the costs have to be reasonable. If you can’t afford it, you’re not gonna set one up, and then you’re gonna still be personally liable.

Then at the back-end of it, the annual maintenance that you have to pay with your IRS and your filings – you can’t lose money due to annual maintenance fees, otherwise you’re also not gonna set one up. So you just wanna keep in mind when you’re talking to your lawyers and shopping around for systems, ECCM.

Joe Fairless: You said the rich have control, but they don’t own them, but they get to use their assets… How do they do that?

Brian T. Bradley: What they’re doing is a basic system – you’re transferring the assets out of your personal name. A lot of your listeners are gonna go into a bank; they wanna go buy an asset, so they’re gonna go get a loan, and they’re gonna put the title in their own personal name. But then that holds you personally liable for everything… So no matter what kind of system you set up, whether it’s an LLC or some sort of asset protection trust, what you wanna do is then transfer that title out of your personal name and put it into an asset protection trust, or an LLC linked to a land trust… You just wanna take it out of your personal name, to where you’re not gonna be personally liable for it.

Joe Fairless: If someone has worked with an asset protection attorney already, and they’ve got some stuff drafted up, and they couldn’t exactly explain what they’ve got drafted up; they just kind of followed the advice of the attorney… What are some questions that they should ask their attorney to make sure that what they currently have is set up properly?

Brian T. Bradley: I think the best thing first is, like anything, you wanna shop around. Don’t just talk to one person. You’re gonna want to vet that attorney like you would vet your doctor or your CPA. The first thing you would wanna do is make sure they do what’s called an asset diagnostic.

Some firms, because they’re just used to drafting trusts and they’re not asset protection firms, no one wants to turn down business, so they’re like “Oh yeah, we can create an LLC for you. We’re real estate lawyers”, but they’re not specifically specialists in asset protection.

An asset protection lawyer who’s worth his dime is gonna first have you fill out your entire financial portfolio in life into what’s called an asset diagnostic. Then what we’re gonna do is look through what state you live in, what exemptions you have available for your state… Because then once you put an asset into an exemption, that can completely change the entire evaluation of what we actually have to protect, because if it’s an exemption, we don’t need to put it into a protective system. So we need to know what we can exempt first, and then go from there… But that’s all gonna be derivative off of the asset diagnostic.

So that’s really the first thing that you wanna make sure – before you even speak to them, you’re gonna have an efficient conversation with that lawyer because they’ve done an asset diagnostic.

Then the next thing is what other tools do they have in the toolbox? Are they only pumping one product? Are they only using an LLC? Are they only using a Delaware statutory trust? Or have they taken the time to actually evaluate you and see how you’re different than your neighbor or everybody else, and then just like a doctor, matching what prescription works for you, your net worth, your profession, your risk liability, your investment strategies, what tax advantages don’t you have, because then we’ll work with the CPAs and our financial advisors to see what credits you didn’t pick up, what tax benefits you didn’t get, and then creating a system around it. So you just wanna vet that attorney to see what options they have to work with.

Joe Fairless: Okay. So that’s in the vetting process, but my question is you’ve already got that done, and  you wanna make sure that whatever has been done is done properly… So what questions should you ask the attorney that you have already selected, to make sure that that was set up properly and that you do have the right stuff in place?

Brian T. Bradley: I think that should be done in the vetting process, because you’re not a lawyer. Just like your doctor, you’re not a doctor, so how do you know that the doctor that diagnosed you diagnosed you correctly? You eventually have to just work with your team, and if you wanted to, take it to another lawyer to have it checked. That’s just gonna be expensive.

But at the end of the day, I think when you set up your team and your advisors, you’re paying them for  a reason, so I would trust them after your vetting process and you asked them all the questions, and you went through a bunch of different people and who you’re comfortable working with. Because your listeners – I wouldn’t be comfortable giving them the advice to say “After you get your LLC set up, now second-guess your lawyer and ask this, this and this”, because that lawyer should know what they’re doing.

Joe Fairless: Got it, okay. So if any Best Ever listeners do have something already set up, then they should already know what they’re doing because they’ve picked a lawyer, if they went through the proper vetting process; and if there is an action item, it’s not necessary they ask questions to them, it’s just you could take it to another lawyer to just have it double-checked.

Brian T. Bradley: Yeah, and [unintelligible [00:11:29].06] For example, if you go to LegalZoom, they’re not law firms, but there’s a lot of missed clauses. I wouldn’t be able to tell  you “Go ask this as a checklist”, because I don’t know their situation, but I would say if you aren’t comfortable with what your lawyer is doing, go get a second opinion.

Joe Fairless: Got it. Okay. When you work with clients, what’s a unique challenge that you’ve come across, that you’ve helped solve?

Brian T. Bradley: A unique challenge is 50% of the phone calls that come in are people who are already being sued and are asking us what we can do for them. Unfortunately, on the asset protection side the courts really favor asset-protection planning before you’re in trouble. Obviously, people don’t care about that; they don’t think about it until they already are in trouble. You’ve jumped into the deep water. So 50% of the clients are coming in the door already being sued, and at that point it gets tricky in what we can and can’t do, and it gets more expensive.

One of the clients, for example, is a doctor that we had. He had got sued – if I think back to this real quick – for a nerve-damage case and he had one million dollars in liability coverage. He had about 3 million in assets in net worth, plus his practice… He was like “Hey, I’m being sued. What can I do for you?” And it’s like “Well, you’re already being sued and you didn’t set anything up in the beginning, so it’s gonna be a little tricky, but what we can do with some of the tools in the toolbox is look at what your insurance coverage is, and then what we reasonably would expect your malpractice insurance to cover you for… And then from there, what would a reasonable claim be, and then we can either shield those assets and put them out of the protection system, and then protect everything else, or what we can do is put everything that you own into a protective system, and then just exempt that lawsuit.

Another tricky one is we get a lot of divorcees coming and not wanting to give their spouses access to the properties that they own, so we have to walk through and say “Alright, this is communal property, most of this. We can create and help you protect the assets, but we either have to exempt the current dissolution assets and then work with your spouse on what is community versus separate property.”

So those are the tricky ones when they come in, just how to balance what’s reasonably gonna be covered with insurance and what’s not, or dissolutions because of communal property relationships.

Joe Fairless: And any tips for someone who is getting sued and they’re like “Oh man, I don’t have any asset protection…” — or let me rephrase; let’s do a different hypothetical… Someone who has a high likelihood of being sued because maybe they’re a fix and flipper and they work with a lot of general contractors, and they don’t have asset protection – any main things they should make sure they keep in mind whenever they’re working with an asset protection attorney?

Brian T. Bradley: Yeah, I would say the thing to keep in mind is — I get a lot of guys who are like “I’ve never been sued yet”, but you need to realize if you choose to work in real estate or be an investor and a flipper, or whatever you’re doing in real estate, real estate law is the hottest area of law for you to be sued in. It’s the most litigated area of law, so it’s really just not a matter of if, but when and then what condition you’re gonna be in when you do get sued, to deal with it.

So I also say proactive planning… If you’re already being sued, what you need to do is understand your assets and what is that asset that’s under attack right now, and then ask the lawyer “What are the options of…” – like we just went through. “I have insurance in X amount. What’s the reasonable amount of coverage that we can expect the insurance company to cover on this lawsuit?” And then if we can’t protect that one particular piece of property, maybe you own 3-4 more, and then maybe we can shield the rest of those and protect those, while that one piece of property that’s subject to the lawsuit gets filtered through the system, and then the lawsuit goes away. Or, like I said, ask them “Can we put everything in and then just exempt that one lawsuit from the protection system?”, and then you’re protected going forward.

Joe Fairless: Okay. You’ve mentioned Cool Islands. Why set up jurisdiction there?

Brian T. Bradley: It’s just the strongest jurisdiction that you can have, because they just don’t recognize U.S. court orders. That’s the great thing about it. Let me get to this right here for you… What we always say is maximize exemptions first, and then picking jurisdiction is the next best thing after that. And the greatness of foreign trust is that, like I said – statutory non-recognition of jurisdiction court orders from the U.S. What this means is they’re just gonna go tell anything in the U.S. [unintelligible [00:15:57].04] to go pound sand. They’re not gonna be able to collect. They’d have to go and restart the case all over from scratch, [00:16:05].07] the highest legal standard in the world, which is [unintelligible [00:16:04].24] beyond a reasonable doubt. And this is just for a civil claim.

Then the plaintiffs are gonna have to front all the court costs, they’re gonna have to fly in a judge from New Zealand to the Cook Islands… It gets crazy what you have to do to be able to sue somebody in the Cook Islands. And the claim is not amendable; what this means is that once you file the complaint after the discovery process, you can’t go back and amend that complaint like we can do here in the U.S. So what you file, you’re stuck with.

And then a big deterrent on this is if you lose, you end up paying. So that plaintiff who is suing you is most likely going to lose, because they have to prove their case beyond a reasonable doubt, so they’re most likely gonna be paying all of your legal fees also, and most likely they’re never gonna get the chance to sue you in the Cook Islands, because there’s a one-year statute of limitations.

So while they’re kicking their tires here in the U.S, trying to sue you in the U.S, they’ve already run their statute of limitations timeframe in the Cook Islands, and they don’t have an actual timeframe now to go and sue you there.

If we wanna compare this now to our acronym ECCM, because there’s always give and take, some pros and cons to everything, if you’re purely foreign, meaning an offshore in the Cook Islands, number one, effectiveness – that’s five out of five stars. We’ve just went over how it’s truly effective.

But on the other three factors – control, cost and compliance – it’s gonna be a little but short. For a foreign asset protection trust to actually work you have to be out of control, meaning you’re gonna have to be subjected to a third-party foreign trustee in the Cook Islands. The costs are gonna be a lot higher to maintain, so you’re gonna go from about $1,500 to maintain, to over $5,000, and we’ve seen over $10,000 to be purely foreign, in just annual maintenance fees. And if you’re purely foreign, you have a lot more IRS reporting compliance and disclosure fees; you have to file these IRS 3520s and 3520(a)’s. But we only go purely foreign for about 5% of our clients who are really high-risk. For everybody else that’s just overkill.

So we have the option that we use, which is called a bridge trust, and we kind of bridge something domestic with the Cool Islands and we stay domestic until we actually have to go foreign with a predrafted triggering clause, that then moves us foreign if we ever have to execute that clause.

Joe Fairless: Oh, it sounds like the best of both worlds. Why wouldn’t  you have the bridge trust clause – if I said that right – in the super-risky people? Because it sounds like it’s the same thing.

Brian T. Bradley: Because sometimes you just – depending when they’re coming in and what’s going on with their situation, they may just have to immediately be more aggressive in their planning and go foreign… And just to preserve wealth, depending on — they may have a potential lawsuit that’s coming up and they may be losing 15 million dollars. On that standpoint I would say we need to be a little bit more aggressive and we need to go immediately more foreign, and then apply some more aggressive asset protection strategies to preserve the equity into it. But like I said, that’s just for higher and more risk clients.

What you really wanna do is just be more reasonable in your cost and how you’re gonna break things down, but have (like you’ve just said) the best of both worlds. Be domestic, don’t have to worry about all those IRS filings that you don’t have to do, pay cheaper maintenance fees, but still have the power of the Cook Islands with the built-in triggering clauses to go there if you need to.

Joe Fairless: Anything else that we haven’t talked about as it relates to asset protection that you think we should?

Brian T. Bradley: How are we on time? Because there’s one thing I think that would be a really big value for your clients, which would be [unintelligible [00:19:30].10] but I don’t know how we are on time.

Joe Fairless: Please continue.

Brian T. Bradley: Fraud and fraudulent transfer is really the crux of where all the decisions that we have to make come down to. Fraud is — or let’s start with fraudulent transfer/conveyance. It’s a transfer of ownership of an asset – what you own – for little or no consideration. What this means is that the other party is not really getting anything of value for it, and then this comes with an intent to hinder, delay, or defeat the claim of a creditor.

The key here is the intent. In other words, the courts are gonna look at what was the state of mind when a transfer was made. So whenever you’re transferring properties, they wanna know what was your intent, and then did it have an actual effect during the transfer period? …delay, hinder or defraud a creditor.

Where people get wrong with this is if you don’t have that state of mind, then there’s no fraudulent conveyance. And if you didn’t have a creditor existing at that time when you made that conveyance, then there was no fraudulent conveyance. So that’s the point of being proactive and planning beforehand, and before the need.

And now let’s compare this to fraud, because these are drastically two different concepts. Fraud is an intentional misrepresentation of a material fact to induce someone to refrain from acting to their detriment. So you’re just intentionally misrepresenting them with the intent to hurt them, and then they do get hurt. So these two concepts are different in how they’re actually applied in the law.

Understanding fraud is usually — that’s a crime. But fraudulent transfers on the other hand aren’t. They’re what we call a supplemental or secondary proceeding, where you get sued, they’re gonna start finding out what assets you transferred during the discovery process and for what consideration. And if it’s discovered that you made a transfer for little or no consideration within about five years, what they’re gonna do is have the judge ask to undo that transfer. So the remedy of this is to ask the judge to give it back, so that the creditors can collect the judgment.

I think a good example would be the doctor example that we went over in the beginning [unintelligible [00:21:31].07] the likelihood of what the insurance would cover or not. And then this also goes for the importance of what we were talking about with picking a jurisdiction and how it relates to fraud. The reason, for example, an offshore trust is so powerful, or having it in the backpocket, is that in order to undo a transfer, the court actually has to have the power to tell that person that you did the transfer to, that you gave the asset to, to actually give it back. Any court that’s in the U.S. doesn’t have the power to go and tell an offshore Cook Island trustee to give it back. They’re just gonna tell you to go pound sand  and ignore that order. The Cook Islands, like we said, just statutorily don’t recognize U.S. court orders or judgments.

But if we compare this to anything purely domestic in the U.S, we don’t have that option because of the full faith and credit clause of the Constitution; you can’t run from judgments in the U.S. So that really goes into why we wanna pick strong jurisdictions and why we wanna first  max out exemptions.

Joe Fairless: Thank you for sharing that. I’m glad that you brought that up. I know that’s gonna be valuable. And this conversation was very valuable, and I’m very grateful that you’ve spent some time with us on this show.

How can the Best Ever listeners learn more about what you’re doing and get in touch with you or your team?

Brian T. Bradley: Yeah, my email is one of the best ways – brian@btblegal.com, or you can find me on LinkedIn, Brian T. Bradley. My firm is Bradley Legal Corp. I’m always checking my email, and on LinkedIn. We do free initial consultations and the exemption diagnostic reports, and we’ll go over all your assets, and the different exemptions, and the specific tax and credit strategic planning that you may have missed, so you can try to recapture those missed opportunities.

I used to charge for this, but then I got tired and concerned about clients not wanting to know what’s going on and what we can do for them, because they didn’t wanna pay a consultation fee, so I’d rather just say “Here, take this hour, hour-and-a-half for free, educate yourself. Let’s go over everything, and then now you have more education to set yourself up.”

Joe Fairless: And if someone already has a plan in place, but they are not sure if it’s accurate, is that free consultation still…?

Brian T. Bradley: Exactly. And particularly, there’s a lot of exemptions that — I know you probably have a lot of California listeners…

Joe Fairless: Yes.

Brian T. Bradley: They don’t even know that, for example, what’s called a private retirement plan (PRP planning), which anything that can be stuffed into this plan, that we can easily calculate for, is completely exempt from a lawsuit. So we will do these evaluations, and a lot of people outgrow the systems that they’re in, and we’ll just upgrade them and see what we can stuff them into, and what works for them.

Joe Fairless: Excellent. Brian, thank you so much for being on the show, thanks for talking about your background for why you got into the business, as well as a lot of specifics for what to think about from an asset protection standpoint.

Thanks for being on the show. I hope you have a best ever day, and we’ll talk to you again soon.

Brian T. Bradley: Thanks, Joe. You too. Bye!

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JF1708: Reg A Allows Non Accredited Investors To Invest In Big Deals with Alex Aginsky

Alex has been working on his platform, BuildingBits, for about three years, they are now live and accepting investments. They are a company that brings institutional type commercial real estate deals to the average person. We’ll learn what led Alex to creating this platform, and also hear about the experience and returns that an investor can expect to receive. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!


Best Ever Tweet:

“If we feel the price is fair and is supported by a third party appraisal, we’re not going to beat them up on the price in two or three months when it’s time to close” Alexander Aginsky


Alexander Aginsky Real Estate Background:

  • Principal Shareholder, Founder and Chief Executive Officer of Building Bits
  • Extensive real estate, private equity, and venture capital experience
  • Managed a complex commercial real estate portfolio for global investors, including two hotel developments
  • Based in Portland, OR
  • Say hi to him at https://buildingbits.com/
  • Best Ever Book: The Fountainhead


How great would it be to buy a piece of institutional-quality, income-producing commercial buildings? Now you can… with BuildingBits. It’s NOT A REIT or a fund. BuildingBITS is a new platform for non-accredited investors, where virtually anyone, regardless of income, can select a building leased to a major corporation and earn money from it!

Start investing with as little as $500 at https://www.buybits.us/


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, Alex Aginsky. How are you doing, Alex?

Alex Aginsky: I’m well, thank you, Joe.

Joe Fairless: I’m glad to hear that. A little bit about Alex – he’s the principal shareholder, founder and chief executive officer of Building Bits. He’s got an extensive real estate private equity and venture capital background and experience. He managed a complex commercial real estate portfolio for global investors, including two hotel developments. Based in Portland, Oregon. With that being said, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?

Alex Aginsky: Absolutely. Before founding Building Bits, my main business for many years was helping family offices and ultra high net worth individuals internationally to find great deals, great investment opportunities in the United States. My job was to not only identify the asset, but do all the due diligence, negotiate the terms, structure the deal, broker the deal, and then manage all the assets post-acquisition. In many cases we were a principal, as well as the manager and the broker…

So we kind of took on all of the responsibilities, in essence, as a general partner, of all the acquisitions. We did deals of all sorts, everything from new development projects to stabilized, income-producing assets; all asset classes, from multifamily, medical, to office and industrial, and really throughout the United States, though historically most of the focus has been on the West Coast. So that was kind of the impetus behind the creation of building bits, in the sense that the idea was born in trying to scale that existing business and trying to really broaden our horizons.

We started opening up offices internationally. We had an office in Russia, in Moscow, another one in India, New Delhi, and ultimately I came to the conclusion that we could source the capital right here at home and internationally through this regulation that came out of Obama’s Jobs Act, called Regulation A+… And really offer the exact same suite of services that we’ve been offering to very wealthy individuals, offer that same service to now virtually anybody. You didn’t have to be a multi-millionaire and invest millions of dollars into a particular deal to be able to take advantage of the power that real estate provides, that you and I, Joe, are both familiar with as a result of this new regulation.

So in essence, Regulation A+ allowed us to really be able to have the average Joe – pardon the pun – the average person, the average retail investor, be able to identify a particular property on our website that they would like, be that Walgreens or Starbucks or an office building maybe that they work in, and be able to invest as little as a few hundred dollars into that property, and we would manage that whole process for them. We would curate the properties to put on the platform, we would take each property through an SEC qualification process, making them available to all investors.

We would then take on the management responsibilities, and so on and so forth. So all you would have to do as an individual investor would be to find a building that you might like, maybe in your hometown, maybe halfway across the country, maybe it’s based on a particular geographic preference or certain return profile that you’ve got, or maybe you just like Starbucks, so you wanna own a part of an actual Starbucks, and have Starbucks pay you rent, rather than you buying a cup of coffee and paying them everytime. Whatever your criteria might be, you could have selected a building on our platform and invest into that building, and start to earn regular quarterly dividends from that point forward.

That was really the idea, that was what we started to build out in 2016. It took a couple of years to really get through that process, to build out the platform, and most importantly, to get through all of the regulatory compliance, and then to really convince the Securities and Exchange Commission in the U.S. that this would be a product that we can, in fact, sell to the mass market… And we finally got, after almost two years of wrangling with the SEC, we finally got the qualification in September of last year, so we ended up launching the platform soon thereafter. We’ve now been in the market for about 4-5 months.

Joe Fairless: Lots to discuss there, and I appreciate you sharing where you were before with Building Bits. Best Ever listeners, you recognize Building Bits because they’re a sponsor of the show… So I know about his company, but I don’t know his story, and also, Alex, we haven’t had a chance to really do a Q&A, so I’m really gonna enjoy this, especially given your background in commercial real estate… So let’s first talk about you. Before you were helping family offices find great deals in the U.S, what were you doing before to qualify you to do that?

Alex Aginsky: I’ve always been in the investment world before the company that was responsible for bringing capital into the U.S, which was called Aginsky Capital Group. For a number of years I had another kind of boutique investment advisory firm that worked on the other side; we were helping companies to source capital all over the world, and that was really the main business. We would package deals for them and approach Western private equity firms that wanted to invest into emerging markets, be that Asia, or Eastern Europe, or elsewhere.

When 2008 happened, when the Great Recession took hold on the entire world, many of our investors weren’t interested in continuing to move forward with the deals, so we needed to kind of redefine our business model and find a new way to create value… And it was at that time that I approached many of my clients overseas and I asked them if they would have any interest in continuing to work with us in some other fashion. They said that they wanted, instead of raising capital or selling their businesses, they wanted to in turn look to the United States as the last remaining safe haven in the world, and look to place capital there. That’s when the former business was really born, was really out of that Great Recession, 2008-2009.

Joe Fairless: And you were identifying properties, doing the due diligence, brokering it and managing it post-acquisition… What was the hardest part to do at that point in time for you?

Alex Aginsky: There was complexity in all of it, obviously. I would think that finding a great deal and putting it together was certainly not an easy task, but also managing the properties. We think that the triple-net properties are not so complicated where they require a lot of management oversight, but nonetheless, there’s always something that happens that requires some handholding, some work with the tenants… Long-term that proved to be actually the most complex of all things, but I feel like we were able to really get a pretty good handle on how that process works, and that’s what ultimately led us to be able to start building bits and take that to a whole other level.

Joe Fairless: Will you tell us a specific example of where a triple-net lease required some hand-holding on your part?

Alex Aginsky: Sure. I can think of a few examples, but most of them really have to do with what happens when the tenant is not able to continue to make good on their obligations under the lease… And it really rarely happens with the types of tenants that we now have on our platform, which typically are credit tenants. We do a lot of vetting in advance to make sure that they have the financial wherewithal to be able to continue to make good on their obligations.

Where we ran into some difficulties early on was with tenants that were relatively small, that would sign on a five or ten-year lease, and then a couple years into it weren’t able to make ends meet, so that required some restructuring, or ultimately retenanting the property altogether… That is never a simple or straightforward process, and again, that’s why the focus for Building Bits has always been on really great properties, that are in great locations, and most importantly, that have strong tenants in place, with corporate guarantees or personal guarantees in certain cases, so that we can obviate the risk as much as possible.

Joe Fairless: In 2016 you said you started to build out Building Bits, and it took two years to get the right approvals… Why do this approach? I imagine it was over six figures that you invested into the regulatory approval process… So why invest that much money and that much time, when you could do one-off 506(c) offerings, where you’re still bringing in the public, and it’s significantly less money and significantly less time invested on your part.

Alex Aginsky: There’s many different ways to answer that question. It’s a great question, and I get asked this quite often, Joe, so I appreciate the question. I think that really the biggest reason to do that was we saw where the world was going. I see the world democratizing more and more every single day. The gig economy that we live in, the Ubers and Airbnbs of the world make it possible for anybody to now be able to have, in essence, their own business, be that by renting out a room in their house, or by owning a miniature taxi company.

You can now take those savings and put them into your ownership of real estate without having millions of dollars to become an owner of an entire asset. So I firmly believe that this is the future, I firmly believe that in the not-too-distant future all of us will own a lot more of the global economy in this fashion. We’ll own not just buildings, but we’ll own all sorts of other things as well, that can be crowdfunded, that can be purchased in this fashion… And real estate is the most obvious and the most logical asset class, in my opinion, to use for this type of investment, given its stability, given the fact that we all understand real estate, we all work in buildings or live in buildings, so everybody understands what that is, everybody understands what paying rent is, and everybody would love to own a part of something big and tangible like that.

I typically use a quote from over a hundred years ago from Andrew Carnegie, who said back then that over 90% of all millionaires become so through owning property… And that still rings just as true today as it did 100 years ago; yet today it’s becoming increasingly more and more with every year, with every decade, for somebody that just works an average job, to be able to afford a large commercial building. Even their own home. So this model allows people to be able to take a piece of the global economy that has never before been possible for them to have a piece in. So that was really one of the drivers.

The other primary decision to go into this direction was the sheer scale and size that we felt we could ultimately build and achieve through this model. Like I said, we were the first such company to have received this type of SEC qualification, and I feel that there’s a lot more people out there that would love to be able to invest, but simply can’t afford to invest into commercial real estate, than the people that actually can.

In U.S. the statistic is that about 95% of the U.S. population is non-accredited. That means only 5% are actually accredited investors that can participate in the 506(c) type offerings that you just mentioned, Joe. So we’re really going after the 95% of the market. We’re making it possible for anybody to have the same kind of access that my former clients user to have when they were dealing with me.

Joe Fairless: I know you’re not an attorney… At least I don’t think you are, right?

Alex Aginsky: That I’m not what, sorry?

Joe Fairless: An attorney, a lawyer. So I’m not asking from a legal standpoint, I’m just wondering more high-level, since you are targeting the 95%, the non-accredited investors, there’s gotta be more compliance, more disclosures, more red tape quite frankly that comes along with that, because I’m sure the government want to protect them a little bit more (or a lot more) than accredited investors… So just from a high level, what are some things that you all have to do, that you wouldn’t have to do if you just focused on the 5%?

Alex Aginsky: Absolutely. We’re very similar, in many respects, to what public companies have to do. Not quite as rigorous as far as reporting; for example, we don’t have to do quarterly reports, but we do have to do annual reports, we have to provide audited financials for each of the individual properties, we have to do annual 1K’s, 1A filings etc. So ultimately, all of the information is made public. Everything from each and every expense on each and every property, to even my salary – it becomes a matter of public information.

Joe Fairless: Got it. That is different than if you were doing 506(c) offerings on a one-off basis, that’s for sure.

Alex Aginsky: Exactly, exactly.

Joe Fairless: So you have experience in multifamily, medical, office, industrial… What’s your favorite asset class to make money in?

Alex Aginsky: It’s a difficult question to answer, because ultimately, it’s always deal-specific. Real estate is something that is difficult to generalize in, and every deal is dependent on the location, obviously… The first three rules of real estate, as I’m sure most of your listeners are aware of, is “Location, location, location.” So it depends on the quality of the tenant, the quality of the lease etc.

We believe that the types of properties that are best for the non-accredited investor, in our case, are either retail properties, and that’s because everybody understands retail, and you can go into that Walgreens or Starbucks or AT&T store which we have on our website, walk in, and know that what you’re gonna be spending your money on as far as maybe buying that new cell phone is ultimately going to pay rent now in that building that you might own. So it’s very simple… Specifically the single-tenant triple-net retail deals are the ones we’re focusing on the most.

We also believe that we can get the most amount of scale with the least amount of headache, if you will, given the quality of the tenants and the types of deals we’re focusing on. But beyond that, again, we’re very opportunistic and we look for deals that, on one hand, are quality assets in great locations, with great tenants, and on the other hand have some potential upside. They have to be income-producing to even qualify for them to go onto our platform. We don’t do any rehab deals or new development at this point. We might in the future. But the focus is really stabilize the assets that we believe are gonna appreciate in value, either because of the market, or the quality of the tenants, or the structure of the lease, or simply because that’s the type of tenant that will resonate most with our target audience.

Joe Fairless: So you basically have two customers. One is the investors who are passively investing in the deals, and two is the sponsors who you’re partnering with, who are managing the deals and overseeing them, that you’re connecting and partnering with them. Is that correct?

Alex Aginsky: Not quite. So we are in essence becoming that sponsor.

Joe Fairless: Oh, okay.

Alex Aginsky: We are not partnering with sponsors. We take on the asset management. There are deals that we curate, we have a number of brokers that come to us with different deals, we have a number of property owners that want to list on our platform. We need to make sure that those properties will meet the sniff tests and will meet our stringent criteria. And not just our criteria, but the criteria for the SEC as well.

If we believe that that’s a good asset, we’ll list it on the platform, and then the crowd gets to vote with their dollars and to determine whether that’s an asset that they wanna invest into or not. If they do, we’ll basically take down that property and we’ll take on the management responsibility.

Joe Fairless: Okay. So help me understand a little bit more… You are the asset manager, and you’re working with brokers. I’m a little confused. You’re the sponsor, and then the crowd… Okay, so you do not partner with other sponsors to [unintelligible [00:16:41].08] Alright, I’m with you. Cool.

Alex Aginsky: Right. Think about it this way – there’s no shortage of real estate brokers out there that want to get deals done, and they will approach us just and just any other buyer, and they will say “Hey, we’ve got this great urgent care facility (for example) that we just listed on our platform today. Here’s a great urgent care facility. The company is signing a 15-year triple-net lease, the cap rate is 8%, it’s a great quality asset, newly-built, newly-constructed.” If we feel that that’s a good asset, we take it through an SEC qualification process, list it on our site, investors can start investing into that asset right away.

If we reach the minimum requirement to ultimately acquire that asset together with financing, then we will, as the company building those properties, one actually, the entity that ends up acquiring the asset, and that’s the entity in which shareholders or crowdfunding customers will become membership interest owners in. We will then take down that particular property, and those individuals that made the investments will start to receive quarterly dividends from us.

Joe Fairless: Got it. Alright, thanks. Very clear now. With the property that you’re purchasing that you offer up to the investors, the crowd, do you always have that under contract?

Alex Aginsky: Yes.

Joe Fairless: Okay, so you have it under contract… And then you said the crowd can vote with their dollars on if they want to invest or not… What if they vote no? What do you do?

Alex Aginsky: We have a certain period of time during which – we can basically think of it as a syndication platform – we can syndicate that deal. If there is  a lot of interest and a lot of demand for that particular deal, and we can fill that demand, that funding goal, if you will, during that period of time – which can vary from deal to deal, but usually it’s anywhere from 60 to 120 days. If we can fill it, then we acquire that property. If we don’t fill it, then we simply don’t acquire the assets, and whatever funds have come in, we never actually touch the money, we never get hold of the funds. The funds are always going into an escrow account.

Hypothetically, let’s say we’ve got 90 days to raise capital for an asset. We were supposed to raise $100 and we were only able to raise $50, and the 120 days or 90 days came up to an end and the seller doesn’t want to extend, then at that point whatever funds – let’s say the $50 that’s sitting in escrow – will simply go back to all of the investors, without any offsets or fees or expenses.

Joe Fairless: Got it. And has that happened before?

Alex Aginsky: That has happened, yes.

Joe Fairless: So in terms of the relationships with brokers, and then also due diligence costs that you all I’m sure spend leading up to that point, how do you handle that?

Alex Aginsky: With regard to the brokers we’re upfront that we’re a new platform, and that we might not be able to raise all the funds, and they understand that, and they’re comfortable with it. Ultimately, the benefit to a property owner is that they’re paying much less in the way of transaction cost. We don’t take the big commissions that the other brokerage houses take, so ultimately they can sell the asset with much lower transaction costs, and that’s one of the big benefits to them.

The other benefit is that they can sell just a fraction of the asset. So they don’t have to sell the asset in its entirety, they can sell for example 50% of the equity on our platform… Which has never before been possible either.

Joe Fairless: Oh, yeah…

Alex Aginsky: It’s akin to floating part of the company stock on the New York Stock Exchange. That’s a new way of selling real estate. So that’s very enticing to some property owners. And because of these couple of things, they’re ultimately willing to potentially wait maybe a little bit longer.

The other thing that we promise them is no retrading. We’re not gonna put the property under contract only to then go back to them a month or two months later and say “You know what, now we want a discount on the price.” If we feel that the price is fair and is supported by a third-party appraisal, we’re not gonna beat them up on the price two months, three months down the road, when it comes time to close, and that’s very appealing to a lot of property owners as well.

Joe Fairless: Alex, what’s your best real estate investing advice ever?

Alex Aginsky: Wow, that’s a tough question. You put me on  the spot there, Joe… To really do your research, to do your due diligence, and to make sure that you know what you’re ultimately getting yourself into. That’s very easy to do with building bits, given the fact that everything is so transparent, all the numbers are public. You can read our offering circular on the SEC website, the link is available on BuildingBits.com and you can see exactly where your dollars are going

Joe Fairless: We’re gonna do a lightning round. Are you ready for the Best Ever Lightning Round?

Alex Aginsky: Shoot.

Joe Fairless: Alright, let’s do it. First a quick word from our Best Ever partners.

Break: [00:20:57].25] to [00:21:41].29]

Joe Fairless: Alright, Alex, best ever book you’ve recently read?

Alex Aginsky: Fountainhead.

Joe Fairless: What’s the best ever deal you’ve done?

Alex Aginsky: Purchasing a hospital in Roseburg, Oregon.

Joe Fairless: Why?

Alex Aginsky: It was guaranteed by a medical group on a long-term lease. We got it an a 9,5% cap rate, and it’s been one of the best investments ever.

Joe Fairless: What’s a mistake you’ve made on a transaction?

Alex Aginsky: Believing that the tenant will be there long-term when they weren’t.

Joe Fairless: Best ever way you like to give back to the community?

Alex Aginsky: We do a lot of charity as an organization, and I do personally as well, and we attend a number of local charity events, and some that we sponsor.

Joe Fairless: And how can the Best Ever listeners learn more about you and your company?

Alex Aginsky: BuildingBits.com. That’s where a lot of information is available about the properties, about our team, and that’s where the link to the SEC offering circular is available as well.

Joe Fairless: Alex, congratulations on creating Building Bits, having this platform, having the properties that you all are putting together and offering to non-accredited investors. They need these types of investments. As you said, 5% of the population approximately are accredited; they get access to the really good stuff. And then 95%, they don’t. It’s nice to have platforms like yours, with these types of offerings for investors, especially the type of investment opportunities that you all have – rather conservative investments, versus, as you said, you’re not doing ground-up development or anything like that at this point.

Then also learning more about why you went the Regulation A+ route, and also your background in triple-net leases. They aren’t necessarily passive, especially if there’s a tenant default, so how you structure that or how you do due diligence with Building Bits to mitigate that risk from that from happening with the offerings that you all have.

Thanks so much for being on the show. I really enjoyed our conversation. I hope you have a best ever day, and we’ll talk to you again soon.

Alex Aginsky: Likewise. Thank you so much, Joe. I really appreciate the opportunity.

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JF1561: Full Service Brokerage Teaches New Investors The Real Estate Ropes with Neal Collins

Neal is a Best Ever listener and now a first time guest on the show. His approach to real estate was to become a Realtor to help pay for his PhD, and now he owns a full service firm specializing in investment properties. A lot of his clients come to him as ‘green’ investors that need some more education and help to get going. He will help them learn the ropes of real estate investing before helping them purchase a property. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

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Neal Collins Real Estate Background:

  • Runs a Portland-based real estate firm that specializes in investment properties, founded in 2014
  • First exposure to property management in 2006, he worked as a leasing agent for a 300-unit student housing complex
  • Started in real estate to pay for a PhD, now has a full service firm
  • Based in Portland, OR
  • Say hi to him at http://chooselatitude.com/
  • Best Ever Book: Five Day Weekend

Sponsored by Stessa – The simple way to track rental property performance. Get dashboard reporting, smarter income and expense tracking and tax-ready financials. Get your free account at stessa.com/bestever


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, Neal Collins. How are you doing, Neal?

Neal Collins: Hey, Joe. I’m great. Thanks so much.

Joe Fairless: Well, I’m glad to hear it, and you’re welcome. Looking forward to our conversation. A little bit about Neal – he runs a Portland-based real estate firm that specializes in investment properties. They also do property management. He founded it in 2014.

His first exposure to property management was way back in 2006, where he worked as a leasing agent for a 300-unit student housing complex. He started real estate to pay for his PhD, and now he’s got this full-service firm. Based in Portland, Oregon. With that being said, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?

Neal Collins: Yeah, Joe. Thanks for the introduction. It’s a pleasure to be on the show. I’ve been listening to you guys since we really started real estate… And it was one of those things that we never intended to go into this industry; I was doing marine conservation work and studying whale sharks in the Maldives in 2013. Then in 2014 I was looking for a path to gain more education and advance in my field, and that was a PhD in California. On the way there, we stopped off in Oregon, had a little bit of time to kill… I wanted to really jump into a project in real estate. I had been listening to podcasts and was really intrigued with the idea of either flipping, or passive income through rentals.

We beat the pavement, ended up finding a really motivated seller… He wanted to sell on contract through seller financing, which was a mind-blowing concept at that time. Ended up not having to do anything to the property. I sold it to a builder not that long after.

Then I ended up having to do some really interesting financing moves where we couldn’t cash out our original seller, so we had to go find more property to collateralize a trust deed against… Which ended up going down this big snowball of how do you find investment properties, getting to learn the off-market multifamily world, getting to establish relationships with brokers to go find more multifamily deals…

It got to a point where I was like, “We’re making some pretty good money in real estate.” We were doing a lot of really good work of buying these buildings, really working with landlords that either had deferred maintenance, or they were just really fed up with dealing with their tenants… So we were raising money, putting money into these projects, and got to a point where we had a couple dozen tenants, and we really wanted the care and attention towards the property management that we had given to the renovations.

So we started to manage the properties ourselves, which organically turned into us creating a management company. We had to take on other employees to do leasing, and then property management… And once your overhead goes up, as you know, you’ve gotta figure out more ways to increase revenue.

Joe Fairless: Yup.

Neal Collins: We had been turning away other colleagues’ requests for us to manage their properties in the same areas, because they wanted somebody hands-on that they knew, they trusted, they liked the way that we were doing it… And we had been saying no this whole time, and then we finally said “You know what, maybe management is a really interesting realm, that would help us invest more”, and keep us on that nice edge of learning what’s going on in the industry, best practices… And really, what we thought at the time – which certainly holds true, but it takes a lot to get it going, is it does tee up investing opportunities.

Once you are able to establish a brand, you’re able to establish relationships with owners, and really just finding ways that you can increase your value to them, because they will be in a position one day that they do wanna sell. You do know that property in and out better than anybody else. And even if we don’t end up buying their properties, which 9 times out of 10 it doesn’t work that way, we find that we can really help them buy more properties, sell their property, 1031 exchange into more property…

So it was really about a year ago that we fell into the position of “If we look at our revenue, we’re doing more revenue from realty than we are from property management”, and that’s just from our management clients that are looking to do more activities and figure out where they wanna go. Then, once we realized we several hundred tenants, that we really believe in the power of real estate and buying your own home, we started marketing to them and helping them buy their first homes ever.

So we created a full-service realty company in January of this year, and we’re off to the races. We’ve got a couple dozen agents now.

Joe Fairless: High-level, what are the services your company offers?

Neal Collins: For outside clients, we do property management and brokerage, and now we’re starting to do more investment-tailored services, kind of bundling together a couple different investors that have some cash and wanna go in as a group to buy buildings.

Joe Fairless: What’s your role in that bundling of services?

Neal Collins: I get to play sponsor in that role, or I get to play deal-maker, just helping to be the broker to go find deals.

Joe Fairless: Have you done one of those?

Neal Collins: Yes.

Joe Fairless: Let’s talk about that. Can you give us an example of it, with numbers and just the story about the deal?

Neal Collins: Yeah, I think instead of going into the analysis of it, the biggest thing that I’ve really had to wrap my head around is 1) there’s a lot of people that come to us that don’t have huge down payment just ready to go, and they don’t want to be that concentrated; they are looking to diversify their funds a little bit more… So it’s been a real learning opportunity and a challenge for me to say, okay, how do I guide people, and realize that I’m not the only cook in the kitchen anymore? …and how do we go out and how do we find the right kind of deals, where for us they’re gonna be in our backyard, which is Portland, Oregon, so it is a pretty expensive market, and then how do educate people on “Hey, we’re not going for fully stabilized assets. We’re really looking for something that’s got some opportunity from value-add, either from poor management in the past, or low rents, or some kind of deferred maintenance and obsolescence on the property…” And really working with these — some are pretty green investors, that maybe have a rental house or two, but they’re stepping up into the multifamily world.

So that’s been the biggest thing for me, really trying to not have that mentality of you’re herding cats, but you’re there to provide opportunity… And for us it’s not these big 300-unit deals, it’s more like as small as a duplex, up to 20 units. That’s been my learning lesson.

Joe Fairless: Yeah, noted. And you mentioned you’re a loyal listener of this podcast, so you know how fun it is to hear specific examples… So noted on the concept, but let’s talk about a specific example, just to bring it to life. Can you talk about one?

Neal Collins: Yes, I’ll talk about a fourplex that we purchased… Kind of in the center of Portland, great location; it was an off-market deal, where the owners had inherited the property 19 years, they’re farmers, [unintelligible [00:09:21].13] in a little community outside of Portland. Beautiful place. It was very charming, built in 1924, craftsmen detail… But we looked at it and we said, “It’s in an A location, the rents are quite below market.” We’ve got a lot of stringent landlord/tenant laws here, so figuring out how do you actually bring this building up to market rate in a short amount of time? Because we went under contract for $800,000, and we knew that we had to put about $50,000 to $100,000 worth of work into it. So not only did we have to raise the $250,000 down, but we also raised an additional $100,000 on top of that.

Then we offered the tenants a way that they could either stay in the apartment building at an increased rate, or we could pay them a relocation fee.

We were able to get the building, do some work on it… Really, a lot of it is cosmetic, and go in, do new countertops, backsplashes, refinish the hardwood floors… So we were able to take rents from around $900/month to $1,600/month. Right now, the building is worth about 1,3 to 1,4 million.

Joe Fairless: We’ll take it! Nice work on that. How long did it take you to go from you closed on it, to today and it’s worth 1.3 million?

Neal Collins: It probably took us all-in six months to do that, because we’re looking at the value of how long do we have to season the property. From a bank perspective, it took us a year to actually refinance that… So we’re just finishing up with the process on that. But it’s really one of those things where we can crank on that forced appreciation lever pretty hard in these really expensive markets, and really provide a lot of value of just “Hey, we’re gonna bring great management to it, we’re gonna stabilize it, and we know that by turning this property around from its financial performance, that it’s gonna be worth significantly more on the back-end.”

Joe Fairless: And you said it’s a fourplex… How many out of the residents in those units agreed to increase their current rent from $900 to $1,600?

Neal Collins: We increased one not that much. He stayed, and then we actually helped him find another property. He was looking for a house to buy, so he had a little bit more flexibility on that side. He made good income, and wanted to stay in the area… So it was really fun to actually work with him.

Then the other residents in the building — you know, it is a big jump for them to go from $900 to $1,400, $1,500, $1,600… And that’s something we are very cognizant of, and we don’t want to go into any kind of a displacement attitude, or be blasé about that.

That’s the benefit of saying “This is what we’re gonna be doing to this property. It is gonna  be a lot nicer, we are gonna put a lot of money into it, but here’s 20 other rentals in the neighborhood that we manage that we’d love to see become your home.”

Joe Fairless: Sorry, I missed that… So 1) stay, but then they didn’t pay all the way the $1,600, then you found him a house… But you said two, three, and four – what did they do?

Neal Collins: We give them the option if they wanna move into another property within our portfolio.

Joe Fairless: So what did they do?

Neal Collins: I do not know what they did. They moved out of the fourplex that we had to renovate.

Joe Fairless: Okay, so they moved. Got it. So they didn’t accept the increase. That’s what I was asking. Okay. So one stayed, but not for the rate, and then two, three and four, they left as well. Basically, you offered either a higher rate or cash for keys. Did you give any cash to any of them for leaving?

Neal Collins: We did. That’s actually been institutionalized here in Portland through what’s considered a landlord/tenant relocation fee. It’s not cheap; it’s per bedroom in the unit. If you have a one-bedroom unit, you’ve gotta pay $3,900.

Joe Fairless: Dang!

Neal Collins: Yeah, right. So if you’re doing that on scale, it adds up really quick. For us, we just have to really factor in, okay, if we’re gonna be buying a building and then having to put money into it, and we know that we’re gonna be turning the financial performance around – just capitalize that up front and plan for it… And if they don’t leave, then it’s extra gravy, because you’re not having to spend that money.

And a lot of these — it’s like, I completely understand the hassle that you have to go through as a resident, and you’re getting a notice to either pay almost double, or find another place to move to.

We’ve had a big learning lesson on the West coast, of “Okay, how do we work through these issues [unintelligible[00:13:57].24] politically?”

Joe Fairless: How many bedrooms per unit were there?

Neal Collins: Three of them were one-bedroom apartments, and then one was a two-bedroom.

Joe Fairless: Okay, got it. So did you have to pay the $3,900 for the gentleman who you helped find a new place, too?

Neal Collins: We did not, no.

Joe Fairless: Okay, got it. Cool. So that’s around 12k-15k, depending on how the math works on that… But for a property that is now worth — you said you paid 800k, you put about 100k in, so all-in around 900k, and it’s worth 1.3 million… So  you’ve got about 400k in  equity on it, right?

Neal Collins: That’s right.

Joe Fairless: And how did you find it? You said it was off-market.

Neal Collins: Yeah, we had sent out direct mail to long-term owners. We really like to go that route of seller-financing. However, this one was not seller-financed; it was conventional. That’s really what we like in that asset range of — okay, if it’s two to four, it is a pretty big purchase price for us, but we can put 30-year fixed, low-interest rate financing on it.

Joe Fairless: Who did you go with on the loan?

Neal Collins: We went with a local bank here called Umpqua.

Joe Fairless: What type of terms did you get? You said 30-year fixed. What about the rate?

Neal Collins: The rate was 4.5%, 25% down, 30-year fixed.

Joe Fairless: And how did you structure the general partnership with this deal? Along with the limited partners, what was that structure?

Neal Collins: Whenever we’re structuring that, we will be kicking in some of our own funds, and  we will be getting a sponsor’s fee on top of that. We didn’t do an acquisition fee, and the other limited partners kicked in the rest of the equity.

Joe Fairless: Okay, cool.

Neal Collins: And we are the ones that are actually running the personal guarantee of it.

Joe Fairless: Okay, got it. So you signed on the loan, because it sounds like it’s a recourse loan…

Neal Collins: Yeah. Unfortunately. We’d like to get out of that… [laughs]

Joe Fairless: Right, right.

Neal Collins: In that residential product, it was common for us to have to do that.

Joe Fairless: Okay. So you signed on the loan, you found the deal, and your limited partners put up the $300,000 total for the project?

Neal Collins: Well, it was a little bit less than that, because we came in with some cash.

Joe Fairless: You came in with some cash, okay. Got it. And how do you structure the GP/LP split?

Neal Collins: We did an 80/20 on that, but it will range between 80/20 to 70/30.

Joe Fairless: Depending on performance hurdles?

Neal Collins: Right. And the management piece… We’re bringing in our management company on it, so it’s a little bit more attractive for us to play in that role. So it really depends on the deal, and who’s bringing it to us, and how much effort we’re having to put in… It’s really deal-by-deal, instead of “This is the one way that we’re gonna run it.”

Joe Fairless: Why do a syndication versus joint venture on this deal? The reason why I ask is with this size of property, getting it registered with the SEC, and getting a PPM and everything situation can be a little costly, versus doing a joint venture, where you don’t have all that, but everyone has a say in what direction the property should go.

Neal Collins: Right. I think a lot of it really depends on how active you want other people to be in it. For us — this is a newer role for us. Our financial resources only go so far, but we have a lot of expertise in this area now, and if people are coming to us saying “Hey, we wanna bet on you and your ability to go find these properties. How do we do that?”

For us, it’s really getting to learn how to put together deals, and what’s the best structure and what’s not… And every single decision that we make isn’t perfect, but it’s been a great learning opportunity for us to figure out “Do we want a joint partnership, or is it something where we’re bringing in more people that we already have relationships with?” We wanna have this notch on our belts, so that we can — say, instead of a four-unit, let’s go take down a 40-unit.

Joe Fairless: And you said it’s been a good learning experience… What are a couple things that you’ve learned from the experience?

Neal Collins: In terms of working with others?

Joe Fairless: Anything. Renovations, working with others… Whatever direction you wanna take that question.

Neal Collins: Okay. Well, some of the biggest learning was how to navigate through a low-cap environment. If you’re working with investors from around the country and you’re doing work on a property on the West Coast, or on the East Coast – it doesn’t really matter – we’ve got some pretty low cap rates… And you’ve really gotta come in and show them, “These are the examples that we’ve done in the past. If we’re entering in on a low cap, we know that we’re gonna be able to increase the value.” So just really being adamant about your buying/investing criteria has been a big thing, because it’s not a market for us where we can just say “You know, I really like this building. It’s fully stabilized, and we see a lot of opportunity with it.” Unfortunately, those days and deals are very numbered.

Joe Fairless: What specifically, or maybe quantifiably, what do you look for in a deal, whenever you’re assessing it? In terms of age, or unit size, or price point, or median income within a certain radius of the property… That sort of stuff.

Neal Collins: I really look for a solid tenant location base where we know that there’s gonna be neighborhood amenities around, we know that we can bring in different types of programming that’s gonna increase resident retention… Because if you look at the numbers – and this is what’s great about having a management portfolio, is we say “How can we increase the financial performance? Is it through increasing rents, or is it through resident retention long-term, after we’ve stabilized the property?” For us, we’re not gonna be tripping over dollars to pick up the pennies.

We’ve found if we can bring in amenities like bike storage, and get rid of carpet and put in hardwood flooring, and do marmoleum in the kitchen, or bring in laundry, or shared laundry with storage spaces… It’s all these little things that we can do to help increase that rent, to get to stabilization, and then instead of having a tenant turnover every 12 months, it’s how do we actually get them to stay 24 months, or 36 months? That has been a huge boost in terms of not only our properties, but our property management clients’ properties, where we average about a 31-month tenancy… And you’re not having to pay re-leasing fees, you’re not having to turn these units, but you’re able to stay at market rent a lot closer. That’s been a  big one for us.

Joe Fairless: Congrats on that average 31-month tenancy. That’s wonderful, and it’s impressive. One question I have on that is have you looked at the average month tenancy for single-family home renters versus buildings that are 5+ units and compare that in your portfolio for what the averages are for those two groups?

Neal Collins: I don’t look at it in grain like that, because I’m looking at more of the portfolio from a broader scale, of what’s our vacancy rate and how long are tenants staying in there. I would just anecdotally say that a single-family house is going to have a longer stay, because it’s just more of a hassle to move into a house and then have to move out 12 months later.

But we’ve seen examples where a  resident will stay in a multifamily property for a long time. [unintelligible [00:21:30].22] I see the larger properties are turning over more often, and maybe that — it’s more of a hypothesis, that if you can find that balance of how to create community that they really buy into, and they feel like they’re a part of something a little bit special, more so than the apartment community next door to them, then they’re gonna stay longer.

Joe Fairless: Yeah, I agree. I absolutely agree. The follow-up question is what are some specific things you or your team have done to increase resident retention?

Neal Collins: One, it’s looking at your management practices. Are you communicating well with your residents, and telling them what’s going on, and giving them opportunities to give input? And then really finding those programs, like “How do we encourage people to ride their bikes to work, or to use public transportation?” So as simple as putting in covered bike storage, where the bikes are gonna be secured and they’re gonna get wet in the winter time is a big boost for people in Portland, Oregon; we have a pretty big bike commuter population, and you’d be shocked at the amount of apartment buildings that don’t offer these amenities.

Where if you’re going in and you’re buying a building that’s got a really large unfinished basement, how do you go in and actually build storage units? And you can even charge for monthly rent on that.

The biggest thing that’s coming to mind right now is once we started to allow pets, we saw a huge increase in the amount of applications that we were getting on vacancies. It was staggering. A lot of people have pets, and they do pay for that privilege, but it is something that I feel we open ourselves up to a broader range of people that are looking for homes, so we’re able to increase the financial performance on the building that way, because we’re gonna be charging pet rent… And they do like to stay longer, whilst we are now allowing for them to have their animals, and hopefully there’s a yard or something where they can run around.

Joe Fairless: What’s your best real estate investing advice ever?

Neal Collins: My best real estate investing advice is really focus on self-discipline first. If you wanna be doing apartment syndications, you’ve really gotta make sure that you’re firing all cylinders. If you wanna get to achieve a goal, start with putting in those practices of “How do I get myself better? How do I form daily disciplines that are gonna lead me to that goal?”

Joe Fairless: We’re gonna do a lightning round. Are you ready for the Best Ever Lightning Round?

Neal Collins: I’m ready, yeah.

Joe Fairless: Alright, let’s do it. First, a quick word from our Best Ever partners.

Break: [00:24:08].22] to [00:25:07].02]

Joe Fairless: Best ever book you’ve recently read?

Neal Collins: The best recent book that I’ve read is from Garrett Gunderson, and it’s called “5 Day Weekend.”

Joe Fairless: Best ever deal you’ve done that we haven’t talked about?

Neal Collins: The first deal that we ever did, actually… We kind of briefly went into it. We got 2% interest for 30-year financing. That was just incredible, and mind-blowing at the same time that we didn’t have to go to a bank to get financing.

Joe Fairless: A mistake you’ve made on a transaction?

Neal Collins: Oh, god… There’s too many to even count. I think really looking at our experience as real estate agents, there’s so much paperwork and you really have to make sure that you’re on top of it. I can’t tell you how — that feeling in your stomach of like “Oh shit,  I just lost some paperwork”, or I told them that it was gonna be one way, but it’s actually the other way, so… I don’t even wanna bring out those skeletons from the closet, but invariably they do happen, and you just try to minimize it and move on.

Joe Fairless: Best ever way you like to give back?

Neal Collins: We really like to work with people that they self-select a non-profit that they wanna donate towards, and we’ll actually match a realtor commission towards that. Or we’ll just say “Hey, if you really like whatever NGO, we will give a percentage of our commissions to that organization.”

Joe Fairless: How can the Best Ever listeners learn more about what you’ve got going on?

Neal Collins: You can go to our realty website, which is ChooseLatitude.com, and you can find our company Latitude Realty and Property Management. Or they can reach out to me directly via e-mail, which is neal@chooselatitude.com.

Joe Fairless: Neal, thank you for — well, first, you mentioned you’re a Best Ever listener, so thank you for listening. I’m glad you get a lot of value from the podcast. And thank you for being an interview guest; I really enjoyed meeting you and learning about your background, as well as the fourplex that you all bought for $800,000, put in $100,000, and you got into the specifics of how you structure it with your investors, the business plan, the financing… You know we love that stuff on the show, so thanks for talking about that and getting into the details, as well as your business. And when you look at deals, look at not only how can you increase the rents through adding value, but you can add value through resident retention, so increasing the number of months residents live at the property, which I think most of the listeners think about already, but you got into the specifics of how you all do that, the specific ways, and how that’s always incorporated into your business plan, which is really interesting and really necessary… So thank you for talking about that.

I hope you have a best ever day, I really enjoyed our conversation, and we’ll talk to you soon.

Neal Collins: Great. Thank you, Joe. I appreciate it, it was a pleasure.

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Joe Fairless and Doug Marshall podcast episode JF1491

JF1491: Helping Investors Get The Best Financing For Optimal Returns with Doug Marshall

As a real estate professional for over 40 years now, Doug can help us learn a lot. He’s managed properties, done ground up development, and now helps borrowers get the best financing possible to optimize their returns. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!


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Doug Marshall Real Estate Background:

  • Real Estate Professional for nearly 40 years
  • More than 30 years of experience financing apartments and other commercial real estate
  • Author of Mastering the Art of Commercial Real Estate Investing: How to Successfully Build Wealth and Grow Passive Income from Your Rental Properties.
  • Based in Portland, OR
  • Say hi to him at marshallcf.com
  • Best Ever Book: http://marshallcf.com/book-recommendations/

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Do you need debt, equity, or a loan guarantor for your deals?

Eastern Union Funding and Arbor Realty Trust are the companies to talk to, specifically Marc Belsky.

I have used him for both agency debt, help with the equity raise, and my consulting clients have successfully closed deals with Marc’s help. See how Marc can help you by calling him at 212-897-9875 or emailing him mbelsky@easterneq.com


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, Doug Marshall. How are you doing, Doug?

Doug Marshall: Hey, I’m doing really well, Joe. How about you?

Joe Fairless: I’m doing well, and I’m excited about our conversation, because Doug has been a real estate professional for nearly 40 years. He has more than 30 years of experience financing apartments and other commercial real estate. He is the author of the book “Mastering the art of commercial real estate investing. How to successfully build wealth and grow passive income from your rental properties.” Based in Portland, Oregon. With that being said, Doug, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?

Doug Marshall: Yes, I’d be happy to. As Joe has been saying, I have nearly four decades of experience in commercial real estate. I started off with a developer out of California for a number of years. He moved me to do some property management for him on class A apartments in Atlanta, Georgia, and then beginning in 1987 I permanently went over to the financing side of the business.

My entrepreneurial journey began when I started my own commercial mortgage brokerage firm back in 2003, Marshall Commercial Funding. Simply put, what I do for a living is I help real estate investors get the best possible financing for their rental properties, so they can optimize the return on their investments.

I’ve been a commercial real estate investor, both apartments and office properties since 2007.

Joe Fairless: We have so much to talk about… I am very much looking forward to our conversation. One thing that stood out to me was one of the last things you said, and that is “help investors get the best financing to optimize the return on their apartments.” Let’s talk about that… What questions should be asked in order to determine what type of financing is best to optimize the returns?

Doug Marshall: Well, that’s a good question. As a mortgage broker for the last 30+ years, I have found that most real estate investors aren’t particularly knowledgeable about the real estate calculations that are necessary to really succeed in the business. They have some knowledge of how maybe to value commercial real estate, but they generally are deficient in one or more different areas.

There’s really six different types of commercial real estate calculations besides knowing how to value real estate. You need to determine the loan amount based on the lender’s underwriting parameters, and many people don’t understand what those lending underwriting parameters are… And how do you calculate a property’s cash-on-cash return? Many people do, but surprisingly, there’s some that don’t.

How to leverage a property and how that impacts your property’s cash-on-cash return is another example. Sometimes you can over-leverage a property and actually reduce your cash-on-cash return.

And then how does loan amortization impact your investment? There’s different types of amortization methods, and surprisingly, some people don’t know what they are.

Then the minimum financial requirements lenders require of borrowers in order for them to be approved for a loan. So what I’ve done in this book that I’ve just recently completed is that I have a short ten-question quiz to find out how knowledgeable they are on these six different types of commercial real estate calculations. This gives the reader a pretty good understanding of where they stack up compared to their peers. For those questions they get wrong, I try to explain in details how these commercial real estate formulas are calculated.

Joe Fairless: I want to summarize to make sure I have them right… One is to calculate the value of the real estate, two is the loan amount based on the lender’s underwriting parameters, three is the cash-on-cash return, four is how to leverage a property and how it impacts that property’s cash-on-cash return, five is loan amortization impact on the investment, and six is minimum requirement of the… Borrowers, to be approved? Did I get that right?

Doug Marshall: That’s correct.

Joe Fairless: Okay, cool. Which one do you wanna talk about?

Doug Marshall: Well, I can talk about any one of them. I think that those are just nice guidelines to follow, and I try to explain it in detail in the book as to what needs to be done.

Joe Fairless: Okay. Let’s talk about leverage. How to leverage a property and how it impacts a  property’s cash-on-cash return… And you said if it’s over-leveraged, that can hurt the cashflow. Can you elaborate?

Doug Marshall: Yes, there’s both positive and negative leverage that you can put on a property. It’s depended upon the interest rate on the loan, but also the cap rate, and they are very closely aligned. Sometimes when the interest rate is higher than the cap rate, the more leverage you put on it, the worse the cash-on-cash return, and vice-versa.

So if you have a higher cap rate property – say it’s a 5% cap rate and you have a 4% loan that you can use, then you have positive cashflow. But you have to run the numbers, you have to look at it, you have to see “Okay, at a certain loan-to-value what happens to my cash-on-cash return?” As you play with the numbers, you’ll see that as you increase the leverage, you’re gonna see whether or not it improves your cash-on-cash return… Because sometimes you have less equity that’s required as you leverage your property, and if it’s positive leverage, you’ll increase your cash-on-cash return. And just the opposite will happen if you have a negative cash-on-cash return as well, if your interest rate is higher than your cap rate.

Joe Fairless: If the interest rate is higher than the cap rate, then you would have a negative return, assuming that you operate the property similar to how it’s already been operated. But if you operate it differently, then that would change things, right?

Doug Marshall: Oh, absolutely. I’m just talking about not how you’re gonna operate the same way in both scenarios, but how you leverage it will determine your cash-on-cash return. But obviously, if you’re gonna buy a property — I was listening to one of your podcasts where… I forget the…

Joe Fairless: Theo?

Doug Marshall: He was talking about a 2% cap rate, and it doesn’t make sense to buy at 2% cap rate, unless you have the ability to have a vision for that property that will determine whether or not you can get a higher return because you know how to increase rents or lower expense, or you’re gonna improve the property’s tenant profile, whatever it might be. The vision that you have for that property will determine whether or not you should proceed.

Joe Fairless: Let’s talk about the loan amortization impact on the investment. You said there’s different types of amortization. Can you go into the most common types for commercial loans?

Doug Marshall: Well, there’s three. There’s obviously interest-only, and that’s really nice as far as optimizing your cash-on-cash return. But then you have two types of amortization methods that have different impacts, one of them being a 30/360 method, which is the traditional approach, where every month assumes a 30-day month, and then there’s the amortization where it’s called the 365 method, where — this was started about 15-20 years ago with the conduit lenders, when they saw an easy way of adding another five days’ worth of interest into the calculation for the year… So they would provide you with a better interest rate generally than you could get with a traditional loan, but it would amortize more slowly.

You just have to know over time which of those three amortization methods you want to use.

Joe Fairless: Will you elaborate a little bit more on the 30/360 and the 365? Just for someone who perhaps isn’t familiar with these types of loans, just go a little bit more high-level.

Doug Marshall: Okay. For the last 2,000 years, the traditional approach to financing was based on a 30-day month, even though some months might have as few as 28 days, and as many as 31. And it just made it easier for everyone to make that calculation. Most loans prior to, let’s say, 15-20 years ago, almost all of them were that type of amortization method. But as I said, with the actual 365 loan, things change. Instead of having 360 days, you now have 365 days; you have an extra five days of interest. So the mortgage payment would stay the same, but more would be applied to interest and less to the mortgage balance. So it slows down the amount of amortization that takes place with the actual 365 type of amortization method.

Joe Fairless: Thank you for that. With the interest-only approach, what business plan does this fit the best?

Doug Marshall: Well, I think it’s a great way to get started on a property. In the last few years especially, the lenders that I’ve gotten to, it’s not uncommon that they’ll offer two or three years or more of interest-only. The advantage of that is, if you really do take a look at your cash-on-cash return, is not quite doubled when you use an interest-only type of approach. So if it’s a little bit skinny when you buy the property as far as the cash-on-cash return, you go with an interest-only situation – all of a sudden you’re most flushed with cash; it might initially be a 4% cash-on-cash return for you. Well, if you were to go interest-only, it’d probably be close to 7% or 8%.

The advantage of that approach, Joe, is that you can make the changed necessary, especially when you have a net value added play that you’re working with. The property is maybe a little tired, it needs some renovation, and maybe you need to improve the tenant profile; it requires maybe having a little higher vacancy, because you’re moving some people out, and you’re upgrading various units, an apartment, for example… The interest-only approach still allows you to cash-flow the property.

Joe Fairless: For an investor who hears that and they’re thinking “Oh, but I wouldn’t do that, because then I’m not paying down the principle”, what are your thoughts about that thought process?

Doug Marshall: Well, that’s true, there are trade-offs  between doing that… But the reality is that most investors realize that their properties are always gonna have debt on them. Very few people invest in commercial real estate apartments, office, retail expecting to eventually at some point in time to have paid off the loan. You can do that, but if you’re really trying to optimize your property’s cash-on-cash return, you’ll always have a property leveraged.

So I would not be concerned about going with the interest-only for a few years. The thing I would be concerned about though is that you have a grace period. You’ve got three years to get that property turned around. You wanna make sure that by the third year you’ve pretty much stabilized your property, rents have gone up, so that when you go back to an amortization of the loan, that your property cash-flows, so that it has sufficient cashflow that’s been generated as a result of those improvements that you’ve made over the first couple years.

Joe Fairless: Let’s go to the sixth calculation, the minimum requirement of borrowers to be approved. What’s a rule of thumb?

Doug Marshall: Well, there’s several rules of thumb for lenders. I go through it in the book, there’s actually ten different ones. I don’t have them in front of me right now, but there are ten different rules of thumb that most lenders go through when looking at a potential borrower. A couple that are most important probably is your net worth, and your net worth needs to be at least equal to the loan amount. If you’re looking for let’s say a five million dollar loan, you’d better have a five million dollar net worth.

As far as liquidity is concerned, I’ve always been surprised at how lax most lenders are on liquidity requirements. Let’s say that your mortgage payment just happens to be 20k/month; they would require a minimum of as many as nine months of mortgage payments on that particular property. So let’s say on a 20k/month payment, you would have 120k to 180k of liquid assets in your balance sheet to be at their very minimum requirement.

Joe Fairless: What are the ranges that you’ve seen for liquidity from lenders?

Doug Marshall: Well, usually it’s in that 6 to 9-month requirement. That’s what I normally see.

Joe Fairless: Okay, 6 to 9-month requirement of paying what, again?

Doug Marshall: The mortgage payments. If you have a 20k mortgage payment, you would need to have six times 20k.

Joe Fairless: As far as the net worth goes, just for clarification purposes, it’s net worth equal to the loan amount prior to closing, so the property can’t count towards your net worth. With your track record as a professional, what are some of the things that you’ve evolved in your business over the years, so that you’ve gotten better at what you do?

Doug Marshall: That’s a very good question. I think that is a critically important question. For example, first of all I’m a one-man shop, and I’m in Portland, Oregon, and I had a client that was buying an apartment in Phoenix, Arizona. I initially told him “Probably the best thing that you can do is hire someone down there to do your financing for you.” And he did that. He went down to Phoenix, he found a very reputable national brokerage house that if I told you the name you would know it, and he showed me a few weeks into it what they had offered, and I was surprised it wasn’t that competitive. I was expecting that they would know the market much better, they would have much better resources of funds available, and they really didn’t.

I said, “Let me see what I can do”, and I came up with some lending sources of my own that I’ve used traditionally, that would go down to Phoenix. But the difference between what the other mortgage brokerage firm used and myself was not so much on the actual rates and terms, though mine were slightly better, it was on the presentation. I saw what they provided, and it was like on a four-point font, and you could barely read it, and it gave no guidance as to which one they would choose, and they’d come up with eight different lending alternatives.

What I’ve been able to do is I found out exactly what the borrower was looking for, what his hot buttons were, so I was able to say “This is how much cash would be required at closing for the three alternatives that I have, this is your cash-on-cash return initially, this is what your internal rate of return will be if you choose these options.” It was like, one was spewing you with facts, and the other (myself) was providing them with the information that they really needed to be able to make a decision… So I was able to win that business, even though the national firm should have had a leg up on me for two reasons: they were local, and they had correspondent relationships with like companies that they could have gone to.

Joe Fairless: When you take a look at the real estate financing and how it’s evolved (or devolved), what are some things that are in place now from a financing standpoint that either surprise you or you would certainly take advantage of that perhaps weren’t in place before?

Doug Marshall: I will say that the financing has evolved over time, and I think at back where we were prior to the great recession – there were things that were going on at that particular point in time, even on the commercial side, but really it was the residential side where the abuses were… But on the commercial side of the business, we were in some ways way too aggressive on offering certain types of products.

In recent years, as they got out of the recession and moved forward, lenders have become a lot more conservative in their rates and terms… Even in the heyday, at the top of the real estate cycle, which we probably peaked maybe last year or maybe the year before on apartments. I’ve seen a real change in how lenders calculate what properties they wanna become involved in… But generally it’s become more conservative, and not like there’s additional advantages. Are you thinking of something else, Joe?

Joe Fairless: I’m not, no. I just wanted to hear your thoughts on it.

Doug Marshall: Okay.

Joe Fairless: Sometimes I just ask questions I have no idea which direction they’re gonna go. [laughs] You’ve got four decades, I don’t, so I figured I’d just tee it up and see where you took it. I looked on Amazon and I couldn’t find your book. Is it published?

Doug Marshall: It is not published at this particular point in time. It will be available for pre-order in June, and it becomes available — the launch date is in September for the eBook, and the paperback launch date is for December. It is being published by Morgan James Publishing.

Joe Fairless: Cool. I thought something was amiss whenever I couldn’t find it… Okay, cool. And I saw on Amazon you can pre-order and it showed the launch date December… It’s certainly a book that I’m gonna be buying, and I’ll just click the pre-order button after we get done having our conversation, so I make sure I get on that list for December.

What is your best real estate investing advice ever?

Doug Marshall: My best real estate investing advice would have to be to pull the trigger. Back in 2009, when the real estate market was in collapse, we had the opportunity to buy a property called Cedar Lane Apartments, and I had to get over the fear factor of actually doing it. Everything at that particular point in time was still in decline, it was plummeting, and actually making that decision was very difficult… Not because the property wasn’t good; the numbers showed well, and it was just getting over the fear of not following everybody else that was going on in the market… Because at that particular point in time, people were trying to sell their properties, they were trying to hunker down to some extent. Lenders weren’t lending at that time, so the best investment I’ve ever made was right at the bottom of the market… And I had to get over the fear of making the decision to go forward.

Joe Fairless: What did you buy that property for?

Doug Marshall: We bought it for $39,000 a unit, and today conservatively it’s worth about $130,000 a unit.

Joe Fairless: [laughs] Those are just stupid numbers. How much did you put into each unit?

Doug Marshall: We only put in a modest amount. It’s like probably 5k-10k/unit. It wasn’t in bad shape. We bought it at a foreclosure because the owner was taking the cashflow from that property to build a condo development that went sideways on him, and he lost the property. It was a little bit tired, but it wasn’t in bad condition.

Joe Fairless: How many units?

Doug Marshall: It was 56.

Joe Fairless: Got it, so you bought it for around 2,7 million, and now – I’m gonna enjoy doing this math… 130k times 56… 7,2 million.

Doug Marshall: Yup.

Joe Fairless: That’s a decent chunk in nine years.

Doug Marshall: Yeah, I wish all of them went like that though.

Joe Fairless: Oh, they’re not all like that? I can’t believe that. [laughs] Well, we’ll get into the opposite end of that here in the lightning round. Are you ready for the Best Ever Lightning Round?

Doug Marshall: I am.

Joe Fairless: Alright, let’s do it. First, a quick word from our Best Ever partners.

Break: [00:23:32].26] to [00:24:19].25]

Joe Fairless: Best ever book you’ve read?

Doug Marshall: Well, the problem with that is that I love to read books, and I have over 200 listed on my recommended reading list on my website, and I would suggest that your Best Ever listeners go to my website and see what those books are… But right now, the book that I’m really fascinated with is called “Building a Story Brand” by Donald Miller.

Joe Fairless: And that’s not even on your website, for the recommended list; I’ve just searched for it.

Doug Marshall: Yeah, I’m in the process of reading it right now.

Joe Fairless: That’s awesome. Yeah, I enjoy how you structure this recommended reading list, and I see you’ve got Robert Greene, one of my favorite authors on here… I’m just kind of scrolling through.

Doug Marshall: The other thing I would tell you is that if you take a look there in the far right column, the little icon that looks like a book…

Joe Fairless: Summary.

Doug Marshall: It’s a summary, and I have about 40 books that I’ve summarized over the years… So if your listeners are not really into reading, they can click on this PDF and read a 8-10 page summary of the book, and find out if they like the topic. If they do, they can then buy the book.

Joe Fairless: That’s incredible.

Doug Marshall: So you have about 40 (almost 50 now) books that I find worthy enough to summarize.

Joe Fairless: What’s a mistake you’ve made on a transaction?

Doug Marshall: Well, I like to talk about my property that I’ve bought a couple years earlier than the Cedar Lane apartments, which was the grand slam… And I wanna let you in on a little secret, if you don’t know this one already – not every commercial real estate property that I’ve ever invested in turned out to be a home run… Now that I’ve got that confession off my chest, maybe some of your listeners can relate.

In the summer of 2007, which turned out to be about the absolute peak of the real estate market, I along with a like-minded group of investors purchased a 32-unit apartment located in a small town… And at the time it seemed like it would be a good investment. It had large unit sizes, and it was one-story buildings. It was located in a nice quiet little town, and it had the potential down the road to convert to condos. I was thinking to myself, “What could go wrong?”

Well, it turned out that a lot of things could go wrong, most of which could not have been predicted by the most seasoned of real estate investors. A couple of years ago we sold this property… And we didn’t too badly; we got a 7% internal rate of return on that investment, so it wasn’t like we lost money, but we owned it for almost 10 years… And there’s four things that I’ve found out from this property. 1) Market timing is everything; the old adage, make your money on an investment when you purchase it, not when you sell it, is very true. This investment had very little chance to perform well because we simply paid too much for it. And if we had purchased the property a couple years earlier, with a much less inflated price, we probably would have performed well.

Another lesson was that there’s a reason why properties in small markets have higher cap rates. When the economy went bust in 2008, unemployment soared, the vacancy rates rose and rent flattened or declined because of the concessions – as bad as this was in the large metropolitan areas, it was far worse in small towns, which had higher vacancy rates and struggled with more significant renting concessions.

When the commercial real estate market turned in the large cities, it was still another year or two before the small town where this property was located began to see occupancy rates rise, and you started to see rents increase again. So that’s a couple of things.

The other two things I learned from this apartment is never underestimate the cost of deferred maintenance. This was truly a value-added play and we thought we had plenty of money necessary to get these capital improvements done, and in reality we weren’t even close. The property kind of limped along because we could not put in all the capital improvements we wanted to, and we had to do it over time.

And finally, a truism that I’ve learned over the years, and I bet you’ve probably learned it as well – you need to pay close attention to your on-site manager. The old adage is you get what you inspect, not what you expect, and it’s very true. During the years that we owned this property, we had three different on-site managers, and they always started off well, but their performance was highly correlated to how well you monitored them. If you monitored them well, then things went well; if you didn’t, it went downhill.

So those are the four lessons I learned from my loser property that I purchased in 2007.

Joe Fairless: Great stuff. I wanna make sure I captured the second one – I got 1, 3 and 4… What was the second one about cap rates? What was your takeaway?

Doug Marshall: There’s a reason why cap rates are higher in small markets.

Joe Fairless: Oh, yeah. Okay.

Doug Marshall: The reality is a lot of people, especially in the last couple of years, have been chasing cap rates. “Well, I can’t buy anything in this nice metropolitan area. I’m gonna go to the small little community where the cap rates are higher.” Yeah, they are higher there, and there’s a reason for it… And really, when the economy turns, you’re gonna find out just why you shouldn’t have been in that particular small little town.

Joe Fairless: What’s the best ever way you like to give back?

Doug Marshall: Well, I have a couple of different ministries I’m involved in. I have a ministry called The Jesus Table – we provide meal and free conversations to anyone who wants to come, every Tuesday night. We’ve been doing that for about 7-8 years now.

The second one is a non-profit that’s called Fairhaven Recovery Homes. It’s a non-profit that provides a structured environment with housing for alcoholics and for drug addicts that wanna turn their lives around.

Joe Fairless: How can the Best Ever listeners get in touch with you?

Doug Marshall: They can get in touch with me by going to my website. If they go to marshallcf.com/bestever, they will see the pre-order page for my book.

Joe Fairless: Cool. Well, I’ll just go there and pre-order it through your website. Thank you so much, Doug, for being on the show. Lots of knowledge and helpful, practical tips, from how to leverage a property, how leverage affects a property’s cash-on-cash return, we talked about the interest is higher than the cap rate, it would be negative, but not factoring in the business plan, and certainly the business plan will have a great influence on that, depending on what it is.

Then also loan amortization impacting the investment. One, the interest-only approach, and then the two types of amortization – the 30/360 and the 365, and you educated us on the differences between those two… And why people would do interest-only loans on value-add deals over for a short term, as well as the minimum requirements of borrowers – the net worth equal to the loan amount, and then also liquidity between 6 to 9 month requirement of monthly   mortgage payments… Plus, congrats on your 2009 deal, and congrats on the 32-unit deal that didn’t go so well and you still got a 7% IRR, and you bought at a terrible time; that’s pretty good. Plus, you got lessons learned that you’re applying towards future stuff.

Thanks for being on the show. I hope you have a Best Ever day, and we’ll talk to you soon.

Doug Marshall: Thank you, Joe. I appreciate it.

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Joe Fairless and Doug Fullaway podcast episode JF1449

JF1449: Make $100 More Per Person In Your Senior Living Properties with Doug Fullaway

If you’re in the senior living space, you know that not every resident has the same needs. Doug and his company are experts in fine tuning systems and processes of senior living facilities. Doug also raises money and does his own investing, there are a lot of great tips in this episode. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!


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Joe Fairless: Best Ever listeners, how are you doing? Welcome to the best real estate investing advice ever show. I’m Joe Fairless, and this is the world’s longest-running daily real estate investing podcast. We only talk about the best advice ever, we don’t get into any of that fluffy stuff.

With us today, Doug Fullaway. How are you doing, Doug?

Doug Fullaway: I’m doing well, thank you.

Joe Fairless: Well, I’m glad to hear that. A little bit about Doug – he’s the president of Fourteen Plus. He specializes in investing in and growing the senior living market. He’s been in the senior living space since 2002. He’s the author of the book “Investing in Senior Living.” You notice a trend here…

He’s based in Portland, Oregon, and with that being said, Doug, do you wanna give the Best Ever listeners a  little bit more about your background and your current focus?

Doug Fullaway: Certainly. I’m an Oregonian by birth. I’ve lived in Costa Rica, the Netherlands and Singapore, and early in my career – I spent most of it in the high tech world, in electronic design automation… But in 2002 I found somebody asking me to help turnaround the company in assisted living. At that point I didn’t know what it was, but I grew to love it and we grew that company to be the largest provider of software to the senior assisted living communities in the United States, with thousands of sites or customers.

I ran the software business and stayed in that until about 2016, when a large company came along and offered us lots of money and made my investors very happy.

I stayed with that company for a number of years, but several years ago I realized I was making significantly better money by investing in senior living, so that’s why my focus is on this space.

Joe Fairless: You helped turn around the company…

Doug Fullaway: That wasn’t my company. I wasn’t the founder… The founder had kind of given up; he was gonna close the company, and I worked with him and we turned it around… It was a struggle for a number of years, but we grew to have literally thousands of sites using our software for assisted living management.

Joe Fairless: Wow… And you said your investors, so did you recruit investors to invest in that company?

Doug Fullaway: Yes, I did recruit investors. I had to bring in more money, and of course, you wanna keep your promise to them.

Joe Fairless: Yes, that is important, that’s for sure. Okay, so you were in the software/technology space within senior living… And we’ll get to your investing here in a second, but why was it that your company was sought after from the senior living communities?

Doug Fullaway: Yeah, you know, partly just being in the right place at the right time. When we approached an operator, we would ask a very simple question – would you like to increase your revenue by $100/resident/month? Of course, they all said yes, and of course, they’d say “How much?” and we’d say “Well, $5 or $6/resident” and they’d go “That can’t be…” Well, in fact it was, because the business had been running in kind of an informal way. Martha, who was 87 years old, asked you to deliver the paper in the morning – of course you wanna take care of her. You’re a good person. But pretty soon you’re delivering 100 newspapers in the morning and putting in real labor and not getting paid for it… So people were giving away services and by putting our software in place, they could easily keep track of all the service and charge appropriately… So remarkably, resident satisfaction would go up because you delivered what you said you would do, you kept your promises, and at the same time they would pay you more money… So it was a good thing for everybody.

Joe Fairless: Just educate me on some tasks that were sporadically monetized but then with your software they were fully monetized?

Doug Fullaway: A really simple one is bathing. Some people just don’t need any help at all, some people just need a reminder… Some people actually need help because they have a very difficult time getting undressed and taking care of it. So there’s varying degrees of need there.

An informal way of doing that was you’d just put bathing assistance on the list, and the caregiver didn’t know what they had to do or not do until they talked to the person… So the person who took 30 minutes to help with bathing was very different from the person who took 5 minutes. You could then be more granular and specific about the charges – “This person needs five minutes”, “This person needs 30 minutes”, “This person needs 45 minutes”, and then that showed up on their bill”, and that’s what made the difference. It was so easy to do that the people would do it, and the residents didn’t object, because they were getting the service.

Joe Fairless: What’s a couple other services?

Doug Fullaway: Another service would be help with medication management. It’s actually the biggest consumer of labor in assisted living. People have 11, 12, 14 medications they have to take typically three or four times during the day, and many of these people are beginning to have issues with memory, so they forget, they get confused… So that’s one of the things that takes a lot of time, and obviously has to be done very carefully, so that people get the right medications at the right time.

Another service is something that sounds really simple, but it actually takes a lot of time… Help with ambulation. If they have trouble getting up out of a chair and walking to the dining room, it’s best that somebody’s there to accompany you.

There are many people who don’t need any of this assistance, but there are others who need lots of things, and it varies person to person and it changes over time.

Joe Fairless: You mentioned assisted living, and we’ve also said senior living… Are they different?

Doug Fullaway: They are. Let me start at the top. If we look at all the kinds of care for anybody who’s older, there is skilled nursing, there is memory care, there is assisted living, and there’s independent living. Independent living is kind of like a college dorm for old folks; it has a dining room, but they care of themselves completely. That’s considered part of senior living or senior housing.

Assisted living means they need more help, the things we just talked about. Memory care means they need even more help. So senior housing or senior living refers to everything except skilled nursing. Skilled nursing is a very different business, highly regulated. It’s more regulated than the nuclear industry, there are more pages of things you have to do per the Federal rules, and it’s entirely paid for really by government programs, mostly Medicare… Whereas senior housing and senior living have no reimbursement really for the most part; it’s 92% private pay.

Joe Fairless: I’ve seen memory care, assisted living and independent living communities, but I don’t think I’ve ever seen a sign that I’ve passed by that said “Skilled nursing community.”

Doug Fullaway: Yeah, it’ll just be called a nursing community, or it will have a name like a rehabilitation center… But the key there is it’s paid for by a government insurance program.

Joe Fairless: Got it. Okay, that’s good context, and there’s some helpful pieces of information for anyone interested in investing in assisted living. What is your focus now as an investor?

Doug Fullaway: Really, my focus is 100% on helping great operators raise the equity they need to grow their business. Operators are very good at doing those things, but they are so busy because they have so many things to manage that they aren’t necessarily great at raising the money they need to grow their business… So that’s where I focus my time – finding them the equity. They typically can find the loan they need pretty readily, because there’s lots of sources… But equity is always a difficult thing for them to find.

Joe Fairless: When you say “Great operators raise equity”, are you referring to the assisted living and senior living?

Doug Fullaway: Yeah, I’m referring to the operator of the property and all the services that go into doing that. For example, let me give you a list of kinds of things an operator has to worry about. They have a bunch of regulations and there are different rules in each state; they have to comply with those… Things like the water temperature coming out of the tap in the bathtub cannot exceed a certain temperature. It must be more than and less than.

They have to deliver all those care services. A typical building will have three to five thousand individual services delivered every week in the building; that’s a lot of stuff to keep track of.

They’ve gotta make it as much like home as possible. That means there’s gotta be fun things to do, there need to be activities… They can’t afford to pay the staff $20/hour, so they have a real issue with staff turnover, because — do they pay minimum wage? Yes. Often $12, $13, $14/hour is pretty common. But that means they’re competing with lots of other entry-level jobs out there… So controlling staff turnover is hard.

Making sure they don’t give away services that I talked about earlier – that’s  a big issue. In this business – and let me contrast this with running a multifamily investment… In a multifmaily investment if you have 100 residents, you probably have 3-4 employees. In senior living, if you have 100 units, you’re gonna have 55 employees. It’s clearly a more complex business to run.

And then you’re running a restaurant, only it’s three meals a day forever, so making it cost-effective and yet high-quality is a real challenge in itself… And just like the multifamily business, they’ve gotta maintain the building, the asset… So they have all those things to do, and then you say “Oh, by the way, go raise some more money for the next property.” That’s a big time-sink for them, so that’s where I fit in, as trying to help them with that problem.

Joe Fairless: And where does your network of investors come from?

Doug Fullaway: There are family offices, there are high net worth individuals, and I have a fairly long list of individuals who can put in, for example, a $50,000 investment. I have a whole range of those.

I am not big enough and I intentionally don’t go after state pension funds or endowments or those kinds of things. They’ve asked, but they look at me like “Oh, you’re too small. We can’t do that”, although many of them are asking and I’m doing fine with the list that I have.

Joe Fairless: How did you build the relationships with the family offices?

Doug Fullaway: Difficult. It took a long time. I started with somebody I’d known and I didn’t really realize was in a family office… He was an accounting kind of guy, he had an MBA from Cornell; I’d known him for many years and I used to go skiing with him, and then I found out he was actually the president of a multifamily office that supported three families.

So I got to know him, and showed him some investments and helped him succeed, and then he introduced me to some other people. I’ve also made it a point to go to family office events, just to be there, be known… And then I have a partner who helps me, who used to be in the venture capital world; he was at Norwest Ventures and he has a long Rolodex of high net worth high-tech people that were his clients, who trust him because he helped them make lots and lots of money. So those are really the two major sources.

Joe Fairless: How many projects have you partnered on with operators?

Doug Fullaway: In the last year I have helped raise money for 8 projects successfully.

Joe Fairless: Wow!

Doug Fullaway: I look at a lot of them. In the last 30 months I’ve looked at 1.6 billion dollars of potential… There’s clearly been 500 million of that that I wouldn’t go near, because the numbers didn’t make sense. They had labor costs at 22% of revenue; well, the industry norm is someplace in the 40% to 55% range, so they just didn’t work… But I see lots of things and I’m very picky about which ones I help with, because the magic ingredient in senior living is really the operator.

You can have the same building in the same location either making great returns for the investor or being a disaster, all based upon the capability of the operator. I don’t go looking for projects, I look for operators.

Joe Fairless: We’ll dig into that… Real quick, the eight projects over the last 12 months – how much total equity was that?

Doug Fullaway: They average 5 million each, so it came to 42 million.

Joe Fairless: Wow, that’s a whole lot of buckaroos.

Doug Fullaway: Well, actually, in this space I’m a little tiny player. Think about BlackRock with its billion-dollar-plus funds on a regular basis… You have Goldman Sachs in this space, paying attention; there are some very large private equity players. The amount I’m raising is actually considered very, very small.

Joe Fairless: You said you wouldn’t go near a lot of them that you looked at; you mentioned one thing, the labor, where maybe they have a 22% of revenue, with the industry norms around 45%… What are a couple other things that you have noticed that made you turn the other direction?

Doug Fullaway: There is a problem that exists, I’m sure, across all kinds of real estate, but in the senior living space there can be a local market where you’ve gotta understand what the real supply and demand look like, and what they’re gonna look like two years from now. So when I go in and see a proforma, and a nice set of numbers, and a good market study, and then I quickly go look  at the Census Bureau data and I see that the number for those over 75 is at a certain level, and I look at the available supply, and I see that they’re already meeting the demand, if makes me really wonder about why somebody thinks they can put somebody new in. They’re gonna have to have a significantly better product in order to attract people away from their existing property that they’re living in, and that just seems like a higher risk proposition.

On the other hand, if somebody will look at the data for a proposed community or a community to be acquired, and look at the demand within 3 miles, 5 miles – with a 20-minute drive, to be specific – and in a market that’s supposedly over-built, there might still be great opportunity. So that’s one of the big things I look for – the supply and demand for the very specific location and the product being offered.

Often, they hire somebody that’s not really an expert at senior living; somebody is moving out of doing multifamily into senior living, and they use the same people to do the market study. There are some great firms out there that are absolutely good at doing it, and it’s not that expensive to get it right.

Joe Fairless: What is a good firm that would be great at that type of market study for senior living?

Doug Fullaway: There’s a firm called IRA that does studies all across the country, and they absolutely understand the senior living market; they understand all kinds of real estate markets, actually… And because their data is very thorough and very well thought out — when I see a study from them, I usually can’t find any holes; it’s almost like “Oh, if they wrote it, it’s exactly right.”

I do one other thing which is so simple that any investor can do, but it often tells me a lot – I simply go to Google Maps, I put in the location and type in the word “assisted living” and I do it again for “senior living” and I see what’s in the area, and then I build my own list of competitors and compare it with what’ I’m being told in the offering memorandum. More often than not I find that they haven’t really discovered everybody. That’s always a red flag for me, which is “Okay, why don’t you know about this competitor?”

Joe Fairless: [laughs] I would think that’d be a major red flag…

Doug Fullaway: Quite frankly, it’s difficult, because the terminology varies. There’s these things called residential care facilities; well, what’s that? It’s really an assisted living and under-the-law in some states — for example, here in Oregon there’s both assisted and residential, and there’s some slight differences in the size of the rooms… But from a consumer point of view, there’s really not much difference.

Joe Fairless: Do you know what IRA stands for with that market study group?

Doug Fullaway: You know, I’ll have to look… I don’t remember off the top of my head. It will come back to me here.

Joe Fairless: Because I tried to google it after you said that and I couldn’t figure it out. No biggie. So the supply and demand — I wanna ask a couple follow-up questions on that, where you look at the Census Bureau data for people over the age of 75 within a certain area… So that gives you the potential demand; then what about supply? What resource do you look at in order to identify the supply?

Doug Fullaway: There are several places I go look in the “public” that don’t cost me any money… If you go to caring.com, they’re doing reviews of sites, but they almost always describe the number of units available there. So it takes me a little time. Now, if I have a market where I’m doing lots and lots of investigation, for example South Florida, I can go to the National Investment Center, nic.org, and I can pay for a one-year subscription to their data for a market, which is all of Florida.

Yeah, it does cost $2,000 to do that, but I see every building —  see not only what kind of units they offer, but I can see what their asking prices are, I can see what the occupancy is for an area; I can’t see for one building, but I can choose an area that’s a three-mile circle or a zip code, and as long as there’s more than three competitors in that space  – and there almost always are – then I get to see what the total occupancy is. So if I see total occupancy at 95%, that’s usually a really good indicator that there’s plenty of room for somebody else to be in there, because most of the buildings are close to full. So that’s another place I go…

And then the final thing I can do is — this is a friendly industry… If you call the association in the state and make friends with somebody and talk to them, you can usually find out lots of things that aren’t necessarily published, and I do that.

Joe Fairless: Call what association in the state?

Doug Fullaway: For example, the Assisted Living Association; there’s one in every state. Or sometimes they’re healthcare associations. There are two national organizations, one called Argentum, which really focuses on assisted living, independent living and memory care, and there’s another one called “The American Healthcare Association”, which primarily focused on skilled nursing, but they have a group called “The National Center for Assisted Living.” So you really can go to two sources and get a lot of information pretty quickly.

Joe Fairless: You mentioned that the magic is in the operator, you talked about some things that would disqualify the operator… What are some specific things that would qualify him/her?

Doug Fullaway: I wanna see that the CEO has been in the business for at least ten years. If it’s less, then I’m a little suspicious. I wanna see that the CEO has direct reports – somebody who’s really the head nurse; the titles vary, but really a head nurse… Someone who worries about the day-to-day operations, and a good chief financial officer. So I wanna see the right staff.

The next thing I wanna see is let’s call it the hospitality factor. After all, we’re trying to make sure that there’s a great home for somebody… So it’s not like I can measure a ratio or a number, but I go visit people, I see them, and I just see if they’re gracious to the people around them all the time… Do they go out of their way without being asked to talk about creating a nice place for their employees and for their residents? It’s about making a lifestyle and a home for people, so I really wanna see that. It’s a little hard to measure, but it’s important and it doesn’t take that much time to figure it out.

Joe Fairless: Yeah, I imagine the ten or greater amount of years of CEO – that’s easy to disqualify or qualify people right out of the gate… And then direct reports, I would think – and I don’t know the business, so correct me if I’m wrong, but I would think that that would just be a plug-and-play model where every CEO, if they’ve been in the business for 10 years, they would have that staff structure, so does that vary at all?

Doug Fullaway: It does, and let me give you an example. There was an operator that I knew who had over two billion multifamily buildings under management. Very experienced, been in that for 30+ years, and he was gonna start off in the senior living world and he didn’t have a single person on his staff who knew anything about senior living. He thought it was just gonna be the same.

Well, he’s a great CEO, but I’m sorry, he needed a vice-president who’d been in the business at least 10 years. Now, he did eventually go get two people who had that kind of experience, put them in, and he’s now grown into building number (I think it’s) 15 or 16, and his returns for his investors are in the 23%-24% range. If you get the right people in place and you do this the right way, it’s a great place to invest.

Joe Fairless: Where do those returns come from? Is it on the sale, or is it making that 20%+ cash-on-cash return during operations?

Doug Fullaway: It’s really on the sale. The cash-on-cash certainly — you can acquire something that might have a 5% cash-on-cash in the first year, but if you run it properly, you’re gonna grow it to be the high teens pretty readily. It might take 3 or 4 years to do that, but in the industry I helped lots of operators find a building that’s poorly run, that’s in the bottom 25% of performance, and just over the next three years move it up to median, and that doubles the value for the investor. They refinance it at 5 years, and that’s what creates it… So it doesn’t necessarily have to be a sale; it could be just a refinance.

Joe Fairless: Based on your experience in this industry, what is your best advice ever to real estate investors?

Doug Fullaway: Go find a great operator; if you do that, good things will happen.

Joe Fairless: How do you come across operators in senior living?

Doug Fullaway: There are a couple things you can do… Find the local association – the California Assisted Living Association, for example – and go to their conferences, and hang out and talk to people and you will figure out pretty quickly who the top 9 or 10 operators are, and go introduce yourself and just say “I’d like to invest.”

Joe Fairless: We’re gonna do a lightning round. Are you ready for the Best Ever Lightning Round?

Doug Fullaway: I’m ready.

Joe Fairless: Alright, let’s do it. First, a quick word from our Best Ever partners.

Break: [00:23:07].05]

Joe Fairless: Best ever book you’ve recently read?

Doug Fullaway: Recently – well, the best ever book I’ve read is Management by Peter Drucker, and I re-read it about a year ago; even though it’s an old book, it’s an amazingly interesting book.

Joe Fairless: Best ever deal you’ve done?

Doug Fullaway: I bought a small assisted living community in a small town for 5.2 million, and we sold it four years later for 10.

Joe Fairless: How much did you all put into that property and the operations?

Doug Fullaway: One million dollars.

Joe Fairless: What’s a mistake you’ve made on a transaction?

Doug Fullaway: I got together with a group of people to buy a property; we all knew each other, it all seemed friendly, and three years in I realized I didn’t understand the investment motives that each of the investors have. Some wanted a long-term dividend, and some wanted to flip it and make money, and that controversy created a horrible dynamic.

Joe Fairless: How did you resolve it?

Doug Fullaway: We talked it out and it took several years to get everybody to agree it was just time to sell… So I parted company, essentially.

Joe Fairless: Best Ever way you like to give back?

Doug Fullaway: I built a business game, a Monte Carlo simulator of a poorly-run assisted  living community that’s used now at several universities, and I’m building a new generation of that. It really helps you run a business on paper, so to speak, with a computer, to learn the ins and outs of the business.

Joe Fairless: How can we see that or check it out?

Doug Fullaway: Well, that you can’t see… It’s not widely distributed. We’re working on one we can distribute to the world, because I deliver it in person to these universities. I go and do it.

Joe Fairless: Okay, cool. That’s interesting.

Doug Fullaway: To put it another way, we’re working on that generation next.

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

Doug Fullaway: Fourteenplus.com. There they can download the book for free.

Joe Fairless: Oh, cool. And I’ve gotta ask you about the name… It seems ironic to me since you’re in senior living, but your company is Fourteen Plus…

Doug Fullaway: Well, I chose that name because everybody asks…

Joe Fairless: [laughs]

Doug Fullaway: And the real answer is if you look at NCREIF, National Council of Real Estate Investment Fiduciaries  – there’s a mouthful… Over a five-year timeframe, senior living has produced the highest return on any type of real estate property at 14.7%. So Fourteen Plus means I wanna do better than average.

For example, multifamily did 8.3% in that same time period. And this has been true for the last 15 years, it has not changed. It is the best place for a real estate investor to put their money, and people don’t know that.

Joe Fairless: Well, Doug, thank you so much for being on the show… Really educational and also very practical for us to take action on after this interview, looking at deals the way that you look at them; you talked about ways you disqualify deals, if the labor costs are 22% of revenue, but the industry norm is around 45% or something like that… Looking at the supply and demand, looking at other competition within the footprint – a 20-minute drive, and making sure that the operator has that accounted for… Raising money for projects and how to find good operators, and then some characteristics of a good operator… Lots of great stuff.

Thank you so much for being on the show. I hope you have a best ever day, and we’ll talk to you soon.

Doug Fullaway: Joe, thank you very much.


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JF1301: Starting & Operating An Asset Based Investment Fund While Building A Rental Portfolio with Jeff Wallenius

Jeff started as a flipper on the side while also being a professional firefighter. Realizing that flipping didn’t align with his cash flow goals, He started funding out-of-state turnkey providers. Jeff is also working on his own rental portfolio and has aggressive goals for how many units he wants to own. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!


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Jeff Wallenius Real Estate Background:

-CEO of North Peak Investments, an asset-based investment firm

-Professional firefighter who began flipping houses in 2005

-Started an investment fund in 2015 funding out of state turnkey operators, Fund #2 in 2017 funding flips

-In 2013 he began flipping 10-12 houses per year

-Currently building his rental portfolio with goal to get to 160 doors by May and 1000 in 4 years

-Say hi to him at http://www.northpeakinvest.com/

-Based in Portland, Oregon

-Best Ever Book: The Legacy Journey

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Joe Fairless: Best Ever listeners, how are you doing? Welcome to the best real estate investing advice ever show. I’m Joe Fairless, and this is the world’s longest-running daily real estate investing podcast. We only talk about the best advice ever, we don’t get into any of that fluffy stuff. With us today, Jess Wallenius. How are you doing, Jeff?

Jeff Wallenius: I’m good, Joe. I appreciate you for having me on.

Joe Fairless: Well, it’s my pleasure, nice to have you on the show. A little bit about Jeff – he is the CEO of North Peak Investments, which is an asset-based investment firm. He is a professional firefighter who began flipping homes in 2005, started an investment fund in 2015, and in 2013 began flipping between 10-12 houses a year; currently building his rental portfolio with the goal of getting to 160 doors by May and 1,000 in four years. Based in Portland, Oregon… With that being said, Jeff, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?

Jeff Wallenius: You did a great job there. Like you said, professional firefighter – I’ve been in the fire service for 17 years, third generation, so I’ve been in the blood… I started flipping houses in 2005; I had a construction background, so I’d start do all the work myself on those houses [unintelligible [00:03:26].01] and all that stuff… I finally figured out that that was the wrong way to do it, and I started paying contractors, and that’s kind of when we ramped up in 2012-2013 and started doing a little bit more volume.

From there, flipping is great, and I enjoy flipping houses. The problem is when you stop flipping houses, you stop making money. I wanted to build that generational wealth, so I started looking at rental properties and I started researching turnkey… That was a new concept for me, and I started looking across the Midwest. It’s hard to make anything work here in the West Coast cashflow-wise, so I wanted to find other areas that made sense to jump into that buy and hold strategy. I did a bunch of homework, and lo and behold, I came across a gentleman here locally that was funding a lot of these turnkey providers. He said, “Hey, why don’t you build an investment fund with me?” Well, I’m dumb enough to try anything, so let’s give it a shot”, so that’s when we built that investment fund out of the first investment fund that I put together.

We put that together, we started funding a lot of these turnkey providers, and that opened up a lot of opportunities and relationships, and I started really seeing the opportunities that were in the Midwest and South. Flying out there, meeting these teams on the ground, meeting these partners… From there, it progressed into building those relationships out further, finding a business partner locally that had a lot of strengths that I did not have as far as marketing, and some business acumen. So I teamed up with my business partner Grant in 2015, and we thought “Well, let’s create North Peak Investments.” That created North Peak Investments.

We started another investment fund and right now we’re working in the Midwest primarily (Midwest and South), we’re flipping houses… We’ve got some investors on board with our investment fund, things are going great, I’m building up my rental portfolio, and… That’s a quick overview, I guess.

Joe Fairless: Help me understand the process, and in particular the first one… What did you bring to the table and what was the fund around? I thought I heard you say “funding turnkey providers” – if you could clarify that.

Jeff Wallenius: That’s a good question. So the first fund that I put together was — actually, it’s named Firefund; I sat with a bunch of my brothers and sisters in the firefighter department, sat across a coffee table and had a bunch of speeches that I gave them and said “Hey, here’s what we can do with your money. We’re investing in the Midwest”, and luckily, having 15 years in my current department, I had that trust level that we carry in the fire service, so going out and raising money – I wouldn’t say it was easy, but they had a trust level and a comfort level with me, with my background with flipping.

With my business partner in Lake Oswego that I had formed that relationship with we started funding a lot of these turnkey providers. We would provide the money to have them buy their properties and fix those properties and get them turnkey ready. Then they would go off and market those to the end buyer.

Joe Fairless: Okay. You would provide debt financing to the turnkey providers.

Jeff Wallenius: That’s correct.

Joe Fairless: And what were the terms that you’d give them?

Jeff Wallenius: Oh, expensive. Our money were expensive for them. I’m not gonna give the full details on that, because that was my business partner in Lake Oswego, I’ll let him jump into that, but… Our money was expensive. The reason why these turnkey providers used our money is because it was easy, and there was no monthly payments on accrued interest, which with these guys and gals that are doing high volume, that’s really a big deal, so it made sense for them. It provided a great return for our investors, and the model is still intact today.

Joe Fairless: Okay, so that was your first fund, providing turnkey providers money to then they go operate their business, and that’s still in existence. What is your second fund that you have now?

Jeff Wallenius: The second fund that we put together is jumping in through the SEC guidelines as a 506(c), and the 506(c) allows us to flip properties. We’ve got properties we’re flipping in several different regions, so that provides that financing for the purchase and rehab with those funds. I started looking at syndicates, and syndicates are great, and there’s different ways to run those, as you know, as apartments, or doing a big buildout… What I wanted to do was do something with single-family, which kind of changed opportunities for investors to be involved. It spread out risk for us, as we were doing multiple projects, and the timelines in the single-family are obviously a lot quicker than doing a large play on an apartment reposition or buildout.

Joe Fairless: Okay, so you’re doing flips across the country. How many markets are you in?

Jeff Wallenius: Right now we’re in three primarily.

Joe Fairless: Which ones?

Jeff Wallenius: Indianapolis, Jackson, Mississippi and Oklahoma City, Oklahoma.

Joe Fairless: Okay. How the heck did you pick those three?

Jeff Wallenius: [laughs] Great question. Basically, partners on the ground that I had met with this first fund that I put together, and spending time and really vetting out those areas, vetting out those partners is really where it started. Then knowing those areas and knowing the economic factors and driving factors behind those markets is really where we started. But really, it all comes down to your team on the ground, that’s really where everything is made and lost, really. I would say our partnerships have been the main factor there.

Joe Fairless: And going back to the first fund, why did the person who had the money partner with you? Maybe I misheard you, but I thought you said that there was a person who was already doing financing, and then they partnered with you to create the fund, but maybe I misunderstood you or didn’t hear that right.

Jeff Wallenius: That’s a good question. They were already funding a lot of these turnkey providers, had great relationships, had a long-term track record of investing in real estate… They invested with me or partnered with me. They didn’t have a fund; what they would do is bring in large investors on a one-off basis, so… I don’t know why he took a liking to me, that makes no sense to me. He didn’t need me, but I guess I wooed him with my charm and wit… That’s a pun there. A bad one, at that.

He just gave me an opportunity; I guess I bugged him to the point where he said finally “Why don’t you build a fund?” I think he probably thought that I wouldn’t put that together or be dumb enough to try it, and I definitely am dumb enough to try it, so… I guess I fooled him.

Joe Fairless: Okay. If I were to ask him that question, what’s your best guess that he would say, the business reason why he partnered with you?

Jeff Wallenius: I had a background obviously in real estate, and over 35 flips here locally. I think hard work, motivation… I bugged the heck out of him. I said “Hey, let me come right along with you, let me come sweep your floors or make your coffee…” I think he saw that I was serious about doing what I do and wanting to learn, and being teachable I think really is a factor today that those investors look for, and those people that have been there…

I mean, I’m in that now, that I’m finding those teammates that really are driven, and finding those people that you don’t have to drag. I don’t wanna drag anybody along in my company, but if I can find those that every now and then I have to pump the brakes on, and they’re out there driving and building out their own systems and their teams, and they have a vision for where they wanna go, I think those are the people you wanna partner with. Selfishly, I think that’s what he saw in me, and I’ll take it.

Joe Fairless: What was a learning experience , just any one learning experience that you got from building out that fund, the first one?

Jeff Wallenius: I think I had no idea the opportunities that were in the Midwest and South, so that was a real eye-opener, traveling out there and meeting these partners on the ground and driving through these projects and seeing these projects and seeing the land cost and the taxes… Growing up on the West Coast – I’m a born and raised Oregonian – it’s a whole new world, and I had no idea that that existed out there, and that those opportunities existed, so I think that was the big learning piece for me, really opening my eyes to being able to invest outside of my little bubble here in Portland, Oregon, and that this whole (for lack of a better term) world was opened up to me, investing-wise. I think that would be paramount for me.

Joe Fairless: What were your specific responsibilities with the first fund?

Jeff Wallenius: I was the liaison between my investors that I had brought into that investment fund and the partner here locally that was deploying the capital. I would maintain all the accounting, I would maintain all the information that was generated through the fund as far as what projects that we were investing in, the details on all that; I would relay that information to all of my investors. And the key was transparency on that. My investors had access into all the files, they had access, looking privileges to the bank accounts…

Being in the fire service and having to sit down across the table from these guys and gals that were investing with me and having coffee, I needed to make sure that everything that we did was transparent. That’s what my role was.

Joe Fairless: Got it. And just so I’m understanding the terms, you said “Liaison with the investors on the ground (so the firefighter people) and the partner locally deploying the capital”, so that would be the turnkey property management people?

Jeff Wallenius: That was the partner here locally that had all the relationships, that was deploying the capital to the turnkey providers.

Joe Fairless: I’m trying to understand – who’s deploying the capital? It sounds like both of them are deploying capital, both of them are investing – the firefighter friends and the partner locally.

Jeff Wallenius: Yeah, I’ve got this thoroughly confused for you. So my firefighter friends would invest in my investment fund, and then I would work with my partner here locally to determine where to deploy those funds, to which turnkey provider.

Joe Fairless: Oh, okay. Got it. Firefighter friends invest in a fund, like a blind pool, basically, and then you would consult with your partner locally to then decide where those funds go, to which turnkey provider?

Jeff Wallenius: You got it, yeah.

Joe Fairless: I’m with you, cool. The fund you have now – what is your responsibilities?

Jeff Wallenius: My responsibilities now is more of a ground operation. So I coordinate with our ground partners. I’m coordinating every day, I talk to my ground partners every day, for multiple hours a day, and we talk about projects that we have currently going, and how those are going, where we’re at in the process…

I also talk with my ground partners to see what upcoming projects we have coming down the pipe and what capital outlays are gonna be required for that, and then working with my business partner who is raising the capital along with myself, and just making sure that we coordinate having the funds readily available, and as we bring in more money, that we have projects readily available to allocate those funds. So a little bit of everything there, but my main role is dealing with the ground partners in the projects upcoming.

Joe Fairless: How have you learned to evolve your qualification process for a ground partner?

Jeff Wallenius: I could probably spend half an hour talking on that alone. The major thing for us is having the same moral compass that we (Grant and myself) have. That’s really important. I think that is really vetted by determining when things go poorly or not the way that they were supposed to go, how does the ground partner react? I think anybody is easy to work with when things are going great, so as we work through processes and we work through deals, and maybe a project goes the wrong way and it loses money – I mean, it’s real estate, so those things do happen – it’s really seeing how our ground team reacts to that; that’s really important to us. We wanna make sure that we’re aligned with like-minded individuals and really that core piece of us is having that same moral compass. Doing the right things when it’s hard.

Joe Fairless: How do you qualify that, or determine that before something poorly happens?

Jeff Wallenius: You can’t really, other than taking them for their word, especially when you’re just starting off, I think that’s a difficult piece. If you’re opening a new market and you’re trying to find a ground partner, you really have to take them for their word… But we ask all those questions, “What happens when something goes south? Can you share some experiences, one that has actually happened for you and what you did?”

We have a very important fiduciary responsibility to our investors, so when things go South, we wanna know how our ground team operates. As we move through the process and we start moving through deals with these ground teams, we make sure that we’re constantly aligning with them and have that same mindset. But really, it all comes down to when something does go south, how they react, and then we kind of move from there.

Joe Fairless: How do and how don’t you want them to react when something goes the opposite of what you expect?

Jeff Wallenius: Well, our mindset when something goes south is that our investors don’t lose money. We need to make sure that our investors’ capital is preserved… So when something goes south, as we’ve done before, we pay out of our pockets to make sure that it was made right. If we have ground partners that share that same sentiment, then we’ve got something good there. That’s exactly who we’ve aligned with now; we’ve had a couple that have gone south, and that’s exactly what’s happened – we’ve all reached into our pocket and made it right for our investors and we’ve moved on.

If we had somebody that had backed down on that concept and wouldn’t share in that same idea, then that’d be a problem for us.

Joe Fairless: What is your best real estate investing advice ever?

Jeff Wallenius: Really my focus is not on money, and I think if I could relay any advice, it’s don’t focus on money, don’t focus on profits. If you really focus on providing a service and helping others achieve what they want to achieve… I don’t wanna go off on a long spiel on here, but for example, if you’re trying to buy a flip property and the seller is motivated to sell, determine why they need to sell, what do they need out of this? Versus going in and say “Hey, I need to buy it for X amount of dollars”, determine what the seller needs – maybe they need cash right away, or maybe they need monthly payments, or maybe they just need to get out of their payment. If you figure out that you can help people through this process, everything else falls into place. So don’t focus on money, don’t focus on profits, focus on helping others achieve their goals, and really everything else falls into place.

Joe Fairless: You mentioned an example with a flip and why they’re looking to sell and what do they really need… Are there any other types of questions that you ask? It sounds like you’re a couple levels removed from talking directly with sellers on fix and flips, but maybe with your investors or something like that, so that you’re asking the right questions so that you can be in a position to help others get what they’re looking for.

Jeff Wallenius: As far as investors go, is that what you’re asking?

Joe Fairless: Yeah, investors, or whoever you’re generally working with to accomplish that.

Jeff Wallenius: Yeah, all across the board. With investors the same thing applies – what is an investor looking for? Some people are looking to own real estate, and they wanna own those rentals and those buy and holds, and really in that scenario I wanna be able to provide transparent advice on not only turnkey, but owning real estate, so that people have realistic expectations when they get into owning real estate.

Some investors just wanna have a passive return, and that’s it. Some investors are very well off, and they’re not necessarily worried about the returns, they just don’t need to lose money. You just kind of have to determine where each investor lies, what their situation is… I always love getting in front of people and having a sit-down conversation; obviously, that’s not always possible, because investors are all over the place… But really feeling what their scenario is, learning more about them, what drives them, kind of what their situation is, and from there you come up with a solution and a game plan that works best for them.

Joe Fairless: We’re gonna do a lightning round. Are you ready for the Best Ever Lightning Round?

Jeff Wallenius: I’m ready.

Joe Fairless: Alright, let’s do it. First, a quick word from our best ever partners.

Break: [00:19:35].23] to [00:20:11].19]

Joe Fairless: Best ever book you’ve read?

Jeff Wallenius: The Legacy Journey, Dave Ramsey.

Joe Fairless: Best ever deal you’ve done that wasn’t your first, wasn’t your last?

Jeff Wallenius: Man, I’ve had a lot of good deals. I would say the most unique deal for me is the — recently we bought a house and got a free church.

Joe Fairless: Will you elaborate on that, just so we understand how that happened?

Jeff Wallenius: Well, I could run it the other way too, we bought a church and got a free house. The church owned that property, and it had a house that was adjacent to it that they were selling as well, so… Basically, the purchase price allowed us to buy one, fix it up, and sell — right now we’re doing a remodel on the church, so sell the church and [unintelligible [00:20:47].16] free house.

Joe Fairless: What’s a mistake you’ve made on a transaction?

Jeff Wallenius: We invested in a horse training facility in Oklahoma City. It kind of went south, we ended up owning the property, which has been a learning curve for my business partner and I to figure out all the horse terminology, and training, and the track speak, and become horsepeople. That’s probably been the worst deal, but it’s starting to turn around and become a pretty interesting deal.

Joe Fairless: Best ever way you like to give back?

Jeff Wallenius: I really like giving back my time. I’ve had a lot of people that have helped me through the years as far as advice and taking me under their wing to learn about real estate, so I like doing the same thing. I’m more than happy to talk with anybody that’s looking to get into real estate, providing transparent advice on the pros and cons to every side of this thing and making sure that they know what they’re getting into, and helping any way that I can in that scenario.

Joe Fairless: And how can the Best Ever listeners get in touch with you and learn more about your company?

Jeff Wallenius: Our website is NorthPeakInvest.com, we’re on all the social media – Instagram, Facebook… And my e-mail, jeff@northpeakinvest.com would be great.

Joe Fairless: Well, Jeff, thank you for being on the show and talking about how to you got going, and thank you for doing what you do for the last 17 years as a firefighter first and foremost, and then talking to us about your approach, how you built a relationship with the local person who had the money, and if he perhaps were to be asked that question about why he partnered with you, he would say that you had the local experience, you worked hard, you were persistent, motivated, teachable, and saw that you were serious about doing what you say you’re going to do.

I love the analogy… That can be applied to anyone who’s building a company – you want to have to pump the breaks on people, versus dragging them along. You might have said “driving them along”, but I said versus dragging them along… It’s an analogy that plays well with any business. And then the evolution of how you’ve built your partners in the local areas, with picking the right partners based on what your mission is and the approach you take.

Well, thank you sir for being on the show. I hope you have a best ever day, and we’ll talk to you soon.

Jeff Wallenius: Alright, thanks a lot, Joe, for having me on. I really appreciate it.

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JF1255: Started In The Stock Market At 7 Years Old – Has Now Completed over $5 Billion In Real Estate Projects with Ian Formigle

As the title says, Ian started investing at 7 years old in the stock market. Now He oversees Investments for the funding platform CrowdStreet. Now with over $5 billion of value in projects completed, Ian is here today to tell us some higher level investing strategies and things to look out for. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!


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Ian Formigle Real Estate Background:

-Vice President of Investments at CrowdStreet

-Commercial real estate professional and serial entrepreneur with over 20 years experience in real estate

-His experience includes private equity, startups and equity options trading

-At CrowdStreet, he oversees the  Marketplace, an online commercial real estate investment platform

-He has has completed over 160 offerings totaling over $5 billion in project value  

-Say hi to him at https://www.crowdstreet.com/

-Based in Portland, Oregon

-Best Ever Book: Mystery of Capital


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Joe Fairless: Best Ever listeners, how are you doing? Welcome to the best real estate investing advice ever show. I’m Joe Fairless, and this is the world’s longest-running daily real estate investing podcast. We only talk about the best advice ever, we don’t get into any of that fluffy stuff. With us today, Ian Formigle. How are you doing, Ian?

Ian Formigle: Doing great, thanks for having me on the program, Joe.

Joe Fairless: My pleasure, nice to have you on the show. A little bit about Ian – he is the vice-president of investments at Crowdstreet. He’s a commercial real estate professional and serial entrepreneur with over 20 years experience in real estate at Crowdstreet. He oversees the marketplace, an online commercial real estate investment platform, and he’s completed over 160 offerings, totaling over five billion dollars in project value. Based in Portland, Oregon… With that being said, Ian, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?

Ian Formigle: Absolutely. I think just to kick things off, the interesting little factoid about my past is that investing across all kind of different asset classes has always been in my background; I literally think it’s a part of my DNA. I started investing in the stock market at the age of seven, which I think is actually earlier than the age of Warren Buffet… He started investing at 11.

Joe Fairless: Is that even legal? [laughs]

Ian Formigle: So my little story was I saw my dad investing in stocks, I got interested in it, he taught me how to do it, and then I started buying my first shares of utility stocks back in the end of the 1970’s going into 1980. As soon as I got my first dividend checks in the mail, which at the time were about 40 cents per quarter, I was completely blown away… Basically getting money in the mail for what felt like doing nothing. I think I still have those stocks certificates from those first purchases.

On to my career, post-college I began my career as a financial derivatives trader. Some early success on the trading floor is what got me into the commercial real estate business. I came out of a real estate family, so therefore like a lot of investors, I started in real estate by acquiring, managing, renovating, and ultimately selling single-family homes. In my case, this was in California. I did that for a period of about three years. Luckily, a cashflow model that got me into that business in 2002, got me out of it by 2005.

It was at the point when I was liquidating assets in California in 2005, trying to figure out where to place the money next on 1031 exchanges, I did some analysis and determined that I should go into multifamily investing and that I should do it in Birmingham, Alabama. It was at this point where I had some friends and family money approach me, and it led me to becoming a multifamily syndicator, so I proceeded to do that from about 2005 to 2010, and I was acquiring at that time a garden-style class C and class D deals in Alabama, Texas, Oklahoma and Kentucky.

So it was really in 2010, when I was not actively syndicating at the time, like a lot of other people in the industry, really just managing the portfolio, these B and C deals that were hanging in there and doing okay, that I was invited to join a Portland, Oregon based commercial real estate private equity group (it was called SKB). They were emerging from their own hiatus during the downturn, and that turned out to be a fantastic pivot in experience for me, because it’s really where I learned how to do true institutional quality private equity deals. So I joined that group, I ultimately served as a senior member of the acquisitions team, and we did about 500 million dollars of deals over the ensuing four years. We partnered with numerous industry household names.

It was in 2014, after researching this new space of online commercial real estate crowdfunding for about the first half of that year, that I became convinced that this movement was real and it had the opportunity to disrupt capital markets. So it was around the summer of ’14 (early summer), two co-founders of the company Crowdstreet approached me and pitched me on joining them to be effectively their CIO, as they were getting a platform live and started having a couple deals, and now they needed somebody with private equity experience who’s kind of been there and done it, and who could understand deals.

I viewed that really as a once in a career opportunity to join a fledgling startup that was getting VC traction, and be kind of an original co-executive, so I jumped in, and about four years later, like you said, we’ve now actually done over 170 deals, it is over five billion dollars of total cap of what we’ve put on the marketplace, and we’re now currently raising about 25 million dollars a month from investors nationwide, that want access to online institutional quality commercial real estate investment deal flow. It’s just been an amazing ride thus far, and we just continue to charge ahead, quarter by quarter.

Joe Fairless: What specifically are your responsibilities now?

Ian Formigle: My responsibilities are to oversee the marketplace. I oversee all the deal flow that comes into the marketplace and kind of have a final say over what goes up or does not go up on the marketplace, and I currently sit over all the investors, so the investor relations team works with me; we connect with all the investors across the nation, and I work with the IR team to build and cultivate that investor base. That is really one half of what is Crowdstreet.

The way we describe it is Crowdstreet is one platform with two solutions. On the investor side, we are now the nation’s leading direct-to-investor online commercial real estate investment marketplace. As I described, that’s the side that I oversee.

Then on the other side, we are now an industry-leading software provider to commercial real estate firms across the country. We license the same technology that powers the Crowdstreet marketplace to now over 100 commercial real estate companies, to manage their own investor bases and do their own deal flows, so in essence, what I would say, is run their own marketplaces through their websites.

What we really found is that it’s this combination of a vibrant online investment marketplace, and now in an industry-leading software solution that’s our key differentiator. So I would say that Crowdstreet has competitors, it can beat a competitor on one side or the other, but no one can really claim to be a competitor in both, and I think that’s kind of the key value proposition that resonates with all the investors and all the companies out there that license our software or join the marketplace.

Joe Fairless: Let’s talk about the first half of what Crowdstreet is, and that is the marketplace where investors can passively invest in the deals, and you said your two primary responsibilities are from a high-level flow and investors. With the deal flow, you help decide and ultimately decide “Does or doesn’t a deal go up?” What was the last deal that didn’t go up? Obviously, I’m not looking for names or anything, but picture it please in your head and then describe it to us, and what was the issue with it.

Ian Formigle: When it comes to evaluating deal flow — and again, I will fully caveat all of this to say I’m one guy, in one location, just with one opinion, and we could be completely wrong. But we’ve done some deals over the years and we’ve looked at a lot of deals since we’ve been at Crowdstreet, and we will look at, for example — overall, we have a three-step process when it comes to evaluating sponsors. First, we start with them – who they are, what they’re doing, where they’ve been doing it, how long they’ve been doing it, all that kind of stuff. Then they’ll give us an application, we’ll be able to conduct background checks, so we’ll more or less be able to come to the conclusion that this is a legitimate group, doing legitimate deals, and has the ability to raise and manage capital.

From there, we’re gonna get into actually looking at the deal. As I’ve explained to other investors, I came out of an operator background and was going out and getting institutional LP to partner with me on my deals… I’m kind of turning those tables – I’m acting like the institutional LP on the other side of the phone and meeting, and hearing the pitch from these operators over the country and kind of putting assumptions to the test.

So to give you that case study example, this was a deal that we looked at recently, an example of a credible operator. I would say we would totally look at doing a deal with this group in the future; it came to us with an office deal. It was kind of in the Midwest, but in a major metro, suburban location, pretty good-looking asset, had the right bases coming in… I would say this was an office asset, 80-something percent occupied, had some roll, they were gonna add some value, going in basis at about $70/foot over an 8-cap going in, and they were gonna exit at an over an 8-cap and they were gonna add some value [unintelligible [00:10:36].19] kind of scenario.

So at the surface, the deal looked pretty good. It was an institutional-quality asset, it sat on a major highway, so it had great visibility, and it seemed to have a place in the community.

What got us ultimately uncomfortable with the deal was when you looked at the debt that they were putting on the deal. It was a short-term loan with a refi provision, and to get to the refi you had to trigger the refi, I should say, you had to solve to a 12% debt yield. When you looked at the rent roll and you looked at the tenant roll over the first ensuing three years, there was a decent amount of roll and there was a couple of tenants that were significant in terms of the total GLA, and the ability to meet the refi provisions on the debt yield. So in essence, you had to get both of those tenants to renew; if one or the other didn’t renew and you couldn’t backfill them immediately, which if they did, you kind of look at the market and say “Hey look, we have to have reasonable assumptions. How long is it gonna take to backfill those?” That’s where we said “Look, I think there’s a shot here, and it’s reasonable that you don’t have the 12 debt yield in place that you need to be able to trigger the automatic conversion of the refinance to kind of the mini perm scenario. So therefore, if you don’t have that, you’re kind of looking at one of two scenarios. Either a) you’re going to go back to the capital markets in three years from now, which we don’t know what those will really look like, and you’re gonna be trying to refi a deal that didn’t meet its previous debt yield hurdle. Or b) if you can’t find the debt that looks good if you go back to the market, which might not be the case if you didn’t actually get the trigger to refi with your existing lender, now you’re into what we call forced sale scenario, and we know how those go and we’ve seen that happen.”

So at the end of the day, the conclusion was the debt risk that was in place on this deal didn’t really seem to fit with the overall context of the deal. It seemed to insert excess risk to maybe achieve returns that didn’t necessarily [unintelligible [00:12:36].16] enough to us, so we just kind of said “Hey look, I think this is one that we’re just gonna take a pass on. Show us the next deal.”

Joe Fairless: And you said there’s a three-step process – I wanna make sure I’m writing it down right. One is sponsor, two is deal, what is three?

Ian Formigle: Third is terms review. After we get to the point to say if I like the sponsor and I like their deal, so I’ve looked at their proforma, the assumptions – let’s just say we get through that scenario with that operator and all the assumptions in their proforma seem sound, they seem defensible, I’ve checked the sales comps through RCA, I’ve looked at my CoStar reports, the rent comps look pretty good, the market reports feel pretty good and we’ve gotten some local market level intel – often times we’ll talk to leasing brokers in the market to kind of get a sense of what’s going on… We come to that conclusion that the deal now looks good, now let’s go through an analysis of the terms of the deal. We’re gonna look for things, for example sponsor co-investment amounts.

This is where we get into prefs and splits, we’re gonna look at capital call provisions, we’re gonna look at voting rights, and what I’m really looking to solve to at the end of the day on that piece is are those pieces of the terms industry standard?

Now, considering that we’ve done over 170 deals and I’ve looked at 10x of those deals at least kind of at this level, I have a pretty good sense of what’s industry standard. If something comes in and it is kind of out of bounds, we will call it out pretty immediately. Often times the case, we can actually have a good conversation with a sponsor at that point, maybe in many cases leading to changing the terms of the deal before it goes live on the marketplace, and if something really sticks out and they don’t change it, well that’s where the deal dies. Or if we look at the deal and the terms are pretty industry-standard, then it continues on and it gets on the marketplace.

Joe Fairless: What are a couple other examples of some not typical industry terms that you’ve come across?

Ian Formigle: For example, I would say look at capital call provisions – it’s pretty normal to have kind of a cascading series of rights for the sponsor to enact if they have to call capital. First would be that the sponsor could insert a loan into the deal. Interest rates might range from 10%-12%, onerous terms could be 18%-20%. I’ve seen that. That would be a scenario where we’ll say “Look, if you’re gonna insert a loan into the deal…”

Joe Fairless: That’s crazy.

Ian Formigle: Yeah. “…that is higher than the targeted IRR from the get-go with the equity…”

Joe Fairless: They’d have incentive to do the capital call. [laughs]

Ian Formigle: Exactly. Or potentially, if we get the deal done, go to their [unintelligible [00:15:09].26] and say “Hey look, if this thing gets sideways, I’m gonna bring it to you and it’s like the best [unintelligible [00:15:13].25] you’ve ever seen.” So that would be one where we’ll just pause. We’ve seen that a couple times and we said “You guys have gotta change this.” That would be number one.

Number two would be then what happens in the next step? Let’s say that we have the option to actually go into a capital call of the partnership… What is reasonable at that point? Well, dilution can occur in a deal, but what is reasonable? Well, reasonable would equal anywhere from 1.5x to 2x dilution, and that is on the capital call itself, not on the total equity.

A little example is if you’re saying “Hey, I’ve got $100,000 in this deal. You come to me for $10,000. If I don’t give you the $10,000…” then the numerator – it was $100,000 over $100,000, so numerator and denominator being one; in the new scenario, if I don’t participate, well immediately the denominator goes to $110,000, because we’ve called 10% of the original capital, and then if you’re a bad actor/investor and you don’t participate, well I could theoretically dilute you by 50% of the capital call (another $5,000), so therefore your ownership stake in the deal, what was 100% is now basically $100,000 divided by 115, or about 85%. That would be theoretically reasonable, versus everything that we’ve seen out there.

What’s not reasonable is if you see a clause in there that says “I can come to you for a capital call and if you don’t participate, I can dilute you 100% out of the deal.” That’s just onerous, that would be out of bounds, that would be a deal that we would pause and say “Look, if you’re going to a sponsor and stick to this term, that’s a deal killer” because while investors are going to accept the possibility of the ultimate loss, risk of loss scenario is 100% of your capital – that doesn’t really include “I could come to you for capital and if you don’t give it to me, then you’ve lost 100% of your money.”

Joe Fairless: I find this fascinating, because you’ve seen so many of these deals, you’ve been able to identify some of these ridiculous things that are in there. Do you have one or maybe two other things that you can think of?

Ian Formigle: Yeah, let’s see… For example, when we look at voting rights, what would be a good sponsor and would be very right down the middle is sponsor, and in this case sponsor is manager of the entity, so you’ve gotta look to who’s managing the entity, and if you say hey, when it comes to day-to-day decisions, and kind of even relatively important decisions at the property level, passive investors do need to understand they need to empower the sponsor to take the appropriate measures and also keep in mind investors that sponsors are the ones on the non-recourse carve-outs… So even though they have a non-recourse loan, there is the potential for the bank to come after them if something really goes awry. So in order to get that kind of risk by them stuck in the deal, you need to empower them appropriately.

Now, where appropriately can go too far is while those day-to-day decisions and maybe some meaningful decisions can be saying “I need to determine how I’m gonna run the deal, who I’m gonna hire to manage it, whether it’s affiliate or a third-party, we’re gonna make key decisions on capital expenditures and all the like… Now when it comes to major decisions of the partnership, for example are we selling or not selling? If things go bad, are we filing bankruptcy at the entity level or not?” Those begin to trend into the territory of hey, you probably wanna go to your investors, now reasonable can have a range – it can go to majority vote, it can go to supermajority, but you at least wanna be able to have passive investors have some sort of say over stuff if it’s either really good, like “Hey, are we selling or not, because we’ve crushed our proforma at year three”, or potentially bad, like “We need money. How much and under what terms are you guys willing to put it in?”

If you don’t give any investors any ability to participate in any of those major decisions, well then the sponsor a) better have the majority of the equity, and/or b) have all of the risk in the deal, have recourse, have a material co-invest with recourse loans and all the like. There’s a couple ways to mitigate that, but at the end of the day it’s gotta be logical, and I would cast that over everything that we look at. When it comes to the terms of the deal and the operating agreements, logic is king, that makes sense for that piece of language to be in there, and you can get to the understanding of why it is logical, that can get done.

If you look at something and when you understand the whole context of the deal and you’re left with the feeling of “This is illogical”, that’s where you’ve gotta pause, ask a lot of hard questions and then maybe walk away.

Joe Fairless: And then one more example, I’m gonna stretch you.

Ian Formigle: Alright. Within terms of a deal, another thing that we would look at — oh, here’s something that we came across recently… Sometimes there is a misperception in deals – when you look at an operating agreement, we’ve had investors look at them and incorrectly assess that “Hey, it looks like I’m giving the sponsor ownership in the deal for nothing”, because the language of the documents will say “At the inception of the company, the managing member (which is the sponsor) is gonna own X units of the company”, and that will be all the units of the company, and then the company will get capitalized and then there will be more units of the company… And from the surface, that can look to the investor like “Wait a minute, we just did this deal, and now the sponsor is showing up with ownership shares at the company that they did not capitalize through a capital account.”

Then we have to explain to the investor to say “Well, you have to go one step further”, because what you will then start to read about is to understand that the ability for the paid upon dissolution and the cashflow – really not even cashflow, but dissolution during a capital event – the ability for those ownership shares, which were kind of the founder shares, so to speak, are subordinate to a) your return of capital, b) they’re subordinate to your preferred return, and then c) they turn into a pro-rata share — well, I should say a percentage share of profits over the return of capital and the preferred return… Which is really another way of saying that what we’re looking at here is tax structure that is intended to give the sponsor the ability to convert their promote to ownership in the company, which will enable them to take capital gains at exit and not income, which in a normal partnership share if you say “Hey, I’m gonna hire this sponsor, they’re gonna do the deal, and if the deal goes well, they’re gonna earn a share of the profits” – that’s income.

So the sponsors have found a way to structure kind of triggered ownership, which if you think about a 40 or 50 million dollar deal, a promote could equal 3, 4, 5 million dollars, and now the difference between ordinary income on corporate levels – which we know is kind of changing – but income versus capital gains could be material, over a million dollars. So I think that’s an example of when we see that structure, we don’t necessarily get bent out of shape; we just wanna understand it and make sure that it ties correctly to the waterfall and that it is structured appropriately, and unsurprisingly sometimes it’s done exactly right, sometimes it is not done totally correctly… We will then point out some of the nuances to the sponsor, they’ll go back and clean them up, and then the operating agreement that the investor sees is actually not the operating agreement that we saw.

Joe Fairless: This is outstanding. I really am glad that we are digging into details here and that you’re going through this with us. Based on your experience as a real estate investor and also part of a startup that has grown over the four years since you’ve been there, what is your best advice ever for real estate investors?

Ian Formigle: Alright, I will give you kind of like my top three really quickly. First, when it comes to passive commercial real estate investing, focus on sponsorship over targeted returns. There is definitely a behavior pattern on the Crowdstreet marketplace to chase IRR, and I understand. It has an allure. Everybody wants great returns, and they want the sexiest story sometimes that hits the marketplace. However, we’ve seen on the marketplace that when a group has a great track record, that it’s long-standing and they’ve done 70 or 80 deals and all of those had gone swimmingly, they zealously guard their track record, which means they’re gonna be less likely to over-commit on the next one; they kind of wanna continue to manage expectations, so they’re gonna have a tendency to kind of push the IRR down.

So look at that scenario, understand that the sponsor really has a proven track record delivering returns, and when they say a 15%, versus maybe another group saying  20%, they really think in their minds 18 to 19, but the group that maybe says 20% is thinking and hoping 20%, but knows there might be a chance that it’s 18% or 19%. So I think that is number one. And it’s not to say that you can’t find [unintelligible [00:24:25].11] proven younger groups with fantastic IRR’s… In that case, the sponsor should be compensating you for their kind of risk of unprovenness with basically better splits and better price. So if they can compensate you through structure that is quantifiable, so be it. Otherwise, really pay attention to sponsorship.

Second, when it comes to value-add investing, pay attention to basis. Basis is so important. It’s essentially the equivalent of that adage of saying “You make your money on the buy, you realize it on the sell.” Really what that means is that buy low basis. If you can get into a deal and you know that your basis is lower than your comp set, you are immediately set up to win. That’s gonna allow you to price rents very competitively and win tenants over that comp set, particularly in office deals.

If there’s been deals that I’ve seen crush it, it’s because they had basis going in. So you kind of look at basis going in, basis going out – if it all makes sense, then I think you’re looking at a pretty good deal.

Joe Fairless: Is there a percentage that you look for on that?

Ian Formigle: It can be a percentage, it can be on a per-foot basis, so sure… For example, if you’ve got a 10% advantage on basis relatively to your comp set, it’s pretty good; you’re gonna compete. Now, whether it’s multifamily or office, sometimes that has some variances, but in general, look to be having a similar type product in a competitive location, and if you feel like you can undercut your competition on actual basis – not current basis, but actual basis – what did they buy at and what are you buying at, that’s what’s really gonna matter.

It doesn’t matter if the deal should be worth $250/ft, but your competitor bought it at $200/ft. Well, to price deals competitively and to do them profitably, it’s based on their $200 basis, not the current $250 prevailing market basis. So if you’re buying at $225/ft thinking that you got attractive basis, well maybe you don’t. Maybe you’re actually above the competitor, and they’re the one that’s gonna be winning on a deal like this.

I think the last thing is that — this one was kind of mind-blowing to me in a way, and I’ve seen this a few times… It’s that if you have conviction in what you think can be achieved at a property in a given location, do not be afraid to dismiss conventional wisdom. I have a great case study in this. I know a family operator that acquired a property a few years ago for 21 million dollars; the local conventional wisdom in this submarket – the deal should have traded at somewhere between 19 and 20 million. In essence, he overpaid. Well, this operator didn’t care about what happened in the past, and that’s where this conventional wisdom — it was rearward-looking and saying “Well, look where rents have been, and look where deals have traded, and therefore it should trade at 20 million, not 21.”

This sponsor was solely focused on where the asset sat in the submarket, what was happening in the market today, and what he thought could happen in the market tomorrow. So his analysis was solely forward-looking and he was saying “What’s in the past is past. I’m doing this deal for what is in the future.”

What ended up happening in that deal is that the market did explode, his rents went up by 40% over the next two years. He leased up his property at all the new rents, and he sold that property two years later that he bought for 21 million, for 37 million. It was the best single deal of his entire career, and it was one of the only deals in which all the prevailing players in the submarket thought that he was over-paying.

Joe Fairless: Wow, the irony is thick, because number two is value-add investing/pay attention to your basis… And you said 10% advantage relative to your comp set, but then on number three, everyone was wanting to pay 19 to 20, and he bought it at 21, and it sounds like (based on how you described it) he was buying based off of speculation.

I’m almost sure – I don’t know, you can verify it – that he did an analysis for how he’s validating that speculation, but it goes against in my mind (on the surface, at least) your second piece of advice.

Ian Formigle: Which is why I believe you have to have conviction in that analysis. In a normal market, with normal assumptions, basis is super important. And then there has to come a point in time where you feel like you are in the right market at the right time and positioned well; that’s when you have to kind of put that analysis a little bit to the side and say “Am I willing to take the bet that what everybody else is thinking in this market right now is wrong?” In this case it was a relatively small market that was seeing a massive influx of population growth, at the same time where there was minimal supply… So they knew that they were gonna get pent-up demand that was coming, and it had started to accelerate and they felt – and they took a critical bet – that the acceleration that they started to see was going to continue and perhaps intensify, and if it did, it was gonna completely change that entire market. It was a smaller metro, so this kind of thinking happened rapidly in a smaller metro.

It’s not gonna happen as fast as in San Francisco as it could happen in kind of a tertiary market, for example somewhere like Colorado. But if you get that kind of transcended growth into a market, that’s when you can kind of take — again, I kind of go back, if you did have basis, well then that’s just more fuel to the fire. But even if you have to look at a deal and say “I need to stretch out and do a deal that I think is gonna be awesome in the future, even if it looks okay today” – and in this case the sponsor was really putting in its own money to work, so it could easily take that bet – that’s when you’ve gotta go with it. Like I said, it hinges on conviction. You have to forcefully believe that your analysis is the right one, that conventional analysis is currently incorrect; there’s a reason for that incorrectness that has to do with basically kind of the overhang of what the market has been doing… This is a hugely powerful analysis that applies to a lot of markets in kind of the 2012 to 2014 period, where essentially every single deal, anybody that stepped up to overpay at the time was rewarded handsomely two or three years later.

Joe Fairless: That’s great stuff. We’re gonna do a lightning round. Are you ready for the Best Ever Lightning Round?

Ian Formigle: Yeah.

Joe Fairless: Alright, let’s do it. First, a quick word from our Best Ever partners.

Break: [00:30:31].20] to [00:31:21].00]

Joe Fairless: Ian, what’s the best ever book you’ve read?

Ian Formigle: I would say The Mystery of Capital by Hernando De Soto. This is  a book that changed the way that I looked at how markets function. This book compares and contrasts how capital is formed and the key tenants of capital formation, and I think for anyone who is in the business of understanding capital formation, this books is a must-read.

Joe Fairless: Best ever deal you done – not the first, not your last.

Ian Formigle: Alright, a deal that I did somewhere in the middle was a multifamily deal in Dallas that I bought in an emerging area of Dallas called North Oak Cliff. I bought the deal because it was essentially a class C property that I could fix up a little bit and cashflow. It had million dollar homes going in across the street, a brand new primary school… It sat on six acres of land, about five of which were on a plateau with unobstructed views of the Dallas skyline. [unintelligible [00:32:04].14] was to buy this deal, improve it some, cash-flow it over a 3-4 year timeline, and then sell it to someone who would ultimately redevelop the site, given its location.

We bought it for 2.6 million, a month later we had a 3.6 million dollar offer on the table to sell it to a developer who was gonna build townhomes. So we proceeded to sell it three or four months later, and the buyer ultimately scraped it and had to sit on it for years, and I think it hammers home the point why an exit strategy is really important; actually, timing is everything. That was a timing deal, so think I got kind of lucky on the timing, which made it my best deal.

Joe Fairless: What’s a mistake you’ve made on a transaction?

Ian Formigle: Not contemplating that sometimes your analysis can be so right that it’s totally wrong. When we sold that deal in Dallas, we bought 260 units in Oklahoma City. This was over a decade ago. The analysis at the time was “Hey, we’re gonna go and buy these two properties in Oklahoma City that cater partially to the FAA Student Academy. There’s an airport in Oklahoma City, it trains FAA employees, it trains them to be air traffic controllers, and it gives them continuing education.

These were at the time ten properties that would service the FAA student population. We’d done all this analysis – look, the demand for FAA training is on the upswing. 1981 was when Reagan threw out all of the air traffic controllers; it takes 25 years to get to pension status. 25 years later, we’re looking at this deal in 2007 — essentially, the majority of the air traffic controllers in the country were becoming eligible for retirement. We were gonna buy these properties, we were gonna cashflow them and we were gonna convert them more towards FAA student housing. So we did that.

At the time we bought them, there were about 50/50 regular apartments and FAA. The demand ended up being so strong in 2007 and going into 2008 that we converted them 100% to FAA student housing. Now, keep in mind that at the time an apartment in this market was running for about $650/month; we could get $75/day for FAA student housing. So therefore, when you convert the deal, you furnish the apartments, the yield go off the charts. We were up to a 14% cap rate.

Then what happens is that the demand was so strong and then the market turned some, that the FAA decides they’re gonna change the criteria by which they had been operating to get into the game. It was previously these ten properties, it was quiet, it was a super good gig… Now all of a sudden 2008-2009 happens, they open the floodgates. You could imagine what happened. We had a 40% spike in supply to the FAA student housing market in six months.

I’m going from 100% properties that were 100% occupied by FAA students, to now all of a sudden being 50% occupied [unintelligible [00:34:42].13] capital calls and I’m converting units back to apartments. It was that scenario of like, though right, we were completely wrong because we completely ignored the fact that if our analysis was that good, that the game was gonna change and it was gonna completely turn our business model upside down, which is what it did. So we had to manage through the trough, we had to throw away a bunch of furniture [unintelligible [00:35:07].28] and then today we’re about 70% apartments, 30% FAA, and we’re kind of right back to where we started.

So don’t ever think that your analysis is so good and you’ve got it figured out, because guess what, if it is that good, the market’s gonna change in a way that you didn’t think it was gonna change.

Joe Fairless: That’s a great case study. What’s the best ever way you like to give back?

Ian Formigle: I enjoy mentoring kids. I had a teacher early in life that literally changed the course of my life, so I’ve never really forgotten that and I thought that it would be great that if I got old enough I could help some kids or some young adults, kind of help them along the way. For example in 2002, after I left the trading floor, I spent about a year – I kind of hung out and I tutored kids, I helped them with SAT test prep and college essay writing. In essence, if there’s young, bright, motivated people, wherever they are, I wanna help them get on to the next thing and give back what I got.

Joe Fairless: And how can the Best Ever listeners get in touch with you and learn more about Crowdstreet?

Ian Formigle: A couple ways. First, you can go to the website, it’s www.crowdstreet.com. There’s a lot of information on the website there. You can personally always reach me at my e-mail address. It is Ian@CrowdStreet.com. As you can imagine, I get a lot of e-mail, but I do try to check it and get back to investors as quickly as possible.

Joe Fairless: Ian, thank you for being on the show and sharing with us your background and lessons learned, and what you’re doing now with Crowdstreet, the three-step process with deal flow that you all look at… One is the sponsor, two is the deal, three is the terms review. Some specific things within the terms that you look at; you know what the industry standard is, so knowing what is and isn’t out of bounds. The case study with the office deal that you talked to us about with the debt yield hurdle as the reason why you all decided not to participate; it otherwise looked pretty good on the surface, and I suspect a lot of people wouldn’t pick up on that… That’s interesting that you got into that level of detail with us on this show, so that if we’re passive investors, we know what to look for.

And then also your Best Ever advice, the three-pronged approach… One is if you’re passive, focus on the sponsorship team over the targeted returns. Two is value-add investing, pay attention to the basis you’re going in at, and you mentioned the 10% relative to the competitive set at what you buy it at and what they bought it at. And then three is maybe throw number two out the window, and if you have a conviction about something, don’t be afraid to dismiss conventional wisdom, and certainly that case study of 21 to 37 million proves that.

Thanks for being on the show. I hope you have a best ever day, and we’ll talk to you soon.

Ian Formigle: Yeah, thank you, Joe. It was a pleasure to be on the show.

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Best Real Estate Investing Advice Ever Show Podcast

JF1083: Asset Protection Can MAKE or BREAK Your Business #SkillSetSunday with Aaron Young

There are so many little nuances and legalities that a lot of probably are not doing properly. Did you know that even if your corporation only has one decision maker (you), you’re still supposed to have a documented board meeting and board resolution for most decisions? Aaron tells us many more little known laws that we may be skipping over. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

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Aaron Young Background:
-CEO of Laughlin Associates, a 45-year-old company that’s helped 100,000 entrepreneurs start & grow their business
-Creator of The Unshackled Owner, a program for entrepreneurs looking to build a business
-Has been advisory board member for International Crowd Funding Association
-Based in Portland, Oregon
-Say hi to him at http://aaronscottyoung.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 only talk about the best advice ever, we don’t get into any of that fluff. With us today, Aaron Young. How are you doing, Aaron?

Aaron Young: It’s good to be here with you, Joe. It’s always great to talk to real estate investors. I love this group of people.

Joe Fairless: Well, that makes me smile from ear to ear; I love that group of people as well, because I am one of those people. A little bit about Aaron – he is the creator of The Unshackled Owner, which is a program for entrepreneurs on how to build a business. He’s also the chairman and CEO of Laughlin Associates, which is a company that helps form corporations and LLCs. He’s helped over 100,000 entrepreneurs to start and grow their business, and his an advisory board member for the International Crowd Funding Association. Based in Portland, Oregon.

Because today is Sunday, Best Ever listeners, well, we’re doing Skillset Sunday, like we usually do on Sundays. Today we’re gonna be talking about asset protection, so that we can keep what we earn. With that being said, Aaron, do you wanna give the Best Ever listeners a little bit more about your background and your current focus before we get into asset protection?

Aaron Young: Yeah, you bet. I guess this is gonna betray my age a little bit, but for 34 years now I’ve had employees – in other words, I was responsible for a payroll – and my business has always been business-to-business. In other words, I’ve been helping other business owners do something to keep their company safe and sound, and for the last 20 years, that’s been very specifically involved in buying and merging companies that were in the corporate formation and management business. So now we represent tens of thousands of business owners, whether they’re enterprise level businesses, movie studios, famous people, to individuals who have things worth protecting. I think that really fits this group.

We have thousands of real estate investors, and we’ve been with those people — we were with them all the way up to ’08, and then a lot of them disappeared in ’08 and ’09, and then the people that had held their money back came and started buying up all those depreciated assets. So we were a big part of that back end, buying up non-performing notes and foreclosures, whether that was a bank foreclosure or like a county tax foreclosure. We have had a lot of that, and now of course we’re back into this zone where there’s a lot of people that are fixing and flipping and building apartment buildings, building multifamily of different sorts…

I’ve spent many years working with people who are real estate investors, it’s a place close to my heart; so anyway, I know a little bit about something that goes on in their minds. Besides that, I’m a guy who likes to start companies, that’s all I’ve ever done. I’ve gotten really involved with everything, from lots of private companies to a couple of public companies, and had some real good successes, and a few really epic failures. So I’ve got some scars for these 34 years, but the fact is – your audience can understand this – you’ve gotta keep taking steps forward, because not every deal is a perfect jewel. But if you kind of make your way forward, you end up having  a lot of success and making a lot of money, but really building a life that you can love.

Joe Fairless: Let’s talk about your asset protection approach with Laughlin Associates. What is the number one thing that real estate investors hire your company for and what’s something that they should be hiring your company for?

Aaron Young: That’s a great question. The number one reason people come to us is they wanna form an LLC. Real estate investors are madly in love with LLCs and LLCs are a good vehicle to do a lot of your real estate investment through, especially if you’re using investor money, you’re finding a deal and then you’re getting investors to put money in. So LLCs are great for a number of reasons, so that’s good.

The thing that they should be hiring us for is most people are not thinking very strategically about how to own things, how to do different things with their business… So while you might be holding real estate in LLCs, you might wanna have a C corporation – maybe an S corporation, but probably a C corporation is kind of your mother ship; this is where your money lives, this is how you do property management, this is how you deal with your contractors, and then you’re owning the individual properties or little buckets of properties in those LLCs. That’s one thing.

The biggest thing where people drop the ball and put themselves and everything they’ve built at risk is they don’t do the corporate formalities that the law requires them to do – things like having board meetings, keeping minutes of those meetings, passing resolutions, issuing stock or membership certificates of that corporation or LLC. And why don’t they do it? They don’t do it either because they know about it, or it doesn’t make any sense to them, that if they’re the one director of the business, Joe, they think “Why would I have a freaking meeting with myself?”

Joe Fairless: Yeah, it sounds stupid, right?

Aaron Young: It sounds like I’m some kind of schizophrenic guy. [unintelligible [00:07:18].10] Well, it sounds like you’re out of your freakin’ mind. So people don’t do it, but the problem is if you don’t do it, you’re not gonna be protected under the law.

When I go out and I give talks on this topic – I call it “building your corporate fortress” – my audience is usually very quiet during the whole 90 minutes. I had a really interesting experience – a real estate investor actually came up to me the other day… We were down in Orlando, I had just spoken at a conference, and he said “I heard you give this talk about a year ago, and it’s very different the second time.” I said “What do you mean?” and I thought he was gonna say it’s kind of dull, “I’ve already heard all of that stuff before.” He said, “The first time I was so scared the whole time I was listening to your talk; I was texting my wife, I was texting my partner, going ‘Oh my gosh, we’re in deep trouble.’ The second time was really fun to listen, because now I’m your customer and now we’ve got everything caught up. I didn’t even know there were all those funny stories and everything in there, because I was too freaked out the whole time.”

Because when you really shine a light on what people are supposed to be doing and they realize that they’re not doing, and that’s like 95% of the small business owners out there, it’s terrifying. But once you get it in place, it’s a huge relief. Once you know the rules and you’re following them, and you know that you’re safe in case something bad happens, it’s a real stress-relief where you sleep a lot better at night, when you know the rules and you know you’re following them.

Joe Fairless: I think you mentioned meeting minutes and resolutions and issuing stock… Can you give us a list of the biggest things that most people don’t do that put their assets at risk, within the context of those things?

Aaron Young: Yeah, the first thing is — let me just give you a very simple example, and then I’ll kind of give you a little bit of a lesson. Let me tell you, there’s over 300 items that the law requires that you document in a board resolution. Most of us just don’t even know what they are, but let me give you a simple, simple one. When that investor goes out and they’re gonna now set up a unique bank account for this LLC that they’ve set up – it’s gonna be XYZ LLC, and this is where they’re gonna start buying and holding or buying and flipping real estate.

If you go to the bank, you go down to Wells Fargo or Bank of America and you say “Hey, I wanna set up this bank account”, the bank officer, when they have you fill out all your forms, they’re going to pull out a generic board resolution, they’re gonna ask you if you’re a director, and you’re gonna say yes, and then they’re gonna have you sign this kind of boilerplate piece of paper, along with a bunch of other pieces of paper, because the bank can’t open a bank account for you unless you have a board resolution that says it’s okay for you to open that bank account.

People wanna change CPAs, people wanna take in a loan from somebody, or they wanna make a personal loan into the business. All of these things have to be memorialized in a board resolution. If you wanna sign a lease, if you want to give yourself a car allowance, if you wanna get medical insurance, if you wanna do any of these things where the company is gonna pay for something, then there’s got to be a board resolution.

And so I think a lot of us — we grew up watching movies and television shows where there was a board meeting, when there were all these suits sitting around a big mahogany table, or something… And it’s no surprise that General Electric or Apple or Disney have a board of directors. We all understand that corporation has a board. But when it’s our little corporation, that we took our savings, or we redirected our IRA or our 401k, or we max out some credit cards to get started – the idea of us being anything remotely like General Electric doesn’t even occur to us. We’re mostly just trying to get something going – find the next deal, make the next sale, something holding on by our fingernails to survive, because our expenses were way out of line… So the idea of acting in this way – we don’t think about it, even though sort of in the back of our mind we know we’re supposed to do something, but we don’t know what to do, so we just do nothing.

Joe Fairless: Okay. Is this taking things to the extreme? And how practical is this for someone to do…? I don’t think it is practical, unless you have a service, which I imagine — does your company do this for LLCs?

Aaron Young: Of course, yeah.

Joe Fairless: That makes sense, that’s a smooth segue. So you provide the solution for this. Are you an attorney?

Aaron Young: No, but I work with over 100 law firms [unintelligible [00:11:42].24]

Joe Fairless: Okay, so you work with law firms. What liability have you been told that this opens up investors to, and how have you seen investors get in trouble?

Aaron Young: First of all, this isn’t sort of theoretical, this is real. Let me just give you some specifics. 94% of the world’s litigations happen in the United States. Every 22 seconds there is a new lawsuit filed against a corporation or an LLC. Every 22 seconds.

57% of all those lawsuits are filed against companies that are earning a million dollars or less. So I don’t mean top line, I mean bottom line earning. So that’s every main street business in the country. Every doctor’s office, every restaurant, most every real estate investor… That’s who’s getting sued. And why? Because there’s an easy target. Here’s why.

According to Cornell Law, the number one most litigated issue in business law is piercing the corporate veil. In other words, they wanna get whatever’s in the company, which may be a lot or may be very little, but they also wanna get whatever the owner has – it doesn’t matter, it could be equity in a house, it could be their kid’s college savings, it could be the coin collection their grandpa left them… Whatever. They want to get as much as they can get, and so piercing the corporate veil has become the most litigated issue in corporate law. That’s litigation.

Let’s look at audits. Audits have been going up, up, up. The more government programs we have, the more the government says “We need to make sure everybody’s paying the taxes that they’re supposed to be paying. So the way we’re going to kind of spot-check that is by audits.”

Since 2009, the number of audits against companies of five million dollars of higher has actually gone down 22%. But the number of audits against companies five million dollars or smaller, which is probably almost everybody that’s listening to this podcast…

Joe Fairless: Oh, you don’t give us enough credit…

Aaron Young: Well, I’m talking about earnings, I’m not talking about transactions.

Joe Fairless: Still… We’ve got some high-achievers.

Aaron Young: Okay. Well, I’ve got a number of hundred million dollars plus investor clients, but the vast majority of people are trying to make $25,000, $50,000, even $100,000 on that transaction, but you’ve gotta do a lot of transactions to earn five million dollars. So here’s the point – the percentage of audits against companies of five million dollars of less is up 38%. Why? Because the government, just like the Court – or, I should say, the predatory litigator – they both know that small businesses are easier targets, because they don’t have in-house counsel, they have uncle Fred doing their taxes, or they’re using TurboTax or whatever, they’re not keeping receipts, and the number one thing that pierces your corporate veil is, even if you’re set up as a corporation or LLC, if you don’t follow the law that says you must not treat your company like your alter ego, it’s gotta be utterly separate, and the only thing that shows the separation is the corporate minute book – because people don’t do it, that leaves them open.

And I’ve seen – because of the business that we’re in, and I don’t wanna exaggerate this, I’ve personally seen probably hundreds (and I know of thousands) of times where people have said “I went through this horrible experience, I lost everything/ I got my backside handed to me. I can never let that happen again.” And I could give you lots of anecdotal stories. The fact is that is what’s going on, and if you research it, there’s just a ton of information out there about companies having the corporate veil pierced because they didn’t follow their corporate formality rules.

Joe Fairless: The over 300 items you document in a board resolution that you referenced earlier are all those included in the corporate minute book? Is that what you’re referring to? They all ladder up into that?

Aaron Young: Well, your corporate minute book is where you put the stuff – you’ve got a meeting today, your minutes say “On this day, these people got together and talked about this stuff.” That’s the minutes. And then whatever was decided by those people, those are the resolutions. So your board secretary – like I said, I think I used General Electric or Disney or something as an example… They would have a board secretary who understands, “Oh, that needed to be documented in a resolution. Oh, we need to have that in the minute book.” That would be their job. People who have experience with this kind of formality.

The local flipper who’s also a general contractor, the person who’s really great at raising money so they can go and buy up those four condos and flip them or get people in them or kick people out and then renegotiate and get new renters or new buyers in – those people don’t have, for the most part, experience. And even if they do, when it goes from “I worked for a big public company and I was a board secretary” to now “I own a restaurant”, they don’t make that transition in their mind, that “We understood why we had to do it there, but we don’t here.”

And most people say “I’m so small, I probably will never get looked at”, and the fact is the small companies are the biggest ones at risk. I don’t wanna come off like I’m trying to scare people into buying something. The fact is we’ve been in this business for 45 years. We’ve helped over 100,000 business owners and hundreds of thousands of companies go from cradle to grave; start, grow, sell, crash, whatever… And I just know that this most basic, fundamental element of corporate ownership is one of the  things that gets ignored, because people are focused on marketing, sales, service delivery; they’re not really thinking about themselves like a big company would. But they want all the same protections that a big company would get.

Joe Fairless: On average, how much does it cost to have your company do what you need to do to make sure that an LLC is up to date with everything?

Aaron Young: I didn’t know you were gonna ask me that question, thank you very much. It’s $1,000 for the first year, and we go back three years, get you caught up with everything that should have been there, and then it’s a 12-month service. In that 12 months we’re gonna go back and get you caught up for three years, which is the average time in audit where a lawsuit will look back,  plus we’re gonna make sure that every month we’re calling you and we’re interviewing information out of you, and in five minutes a month we can typically get everything down that needs to be done. You have a person that’s assigned to you; they call you every month, you answer the questions, they send you the formal documents, you sign them and put them in the corporate book, and if you don’t already have a corporate minute book, we’ll provide that.

If you have more than one company, the second company is $595. Next year, because we have an 86% renewal rate on this product, next year the renewal is $495 per company, and it’s “I’ll do it for you” – we’re calling you every month. You don’t have to know or do anything except for pick up the phone when our person calls.

Joe Fairless: Sounds good.

Aaron Young: It is good, that’s why we have right now tens of thousands of clients that are having us do it, and that’s why 86% if them renew, which… Figure out how many companies fail – that’s a pretty dang high renewal rate. I think of all the things we do it’s one of the least expensive things we do, and I think it’s THE most important thing that we do for business owners.

Joe Fairless: Aaron, with this conversation as far as the biggest thing people do or don’t do to put your assets at risk, is there anything else you quickly wanna mention that we haven’t discussed as it relates to this topic?

Aaron Young: Yeah. A lot of people co-mingle funds. An example of that — there’s a lot of examples I could give, but here’s a quick one. Let’s say you have a credit card and you use that credit card for personal stuff: birthday presents, food, travel etc. Then you start this new business and you think, “Oh, I wanna keep those transactions separate from mine.” You don’t have any business credit yet, so you apply for a new credit card from CapitalOne or somebody… One of those envelopes you get every single day in the mail.

You get that credit card and you say “Okay, this is gonna be my business expense credit card, and this one over here will remain my personal expense”, and then you are just perfect in separating those things. So you only use this new CapitalOne (or whatever it is) card for business expenses, and you’re perfect and you get the statement, and it comes in the mail and you get out your yellow highlighter and you look and you go “Yeah. Business, business, business. Perfect”, [unintelligible [00:19:49].25] for everything on there, and you grab your corporate checkbook and you fill out the amount and you pay out the credit card bill, you send it out, you pay it early… Right? Well, you just pierced your corporate veil. As soon as you had a corporate checkbook pay for that personal credit card, even though it’s all business expenses, you just co-mingled funds. You acted like the business money was your money. Because if you worked for a big company, you would use your personal card, you would submit an expense report, along with that yellow highlighted and receipted bunch of evidence; the company would reimburse you and then you would pay your credit card bill.

But we take out that middle step when we’re small business owners because we think it’s ridiculous. “After all, that’s my company. That was my money that was invested. It’s my time, I’m the only one at risk, so of course the company should pay this bill.”

As soon as we take out that step and we treat the business like our alter ego, as soon as we do that, we’ve pierced the corporate veil, we’ve said the company isn’t separate from us. If I could tell your listeners one phrase that they should memorize, it’s this – “I am not the corporation, the corporation is not me. I am not the LLC, the LLC is not me.” If you can remember that you’re separate, just as separate as you and I are, Joe. No matter how connected, no matter how much we’re dear friends, no matter how much we’re pulling in the same yoke, you and I are separate individuals, and if we’re gonna have any kind of business interaction, we’re gonna document it, we’re gonna explain it. If I’m gonna borrow money from you, you’re gonna tell me how often do I need to pay you back and at what rate… But we don’t do that with our businesses, and by not doing it, we put everything that we’re building at tremendous risk. That’s why we have so much litigation in this country, and that’s why companies have a 50%-95% chance, according to Wake Forest Law… They say a 50%-94% (I don’t know how they got that spread) chance of losing your personal assets to satisfy a business judgment, because the corporate veil was pierced.

Joe Fairless: Aaron, where can the Best Ever listeners get in touch with you?

Aaron Young: They can go to LaughlinUSA.com and check us out there, or you can call 775-883-8484. If you have a question about anything I’ve said, just call up and say “I need to talk to somebody about this stuff.” You can call for free as many times as you want, there’s no obligation to do any business with us. We’ll answer your question because we know the reason you can survive 45 years in a very competitive business and be the leader is because we know that not everybody’s ready to do something the first time they call. They need to get their questions answered, so that’s why consulting at Laughlin is always free.

Joe Fairless: Aaron, thanks for being on the show, talking about the biggest thing that puts our assets at risk, which is adhering to the logistical and administrative things that relate to our corporations or entities, that the majority of entrepreneurs ignore, or don’t do to the fullest extent that they need to. You gave some specific examples, like issuing stock, resolutions, and as you said, there are over 300 items that you document in a board resolution, and just making sure we have all those things taken into account. So thanks so much for being on the show, Aaron. I hope you have a best ever weekend, and we’ll talk to you soon.

Aaron Young: Thank you.


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Best Real Estate Investing Advice Ever Show Podcast

JF1006: How to Build an Online Community and Business #SkillSetSunday

He helps others find the dream career they’ve been looking for. He does it all online. Hear about his challenges, triumphs, and what he’s up to today.

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Mac Prichard Real Estate Background:

– President at Prichard Communications, a public relations agency
– Founder and publisher of Mac’s List, an online community for people looking for rewarding, meaningful work
– Hosts the weekly podcast, Find Your Dream Job
– Author of Land Your Dream Job Anywhere
– Over 80,000 people a month visit the site
– Based in Portland, Oregon
– Say hi to him at http://www.macslist.org/

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building an online business


Joe Fairless: Best Ever listeners, welcome to the best real estate investing advice ever show. I’m Joe Fairless, and this is the world’s longest-running daily real estate investing podcast. We only talk about the best advice ever, we don’t get into any of that fluff.

I hope you’re having a best ever weekend. Because it is Sunday, we’re doing a special segment called Skillset Sunday, where by the end of our conversation you’re gonna come away with a specific skill. Today we’re gonna be talking to someone who has successfully achieved an online platform where he’s generating over 80,000 people a month visiting his site, and he’s the author of Land Your Dream Job Anywhere. How are you doing, Mac Prichard?

Mac Prichard: I’m doing great, Joe. Thank you for having me on the show.

Joe Fairless: My pleasure, and nice to have you on the show. The outcome for our conversation today with you is to discuss setting up and running a business and the lessons learned along the way. Before we dive into that, do you wanna give the Best Ever listeners a little bit more about your background, just for some context?

Mac Prichard: Sure. I run a small business called MacsList.org. It’s an online community for people looking for rewarding creative work. At the heart of it, Joe, is a job board with hundreds of listing for cool jobs, the kind of positions that are either in creative work or nonprofits, or even in government, but jobs that you would like to have. In addition, we also produce a lot of information through a blog, a podcast, books about the nuts and bolts of looking for work and managing your career, because most of us aren’t taught those skills in high school and college; we learn them by trial and error, and because we learn them as we go along, often we get stuck in these periods of unemployment.

So while my business is about helping people find work, I came into this almost accidentally about ten years ago, and also the way I learned some valuable lessons that I think would be useful to your listeners, real estate investors.

Joe Fairless: Yeah, absolutely. As real estate investors, we are entrepreneurs. We are small, medium or large business owners, but we’re business owners, so I would love to learn myself the lessons that you came across along the way and how that’s gotten you to where you’re at now.

Mac Prichard: Well, I think the most important one is the power of relationships and connecting with other people. My business has grown by word of mouth. Our revenue is about $600,000 annually, Joe, and it employs five people. A few part-time, several full-time… But I started my business as just telling people about job openings, and I didn’t realize how valuable the information was that I was sharing, but the people that I shared it with did, and they shared it with others. That power of word of mouth and the relationships that I built as I grew my community has just been a huge part of the success of Mac’s List.

Joe Fairless: Relationships built along the way – can you get more specific as far as how do you build those relationships and what is your specific approach when talking about what you’ve got going on?

Mac Prichard: Absolutely. Because we work in the employment space, Joe. I often get approached by people who want advice about their job hunt or their career, and I’ve always made a point of giving my time to others. So if somebody wants to meet with me, even if I don’t know them, I will make the time. Sometimes it takes a while to get on my calendar, but I will see people, and I do it without any expectation of getting anything in return, and I find that when I do that, I get so much back… Not only offering my time, but my advice and ideas. The relationships and connections that I make through those conversations – and I’ve been doing them for years now – keep paying dividends for years to follow.

The other thing I would say about relationships – I’m often approached by people who say “You’ve got a great business here. I think I’d like to do a job board like you” or “I’d like to be a career coach”, and some people might say “Gosh, I’m sorry, I don’t have time to talk to  you”, but for me, my response is always “The water’s fine, jump right in. Let me share with you what I’ve learned about building this online business. Because I know two things are gonna happen, Joe. One is if they’re gonna be successful – the person I’m meeting with who wants to get into this space – they’re gonna specialize. They’re gonna find a niche that I’m not serving.

The other thing that’s gonna happen is they’re gonna be a partner and an ally down the road. I think again we’re talking about relationships, but generosity and giving to others without any expectation of receiving a return has just been a powerful part of my success.

Joe Fairless: Out of almost a thousand people I’ve interviewed – in fact, by the time this episode airs, it will be more than a thousand, so I will have interviewed more than a thousand people – you are the first person out of the thousand I’ve interviewed on my podcast who e-mailed me before the podcast interview and said “Hey, I love your podcast. I just did a review on your podcast. Here’s the review.” So you’re a living, breathing example of that.

Mac Prichard: [laughs] Thanks. I do try to do my homework, so I wanted to know about your audience and about you and what you like to talk about on this show, so I can not only be of service to you, but to your listeners.

Joe Fairless: It’s not a time-consuming exercise, it’s a thoughtful exercise that you employ. Sure, there is some time, but the amount of thoughtfulness that took and just conditioning yourself to do that is very valuable from a business standpoint, and it just makes you feel good when you give. The way that makes you stand out, in my mind — I mean, I’ve interviewed over a thousand people, and you’re the first person to have done that, and it’s just putting yourself in my shoes, like “Oh, he does a freakin’ daily podcast that’s insane. I bet he looks at everyone who reviews the podcast, because this is his baby”, and that’s true. Having a review added onto that is very beneficial for my own purposes, to have more positive reviews about the podcast. So it’s just putting yourself in other people’s shoes, and that’s one of the things that stood out to me, and we had never talked before; this is the first time we’ve actually had a conversation one-on-one, and it set the stage for how I approach my conversation with you, knowing that’s how you operate.

Mac Prichard: Thank you, Joe.

Joe Fairless: On that note, do you do other proactive things like that when you’re either introduced to someone, or you know you’re gonna be introduced to someone? Do you do certain things like that, and if so, can you give a specific example?

Mac Prichard: Sure. If I meet someone at a networking event or a dinner and we have a meaningful conversation (not just nod and shake hands) I will make a point of connecting with them on LinkedIn and I always, when sending a LinkedIn invitation – write a personal note, just a sentence or two, just reminding the person how we met. I tend to meet people in my world, so generally we’ll cross paths again, but doing that follow-up where you connect with someone on LinkedIn or you start to follow them – I’ll follow people on Twitter, as well… Again, people that I’ve had some kind of significant connection with, because so much of business, as you know, is about building relationships and getting to know people, and eventually liking and trusting them, and that’s how deals are made.

Certainly in the employment space we find, and I’m sure that your listeners have had this experience, too – while I run a job board and I’m proud of the public listings that we have and the value that employers get from those listings – most jobs gets filled by word of mouth. There are estimates out there that up to eight out of ten jobs are never advertised and are filled by conversations between peers. There’s no conspiracy here, you don’t have to have gone to a fancy school, it’s just that it’s human nature – people tend to want to work with people they know, like and trust, or who are recommended to them by people they trust. So I find that that’s true not only in the hiring process, but when you’re doing business, as well. It underscores for me the power of relationships, and making real human connections with other people.

Joe Fairless: I loved the comment about LinkedIn and how you write a personal note to that individual after you meet, you don’t just blindly say “Connect”, because it’s personal, it reminds them of how you met. But also, what I found – and I do the same thing 99% of the time… I’ll admit, I’ve gotten sloppy over the last 3-4 months, but that was my mantra up until the last 3-4 months, and I’m gonna get back on this now that we’ve talked about this.

One thing I will say is an additional benefit of writing the personal note is I might forget three years from now how I met them, and I’ll be able to reference, because LinkedIn keeps a thread of the previous messages… I’ll be able to reference how I met them if I want to reconnect for whatever reason, and that’s very valuable.

Mac Prichard: It is. Also, if I meet you and you give me your card and we have a real conversation – again, I’m not one of those people who walks into the function room at the airport Holiday Inn and blankets the space with business cards… I look for real connections, quality conversations. But if we do meet, I’ll make a note on the back of the card after the event, and when I enter it into my database I’ll put a short note there, just five or six words about how we met.

Just this morning I was at an event, a fundraiser for the Alzheimer’s Association in Oregon, where I happen to live and work. A lady sat next to me and she says “Hey, how are you? We’ve met before”, and I didn’t remember, but she reminded me and gave me her card. Then I went back to my office and I was updating her record and there was a note there saying that we had met five years earlier and that she had gotten her job that she has today through the job board that I operate. So just being reminded of that reinforces the connection and makes it even more real.

Joe Fairless: What database do you use?

Mac Prichard: Just Google Contacts… [laughs] I keep it simple. We’re a small operation and we just don’t have the infrastructure and the size of staff to try something like SalesForce, which is valuable, but for a smaller operation we don’t need all those [unintelligible [00:12:43].09]

Joe Fairless: Okay. Now I wanna talk a little bit about the business side of things… Your company is generating $600,000 of annual revenue – is that money coming from advertising sponsors, primarily?

Mac Prichard: It’s largely revenue from the sales of job listings. If you go to our website, MacsList.org you’ll  see a job board on the homepage, and employers paid to put listings there. The reason they do it, Joe, is because they save time and money. They get fewer applications with the posting on our site, but they’re the right ones. That means they don’t have to weigh through hundreds of resumes; they’ll get a few dozen, and 80%-90% of them are from people they wanna hear from.

We also, in addition to serving employers, because we heard from so many job seekers and they tell us that they struggle with the basics of job hunting, setting goals, doing informational interviews, polishing up their interview skills – we also provide education and training services. That’s still a small part of our business, but it’s growing. So we’re serving both communities – both employers and job seekers.

Joe Fairless: Your business has grown via word of mouth primarily, you said. What mechanisms – if any – have you put in there to help facilitate that?

Mac Prichard: It’s a great question. We find that collecting testimonials from both employers and job seekers helps promote that word of mouth; it also adds authenticity to our work, because when we do publish testimonials on our website, we ask job seekers to share their success stories on our blog, we ask people if we can publish their full name and their photos, and people who read these stories or see these testimonials – they see people who look like them, or are chasing jobs that they want, and they can identify.

It’s not surprising to me, because if you think about how people make decisions when they buy, if they’re thinking about a restaurant, they go to Yelp, they read the reviews. If they’re thinking about buying a book or an electronic product or anything on Amazon, they pay attention to the reviews. So we find that one way to support and increase that word of mouth is to collect those reviews and testimonials and those stories and share them.

Joe Fairless: Do you do video testimonials or text, e-mail testimonials and you just copy and paste that info, or anything else?

Mac Prichard: Right now we’re just using text and photos, and we’re certainly very interested in video, because a video, as you know, is so much more engaging and makes an emotional connection that can be much more powerful than you get with written word.

Joe Fairless: When did you launch the company?

Mac Prichard: Mac’s List is a side project. For years (nine years, actually) I just sent out job postings to a small list of friends, and I started hearing from people who wanted to be on the list and employers who wanted me to send postings, but it wasn’t until late in 2010 that I’ve started charging for my services.

Here’s another lesson I wish I knew back then, or 15-16 years ago. If you’re providing a valuable service and people were saying yes to your e-mails or whatever it is the product/service you’re providing for free, chances are they’re doing that because you’re providing something of value, and you should charge for that. It took me a long time before I flipped the switch on monetizing it, and I’m sorry I didn’t do it sooner because I could have served more people and grown the company and the community even more.

Joe Fairless: Was there a year that your growth did more than other years, and what would you attribute that to? In terms of revenue.

Mac Prichard: Yeah, the last two years our revenue has increased by about 40%-45%. The reason that’s happened, Joe, I think is because I invested in full-time staff, and I also invested in people who were mid-career and knew something about the business and could help me grow it.

Joe Fairless: People who weren’t right out of the gate fresh in the industry, but had some seasoning and brought some expertise to the table?

Mac Prichard: Correct. I didn’t go cheap, I didn’t look for recent college graduates; not that there’s something wrong with that, but I needed more seasoned, experienced people who could actually help grow the business and who had experience doing that.

Joe Fairless: Best Ever listeners, this is a sneaky interview because on the surface it might seem like we’re talking about an online platform to help job seekers and employers match up, but the more we talk, the more I’m seeing about 5 or 6 points that are incredibly relevant to us as real estate investors and entrepreneurs. One is how we grow our word of mouth, and that is by collecting testimonials from people… As simple as text and photos would work. Two is how do we stay in touch with people, and that is sending them not only a LinkedIn request (we all know that), but how many of us actually send a personalized note to the individual. If you do, pat yourself on the back, nice work. I need to get back into that, and I will from this point forward, because it’s a great thread that we can look at and review in the future if we forget how we came across them.

Three, if an aspiring competitor wants to talk about our business because they wanna create something similar, think of them as an ally, versus the competition, because if they are successful, as you said, they’ll probably be serving a slightly different area or a slightly different demographic, and I can tell you, I whole-heartedly embrace this because my business is multifamily syndication; I raise money, I buy apartments with high net worth individuals and we’re sharing the profits. Well, I also interview people who do multifamily syndication, and it’s because the listeners need to have exposure to more people than just me who are doing what I do, and I live in a world of abundance, which you do as well.

The fourth thing is revenue growth – how did you go from where you’re at to getting 40% increases in revenue year over year, the last couple years, or in those two years you mentioned… That was hiring people who are the best of the best and paying them accordingly. Is there anything else that we haven’t talked about that you wanna mention as it relates to growing a business and lessons learned?

Mac Prichard: I guess I wanna underscore a point — great summary, Joe… Just about the power of generosity and helping others, and how much you get back in return when you do that.

Joe Fairless: I’ve got some warm fuzzies when your name comes up, because you’re the first one out of 1,000 people to actually write a review and send it to me prior to jumping on the call where I interview you on my podcast. So you walk the walk, that’s for sure.

Mac, where can the Best Ever listeners get in touch with you or learn more about your company?

Mac Prichard: Well, they can visit our website. It is www.macslist.org, and we’ve set up a special landing page where they can get a free chapter of the book. Just go to MacsList.org/bestrealestate and the book is Land Your Dream Job Anywhere. I know you focus on investors and small business owners, but many of the principles that we talked about about networking and relationship-building you’ll also find in the book, and they’re equally valuable to small business owners as well as job seekers.

Joe Fairless: Outstanding. Of course, on your book page that I’m on right now, you have testimonials, and everything that we’ve already talked about about the book itself, so thanks so much for being on the show, Mac. I hope you have a best ever weekend, and we’ll talk to you soon.

Mac Prichard: Thank you, Joe. It’s been a pleasure.



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JF669: What a Professional SQUATTER Will Do to Destroy Your Flipping Plans #situationsaturday

Today’s guest started back in 2009, but met Mike attempting to complete the most difficult transaction that would have taken almost three years to complete. It began with a foreclosure market, finding a home, then passing through all the legalities in attempts to flip it. They ran into a huge issues such as proving a pre-existing basement and a squatter that was very sly, you have to hear this show!

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JF650: How an Appraiser Levels Up to Control $8 MM in Portland Real Estate

He was just about to purchase a car wash to convert it into a food truck lot. Only in Portland Oregon! Today’s guest was an appraiser and has worked the real estate investing field for some years now with his partner. They control over 8 million in real estate assets and allow for a select few to invest with them. Hear his show and how he creatively structures deals!

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Mike Nuss Real Estate Background:

– Licensed appraiser
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– Owner/Founder of Rare Bird Real Estate
– Based in Portland, Oregon
– You can reach him at myrarebird.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.

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