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

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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


TRANSCRIPTION

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

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

Listen to the Episode Below (28:01)
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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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TRANSCRIPTION

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

With us today, 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.

 

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

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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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TRANSCRIPTION

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

Listen to the Episode Below (38:21)
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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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TRANSCRIPTION

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

Best Real Estate Investing Advice Ever Show Podcast

JF1083: Asset Protection Can MAKE or BREAK Your Business #SkillSetSunday with Aaron Young

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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

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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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Best Ever Show Real Estate Advice from experts

JF746: What You MUST Include in Your Insurance Coverage or Pay the Consequences #SituationSaturday

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Today’s guest has been in the insurance industry for many years and will share with us the importance of having water damage coverage in your insurance policy. Watermain break? No problem!

Best Ever Tweet:

Darrin Gross Real Estate Background:

– Host of Commercial Real Estate Pro Network
– Specializes in real estate investor insurance needs
– Based in Portland, Oregon
– Say hi at commercialrealestatepronetwork.com

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real estate advice podcast

JF669: What a Professional SQUATTER Will Do to Destroy Your Flipping Plans #situationsaturday

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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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Mike Nuss Real Estate Background:

– Mike and Tyler met in 2010 on a complicated transaction
– Mike was previously an appraiser
– Based in Portland, Oregon
– Say hi at rarebirdinvestors.com

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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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real estate advice podcast

JF650: How an Appraiser Levels Up to Control $8 MM in Portland Real Estate

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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!

Best Ever Tweet:

Mike Nuss Real Estate Background:

– Licensed appraiser
– Controls over $8,000,000 in real estate
– 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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JF532: A Closer LOOK at Optimizing Your Mortgage and How to Save Through Leverage

We have had a previous guest explain a phenomenon that seemed too good to be true, paying down your mortgage rapidly and saving by leveraging another interest bearing loan. Today’s guest will come to shed more light on the matter and tell us exactly how it works. He claims you can save in interest payments by leveraging another debt, don’t miss this episode!

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Bill Westrom background:

  • For the past 13 years he’s been teaching homeowners an innovative financial strategy called Equity Optimization
  • Co-author of Master Your Debt
  • Based in Portland, Oregon and company is in Tampa, Florida
  • Say hi to him at truthinequity.com

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Are you committed to transforming your life through Real Estate this year? If so, then go to http://www.CoachWithTrevor.Com and claim your FREE Coaching Session.  Trevor is my personal real estate coach and I’ve been working with him for years. Spots are limited, so be sure to do it now before all the spots are gone.

Have you tried REFM’s Valuate software yet? It makes investment analyses a breeze, and makes you look like you spent all week on them. Go to app.getrefm.com to sign up today.

Subscribe to Joe’s YouTube Channel here to learn multifamily and raising money tips:
https://www.youtube.com/channel/UCwTzctSEMu4L0tKN2b_esfg

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JF384: Forced to LAY OFF His Team, but Now Developing 7 figure Profits

Forced to lay off his real estate team during rougher times, our Best Ever guest and young entrepreneur has seen darker days than most…but it didn’t last! As a young and ambitious business owner, he learned quickly how to rebuild from the ground up and execute most all real estate transaction types. Beginning in the mortgage processing world, experience and many deals have molded him into a now successful investor and host of The Real Dealz Podcast  

 

 

Best Ever Tweet: 

 

 

 

Tucker Merrihew

 

  • Host of The Real Dealz Podcast

  • Owner of TTM Development Company which is focused on renovating older homes and building new homes throughout Portland, Oregon

  • Say hi to him at http://ttmdevelopmentcompany.com/

  • Based in Portland, Oregon

  • Began his career in the Real Estate business back in 2002 as a Top Producing Mortgage loan officer, and then by 2004 he built his own Mortgage Company TTM Finance, LLC & Davis Financial which is still in operation today

  • Play basketball three times a week and was a millimeter away from pursuing a professional career in snowboarding

 

 

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Made Possible Because of Our Best Ever Sponsors:

 

Patch of Land – Could you do more deals if you had more money? Let the crowdfunding platform, Patch of Land, find investors for you and fund your next deal…and your next deal…and your next deal…and…well, just go find out more at http://www.PatchOfLand.com

 

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JF249: Let’s Have Some Fun and Create Some FUNDS

Ever want to conduct more than one deal at a time, but just don’t have the funds to do it? Well, today’s Best Ever guest has the solution to that! Listen up, because we discuss EVERYTHING that you could ever need to know about a SBRE.

Best Ever Tweet:

Match your capital structure to your asset model.

Matt Burk’s real estate background:

–          Founder of Fairway America and is the foremost authority in the specialized field of non-instuitional sized, small balance real estate (SBRE)

–          He consults dozens of SBRE fund managers around the country

–          Based in Portland, Oregon

–          Loves to ride his road bike

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Made Possible Because of Our Best Ever Sponsors:

 

Norada Real Estate Investments – Having a hard time finding great investment properties?  Unfortunately, the best deals are rarely found locally. Norada Real Estate’s simple proven system provides you with the best deals across the U.S. to create wealth and cash-flow.  Get your FREE copy of The Ultimate Guide to Out-of-State Real Estate Investing

 

Patch of Land – Want to learn more about crowdfunding? Let the leading expert in the crowdfunding space, Patch of Land, give you all the info you need to get started. Grab your FREE copy of Top Ten Answers to the Top Ten Crowdfunding Questions athttp://www.PatchOfLand.com/bestever

Youth Nation – How much do you really know about your clients? With milenials taking over the real estate market place, YOU need to learn about them. Read Youth Nation by Matt Britton to learn all you need to know.

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JF230: How YOU Can be the Next Real Estate Rockstar

Punk rock and real estate can’t have anything in common, right? Think again, because today’s Best Ever guest learned how to translate her punk rock days into multi-million dollar real estate success. We discuss finding the next up and coming neighborhood in your market, why you shouldn’t judge an agent by their tattoos, and how to find YOUR real estate investing niche.

Best Ever Tweet:

Jenelle Isaacson’s real estate background:

–          Owner of Living Room Realty based in Portland, Oregon

–          She is an experienced real estate agent, developer and investor

–          Living Room Realty closed on over $242M in sales in 2013

–          Jenelle has been named one of Portland’s 40 under 40 up and coming  business leaders by the Portland Business Journal

–          Expert on Portland’s local food scene

Check out Scaling Up – one of Jenelle’s keys to success

Subscribe in iTunes  and  Stitcher  so you don’t miss an episode!

Made Possible Because of Our Best Ever Sponsors:

Norada Real Estate Investments – Having a hard time finding great investment properties?  Unfortunately, the best deals are rarely found locally. Norada Real Estate’s simple proven system provides you with the best deals across the U.S. to create wealth and cash-flow.  Get your FREE copy of The Ultimate Guide to Out-of-State Real Estate Investing

Patch of Land – Want to learn more about crowdfunding? Let the leading expert in the crowdfunding space, Patch of Land, give you all the info you need to get started. Grab your FREE copy of Top Ten Answers to the Top Ten Crowdfunding Questions athttp://www.PatchOfLand.com/bestever

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Best Real Estate Investing Crash Course Ever!