J Darrin Gross Podcasts -

Real Estate Syndication to Financial Freedom with Linying Zou – CREPN #276

Linying Zou 0:00

It’s easy, right? It’s easy to get kind of stuck in the comfort because you just do the job. And then you know, our academic system trains us to find a job get better pay and you know, climb the corporate ladder, in a sense. And so it’s really easy to get stuck in a kafir we will do work every day, you know, go home to the gym, go to your family, and then look forward to the weekend and then dread the Mondays. Right? It’s so easy to to get comfortable. So, you know, I was at a point where I was really dreading that Monday morning for about two years, until I managed to leave the company. So that was a really valuable experience to be able to exit and see there’s so many other opportunities out there that can provide me the life that I want to live.

Announcer 0:51

Welcome to CREPN Radio for influential commercial real estate professionals who work with investors, buyers and sellers of commercial real estate coast to coast whether you’re an investor, broker, lender, property manager, attorney or accountant We are here to learn from the experts.

J Darrin Gross 1:11

Today, my guest is Linying Zou, and two years ago, excuse me two years after graduating from Boston College, Business School Linying bought her first multifamily investment. She had a new job. But very soon after she started, she realized that the job was not going to provide her the financial freedom she wanted. So she set out on her own to achieve her goal. And she started Akras Capital. And in just a minute, we’re going to speak with Linying about how an immigrant used real estate syndication to achieve the new American dream, reach your financial freedom number, and travel the world.

But first, a quick reminder, if you like our show, CREPN Radio, there are a couple things you can do. You can like, share and subscribe. And as always, we hope you’ll leave a comment we’d love to hear from our listeners. Also, if you’d like to see how attractive our guests are, be sure to check out our YouTube channel. And you can find us on youtube at Commercial Real Estate Pro Network. And I also want to encourage you to subscribe there as well. more subscribers more reach tall good. With that I want to welcome my guest Linying Welcome to CREPN Radio.

Linying Zou 2:58

Thanks for having me.

J Darrin Gross 3:00

Well, I am so looking forward to our talk today. But before we get started, if you could take just a minute and share with the listeners a little bit about your background.

Linying Zou 3:12

Sure. Um, so like you said, I started investing in multifamily two years out of school, but I was actually a trader in fixed income for about 10 years. So you know, I, I worked for as asset manager for my work for insurance company. And, and so I kind of went from kind of the Wall Street path into kinda mainstreet path. And so that’s a really helping what we’re doing right now, because there is a really good segue, you know, from finance into real estate. So, you know, I at Akras, you know, my main, my primary role is acquisitions. So I do a lot of do analysis and in underwriting so you know, using my background finance and that, that that’s really helped. So, yeah, so you know, about three years ago, you know, we started Akras Capital, and and we focus on both buying small multi families for a direct acquisition strategy as well as syndication. So build a portfolio, that allows us to essentially travel the world and you’ll live our lives on our own terms.

J Darrin Gross 4:22

No, sounds pretty good. In that, I think you said it, but I didn’t quite catch it. How long were you at the Wall Street firm doing the E asset management or you said asset fixed assets is what you’re working on there. Right?

Linying Zou 4:35

Fixed income, so corporate bonds. Okay. Yeah. So corporate bonds and government bonds. I was trading those I was there about I was at various firms put together a career total about 10 years.

J Darrin Gross 4:48

Gotcha. Gotcha. And when you bought your first multifamily What was your first multifamily property,

Unknown Speaker 4:58

It was what it is still Actually, I still own it to this day. So it wasn’t a triplex. It was a house hacking strategy. I’m sure your listeners are aware of that strategy by, you know, essentially live in one unit, and then another two to cover the mortgage. So that was back in 2010. So the market was really supportive with that strategy at the time.

J Darrin Gross 5:19

No, it’s a beautiful thing when it works. Yeah. Somebody else pay your pay your way. So you were you were in the the Wall Street world? I mean, it’s, it seems pretty glamorous from the outside. What was it that you recognized? Being in it, that it wasn’t going to get you where you wanted to go?

Linying Zou 5:45

It’s a couple of things. You know, for one, yeah, it’s very glamorous, right? You see it on TV all the time. It’s a very high paced career, and you can make a lot of money doing it. But I think the problem is that it wasn’t just for me, there was just no greater purpose in that career. You essentially tried to make money with money, and there is not enough flexibility, or control on what I want to do. That, that really didn’t jive with me very well. So because of that, you know, I just, I mean, don’t get me wrong, I love the job itself. You know, it was challenging, you know, every day was different. I have so many gathering pitch, so many trade ideas, and you have all these ideas come to the door, and you had vet them. So that was always my favorite part of job was just really the culture, you know, and I realized that just because I didn’t like my job at this company doesn’t mean that I like my job, the next company is going to face the same issues, where, you know, I don’t get to live my life on my own terms. And, you know, I have to basically provide go in and have face time. And, essentially, you know, listen, have the culture be something that I have no control over.

J Darrin Gross 7:05

No, that’s pretty big insight. I think for a lot of people. I think there’s kind of an exception, or not an acceptance, that’s what I’m trying to say. Just that’s the way it is. And this is what you do. And you you go and you try and do more and earn more and keep, keep earning more, but not necessarily recognizing the quality of life. You know, unless you have a really rich life outside of that. And that’s your primary vehicle. But you think about it, how many hours a day you spend at work. And I’m assuming that Wall Street, you weren’t necessarily working just a 40 hour week.

Linying Zou 7:47

Yeah, me, me, I worked on the buy side. So that was a lot. The work life balance is there, but I still spend about 10 hours a day at work. And it’s easy, right? It’s easy to get kind of stuck in the comfort because you just do the job. And then you know, our academic system trains us to know find good job, get better pay and you know, climb the corporate ladder, in a sense. And so it’s really easy to get stuck in a kafir we will do work every day, you know, go home, will the gym, go to your family and then look forward to the weekend and then dread the Mondays? Right? It’s so easy to to get comfortable. So, you know, I was at a point where I was really dreading that Monday morning for about two years, until you know, until I managed to leave the company. So that was a really valuable experience to be able to exit and see there are so many other opportunities out there that can provide me the life that I want to live versus while I was living before.

J Darrin Gross 8:52

No, that’s good. So you you bought your first property, you’re still working your your wall street job was real estate kind of the the I guess I’m trying to figure out how did it fit in? Because it sounds like was that always a goal? Or was that just something that that happened based on the fact that you were having success house hacking?

Linying Zou 9:21

I think real estate really is the American dream, right? Like only property in the States. I’m a first generation immigrant. So it was really a buy the first property It was really a family decision. You know, my parents came here and they never owned real estate and they never owned the house. And you know, I was in a financial position to be able to do that. So that was like the American dream. The family dream of me only a real estate property. And then I after I bought that property, you know, I managed it myself. And it was until four years later I bought my second property And that was in the process by my third property when I left my job. So, so that you know that for a wrench in things when you don’t have a W2 income when you’re looking to buy residential properties, you know, that’s like four units and below. So um, so, you know, I put a pause on that I went travel the world came back. And then when I started to, you know, start Akras, my business partners, that’s when we started investing in real estate full time and start buying other commercial properties.

J Darrin Gross 10:28

Gotcha. And you mentioned, you bought your second and third property, what were those,

Linying Zou 10:34

I bought my second property, which is actually my primary residence right now. Um, so and then my third one we were, we’re in the process of buying a while I was in the process of buying off market property at the time. But they kind of fell through in the last minute, and then, you know, I left my job, so that just went didn’t go anywhere.

J Darrin Gross 10:51

Gotcha. Gotcha. So you traveled? How, how long did you give yourself to travel and we’re all good to go.

Linying Zou 10:59

I travel for six months, I’m on the road and, and my back patient backpacked across Europe, and Asia. So I was in, I basically went, you know, to Estonian, and UK and Iceland, and then kind of flew back into Russia. So I spent about a month in Russia, two weeks in Mongolia, eight weeks in China, and then South Korea, I was actually in South Korea when the Olympics was happening. And then, and I went to Japan, so

J Darrin Gross 11:35

Wow. Well, there’s no no substitute for travel, I love kind of the experience, and just kind of the education of meeting people in different places and all that. So that’s awesome.

Linying Zou 11:47

Yeah, traveling, I mean, traveling really changed my mindset and how I view you know, what, basically, happiness is, because as you travel through these, you know, more kind of developing countries, you get to meet people who are living very happily have very little. So it kind of creates, you know, it kind of quite brings into question like, why is money so important, right? Why is it making more money, you know, having a bigger house or having a really nice car important when having these can be so it can be, you know, just something completely different to someone else. So I think that kind of changed my mindset and how I want to pursue my next career. Because when I first started, my my idea was always that I’m going to go traveling and come back and find a job. And other than, you know, another finance investment firm, it is continued a career path. And then having that kind of experience just seeing, you know, meeting people on the road, encountering different cultures, that’s when you know, my business partners, and I kind of sat down and said, Hey, like, do we really want to go back to the corporate world? Is that really important to us is that end goal is that the end all be all. And we decided that it wasn’t that we want to create freedom for ourselves, and you know, help create that kind of freedom for other people, so they can pursue that passion on their own.

J Darrin Gross 13:10

Now, it sounds like you You’re what am I trying to say, you know, coming from that wall street culture and just kind of go, go Go fast, fast, fast, more, more, more. World travel, and all sudden, now you’ve got a different view of, you know, maybe what’s important. Sounds like? Once you had that change, I would think it’d be kind of hard to go back to Wall Street, or just in that kind of thing. I don’t know if there’s a lot of room for that. kind of more of a Zen kind of a mindset, or do you find or are there people in Wall Street you ever saw that had that kind of a view of things?

Linying Zou 13:53

I think very rarely, I think, you know, people do want, I think most people do know what’s important to them, but it takes I think it takes a lot of courage to kind of step outside your comfort zone. And you know, and I think when you when you’ve been doing the same job for 10, 20, 30 years, it’s hard to change into something else because it’s scary, right? It’s there’s so much uncertainty, you know, your skill set applies. So, you know, it’s easy to kind of stay with the comfort and stay with what you know. So I don’t want to say that people offering people finance, they’ll know you know, they’ll understand like, what’s important to them or you know, that you know what, how they value money, but it just see, you know, it just that you can get stuck so easily and it’s hard to get out. Yeah, and actually, personally, I know so many people like recently that have gotten out and gotten pursuing other careers where you know, they maybe start a restaurant or maybe they started start up. You know, so it’s so you do have definitely people that don’t leave the industry to do to pursue something else.

J Darrin Gross 14:54

Right, well, having that experience where you are able to untether from that pace, and that lifestyle in that culture for an extended amount of time, even six months, I think is, is a good you know, amount of time to actually kind of reset, or have the opportunity to adjust. And, and while you’re traveling and seeing different things, it’s kind of exciting, but at a different pace. That’s, that’s got to be great. So you, you came back? And was it right away that your partners, and you mentioned your partners? How many partners do you have?

Linying Zou 15:35

I have two other partners?

J Darrin Gross 15:36

Okay. And were they also in the same situation? Or what was their?

Linying Zou 15:42

Yeah, so, my, one of my business partners, Christina, where she worked together my last company, and we so now we’ve been working together for like, eight years. So she and her husband, Charlie, who’s our other business partner, were also traveling, and they traveled for 14 months. And we work together for about six weeks during our travels, you know, through Russia and Mongolia. And you know, we really have a chance to kind of sit down and we know how well we work with each other. And so it the timing just worked that when I came back, they also came back. And then, you know, we had an opportunity to kind of sit down have the just strategic meeting, I think in all in July of 2018. And then, you know, decided to kind of go adventure into real estate.

J Darrin Gross 16:33

And were they real estate investors as well?

Linying Zou 16:36

Yeah. So they were when they were trying on the road, they had a property in Boston, which they were renting out as well and the rental income from that were enough to pay for the mortgage and provide funding for them when do on the road as well. So

J Darrin Gross 16:52

know that that is definitely the foot loof, footloose and fancy free kind of, you know, when the worries are taken care of that’s the mortgage is paid and you’ve got money to live on. That’s pretty good.

Linying Zou 17:05

Exactly. It’s a lot cheaper to live overseas to sell. I mean, depends on the country, but most of the countries it’s a lot cheaper to live there than in the US.

J Darrin Gross 17:13

Right, right. So they were basically renting out their home. Did you rent out your home while you were gone as well?

Linying Zou 17:22

I did. So I have my triplex which is you know, always trying to and then I and then I did Airbnb my property for a couple four months to Boston is very seasonal on Airbnb. So, you know, in the winter, no one wants to visit the cold blizardly you know, City of Boston. So you don’t really get a lot Airbnb business, you know, during the winter, and I’ve been traveling during the winter, so but I did Yeah, I did start using Airbnb as an option to provide more cash flow during that time.

J Darrin Gross 17:54

Gotcha. All right. See you. You and your partners. Realize that you’re like mind, you work well together. And the decision is made, let’s go in. Let’s go do real estate. What were your What was your focus? And how did you go about? You know, achieving or acquiring additional properties?

Linying Zou 18:23

Yeah, so there were definitely many asset classes within real estate. And, you know, we were we knew from very early on that we want to do multifamily, because it is, you know, it is the the least cyclical of the asset classes. You know, everyone always needs shelter, right. So it doesn’t matter where the economy goes, so we decide, oh, so we wanted to go into the multifamily. And then we kind of decide to pick which market we want to bid. And, you know, we figure Boston I live in Boston, my business partner is living in Boulder, Colorado. So both the market is extremely expensive. And you know, there’s some cash flow. So we picked a market that’s familiar to my business partner, Charlie, because he grew up there, which is Spokane, Washington to kind of dip bar. Yeah, the bar feed in incense. And we start at acquiring multifamily there. And we started really small, you know, we did our first property was a five unit, and then we bought seven unit and nobody loving unit. So, you know, and, uh, and we mostly use the wholesalers to buy these properties. So all of them were off market listings. And so a lot of that with a lot of the initial efforts went to relationship building and building a team on the ground because it would be like this is the best thing. And then and then eventually, we got to syndication where, you know, we would partner with other operators to syndicate deals and you know, we did a 300 unit and like 111 unit in for the Dallas Because that’s where our partners have experience in.

J Darrin Gross 20:04

Gotcha. So the 5, 7, 11, were those buy and hold? Or were you repositioning selling those? or What were you doing?

Linying Zou 20:12

So we’re using the BRRR strategy. That was our goal. So the 5 ,7 ,11 actually, we’re currently in a process this positioning them and we actually sold the five unit already. And we’re on the contract on the seven unit. And lthe 11 unit is currently on market. So we actually tried to sell those properties and roll them into a larger asset. In different city. We don’t like Spokane anymore. So we were actually going to move into Phoenix, Arizona.

J Darrin Gross 20:42

Gotcha. And now, so you did the the BRRR strategy with the first three properties. You get some experience, how long did you how long between the acquisition, repositioning refinance operation, operating before you jumped into syndication?

Linying Zou 21:03

About ayear, so we spent about here acquiring our own assets? And then we jumped into syndication?

J Darrin Gross 21:12

Alright. And the 300 units? I mean, that seems like a pretty big jump from, you know, 20, what do we got 23 units, three properties to a 300 unit deal? Can you tell us a little bit about the 300 unit property?

Linying Zou 21:32

Yeah, so it is a syndication deal. So we are small GP and then deal and it is our first syndication deal. So we, you know, we actually were, we met some partners at a conference that we attend them, we establish a relationship there and where they brought us in the interview. Um, so that was a really a class B+ property it down in Orlando, Florida is actually really nice type is myself, and we visit all of our properties when we went through our diligence. But um, but you know, it’s essentially a cash more cash flow play. And, you know, we still, we still have equity stake in the right to this day. So it was definitely a learning experience for the first one, and we’re glad to have the experienced operators there with us that we can kind of learn from. And so it’s been, it’s been a very great experience. Yeah.

J Darrin Gross 22:27

No, I appreciate you sharing it. Because I think that a lot of times people recognize the smaller properties or something they can take on by themselves. They recognize the syndication as a model for taking down a larger property, but don’t always recognize how they can fit into the syndication model, you know, thinking that you have to be the general partner, or you can go in passively. Can you speak a little bit of how you came in, you mentioned that you met him at a at a conference, but just coming in as a general partner, what were your responsibilities.

Linying Zou 23:02

So the responsibilities will vary depending on deal itself. So for example, you know, there, you can come in and be an investor relations and capital raise, or you can come in and help with asset management. So for some of our, for some of the syndication properties, we do help out on the asset management side, the leasing side, and on the marketing side, and, you know, there’s interior interior renovations and things like that. So they’re diverse communities and get involved in. So as a GP, that’s really your role, right? Like the main GP brings deal and then other GPS come in to bring both the capital and experience and resources to get the deal done. And there could be someone there, too, that signs off on the loan, right, because for an agency loan, you do need to have that amount of net worth, that’s enough to guarantee guarantee is non recourse loan, but still had to provide your sign off on it. So that’s really the role of the GP. I mean, it’s it is a lot of work. I mean, it is a business, for syndication deal, you’re essentially running a business. So as you know, it’s very important to partner with other people who have kind of business mindset. And as an LP, I mean, it’s, you know, I think for a lot of new investors that want to get into real estate syndication, LP is a great route to go. Because, you know, you get to understand how the deal works. And then but you’re completely passive. So you can take you don’t really take any responsibility, but you can learn as much as you want to learn because all these GP’s are essentially very open and transparent. And then you know, you can take that experience and maybe if you want to be on GP side on the next deal, and you have a way to get in as an LP you can get cash flow, which is the best part right? The GP is typically though really good cash flow during the 10 deal. They get paid on acquisition fee and then at disposition. So as an LP your passive and you just get your monthly according distributions,

J Darrin Gross 24:57

Right, and where are you in the cycle? Have the 300 unit property,

Linying Zou 25:02

We’re in year two? So you know, it’s sure a five year hold. So we’re less than halfway through. But a lot of times, you know, it really depends on because we’re always continuous continuously, kind of reevaluating where word property is today, and you know what the value can be. So it’s not unusual to exit the property or as good deal earlier, and as long as we hit that IRR threshold for the for the investors.

J Darrin Gross 25:32

Right, right. What about the 111 unit property? Where’s it at? Tell us a little bit about that.

Linying Zou 25:41

It’s in Dallas. So that’s a more workforce housing. So compared to the first deal is is different. And this deal has, you know, it’s 111 units, it’s more class C asset in a sense. And we’re, you know, in the middle of it there, there were some issues in the beginning due to tornadoes, you know, there were a lot of tornadoes, the touched down in Dallas the month after we closed the deal. And so there was a whole insurance insurance claims process that happened, you know, we’re we’re in the path of the tornado, but obviously, there was some damages. So that kind of pushed off the the kind of renovation plan a little bit. And then you have the and then you have covid happen. So, so know what the eviction moratorium things to that. So it took a little bit more time for this property to get up to where we want to be. So it’s still in process of getting there. But it’s making good headway now.

J Darrin Gross 26:40

In the 111 property, are you on the general side? Or the limited? Or where are you?

Linying Zou 26:44

Well, the GP side, and we’re on various, you know, committees to help with the asset management as well.

J Darrin Gross 26:52

You know, on each of these, how many people are there on the GP side?

Linying Zou 26:58

It depends, I think for, you know, for larger property, because the capital raise is much greater they can be, you know, more groups involved before to smaller deals, you know, it could, it could just be like 4 to 5 GP groups. So it really depends on you know, what resources are needed to come in to help the deal close successfully?

J Darrin Gross 27:22

And what are you? Are you guys looking to possibly be the general or to be a sponsor yourself going forward?

Linying Zou 27:30

Oh, yeah. I mean, that’s really what we’ve been doing this whole whole year is that we’ve been looking to lead our own syndication deal. So we’re actually in the best and final round on the deal today. So I have to feel submit a best and final offer on a on a on a property in Arizona by tomorrow. So that’s what I’m going to do after this call.

J Darrin Gross 27:52

Oh, that’s exciting. Yeah. How large of a property is that?

Linying Zou 27:56

It’s a 63. Unit. And in Arizona, so well, $8 million deal.

J Darrin Gross 28:03

Oh, that’s great. That’s great news for the sponsor on that you found the deal.

Linying Zou 28:07

Yeah, well, we’ll be the lead sponsor on it if we get word deal. So I still early here, you know, five other groups and investment final rounds, very competitive. You know, I’m sure you know, but it’s just very competitive nowadays, you know, inventories very slim and they’re still all buyers out there despite COVID so hopefully, fingers crossed.

J Darrin Gross 28:31

Yeah, I wish you well, with that. I know, you know, the whole COVID realist estate, rubix cube has been kind of a, you know, an ongoing question people have been I think a lot of the conversations that I’ve listened to or been a part of have tried to match up the past market cycle to this market. And I think for a lot of reasons there is no way to compare the two based on just the different factors that fed into this situation you know that in the prior crash the most clearly there was a lot of loose financial dealings as far as your lending was pretty loose and that. And now you’ve got the economy is running pretty good up until the virus hit. You have much more conservative lending and kind of what I’m hearing from people that are in working on deals is that you know the the requirements to close are a little bit more stringent with the the banks wanting you to have higher reserves, etc. But market seems to be holding up I mean, rents are still being for the most part you know, paid collected. So, you know, especially with multifamily, it seems like it’s a still a pretty strong market and and, you know, I think people keep looking for that sign that thing’s going to take a dip. But I don’t know, I’m not not seeing it. I’m not. You know, I think there have been, like, certain markets or certain things like right after to happen, but as long as the the stimulus checks, the economy keeps improving, I think things look pretty good. So,

Linying Zou 30:25

Yeah, I think I think depends, right? I mean, when COVID first happened, everyone was expecting there to be higher delinquencies and low collections. And then, you know, you have the massive stimulus package that came in from the government that really helped. And that, you know, just the expanded employment benefit just ended, you know, and, and then July, so, it’s kind of too early to tell what’s really going to happen, especially if there’s no stimulus that comes again. So that is like one of our greatest concerns, right, is that there’s a extended kind of extended recession and extended high employment. And that’s really going to affect elections and a lot of cities, the eviction moratorium is still in place. So you can’t really evict your tenant if they’re not paying. So I think, you know, if this does go on, for a while, you might see that they were looking for, because you know, some property, some deals are going to be under stress, you know, due to the low collections, if they can meet the debt service ratio, then they’re in trouble. But that’s not going to be in the immediate current, right, there’s always some kind of cushion or reserve in place. But I think we just had to be really cautious about, you know, how we underwriting future deals, and we’re now using conservative assumptions. Because at the end of the day, if this, no one knows where this COVID is gonna go, and you can only make us conservatively can do to, you know, to kind of understand and say, offset the concerns, right,

J Darrin Gross 32:03

Right. No, yeah, I’m kind of curious. You mentioned two things there. One is you have to be conservative with your underwriting based on all the unknowns, but then you mentioned it’s very competitive. Are you finding that the, the competition is equally conservative? Or are there some that are willing to throw caution in the wind? And I guess you’re gonna find out later today or further on? But do you have any kind of sense and talking to the brokers? What your?

Linying Zou 32:33

I think, yeah, I think they’re, we are trying, it’s a delicate balance that you have to walk down the line, right? If you’re too conservative, you’re never gonna win any deals. But at the same time, you know, we definitely encountered deals where we’re like, Wait, how does this even make sense? It makes no sense to us, like, why how this was underwritten to justify this price. So there are definitely groups out there to still doing deals and using, you know, grass assumptions, I think it just, you know, the investors just to be cautious that they trust the GP and they trust the underwriting, because it’s so easy to kind of just go in and say, you know, hey, this, the numbers look really good. I want to invest in this field without understanding all the assumptions that went into it. because everything’s the pro formas is, you know, whatever GP comes up with, right, you can assume a 20% rent growth if you want, and, you know, this can make any deal work. But it just has to make sure that your GP is the way to doing and how the underwriting and they’ve had that kind of, you know, financial background to, to understand, you know, what’s going on and how to offset some of these risks.

J Darrin Gross 33:42

Let me ask you with syndication, I mean, one of the primary goals or the challenges you face is raising capital? How have you gone about building your investor network or creating a pool of investors?

Linying Zou 34:02

So we have various strategies. So I’m on acquisition side, my business partner, Charlie, he’s actually he’s focused on the capital raising. So we actually have various strategies targeting different peers, investors. So you know, obviously, their investors were, you know, basically our friends and family and our close networks. And then there’s tier two. And tier three are basically investors that we see from, you know, podcasts or from, you know, just what content so we have, so, you know, through different different channels, you know, we build a investor base, and then we provide a lot of educational content, through our, you know, monthly newsletter, through our white papers through our website, we have a lot of articles on website as educational. And, you know, we were essentially using both pull and push marketing in a sense, to to generate that kind of a kind of investor interest. I think it’s really important to continue to have to people to and just educate them that syndication is an option because I personally didn’t know syndication existed 10 years ago, and I probably would have gone into it a lot earlier, if I know that this opportunity even was working a second job, or I could have been cheap, I could just be an LP right on the deal. So I think, you know, the fact that not a lot people knew that this opportunity exists is something that we work really hard to bring to others is just this awareness that, you know, just education, if you want, you don’t want to be a landlord, a one to cash flow and somewhere to kind of put your money that’s away from stocks and bonds.

J Darrin Gross 35:37

Right. Now, I think there is a lack of recognition, almost by design, I think the little bit of the history that I’ve come to understand about the stock market and the 401 K’s and, and, you know, the structure that was was more about stocks and bonds, kind of thing, and I think people get trained in that. And that’s kind of you go to work 401k and you just kind of pick pick your fund. And the the, the ability to have it be liquid, you know, is something there’s I know, I’ve talked to some people, they’re like, Well, yeah, but you can’t get your money out as well. But it’s, you know, it is it is a longer term investment. But the returns I mean, the risk, there is risk, but the potential returns are fairly Can I guess it all depends on the operator. But a little bit more of a you can see the path to the the exit you know, and I say it is you got to be careful what you say because it’s always case by case and late the end where you really know but but it’s good. So you’ve got your property you’re in Arizona that you’re in last and final her best and final? And what do you guys feel like? Is the Arizona market you want to really plant a flag and and build? Or is it still just find the find the best asset wherever the best opportunity of?

Linying Zou 37:12

Yeah, I mean, we do have a focus in Arizona right now. I mean, our key strategies has always been inland pro cities, right. And I secondary cities, that’s getting the population income and growth from the coastal cities through the cost of living, better quality of life, etc, etc. So we do you know, so we actually went through a market criteria exercise and, you know, Phoenix, Arizona does fit most of the criterias that we come up with. And so yeah, so we do want to have a focus in Arizona at this time. We really not looking unless like our partners bring us in as like a coach up on a deal in another market? We will we won’t look at any other markets at this time.

J Darrin Gross 38:01

Okay, got it. And are you still in regular contact with the people you met at these conferences? Is that are you? Do you look to them? When you’re trying to raise capital for your? Your own sponsor deals?

Linying Zou 38:17

Yeah, absolutely. I mean, it’s important. I mean, in real estate, or any anything really, it’s important to have partnerships, right, because they compliment you. And, you know, for partners that we found at these conferences or meetups or, you know, people that we know, we actually, you know, have a regular scheduled calls with them to build that relationship, because we think it would look partnerships a long term thing, like we never just go to, like know, someone get to know someone at a conference. And then six months later, we have to say, hey, you want to come in on this deal with us? No, we want to know you. We want to know, if you’re ethically aligned, if you treat your investors like we do. How is your underwriting? Like? How do you, you know, how do you look at these business plans. So I want to make sure that all of our emails align first, and then you know, we start to say, hey, you want you do want to partner on a deeper level. So all of our relationship is, you know, is maintained through, you know, through years, and that’s what we want to do going forward to is just have these long term partnerships that we can, you know, tap into for resources, it’ll help them they need help, and that way we can kind of grow together.

J Darrin Gross 39:29

Oh, that makes a lot of sense, makes a lot of sense. Linying if we could, I’d like to shift gears here for a second. By day, I’m an insurance broker. And I work with clients to assess risk and determine what to do with the risk. And there are three different strategies we typically consider. The first is we look to see if we can avoid the risk. If that’s not an option, we look to see if we can minimize the risk and when neither the avoid normal Minimize strategies will work, we look to see if we can transfer the risk. And that’s what an insurance policy is. And I like to ask my my guests, if they can take a look at their situation and or their investors or clients situation and identify what they consider to be the biggest risk. And for clarity, I’m not necessarily looking for an insurance related answer. But if you’re willing, I’d like to ask you, Linying Zou I’m sorry, Linying Zou, is that right? .

Linying Zou 40:39

Zou,

J Darrin Gross 40:40

Zou.

Linying Zou, what is the biggest risk?

Linying Zou 40:48

Well, as owner operator of real estate right now, the biggest risk is a prolonged recession and sustain high unemployment. And if there are no more government stimulus, because that will really affect our collection and, and its collection numbers. So that is really the Biggest Risk.

J Darrin Gross 41:14

Yeah, I think there’s a lot of people that are, like we said, you know, kind of waiting to see what happens here. It does seem Well, I don’t know, election and all that stuff going on right now. It would I would hope that there’s some sort of a an effort to keep things afloat rather than just let it crash. But I guess time will tell. Linying, Where can the listeners go? If they would like to learn more connect with you?

Linying Zou 41:46

So yeah, your listeners can come visit our website at www.akrascapital.com. Akras Capital dot com and where you can just send me an email. at lzou, LZOU@akrascapital.com as well. So we have we have a lot of educational content on our website. And we have a monthly newsletter and well white paper called the new roadmap to financial freedom. If anyone downloaded it, you can find it on our website as well.

J Darrin Gross 42:15

Great Linying, I can’t say thanks enough for taking the time to talk today. I’ve enjoyed our talk and learned a lot. And I hope we can do it again soon.

Linying Zou 42:25

Yeah, thank you.

J Darrin Gross 42:27

All right. For our listeners. If you like this episode, don’t forget to like, share and subscribe. Remember, the more you know, the more you grow? That’s all we’ve got this week. Until next time, thanks for listening to Commercial Real Estate Pro Networks CREPN Radio.

Intro 42:46

You’re listening to CREPN Radio for influential commercial real estate professionals. For more information on this or any of our guests like us on Facebook, CREPN Radio

Investors Sponsors and Real Estate Deals with Trevor Crow – CREPN #275

Trevor Crow 0:00

You know, I often get a call, I get calls from people who say, Hey, we want to, we want to do real estate deals. And we want to, and maybe we’ve done a few in the past and been successful. But now we want to do it on a on a bigger scale. And so we want to, what we want to do is raise a fund, we want to raise, we want to get a bunch of capital in and we’re going to go chase deals, real estate deals, and a lot of times they say, you know, I say all right, do you have you know, properties lined up or in the pipeline or locked up in that with a purchase and sale agreement, or at least an option or a term sheet? And they say, No, you know, we just want to raise the money and then go look for him. And inevitably that that fails, unless you’re, you know, a big institutional real estate company that that has a long track record. It’s really hard to raise money unless you have a specific project because investors just say, hey, show me that what projects you want to invest you want to what project what the project is, and I’ll decide whether I want to invest or not.

Announcer 0:40

Welcome to CREPN Radio for influential commercial real estate professionals who work with investors, buyers and sellers of commercial real estate coast to coast. Whether you’re an investor, broker, lender, property manager, attorney or accountant, we’re here to learn from the experts.

J Darrin Gross 1:00

Welcome to Commercial Real Estate Pro Networks CREPN Radio. Thanks for joining us. My name is J Darrin Gross. This is the podcast focused on commercial real estate investment and risk management strategies. Weekly we have conversations with commercial real estate investors and professionals who provide their experience and insight to help you grow your real estate portfolio. Today my guest is Trevor Crow, founder of Crow Legal LLC, Trevor founded Crow Legal LLC to deliver sophisticated and practical legal solutions for companies looking for an alternative to a large law firm. His focus in business transactions include complex joint ventures, and syndicated real estate deals. And in just a minute, we’re going to speak with Trevor about real estate joint ventures. And But first, a quick reminder, if you like our show, CREPN Radio, there are a couple of things you can do. You can like, share and subscribe. And as always, we would encourage you to leave a comment. We’d love to hear from our listeners. Also, if you want to see how handsome our guests are, be sure to check out our YouTube channel. And you can find us on You Tube at Commercial Real Estate Pro Network. And I’d like to encourage you to to subscribe there as well. With that, I want to welcome my guest, Trevor, welcome to CREPN Radio.

Trevor Crow 2:54

Hey, Darren, thanks for having me.

J Darrin Gross 2:56

You bet. I am looking forward to our conversation today. But before we get started, if you could take just a minute and share with listeners a little about your background.

Trevor Crow 3:07

Sure. So I grew up in the Denver area I’m still in Denver now it’s where I Crow Legal is based. And we I went to law school at DU Denver University and graduated in 2009, which was not a good year to graduate law school. There was a right in the downturn in the economy and and law firms weren’t hiring. And so, you know, I had to had to deal with that initially. And I think really think that’s a big part of my background. Actually, that’s why I mentioned it and came out then. And, you know, had to the firm I was supposed to go to kind of had to retract the offer that I had because the work was just so slow, especially in the transactional area.

But anyway, they ended up bringing me back there and long story short, I bounced around to three different law firms and Denver, mid sized law firms, you know, from 20 to 50 lawyers and made partner at one of them in 2017, and was a partner there for a year. And then I decided to, and that was mainly a real estate firm. And so that’s kind of where I got a lot of my real estate experience. And then ended up in February of 2018 jumping out on my own starting Crow Legal and did did that. And since then, you know, we’ve kind of took off and I’m kind of a boutique transactional firm in Denver. doing deals we I mean, we do deals all over the US but focusing on real estate joint ventures, syndicated real estate deals. We represent both investors and promoters and developers. And yeah, so I currently have two other attorneys that have I’ve hired since I started the firm and in our three attorney shop and just trying to make our way.

J Darrin Gross 4:57

Well, congrats on surviving the start in the market you’re in and and, you know, pulling the ripcord and going out on your own. I know that’s always a thought a lot of people have and to actually do it is a whole nother thing. So congrats on that.

Trevor Crow 5:14

Thank you.

J Darrin Gross 5:17

So, real estate. You mentioned your, your, your background, and what you learn there, the firm where you were made partner. Can you describe kind of the breadth of types of transactions and what you’re doing with real estate?

Trevor Crow 5:37

Yeah, so, you know, typically, again, we were representing either the investors or the developer or promoters in a real estate deals. And so, you know, really our, my our focus is not so much on the purchase and sale agreement and locking up the property. A lot of times what we’re drafting is all the entity documents and so we’re doing the operating agreements. And when I say syndicated real estate deals, I’m talking about ones where, you know, there’s a developer who’s gonna have to raise part of the equity. You know, usually a real estate transaction involves a bank loan, which covers part of it, then there’s going to be, you know, equity that they developers or investors are putting in. And so a lot of times, developers don’t want to put in all their money into the one project or either because they don’t have all the money or even if they did, they don’t want to sink it all into just one project. They want to do several projects. And so they go out and they find investors and so with that, they have to raise the money and comply with securities laws. And so we’ll draft all the securities documents will draft all the entity documents and we’ll help navigate all those. And you know, that the joint venture agreement or what I call it joint venture agreement, typically in the form of a operating agreement for an LLC, that is the buyer of the real estate, is is very complex document, depending on the parties involved, and that sort of thing. And so we’ve really carved out a niche and being able to draft those operating agreements and represent either that either the seller or I’m sorry, either the investors or the promoters on those deals.

J Darrin Gross 7:12

Gotcha. And you mentioned joint venture versus syndication kind of thing. Can you distinguish between the two structures or what the differences?

Trevor Crow 7:25

Yeah, you know, there’s there it’s kind of one in the same honestly, what what when I say joint venture is because, at least in my world, there’s attorneys who say they can draft operating agreements for, you know, draft an LLC operating agreement, so somebody forms it and an LLC and whatever state what governs that LLC is the LLC act as well as an operating agreement, which is what is put together to kind of govern the management, the how the economics, work distributions, allocations, all that is built into the operating agreement and You know, an operating room for an for a business say it’s an engineering company. And there’s three, three engineers who get together, they want to start an engineering company. And you could add, they could form an LLC. And there could be an operating agreement for that. But that operating agreement is going to be very different from what I’m calling a joint venture operating agreement, one where there’s somebody who’s managing the the deal, the real estate project, so again, probably a developer, or just a value add sort of real estate person. Somebody who’s going to go and lock down the property get it locked in and a purchase and sale agreement and is going to manage the property either develop it from ground up or is going to do some you know, value add renovations to it, and get at least up or whatever they’re going to do. And so there’s that party, but there also may have to go out and get equity from other people so other investors to come in and put money in so they can close on the on the real estate and, and so When I say syndicated deal, it’s any sort of deal where they’re going out and getting investors to invest in it.

J Darrin Gross 9:07

Okay, we’re like passive investors as opposed to active kind of thing.

Trevor Crow 9:12

Right? Exactly. So it’s gonna be, you know, the manager or the general partner who’s controlling all the operations, but there’s going to be limited partners or, you know, just passive members of the LLC that are investing money in the project and, and you know, want to get a return, they get usually some sort of preferred return and return to capital. And then there’s a, some sort of split after that where the developer gets all their money because they sell the project for a big profit, you know, five years from now.

J Darrin Gross 9:42

Right? Do you tend to deal and more of like, development projects or a lot of like, I think the common term is value add guys are buying an existing property, they’re going to go in and renovate some increased rent. To increase the NOI, value and then liquidate. Is there any? I mean, do you do one more than the other? Or is it kind of can you describe? Your your?

Trevor Crow 10:12

Yeah. Yeah, the allocation of practice there. So it really is probably 50/50 honestly, right now, at least. We’re doing several working on several ground up development deals. And so buying raw land and developing it, which adds a you know, a whole new element to it because you have the whole entitlement and permitting process and things like that and, and more agreements involved because you have general contractors that need to be hired, and, and that sort of thing. But we also do a lot of just the, the value add type projects where, you know, it’s could be in multifamily buying an apartment building, or it could be, you know, an industrial warehouse or it could be just, you know, retail, commercial properties and so we that are existing, and they’re just trying to you know, Like I said, either do some renovations and increase rent or get at least up and be better at marketing it or something like that, and then flipping it later.

J Darrin Gross 11:10

Gotcha. And for the, the, the key principle of the party that sponsoring the the deal. Can you walk through some of the, I guess the the risks and the benefits of working on a deal like this, as opposed to, you know, taking an all on themselves or, or maybe not going out and finding investors and I guess I’m trying to differentiate between, you know, the opportunity, the risk reward of the of the model of going into this with a joint venture syndication model.

Does that make sense?

Trevor Crow 11:49

Yeah, it’s so I think the risk reward from the developer side is, you know, if they put no one if they’re putting all their money into it, because typically Banks not going to provide 100% financing. So you know, then then they’ve kind of put all their eggs in one basket. And but on the back end, you know what, if you bring in investors, one, you have to deal with them. And so they may have certain rights and decision, major decision rights or things like that, that they’re negotiating. And they may have misaligned interest in that they they want to sell the property at a certain time versus when, you know, the developer wants to sell it, and things like that. So you certainly have some push pull there and potential risk with just having other in other people involved in the project. Now, the other thing from the economic standpoint is, you know, the, how the distribution waterfalls typically work, at least in the deals that we’re been involved in, is, you know, it’s gonna you have the property, let’s just say it’s a multifamily existing property and they’re going to be collecting rents, you know, at it. As soon as they buy it, they’re going to start collecting rents. And so they have money coming in and that that cash flow usually goes out first to pay the investors. And so, you know, maybe the, the sponsor of the project takes a management fee as part of it. And so that’s kind of how they stay afloat. But really, their their big payday comes at the end of the day when they sell it, because hopefully they’ve added value, they’ve leased up the property, and now they can sell it for a much higher price than they paid for it. And at that point, the money flows out first to the investors give them all their capital back 11% on on their money for the time period that they’ve owned it, and then the money usually split in some sort of 80/20 fashion or 70/30 fashion where, you know, 80% goes to all the investors or anybody who committed capital to the or made capital contributions to the entity and then the rest is coming out as a as a promote to the, to the developer of the sponsor, and so, you know that 20% or 30% they get on the back end is really their payday. And so they’ve kind of taken a risk that, you know, their big payday for all their work doesn’t come out until till the end of the day.

J Darrin Gross 14:19

Yeah, no I the, you know, the cycle of the deal. I appreciate you kind of going through that because I think a lot of people get kind of wound up in the, you know, the, the passive investor side of things, not really talking about the sponsor side of what, you know, what they stand to gain, but also that their their interests are aligned with their investors. I mean, if your investors aren’t, if you don’t, you know, satisfy your investors. I’m assuming you’re not going to make your money, right. I mean, the investors are in line ahead of you, as far as getting their return and you get your management fee along the way. Like I said, it’s kind of something to sustain you, but not necessarily that The big win that that everybody is looking for. And in your experience what’s been like a typical hold period for for some of these properties?

Trevor Crow 15:16

So the hold period has varied but usually I see where everybody is trying to have some sort of either five to 10 year period of when we’re going to try to turn the property round now different different sponsors have different thesis is on on the property and theories on when they’re going to do it. And so some think that it may happen earlier and try to push for that try to you know, do a quicker sale and in two to three years, but usually, I would say most investments are in the the five to 10 year timeframe.

J Darrin Gross 15:53

And as far as the size of deal, what can you give us a range of the purchase In the capital raise kind of range of, of size of deals that you you’ve worked with?

Trevor Crow 16:08

Yeah, so we we’ve kind of gone across the board on that. So we’ve, you know, done $90 million real estate fund and worked on that, which was obviously doing multiple properties. And we’ve also done we do have a lot of clients that are just kind of the the side side hustle mom and pop it real estate investors that are going out and but they have friends and family who contribute and invest money in these projects. And so they’re just buying, you know, an office building for, you know, a million dollars or something like that. But usually it’s in that range, I would say, I mean, just real estate prices have gone up. So real estate in general is expensive. But most of our deals are kind of in that, I would say a million to $10 million range.

J Darrin Gross 17:00

Got it.

Trevor Crow 17:02

and that’s total purchase price. So sometimes the raise the, the, you know, the investors that they’re getting, you know, are well, on the fund part, they were actually raising $90 million. And so that that was a big one for us, but the, you know, in a smaller one off project, it’s, you know, they could be raising anywhere from 250,000 to, you know, a million dollars.

J Darrin Gross 17:26

Gotcha. Gotcha. You know, talking about kind of the financial risk reward there that we were talking about. Have you had any issues or any stories where you’ve had kind of a mutiny or or where the investors have been so dissatisfied that they’ve, you know, sued the sponsor in any kind of tales like that, that are some cautionary tales that you can tell things you’ve seen? I mean, I’m sure that your documents are set to where, you know, if this happens, this is where this where you go to, but I know that that’s, that’s always the plan, but in reality can deviate from that and anything that you can share with us.

Trevor Crow 18:14

Yeah, certainly. So yeah, and it’s come up and in a lot of times, it’s the timeframe question where investors want to, to sell and, and get their money out and, and the promoters don’t want to sell at this time either because they think the market is going to turn and for the better or if they had a little bit more time, they could get a better rate. And, you know, the thing to consider there is, you know, from the investor standpoint, if if the project sells would sell for enough for them to get their capital returned and the preferred return, you know, some some percentage on their money that they’ve put in, they may be okay with the sale, but the promoter hasn’t, you know, they only get paid if it’s just enough. Return capital and the preferred return. And they don’t get that big payday at the end. And so their, their incentive is to keep it and hold it and hope to get a higher price because that’s where they make all their money. Whereas the investors may say, Well, you know, we don’t need to even get to that split yet. And we Let’s sell now and cash out. And so that’s come up. And, you know, often in these joint venture agreements, there’s a major decision rights and major decision rights usually require a these are the big items, you know, taking out more debt, selling the property entering into you know, affiliated in a contract, something like that. And so that can be that can be a point of contention down the road and so we always like to make clear, make it clear on who can make that decision and when in these joint venture agreements. The other the other thing I would point out is you know, you typically there’s ability to remove the promoter so if the promoter and take away their promote if they do Something bad. It could be usually included in that it’s, you know, fraud, gross negligence, things like that. And so obviously, if they commit that, and the investors can remove that person, as manager, take away their promote, and you know, theoretically at least hire somebody else to come in there and manage the project. And, you know, the issue with that sometimes is that we had a deal before where there was the principles of the developer or the promoter company, were really good people. Unfortunately, they hired somebody who was who was doing maintaining the books, who was skimming off the top, and so technically, the company had committed fraud. And so luckily, we had investors in there who were friendly enough not to remove you know, the us as manager or my clients as manager and take away their promote they we did have to reimburse the company for the amount that was stolen and obviously went after the the bookkeeper who was skimming off the top but there’s You know, technically that was a, that was fraud and they could have been removed. And so something to be aware of that, you know, if you’re running a larger operation and you have employees, you know, that can can lead you into a really bad situation. Luckily, you know, in all other respects, they’ve been managing the property very well. And and doing all the right things. And so, you know, the mistake, the hiring mistake didn’t lead to them actually losing it, but something something to be aware of there, too, which I’ve seen.

J Darrin Gross 21:30

Yeah, it’s, it’s always scary to some of the schemes that people cook up. I know, my dad was a banker, career banker, and occasionally when I didn’t have any funds to do something over spring break, he’d say you want to get a job in the bank because I go, okay. And, you know, it’d be a few months later and he’d go you remember so and so? Gosh darnit, I caught them stealing, you know, and, and, you know, be a dinner or something like that, you know, and it was always some elaborate little scheme. You know, how they met came out with it, but it’s, you know, it happens quite a bit.

So, you know, you mentioned the, the investors want to sell the sponsors not ready to sell. Is that kind of the the more of the focal point of issues you’ve seen? I mean, I know you mentioned the you know, if the operators not the operator commits fraud or whatever they can be taken out but, but as far as I’m just looking for, or I guess I’m asking about just anything friction that comes from the investor side. I know once you you know, if it’s, if it’s you and me, we can probably agree on a lot of things. We’re bringing somebody else and all sudden now we got a third person and and then you just continue to multiply that Rubik’s cube to where it’s not always easy to get everybody on the same page or you think they are because they signed all the documents that you know, to enroll in the deal. I’m just kind of curious, any other points of friction that you run into? Or if you’ve seen?

Trevor Crow 23:08

Yeah, you know, another big one I would say is additional capital contributions. So if the idea of that project is we’re going to go in there, we’re going to renovate and do some things, and it’s going to help us increase rents or whatever it is to add value to the property. You know, typically, there’s a budget that’s put out right and says, here’s what it’s gonna cost to do all this and this is why we’re raising this money. And it’s hard to put together budgets, because they’re not always correct. And so the, you know, investors usually want to put in their money, and they don’t want to put any anymore. They said, you know, this, you you you’ve told me, this is the budget, this is the project, I’m investing this amount of money and I don’t want to put in any more. But that can put the, the promoter or sponsor in a bad position because if they don’t hit those budget targets, and they Need more capital than then what are they going to do, they either need to put in the money themselves, or they need to get more bank financing, which is a lot is hard to do. And or they need to go back to the investors. And so, you know, this gets negotiated in most of these agreements. And it’s kind of a point of contention on, on whether they can or can’t force the investors to make additional capital contributions. And, you know, it kind of is a negotiation that goes back and forth. But even in the case where there is required additional capital contributions to, you know, either cover an operating deficit or a development cost, deficit or overrun, then, you know, a lot of times there’s a that can lead to friction between the investors and the sponsor. And in that investors are saying, you know, what happened? You, you had this, you had this budget, how come we’re off? Why are you asking me for more money? And, you know, no matter what the document says, there’s still that friction. That’s created in potential disputes between the parties there that’s, you know, uncomfortable to navigate. So, you know, we always try to make sure that when we’re representing sponsors, especially first time, people who are really doing this, to make sure they have enough, either additional capital themselves or additional line of credit with a bank, or they have, you know, built in enough buffer in that budget to say, you know, there could be cost overruns here on some of these things.

J Darrin Gross 25:32

No, I know a number of my projects. They’ve all i don’t know that anything’s ever come in under budget or time. bills are settled saying good, cheaper, fast. Pick two, you know, yeah. And so I think the, the, you know, especially with I tend to believe that’d be a bigger issue with a lesser experienced operator. Because I’m guessing that your more experienced operator has learned that lesson. Also, I would I would guess would make it difficult to go raise capital. If that’s your if that’s the rumor on the street is the project you did. I mean that the people that you had in the first deal probably aren’t going to sign up to do a second deal. If that’s that’s your experience base. So that’s, that’s good to know.

So from a passive investor standpoint, what are some things you can you can point to that passive investors should look at or be aware of when engaging in a joint venture or syndication as far as you know, the the agreements or the the operator, are there any kind of things you can point to?

Trevor Crow 26:52

Certainly, yeah, so the A lot of times these get these agreements get drafted and and investors don’t really pay much much attention to it depending on, you know, obviously, if it’s a big institutional investor or just a big, you know, investor who’s putting in a lot of money, they’re gonna do their due diligence more than if you have a around, you know, you’re raising money and you’re getting it from small amounts from 20 different people that are all friends and family, they may just be buying into the person as opposed to the projects, you know, so they’re not paying attention to the documents as much. But the big hammer that I think if you’re a passive investor that you want to kind of have on your side is one that there’s budgets that need to be approved. And so the budgets come in in the beginning, and, and an annual budget is comes every year, and it’s improved, approved by the investors or certain percentage of the investors. And so that that’s one big thing. And then that kind of ticks, ties to a lot of other decisions, you know, so that the manager or the promoter can’t really make a lot of decisions outside of the budget, if it’s in the budget, and it’s been approved. They make those decisions. If it’s if we start getting outside the budget, then that’s go back to the class A members for approval. Also sale of the project approval of that by the, by the Class A members or, or I’m sorry, I say Class A because a lot of times the investors come in as a separate class, but really just the investor members have the ability to, to approve a sale or have to be it has to be brought to a vote of the members to approve a sale. And a certain percentage of those investors have to vote for it for it to happen. You know, those major decision rights are really the big ones that a passive investor should look for. So there’s not just a unfettered, unfettered ability for the manager to do or promoted to do whatever they they want. And, and I keep going back on these terms, you know, I sometimes people call managers sometimes they call it a promoter, sometimes they call it a sponsor. I’m using those terms synonymously as the same thing, it’s really the the person who’s kind of bringing the deal to the table and going to be managing the project.

J Darrin Gross 29:06

Understood, I appreciate you clarifying that because I know I, I think I’m pretty clear on that. But I know that it’s easy to get, you know, kind of mixed up on who’s on first what’s on second and, and you realize they’re all the same or whatever. So, in the spectrum of, you know, doing a deal, there’s a, an investor out there that wants to you know, do a project, raise capital, you know, get their ducks in a row and and, and go out and do a project and you know, be be a developer do be a deal sponsor. Are there some checklist items that you can point to that, that you recommended. They, you know, whether it be time experience resume, you know, any of all or all of the above? Is there a Is there a list when you when somebody calls you up and says, Hey, Trevor, this is what I want to do. Is, is there a kind of a list of things you can recommend the they’d be ready for?

Trevor Crow 30:21

Yeah, I would say, one. So what happens? Now I’ll kind of approach this question in a little different way. But you know, I often get a call, get calls from people who say, Hey, we want to we want to do real estate deals, and we want to and maybe we’ve done a few in the past and been successful. But now we want to do it on a on a bigger scale. And so we want to, what we want to do is raise a fund, we want to raise we want to get a bunch of capital in and we’re going to go chase deals, real estate deals,. And a lot of times they say, you know, I say all right, do you have you know, properties lined up or in the pipeline or locked up in that with a purchase and sale agreement or lease to an option or a term sheet. And they say no, you know, we just want to raise the money and then go look for him. And, and inevitably that that fails unless you’re, you know, a big institutional real estate company that that has a long track record. It’s really hard to raise money unless you have a specific project because investors just say, hey, show me that what projects you want to invest? You want to what project what the project is, and I’ll decide whether I want to invest or not, not many people want to make a capital commitment or an investment. Before they they see that. So this this blind pool fund idea is is very hard to pull off. And so, you know, I think a lot of people get that idea in their head. And it’s a lot tougher than you think just because investors aren’t aren’t going to put up money. So that that leads to the answer to your question, I think is one, you know, have have an idea of the properties that you’re looking at at least have a pipeline of properties.

But at the same time, you know, it’s kind of a chicken in the egg thing where you have to also have investors lined up or at least, you know, soft circled somewhere that that have said, Yeah, we’re interested if you find a good deal. And, and so you want to have those relationships in place, because if you already, if you find the project first and then try to start making those conversations, it’s the timing gets tough. So you’re kind of doing both of those at the same time you’re looking for deals. At the same time you’re talking to investors, telling them kind of what you’re looking at what you’re what you’re thinking about, and getting people excited or interested in so that you at least have a few few people that you have on board that you you know, as soon as you have that project in the door that you can send it to them and say, Hey, what do you think of this? And, and so that that’s important. Having, you know, an idea of the budget is important and something to think about from the beginning. Having your your your team lined up, you know, I think you want to have You got to move quickly on these things. So you need a real estate lawyer to draft the purchase and sale agreement you need, you know, a corporate lawyer or somebody who does entity documents, like me to help with the finding, or putting together that the operating agreements and investor documents that go out. Having, you know, your a good description of viewer track record, you know, any sort of bio on your history, you know, that’s important to investors. Although those things I think are important to think about and kind of have I know, that’s, those are more general rule then kind of a strict checklist, but those are the big things. I think that somebody who’s trying to put together and take take in investments and do real estate deals needs to consider before they’re doing it.

J Darrin Gross 33:55

I appreciate you, you know, taking us through that the I think there’s always This notion if you have the deal, the money will follow. And, and I’ve heard that if you’re, if you’re at a standing start or if you’re at a stop, and you’re waiting to start until you have the deal, you may have waited too long. I mean, kind of like you’re, you’re, you know, kind of putting the feelers like you mentioned is kinda like a juggling act you’re you’re you’re trying to stay in communication with potential investors and let them know kind of what you’re looking at and, and but before you get the formal offer, I mean have a property in mind and in kind of a direction because it seems like the the clock starts right I mean, as soon as you signed the documents, the you know, the bullets are live kind of thing. It’s, it’s, you know, no, no longer nerf kind of thing. It’s that’s the real thing you’ve got, you’ve got timelines and money. And if you don’t meet those timelines, there’s real money on the line kind of thing. So I appreciate that.

If we could, Trevor, I’d like to shift gears here for a second. I mentioned to you before we started that, by day, I’m an insurance broker. And I work with my clients to manage risk. And, you know, assess the risk and determine what to do with it. And there’s a couple of different strategy strategies we typically consider. The first is can we avoid the risk if we can’t avoid it, and we look to see if there’s a way to minimize the risk. And then lastly, if we’re not able to do the minimize or avoid, we look to transfer the risk. And I like to ask my guests if they can identify what they consider to be the BIGGEST RISK? And you know, basically take a look at your operation your customers you, you can frame it however you want to. And again, for clarity sake, I’m not necessarily looking for an insurance related answer. But if you’re willing, I’d like to ask you, Trevor Crow, what is the BIGGEST RISK??

Trevor Crow 36:09

So in my mind, that is assuming that there is no risk in certain actions and or in the status quo. So, you know, for me, I started this firm, which seemed like a big risk at the time. And I started in 2018. But at the, you know, because I was coming from a firm, a well established firm that, you know, paid me and I was, you know, never worried about the paycheck and it just came, and I knew there was business there and as business was going to keep coming in, and so it seemed like a big risk for me to, to go out on my own. Now. Now I look back at it and I think I was at a much bigger risk staying at that firm than I am now. And it kind of goes back to my roots of graduating law school in 2009. And seeing that the the people who had got terminated the attorneys that got let go or laid off. Were not the attorneys with big books of business. Those attorneys always have a place. And so if you have clients, if you have relationships you have, you know, people who know like and trust you and come to you do work for them, you always have a place to anywhere you want. Or you could write your own ticket by starting your own firm. And, you know, the firm I was at was a great firm, great attorneys loved it there. The problem was that I was the corporate guy doing all the corporate work for other people’s clients. And so at the end of the day, you know, my risk was, as I look back at it now, it was more of a risk for me to be there than it is now because now I have my own clients. I have those relationships, direct relationships, and when they have issues that come to me, and and so I can write my own ticket a lot more than I could At the prior firm, and so I think, you know, often people think that certain, whatever society says, or whatever seems normal and safe might not always be normal and safe because, you know, big, big fortune 500 companies will lay you off. And, and that happens all the time. And so just having that job doesn’t necessarily mean you’re safe. And so, you know, I think bottom line is sometimes take what seems like a risk might actually be safer in the long run.

J Darrin Gross 38:31

No, well said I think there’s a lot of people out there that believe if you have, are there security with a job, you know, I think it’s kind of a lot of the way we’ve been. Our society is kind of reflected you know, you go back a couple generations and, and you know, you look for the union label or whatever you want to was and just kind of the, the, you know, the comfort I think is probably to a part of that is a lot of times of jobs, they give you just enough to to satisfy you, but keep you hungry, you know, not so much you’re not hungry kind of thing. And you don’t realize that what’s what’s on the other side of the fence and then then the flip side of that is a lot of times the the opportunity always looks, or the grass always looks greener on the other side of the fence, but it’s just as tough to mow kind of thing. You know, there’s so but that’s, that’s, that’s great. I mean, again, I commend you on on jumping out on your own and congrats on your success. So

Trevor Crow 39:26

Thank you. Appreciate it.

J Darrin Gross 39:28

Hey, Trevor, before we wrap up, where can listeners go if they would like to learn more connect with you?

Trevor Crow 39:35

So my website is www.crow.legal and so it’s not a.com it’s dot legal and so crow.legal and so all my information is on there. But you know, you can feel free to email me at Trevor@crow.legal, happy to talk to anybody who’s who’s looking to do a deal or whatever, even if you just want to want to chat about it and bounce ideas. Happy to do that. You No, we don’t charge for anything like that or initial consultations, you know, we want to make sure we’re the best fit before you ever receive a bill for us from us. And, you know, my direct line is 720-230-7123. You could call me there as well. And yeah, so feel free to reach out anytime.

J Darrin Gross 40:18

All right. Well, Trevor, can’t say thanks enough for taking the time. I’ve enjoyed our talk, learned a lot and hope we can do it again soon.

Trevor Crow 40:27

Sounds good. Darrin, thank you.

J Darrin Gross 40:29

Announcer 40:48

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Earnings with Lior Gantz – CREPN #274

Lior Gantz 0:00

When you do when you buy a company if it’s a private company if it’s a laundromat or a restaurant in your area, whenever you look at earnings. What am I buying compared to what am I paying? Today, investors are paying some of the highest prices for stocks compared to the earnings that they make. But if you look at the alternatives to generating a return about 75% of the worlds bonds yield less than 1%.

Announcer 0:35

Welcome to CREPN Radio for influential commercial real estate professionals who work with investors buyers and sellers of commercial real estate coast to coast whether you’re an investor broker, lender, property manager, attorney or accountant We are here to learn from the experts.

J Darrin Gross 0:53

Today, my guest is Lior Gantz. Lior is the founder and editor of the free number one rated financial newsletter, Wealth Research Group. He’s an investor. And in just a minute, we’re going to talk with Lior about the real economy versus the stock market. But first, a quick reminder, if you like the show, CREPN Radio, there’s couple things you can do. You can like, share and subscribe. And as always, we would love for you to leave a comment we’d love to hear from our listeners. Also, if you’d like to see how handsome our guests are, be sure to check out our YouTube channel. And you can find this on YouTube at Commercial Real Estate Pro Network. With that on welcome back, Lior to CREPN Radio. Lior welcome back.

Lior Gantz 2:09

Thanks for having me back.

J Darrin Gross 2:11

I’m looking forward to our talk today. I think the last time we were together, things were a little different. There was no pandemic. And you know, just definitely some some different circumstances. So but before we get started, if you could just take a minute and share with the listeners a little bit about your background.

Lior Gantz 2:34

Okay. I’m 36. And when I was 13, I think I had a pivotal moment in my life where my father’s business went under, and I had to start earning money for myself if I want to allowance and stuff. So I started babysitting in my neighborhood. And then I told all the parents that I was babysitting at least the male children. That I can tutor them in basketball. So I upsold the parents. For the first time in my life, I upsold something. And then babysat, tutored basketball, and started saving money. I’m 16. I have $20,000 in the bank saved up from like three years of this stuff. And the banker says, Well, you have all this money, why don’t you invest in a way to make your money work? And what does that mean? This? Well, you you invest in the stock market, sign up, get your parents sign waiver, your 16 it’s your parents sign a waiver and we can start doing this. And this was June of 2000. It’s like three months after the.com bubble burst. So in hindsight, a very good time to start investing, and he was like, you should you should see China. And so he was literally telling me great stuff. And then I asked him, What should I learn? Because I was in high school. So you know, my mind is like, what book should I read? Amazon was just starting to ship books. So I bought A bunch of books in English and started tearing through them. And that’s how I got into investing.

My father’s my father had a second business and third business both going under as well. So my mind was obsessed about risk. And what’s he missing? Because I’m, you know, father figure is very important in your life you always assume as a hero, and here’s this guy failing and failing and failing. So, by the time I’m 23, I’m so engaged in entrepreneurship and business and how to do it, right. And that’s the path I took life entrepreneurship and investing. And about four years ago, I really, it’s something to me that most people do not read, you know, one book a week for, for their entire 20s and most people do not have financial education. So I said, let me congest everything that I’m doing because I’m reading four hours a day Talk to CEOs and I, I do the business in our own business and let me congeste it to bite size article three times a week, a week about the economy what’s going on, if I see specific opportunities, then to cover them as well. And that’s how we found that Wealth Research Group in 2016. It’s a free letter, it was one of the first letters to cover Bitcoin $400 per coin. And in early 2017, it was the first newsletter that I know of that covered ethereum, which was a cryptocurrency that traded for $12 when I covered it in $1,000, six months later. And last year, when I was on the show, we talked about gold, gold is actually as we’re doing this interview is an all time high. So, you know, that’s sort of the the way that the newsletter works. We really talk a lot about the economy, and we try to see exactly what’s really important for To give educated on right now and to cover it.

J Darrin Gross 6:04

So let me ask you the the I’ll say the average consumer myself included you turn on the news there’s a blip usually about the the market rallied or the market gave back. But it’s usually focused around the indexes. You’ve got your your DOW or your a in

Lior Gantz 6:29

The Dow and

J Darrin Gross 6:31

S&P yeah NASDAQ and the S&P 500. And those are kind of like just these reference points that are kind of like a collection of multiple stocks and an index and I think if I recall the DOW is the, the collective price of multiple stocks

Lior Gantz 6:51

30 industrials, the 30 Industrial stocks Yeah.

J Darrin Gross 6:54

Okay. So they’re their price combined, equals this. This index

Lior Gantz 7:00

So no, it’s it’s, it’s, it’s weighted on the market cap. So it’s not something like each company is 3% of the index of the index. It’s it’s weighted according to your industry, ya know, to your size to your market.

J Darrin Gross 7:17

Okay. Gotcha. Gotcha.

All right. So, so if the average person is watching the news, and they see it’s up, it’s down, it’s up, it’s down. It’s up, it’s down. And you have some sort of a reference point. I mean, like, right now, I know when when this whole COVID thing started. I think we were, we’re closing in on 29 or we are at 29,000 for the Dow. And since then, I think yesterday I was watching it’s been hovering 26. Close to 27.

Lior Gantz 7:51

Right now.

J Darrin Gross 7:52

Okay. And it. So I mean, the, you know, you look at that and you say it’s down, you know, what is that 10% Okay.

Lior Gantz 8:02

Yeah, from the highs.

J Darrin Gross 8:04

Okay. And all things considered that seems like a not not a horrible place to be considering what’s what’s taking place. My my concern and I think that one of the challenges for really understanding what does that mean when you have all of this governmental interaction with the supporting of the markets and the kind of propping up the markets? How do you take a look at that and sort through that? Is there a, is there any kind of a sense of a false market there? That’s, that’s, you know, if the government doesn’t continue supporting it, that it that it collapses or is it or is there a weight given or help me understand how you, somebody that studies us day in and day out, looks at that and views it.

Lior Gantz 9:00

So that is literally the question of questions that is on everybody’s minds, you know, from the retail investor to the hedge fund manager, Warren Buffett, everyone is literally trying to understand if this market is what we call artificial, if it’s if it’s fake. And if it’s fake, what’s the real price? And if it’s not fake, how am I getting it wrong? Why do I think it’s fake? And it’s not. So the first thing you want to look at is earnings.

Today’s when you buy an index, or the when you buy shares of the Dow Jones, or shares the s&p 500 points, the s&p five etc. What you’re buing is a collection of companies and now you own a piece of them. And the first thing you do when you buy a company, if it’s a private company, if it’s laundromat or a restaurant in your area. Whenever you look at earnings, what am I buying compared to what am I paying? Today, investors are paying some of the highest prices for stocks compared to the earnings that they make. But if you look at the alternatives to generating a return about 75%, the world’s bonds yield less than 1%. As an insurance broker, you obviously know that what insurance companies do are property and casualty insurance specifically or Warren Buffett even more specific because he came up with this is they they take all the premiums in advance, and then they have a float. Basically, this is money. That is that they need to keep on reserve in case their claims on it. But in the meantime, they get invested. That’s a float Where insurance companies investors flow. This is billions and billions dollars of your money, basically, that you paid. They may well retain it. But they for the meantime, after keeping in reserve, they get invested tax free. That’s how insurance companies become giants.

And usually, they don’t want to do the stock market, they do bonds. Now they can’t do bonds. Because you can’t generate a return, you’re getting less than 1%. Inflation is higher pension funds, same thing throughout history throughout the 1980s. The 10 year bonds so you lend Washington money for 10 years, you get 8, 9, 10 percent. In the 90s. It’s about 6 to 7%. In the 2000s. It’s about 4 to 5%. Still great returns overall for very low risk. Today. Zero. And so when you have this challenge, then stocks are just worth more companies are worth more you can pay more for companies if there is no other an alternative, because if the dividend yield of the s&p 500 is 300 or 400%, larger than the yield on the 10 year bond. You know, there’s a point where pension funds and sovereign wealth funds and hedge funds etc. They just stopped with that 6040 mentality because they were not earning anything on their bonds. So, this is one thing that is driving stock prices are much higher. Secondly, think about all of the real estate investors who cannot invest in hotels, casinos, construction of retail, all these you know, very troubled industries and they have to go towards stocks.

Now suddenly stocks you look at what they did in time before And they had a lot of their expenses offset and their expenses basically with the government. Government is paying their their salaries for the employees can lend and they can borrow money from the government to pay a lot of their expenses. So a lot of companies have adapted really quick talking about the multinational companies. And as you as well, pointing out, the s&p 500 is only 500 companies. The Nasdaq 100 is 100 companies in the Dow 30s 30 companies. So this is a collection of 630 companies. And most of Americans have nothing to do with these companies. They don’t work for these companies. They don’t own shares in these companies. 84% of the stock market of the s&p 500 etc, is owned by the top 1% of Americans. We say that again. 84% of the equities are owned by 1% of the people in America. So most Americans have, you know, they they don’t if the Dow is 30,000. That’s a that’s the annual salary. That’s the annual median median salary. For most Americans. It’s the median salary, basically, step. So if it takes you one year, to buy the doubt, that is an all time high right away in 1980. It took about 10% of that. So you could have bought 10 times more be part of the american enterprise system. today. It takes you a year. That’s, that’s insane. So that’s why you have this wealth gap. Why did this wolf gap happen? Why is there is there such an income gap?

One thing is education. When education is so expensive, there is a there’s a certain segment of the population that can never enter college and never go into college, high tech, etc. They’re stuck 30-40 years behind and industries that are getting either outsourced or optimized, or whatever else. And just they’re frozen, their salaries are going to be frozen, etc. So that’s one thing, education and the cost of education. Secondly, what you have in America is the financial system is predominantly handled by the Central Bank, in the central bank, this does not really touch Darrin. It can’t reach Darrin. It can lower interest rates, which indirectly in signal to Darrin and hey, maybe Darrin should, instead of rent, take a mortgage, and then that will fuel the real estate market. But they never touched the real thing. Whereas the government, it can come to Darrin and say, Hey, Darrin, want to buy a house? We’ll give you two years of tax breaks. That’s that’s touching you directly. And I’m not a not an American, and I’m not a political animal. So this is not a political action or something. But during the Obama years, the government was pretty much laid back on, on doing fiscal policy. They left everything up to the central bank. And the central bank wanted the baton, and to the government, but the government just didn’t take it. And so, after 2008, you lower interest rates. If you get over the hump, you get a lot of deficits because of this, but then government needs to start, you know, maneuvering the economy and it didn’t. Trump, on the other hand, is very proactive, maybe does a lot of mistakes. We’ll have to judge that, you know, a few years down the road, but he’s very active tax tax cuts, opportunity zones. You know, working on a trade deal with China. These are all things that touch the people and obviously people PPE, all the things that are happening right now, that’s the government and not just not just the central bank. That’s what you’re going to see going forward. It’s a marriage of doing both of these together. Because interest rates are already at zero. So like a big answer to your question is, there’s the real economy, or 54% of Americans are employed. That’s your small businesses, you know, mom and pops. And then there’s the rest. The rest are doing pretty well, because the central bank has created a situation where they have a lot of liquidity. This is very unusual for a crisis usually. And of course, it’s all the credit contracts, like you saw in 2008. Here, there’s the opposite. There’s all the credit in the world. So you know, companies can can even if they have lots, much lower earnings, they can borrow money at very low costs and get through the hurdle. This is the multinational company, the big company, the small companies, they have much more issues, they don’t have access to the debt market. And the credit markets, they have nothing to do with central banks. That’s why the government had to help them. Otherwise, you would have seen a collapse of small businesses, and just big business is buying them, and there’ll be even more gear than there is right now. And so that’s basically the the dual economy that we have, and have, on one hand, assets prices are totally elevated, because governments are telling you, hey, if you lend me money in 10 years, I’ll bring you back your principal but no interest. So that forces people to go into the stock market.

And then you have the real economy, which depends more on government stimulus, and it’s it’s not as open to all these advantages of cheap credit. It’s struggling. And that back and forth is what’s called causing riots and populism and everything else. Because people are saying, Hey, this is this is not fair. It’s not capitalism. I’m not enjoying the fruits of capitalism only, I’m only enjoying the two, you know, two rules and deciding what to eat for dinner. And I’m the sheep. So it’s fine. The two wolves have raised their hands and we’re in a, you know, democratic system and in a capitalistic free market, but I’m always losing. And so I don’t like it. So that’s where America is right now. And there are clear winners or losers to the system.

J Darrin Gross 19:41

Yeah, I think, you know, everything you talked about, I mean, I get it. It’s, I think it’s it’s frustrating for most of us that you know, support a free market. But yet you see the it’s kind of a bastardized market when you have the the government You know, pouring cash into it, he doesn’t allow the winners and losers like you would normally expect to tries to keep falsely falsely in some cases, you know, and maybe reward some with with additional liquidity to where they can have those opportunities down the road to take advantage of those opportunities when they come, but that that would, I guess, if you, if you, if everything was equal, the the people that have more capital probably had more capital to begin with, you know, in reserve, they were probably operated differently as opposed to the people that were, you know, sink or swim kind of a model there. So, when you when you assess a company, you mentioned talking about looking at earnings and stuff. How How are you in this market? Given this infusion of cash from from the government’s How do you reason through that because Without that, I think you could you could assess, you know, Company A versus Company B or make some sort of a determination. But, you know, there’s a lot of people talk about, it’s kinda like driving in fog lights on, you can’t see where you’re gone and everybody’s kind of in the same. You know, we’re how do you take a look at that and, and when you’re when you’re making a decision to invest? How are you sorting through this? The fog?

Lior Gantz 21:29

Sure. Okay, so there are industries that have really been affected by COVID-19. Those are real items, right? Hotel chains, casinos, cruise lines, hospitality, hospitality, oil companies, tourism, to the airline industry. Okay. So you put all these in one basket, and then within that basket, you look for very specific things, and I can touch on that. So those are the real casualties. amount of in the food industry, you know companies like that, put them in one batch, and in retail, in malls, etc. Let’s put them in one batch. And they are basically whatever is sporting companies, whatever is really impacted either buying government restrictions, literally the government telling you you can’t operate this business or you have to operate within really crazy restrictions, cinemas, etc. Put them in one basket, let’s touch upon them later, then you have the ones that are thriving. Once this is like the government telling you all eliminate your competition for you. You know, I mean, there will be no retail stores online will go big. For example, Amazon, right. So, these are the two companies and then these are two extremes, those that are being victimized, those that are being being benefited, and then there’s in the Middle, all the companies that are sort of chugging along in terms of they haven’t been too much impacted from the bad side, too much for the for the upside.

What most investors are currently doing is that they’re trying to buy a company at x and a few weeks or a few months later just sell it for a higher price. And that model, it works until it doesn’t work. In other words, there’s there’s a top somewhere for the price. I don’t do that. For the most part, I avoid trying to buy a company for x and gambling, we’re speculating that somebody else will pay more for it in the future. What I’m trying to do is look for a company that I buy an x because I can see the earnings are currently pretty good or that I think it they’ll they’ll come back to normal real soon, and its prices cheap compared to the growth of the company going forward. And therefore what I care about is the cash flow this business will generate in the coming years and decades to come and not, then I buy one at one price and I can sell it a few weeks later and another price. And so that’s my model to begin with, because people have to realize the price appreciation is only 40% of historical returns to the stock market. The additional 40% is dividend distributions. And then the additional 20% is what we call buybacks or share buybacks that companies that are there instead of using their capital to distribute the dividend are basically telling you will buy more shares of our own company will will close the pool of shareholders and you will own more of the company tax free. Okay, so that’s just a bit. That’s some points. This is even better than a dividend.

Okay, so now that we’ve done that, we want to look at companies that are almost a monopoly in their industry companies that have very few competitors, either because they operate in a very tricky industry. In other words, it’s hard to compete. Even if you raise the capital, you won’t be able to come in. So they either are operating with very low, very thin margins. And therefore, if you try to compete with them, you’ll probably get eaten alive. Or they have a special relationship with a government or some sort of a regulator that it’s hard to compete with. Or they have a lot of brand loyalty. And it’s hard to shift the trend towards a new company.

Or that they’re one of the dominators or two or three dominators and no one else can get in. It’s very hard to get in and that would be because of economies of scale, for example, other companies will have higher costs. If you can find those types of companies that have what I call a moat, something around their business that makes it very hard for others to compete with, then you have a chance at finding something that will be index. Because otherwise, it is pretty much a certain that if you just find index fund, and you wait at least a business cycle, so at least seven years or more, you will start seeing how consistent the returns are. In the past 100 years. The s&p 500 has returned 8.3% a year but only on four calendar years out of 100 it actually close to you. Listen that 8.3% average. In other words, most it’s like having one hand in in boiling water The other hand and ice, if you combine it, it will probably have a nice feeling to it, but both of your hands are, or one is having froze whites and ones, you know, I mean you know, it’s, it’s, it’s in hot water. So you have to realize that over the long term, the American Enterprise is doing very good, you’re gonna make a fortune betting on American companies. But if you knew how to find companies that even grow faster than the index, then you have something unique.

93% of investors underperform the index and they should just invest in index, and they should probably double down or pilot more after a huge correction. For example, what happened in March that would be an amazing buying opportunity. And for the rest of the people that have a succinct way of understanding businesses can outperform that now over the long term, if you invest for 30 years, the difference between earning 8% a year and 12% is mean over one or two years, it’s it’s almost a negligence. It’s few thousand dollars depending on how much you your risk, but over a 30 year period when you compound that as an insane difference. So that’s where you have to figure out, am I capable? Do I have the time? Or do I need to offset this to somebody else? How do I do this? And that’s, that’s basically the business. So one, competitive advantages. That’s the main way to find a phenomenal business. And then if it’s a complex of knowing the industry, knowing this knowing that understanding the books, the numbers, it that is what being an investor is it’s a profession. Many people do not see it as a profession and And therefore many people lose a lot of money in the stock market.

J Darrin Gross 29:06

No, I think everything you you touched on there, I was kind of surprised you mentioned that only 40% of the returns is through price appreciation. Is that is that true even over the longer haul? Or is that

Lior Gantz 29:20

That is true only in the longer haul? day to day? No. I don’t. I can’t tell you what will happen from now until right. But over the hundred years that they did the study 40% comes from dividends 40% from the appreciation of the price and 20% from you know, earnings with buy backs.

J Darrin Gross 29:49

Well, that’s that’s interesting.

That’s great. Hey,

Lior Gantz 29:53

you may find that study online.

J Darrin Gross 29:56

No, I appreciate it. I want to ask you quick. I know you’re You’re a fan of gold. Can you speak to gold as to how it’s held up and give a little perspective on gold?

Lior Gantz 30:09

Sure. Today I’m a big fan of only a fan. Gold is trading at an all time high. And more importantly, than gold trading at an all time high, which is amazing. And, you know, if you go to our website, for example, for free shipping, you click on that top menu, you’ll see special reports. Lots of them have to do with gold. So If you don’t know why gold is important. As a part of your portfolio, you can definitely download some of those and also go to wealthissues.com/goldplaybook, which is a special report we created for your listeners. That’s a very comprehensive manual on investing going slower.

Okay, so gold is also it’s almost like a mirror of other things that are happening in the economy and the most important thing for gold That investors like to own it, when the interest rates that they can get either intervene by buying bonds is negative. So, let me say that again. If you currently want to do the safest thing in, in finance the traditionally you go and you purchase a and you lend Washington money for 10 years. The 10 year bond is the barometer for all the other assets in the world. Okay, that is, you know, whoever you ask, any professional investor, he will tell you the bare meter is the 10 year bond. So today the 10 year bond is yielding point five of a percent. In other words, if you lend Washington a million dollars, you’ll get point 5%. So that’s $5,000 of interest, a year, million dollars and then you have to duck inflation, inflation is a point and a half. Therefore, in real terms, you are losing $1,000 every year. On on, on this transaction, you are lending money at real negative rates when that happens, gold soars historically.

So that is exactly what’s happening right now the 10 year bond right now, in real terms. So whatever the nominal yield that you see on when you when you’re quoted online, minus the CPI, the consumer price index is the lowest it’s ever been. It’s point zero, it’s minus 1%. And in that kind of environment, there’s a lot of institutions that say, I am not going to just lose money, not going to lend money to Washington, knowing that I’m losing money. I’ll just find gold. And that’s what’s happening right now. And that’s my goal. There’s over $2,000 an ounce. And it will continue on doing what it’s doing, if there’s no change in that, and to me, it looks like there’s not going to be any change because the chairman of the Federal Reserve central bank is saying we are probably done raising interest rates for a few years. And so if they if interest rates are going to stay the same, I think inflation is even going to go up a little bit and rates are going to go even more negative.

Secondly, you have $1 bear market that has just started two months ago after 10 years of a bull market. Now the dollar what is it what is $1 bull market $1 bear market, a dominant bull market is if the dollars value relative value is rising compared to a basket of other leading currencies, the Euro, the yen, the Canadian, the Australian, the Swiss, the Hong Kong, etc. And it was beautiful. 10 years bull Market from 2010. It just broke down below. That was that support line that 10 year support and it’s in a bear market. dollar bear market is the most important financial event or dollar bull market is the most one financial terms, so many other things, because the dollar is the reserve currency that everyone uses. And all bear markets historically are six to seven years long. And so if we just started one then has insane repercussions, or commodity prices and you’ve seen in the last two months, or three months, that’s Silver’s price has gone up 100% that’s the smaller precious metal, the one that’s much more correlated or inversely correlated with the dollar. So you’ve seen phenomenal returns, or gold, silver, gold stocks, silver stocks, some of the stocks that we’ve profiled in our own portfolio are up over 100% Three, four months in the newsletter. So that’s what happens when you have a bull market, in commodities specifically in the mining sector.

J Darrin Gross 35:12

I appreciate you taking us through that the precious metals are I know they they have that are there times when they’re more sought after and it sounds like the way you described it now is definitely a time to make certain you have some in your portfolio. Lior if we could, I’d like to shift gears here for a second. As I mentioned to you before, I’m by day I’m an insurance broker. And I work with my clients to assess risk and do some risk management. There’s a couple of strategies we typically consider. We first look to see if we can avoid the risk. If that’s not a possibility, can we minimize the risk and when that’s not an option, then we look to see if we can transfer the risk and that’s what an insurance policy is. And I like to ask my guests if they can identify what they consider to be the biggest risk grand. for clarification, I’m not necessarily looking for an insurance related answer. You can apply this however you you feel if you want to look at your your business, your clients business, however you want to frame the question is up to you. But with that, if you’re willing, I’d like to ask you, Lior Gantz, what is the biggest risk?

Lior Gantz 36:39

`So I think COVID-19 is changing a lot of habits that people have some habits changed faster for certain people, some habits have not changed and some habits are slowly starting to change. And it’s very important to see that you’re not kind of touch with what’s happening. In other words that you don’t think that the way that you’re being changed by COVID-19 is the way that your clients are being changed by COVID-19. Therefore, you will take your business one way because that’s what personally is happening to you your own personal experience was your, your clients are, are looking at a different route to go forward and you’re going to lose them to competition. So the biggest risk right now is not understanding how your client has changed if it changed, and I think that’s really important for people to to stay on top of now, if you’re an employee, which most people are, your client is your boss, you need to see if he’s changed. If his business is more vulnerable, you should look at moving to a different business. His business is full of problems, but he also has a way to get through it, then you can bring a lot of value by solving problems and you can move ahead in the company. So just think of that, understand that everyone right now is experiencing either multiple problems or other experiencing a boom, because basically the government has benefited if you want to be part of that, be part of that. In other words, go with companies that and with industries that have a huge tailwind or go to the victims because you’re going to have opportunities to make a huge significant significant impact on them. Because they need so many new ideas and some fresh solutions. So either or, but just know that this is a phenomenal time to show your value that is the key point. Just think of the experiment that no business would have ever taken to close down or to put all the employees home. These are unheard of. And they’ve happened now. So you have to be unconscious that and that is the biggest risk losing the mindset of your clients because he’s changing you’re no longer understand what he wants and what he needs.

J Darrin Gross 39:30

Now that’s well put, and I think it’s a good reminder for people to recognize there is an opportunity here and in every crisis, there is an opportunity and it’s up to you to find that and and be the solution there. So that’s great. Um, Lior, Where can the listeners go if they’d like to learn more or connect with you?

Lior Gantz 39:51

Wealthreserchgroup.com. The homepage, you can sign up for the newsletter that’s literally like the best way to stay in touch with whatever I am doing.

J Darrin Gross 40:02

Got it. Lior, I can’t say thanks enough for taking the time. I’ve enjoyed talking with you again, learned a lot and I hope we can do it again soon.

Lior Gantz 40:13

Thank you, sir.

J Darrin Gross 40:14

All right. For our listeners. If you liked this episode, don’t forget to like, share and subscribe. Remember, the more you know, the more you grow. That’s all we’ve got this week. Until next time, thanks for listening to Commercial Real Estate Pro Networks. CREPN Radio.

Intro 40:33

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1031 Exchange Option Delaware Statutory Trust with Jason Salmon – CREPN #273

Jason Salmon 0:00

You sell a property for a million dollars and you pay a mortgage back of $400,000. Your $600,000 goes and sits in escrow with your Qualified Intermediary. That 600,000 still has to buy a million dollars equal or greater, to pull off the 1031. Otherwise, it’s called boot. And specifically in the case I mentioned mortgage boot, and that’s taxable. So you have to buy equal or greater value. With the Delaware Statutory Trust, these DSTs come already, either with or without debt already attached to them. So it’s really important for people doing a 1031 somebody needs a mortgage. The great thing about DST is is it’s already attached to it, you know, any given deal that already has the debt on it. And the great thing further is that it’s not recourse to the investor so they don’t have to sign for it.

Announcer 0:50

Welcome to CREPN Radio for influential commercial real estate professionals who work with investors, buyers and sellers of commercial real estate coast to coast. Whether you’re an investor broker, lender, property manager, attorney or accountant We’re here to learn from the experts.

J Darrin Gross 1:09

Today, my guest is Jason Salmon with Kay Properties and Investments. And in just a minute we’re going to speak with Jason about Delaware Statutory Trust and 1031 exchanges. But first a quick reminder, if you like our show, CREPN Radio, there are a couple of things you can do. You can like share and subscribe. And as always, please consider leaving a comment We love to hear from our listeners. Also, if you’d like to see how handsome our guests are, under normal circumstances, you can check out our YouTube channel. And that’s Commercial Real Estate Pro Network on YouTube. And while you’re there, please consider subscribing.

With that, I want to welcome my guest. Jason, welcome to CREPN Radio.

Jason Salmon 2:22

Thank you. I’m glad to be here.

J Darrin Gross 2:25

I’m glad you could join us and looking forward to our talk. Before we get into the topic, if you could just take a minute and share with the listeners a little about your background.

Jason Salmon 2:39

Yeah, in in commercial real estate in some way, shape or form for about 20 years, probably 20 years plus at this point and started out on commercial real estate research side. Eventually that evolved into private equity real estate and then evolved further into specialization with 1031 exchanges, which is a big part of commercial real estate investing for for many. And beyond that the Delaware statutory trust structure, which is a pretty specialized 1031 exchange vehicle, but kind of been around the space for quite a while and many, you know, wearing many different hats.

J Darrin Gross 3:27

Got it? You mentioned research, can you speak a little bit to what your role was and like the level of properties and then what I mean were you working for a fund? Were you working for an investor? I who, what was your your situation?

Jason Salmon 3:47

Worked for commercial real estate research data and analytics firms. So they were the firm itself was collecting data basically on vacancies, sales, absorption, new construction, leasing activity, concessions, all these things across the board in various sectors, asset classes of real estate. People were collecting that information. And then ultimately those got synthesized into quarterly reports. And part of my role is, you know, was one building out a database itself and, and maintaining it.

And then one of the roles that I had, while there for many years was actually to write and edit the narrative quarterly reports for over 200 markets around the United States in commercial real estate asset classes across the board. So writing reports, market conditions, analysis for you know, the users of these reports predominantly were institutional, but there were a lot of private investors, they hire, you know, assets under management. But essentially, these reports will be used by publications as commentary. The reports will be used by lenders when they were underwriting their, their real estate for for lending, and was also used by asset managers to assist with their decisions on acquisitions or kind of timing and even ultimately, to sell. And in fact, it’s interesting even today, you know, I’ll see some of the asset managers that we work with might are still using those, you know, reports, not the old ones, but the current ones for their decision. Sometimes I’ll see the name of an old firm that I had worked with, in there and it’s, you know, it’s a little validating and it’s kind of a small world. But that’s kind of what I was doing at the time, just from a research standpoint. So researching commercial real estate market conditions in various markets for real estate sectors around the country.

J Darrin Gross 6:16

Yeah, I appreciate you dive into that a little bit. I think sometimes the the notion is there, there are firms that do that, but I don’t know that I’ve had the opportunity to speak with anybody that was intimately involved in the underwriting or reporting of the information. So I appreciate you taking and I would assume that that just as a base level of understanding of commercial real estate, that was a nice entry point for you for the rest of your career. Do you find that so?

Jason Salmon 6:48

Yeah, I mean, yeah, I mean, it’s it’s interesting, as you know, when one is at the beginning of their career, it’s always interesting trying to figure out what’s what, at that time, it was the exact right thing for me I’m an analytical person at heart. And it just made a lot of sense. So, you know, the numbers, seeing kind of how trends, you know, were occurring, seeing kind of, maybe, you know, even headwinds on the horizon and seeing what’s what that was very gratifying for me. I enjoyed it. It was great. And certainly, I have no doubt that it’s prepared me, I think, with an in depth knowledge to actually ply my trade, as I do my day to day today. I think it it all helps I would not have I couldn’t imagine it any differently. And now for what it’s worth. I appreciate that experience.

J Darrin Gross 7:41

Well, that’s good. And then you mentioned private equity. Were you raising capital or what was your role in the private equity firm?

Jason Salmon 7:54

Purely raising capital. That was but they were it was for real estate but, but it was capital raising for private equity real estate in different vehicles kind of across the board so somewhere you know, I guess you get as a overarching I don’t really like to make blanket statements but it would they were syndications. They were syndicated real estate deals. And then that kind of evolved in other kind of larger private equity real estate vehicles, as well, but a capital raising Yeah.

J Darrin Gross 8:30

Well, those are two unique I guess roles in commercial real estate and have a fundamental understanding of both, I would think, would be a nice base level of understanding and give you kind of a just an understanding. I think anytime you’re talking to somebody and they don’t understand or they gloss over or think they know some of the inner workings, I would think it would tend to translate as you’re speaking with, whether it be, you know, potential customers or, you know, whatever level that that would that would give you an edge. I would think that if you feel that way or not, but I would think it would.

Jason Salmon 9:13

I hope it always has. I mean, if you like, metaphorically speaking or analogy of, you know, if you, you know, if you’re batting a certain batting average, I mean, you could strike out, you know, six, seven out of 10 times and be a Hall of Famer or whatever that you know, adage is. I mean, for, for what we’re dealing with. It’s really not for everybody. I mean, I think what I do today is a little different from what I had done previously, years ago. But realistically, it’s a very specialized thing. I mean, the 1031 in and of itself, is a major motivation and that, you know, kind of stands on its own to some extent. Taking that out of it and we’re talking about in you know, commercial real estate investing. It’s not for everybody. And fortunately for me, I like having conversations with people. And I’m happy to do it. And, you know, if my batting average is 100 maybe, you know, I don’t know if that’s all star game territory or not, but I, you know, certainly at that rate, if somebody wanted to do it, it has to make sense. It’s a phenomenon known as suitability. It’s very important, of course, when you deal in securities, because that is kind of the universe that that we dwell in. And so whether it be present, or in the past that always factored in. And, you know, for me, it’s really just a matter and it always has been of established, establishing a relationship with an investor, kind of knowing where they’re coming from. And then kind of seeing where it goes that it’s very easy, you know, to know that generally speaking, people would like, you know, when we, you know, just because of certain things we can’t get into specifics of it, but people want higher returns lower risk And they want to make profits. That’s easy to know, as a general sense, all be it every deal. You know, a real estate deal, especially a private placement stands on its own. It comes with its own business plan and its own risk factors and they stand on their own. So that, again, is something that throughout my career on this side of the business is just really important. But yeah, I mean, I like having conversations. I like talking to people about, you know, what they’ve been doing with real estate, what they’re doing now, what they’d like to do in the future, how that fits into the big picture with their, you know, life plan, estate planning, things like that. And that all weighs in on, you know, if I can or can’t help them. And you know, and certainly there are times where I tell people I wish you the best and my you know, there’s nothing we can do. I just wish, I wish you well. Other times if people eventually do become my clients, then you know, we stay pretty close together, you know along the way.

J Darrin Gross 12:03

Got it. Well, let’s get into our topic here. And and, you know, today the the idea is to talk about Delaware Statutory Trust. But I’m wondering if you’d like to take a minute and talk just a little bit about 1031 exchanges, given the fact that they’re intimately related, as far as you know, where ones coming from and how they get to a Delaware Statutory Trust. Do you Is it fair to start from or maybe we start from somebody who has an investment, and they’ve had it for a long time and they’re, they’re facing either paying taxes, capital gains taxes, and recapturing dish depreciation, or they could do a 1031 exchange into a another property and or That that other property could be a Delaware statutory trust type type of structured property. How would you like to address that?

Jason Salmon 13:13

Yeah, I mean, I think you’re right on, I think we should start, kind of at the top level, the 1031 is kind of the linchpin of the whole thing. Delaware Statutory Trust fits within that if applicable, but, you know, they they’re not, you know, bound at the hip together, if you will. But, but you’re right. The 1031 exchange itself is called that because it’s section 1031 of the Internal Revenue Code. By the way, this is the point in the conversation where I have to say, I can’t give tax or legal advice because one should always consult their own CPA and attorney and guess how many times a day I say that, but the 1031, you know, effectively has, you know, some form of like, kind exchange so 1031 Like kind exchange for real estate. Like kind exchange has been around for decades. And really the genesis of this was regarding farmers, their land, their livestock equipment, all sorts of things with that, you know, played into this method of tax deferral. Now, fast forward, the modern era of the 1031 exchange was, I think, right around 79 came to be known as a Starker exchange. And that really laid out the groundwork for the framework for the 1031. As we know, it’s still today for real estate.

Now, mind you with a caveat there. There was some tax reform a few years ago, now 1031. That’s the whole light kind thing. That that like kind means real estate for real estate and I’ll dig in them in a second. But years ago, you could sell artwork and you could buy artwork. You could sell airplanes, and buy airplanes. You just couldn’t sell airplanes and buy real estate and you couldn’t sell real estate and buy artwork and things like that for 1031. So that’s interesting. But with tax reform, that all changed a little bit. The good news for for my industry and my clientele, is that the 1031 exchange for real estate has remained in tact. And that being said, what that means is like for like, so if somebody is an investor, a real estate investor, so again, primary residents, you can throw out the window that doesn’t count, but investment real estate that has been held for kind of that reason. And, you know, again, one should always consult their own CPA on whether or not the 1031 is a valid tool for them to use. But if somebody’s own investment, real estate, whether it be a rental home, a condominium, multi, a four Plex two family 300 units Commercial Property single tenant net leased and office building something was their family business and they sold it. And then they, you know, they sold the business and they maintain the real estate and then their landlord, all those sorts of things. If you’re a landlord in some way, shape or form, chances are, if you sell at some point, you might have the opportunity to do a 1031. And you were right on. So what you’re potentially deferring the taxes, you’re potentially deferring by doing a 1031 exchange are your long term capital gains. Your depreciation recapture tax at a rate of 25% state tax, if applicable, depending on where you live and where your real estate is, and then possibly even the 3.8% Medicare surtax, and there could even be other stuff on that. So it does add up, potentially. So those are the taxes that if you do the 1031 exchange the right way, you could potentially defer those taxes and what that means is when you sell You can’t take possession of the proceeds. You can’t take the money, you must enlist the services of a professional organization called the Qualified Intermediary. We call them to QI for short. And what happens is, they’re part of that transaction. So when you sell, they get the money, and they escrow it and they’re the ones that are enacting the mechanics of the 1031 exchange. So once that happens, let’s say somebody sells today, and their funds go to that QI and sit in escrow. There are two clocks that are ticking concurrently. One is a 45 day clock and one is a 180. And there’s a little there’s a but with that. One of them the 45 days is to identify replacement property, and we’ll get to that in a second. The other one is 180 days to close, or the due date for your taxes for which for the year in which your property was sold, whichever comes sooner.

So there and then there’s rules within for what you can and can identify and you know how many properties or the number and, and that’s kind of how that goes. But the light kind aspect means if you sell a condominium and you want to buy a ranch, you can do that. You sell a ranch and you want to buy an office building, you can do that. You sell the office building and you want to buy raw land, you can do that. You sell the land, and you want to buy an industrial building, you can do that. You sell the industrial building, and you want to buy, you know, a handful of rentals, you can do that you sell any of the above and beyond. You can do you want to buy do a DST or DSRs plural as replacement property, you can do that. And the reason that the Delaware statutory trust structurally is available as replacement property is through what’s called revenue ruling 2004 dash 86 and that put the Delaware Statutory Trust Which has been around the trust like any other just happens to be a Delaware Statutory Trust and they’ve been around for decades. It’s just that the use of it for the purpose of a like kind 1031 exchange came into being through this revenue ruling, which allows private high net worth accredited investors, it means that you have to meet certain network standards, either individually or as an entity can participate in these private equity real estate deals for 1031 exchange, and I have a lot of direct cash investors also, that just would rather be passive. And I guess we could, you know, I can I can stop there, just based on the 1031 and where DST is the Delaware statutory trust fits into it, because there’s a lot more to it, but you know, I’d like to be as efficient as possible. But

J Darrin Gross 19:50

Yeah, let’s just let’s kind of pause there just for a second. So that again, that the the starting point is if if you are in for The premise of our conversation primarily would be somebody that’s a, an investor currently has been for a period of time, I tend to find that this gains the interest of people who have been an investor for a longer period of time as opposed to somebody that bought something a year ago, and all of a sudden has, you know, potential gain with very little depreciation, I tend to find at least the conversations I’ve had with insurance clients. It really resonates with somebody who’s had a property for 20 plus years. You know, if it’s a residential property and they’ve had it for more than 27 and a half years, theoretically, their depreciation could be used up or, or, you know, a very minimal amount still be available based on recapitalisation. And when they when they face that way, What happens when we sell and realize that all of the years that they’ve been receiving the benefit of depreciation, they have to recapture all that, plus whatever the gain is from their basis. So if they’ve depreciated it, or you know, if they bought it for 100, and they sell for 300, or whatever that that number is you’ve got the long term capital gains plus the depreciation recapture. It’s a pretty significant tax amount. And, you know, so that’s, that’s where I think the the interest, you know, really starts the 1031. I appreciate you kind of laying that out, because those are the mechanics and I think that the thing that I’ve heard and I’d be curious to know if you have any additional insight, but I think there’s a lot of people that have heard of a 1031 but don’t always understand, you know, what’s involved. The best advice I’ve heard is that if you think you’re, you might want to do a 1031 that’s exactly the time you shouldn’t get A Qualified Intermediary to come to understand what’s needed in order to, you know, make it happen properly. You can’t wait till the Day of closing and say, I think I want to do a 1031 where you can get through, but it’s not advisable. I think that laying the groundwork for a successful is a better plan than just, you know, a minute or two before you’re signing.

Jason Salmon 22:26

I agree with that. Yeah, I mean, my experience, I’ve even had people come to us years in advance, because, you know, again, based on the fact that a major part of our business is the 1031. You know, we can kind of help map that out a little bit, just broad strokes, you know, kind of with the intent to maybe, you know, gain some focus on what, who’s who, and what’s what, what the, you know, timing should be, etc. But you’re right. I mean, certainly I’ve also had phone calls with people that said, You know, I want to do a 1031 and I sold last Week and my first question is, where’s the money? They’re like, to my bank account. I’m like, you gotta speak to your tax person. But, but you’re right, I mean, usually approaching a sale. One, you know, if they are planning properly, you know, would want to consider what, you know what might be next. I mean, you know, once somebody sells an event, you know, already has a contract to sell a property. I mean, depends how quick the closing is, but let’s just call it 30, 60 days, that should be ample time to consider, you know, what, what might be next. And I think that, you know, if nothing else, it’d be short sighted to say that they’re going to be buying additional investment, real estate, yet post tax with having had the ability to do a 1031 exchange all along. It’s really not that big of a deal because again, enlisting the help of professionals. This is a major major industry. It’s a big part of of real estate investing, with all the respect for people that might be hearing this for the first time, because they never needed a vehicle, like a 1031 exchange or never had to think about these things. It’s something that again, when you start considering what the potential tax liability is, when you tally all those numbers up that you were referencing a few minutes ago, it could be a pretty bitter pill to swallow. So, you know, those those, those are the things to consider. I mean, you know, are they going to stay in real estate? Do they have other things that they want to do? What are they looking to do post tax versus, you know, conducting the 1031 and then keeping those funds working for them, and hopefully throwing off some income, potentially.

And then, of course, you know, what’s, what’s the bigger picture? Are they, you know, are they looking to you know, kind of take the money and then pay their taxes and be done with real estate investing or you know, is this, again, kind of a long term strategy, multi generational, etc, etc, kind of what are they? What are they looking to accomplish in the grand grand scheme of things, but last minute, you know, it certainly is doable but not advisable.

J Darrin Gross 25:20

Right. You mentioned kind of the generational thing I guess, as a real estate investor myself, I’ve always thought of real estate as a long term play. And when I find that there’s a, there’s a large contingency of investors that are more syndication focused, that don’t necessarily recognize the nuance of depreciation. write off as as greatly as somebody that that has been in a single property for a long time. I’m kind of curious, do you have any sense of and I don’t need specifics, but I was just I don’t know if you can speak to this or not if you can’t so be it. As far as the the average person that comes to you, and the length of time that they’ve been in a property, is there any sense of that or a range? Can you speak to that at all?

Jason Salmon 26:17

I mean, yeah, I’ve been I’ve, I’ve seen people that have owned things for me. And you’re right on, by the way, because, again, the depreciation recapture, you know, it doesn’t necessarily kick in, you know, depreciation itself. It’s all about basis. So if one is working off of straight line depreciation for residential, it’s over a span of 27 and a half years in commercial 39 years. So, you know, depending on how long one is owned these properties, then it does have some bearing but somebody could certainly have owned something for only a handful of years, that just for one reason or another is highly appreciated. And as a result of that, you know, they might have a potentially huge tax burden just on the gains themself. That’s their own motivation.

But I think you’re also right. Many of my clients have owned their investment properties for quite some time. In fact, many of my clients also have done 1031’s, and they’re just coming to me on it kind of, never really, I don’t know if this is really terminology or not, but a, an a next generation of 1031. They 1031 before, you know from a property that’s long gone, they were in another property, they 1031 to get into that, and now they’re coming to me, because they want to diversify. They want to be hands off, they don’t want to chase tenants around or deal with asset management and timing the market for sale. And that’s kind of why people that’s motivation, people coming to me, but yeah, I mean, I’d say to Jeff, I’ve seen I’ve seen corporate documents that looked like they were made of dust before because that’s kind of part of our process to find kind of you know, accompanying documentation and this corporation went back to way back when, and indeed it had owned real estate. And then, you know, literally generationally getting passed through. But I’ve seen people that have owned real estate for 40 years, I’ve seen people that have owned real estate, for five and anywhere in between, and in the cases that I mentioned before, somebody could have just, you know, kind of hit it right. And in got an opportunity made a whole bunch of, of profits just off of the, you know, when they recently bought it and how they’re selling it. And, you know, they’re they have a motivation to do a 1031 because they believe it’s in their best interest. And, you know, they do it. So, but you’re right, the longer one owns the real estate, it’s the combination in many cases of the least the motivation is the depreciation recapture tax, which is, which is, you know, could be pretty painful. And then the and then the capital gains, and the other ones that we kind of mentioned a little bit earlier in this conversation, but it all adds up. I mean, it, you know, again, I don’t want to fight a number per se, but, you know, I guess really you just have to consider that if one has to pay their taxes by not doing a 1031 exchange. I mean, let’s just talk, you know, General numbers, if somebody sells something for a million dollars, and they have a potential tax liability of $300,000. You know, that’s, that’s significant, you know, if that’s what that person’s situation is, you know, if somebody is selling something for $5 million, and they have a seven figure potential tax liability. I mean, it’s really just a question of, you know, what the motivation incentive is to, you know, stay within the real estate universe. If one is able to, you know, to enact The 1031 exchange because again, those are significant numbers. I mean, in and of themselves are large numbers, but we’re talking about, you know, to continue to have that number working for you, or to just, you know, pay it in taxes, have it be water under the bridge and then go on to the next adventure. You know, I can’t make that decision for people. But I certainly know from my day to day, what I think, you know, makes sense, but not always people have to make that decision for themselves. They have to consult with their, their advisors on, you know, on how that looks. And then certainly from a professional standpoint, it’s part of my job to help with that process as well.

J Darrin Gross 30:41

Got it. What I asked you quick about the, you know, part of the 1031 exchange requires that the seller of the property, be the buyer of the the replacement property if I’m selling one property and I own it as an individual or an LLC. However, the replacement property, I’ve got to have the same chain of title, the, the, you know, entity a or or individual a has to be the buyer on the second property is individual layer or LLC or entity a. Can you explain how on a property with a Delaware Statutory Trust and maybe we should back up for one second, just explain what is what kind of properties are held in a Delaware Statutory Trusts and then talk about the, the the way you know, how one’s able to maintain that, that seller, buyer status?

Jason Salmon 31:51

Yeah, I’ll make it very easy. I’ll we’ll address that question straightforwardly, and then I’ll build that out. With respect for Delaware Statutory Trust. Fact of the matter is in the paperwork that I have for my clients as investors, there’s a place if you can own real estate any which way you can own real estate within a Delaware Statutory Trust in that same way. If it’s a corporation, I have clients that are corporations, if you’re an LLC, I have clients that are LLC’s, partnership, joint tenants with rights of survivorship, individual husband and wife, if you can own real estate in that way, and that’s how you sold your real estate. And that’s how you need to buy your real estate as replacement property. That’s, that’s a okay. That’s there’s a place for that it works the exact same way. But for the fact that you own what’s considered a beneficial interest in a trust a Delaware Statutory Trust. So you go in buying the replacement property if you buy into a DST or DSTs plural, case by case in that exact same way so that that would be no issue. No problem. You know, I probably right now I have clients of all stripes that are those types of entities and individuals that I just mentioned a few seconds back. As far as the structure itself, the Delaware statutory trust in and of itself is a trust. And that is how the real estate is owned. Now, somebody doesn’t come to me and say I’m investing with Jason I’m investing in in a DST, and then magically, they are in, you know, a bucket, or a portfolio of various real estate. That’s not quite how it is. So with the Delaware Statutory Trust, again, it’s a structure the trust owns, or it’s the trust that owns a real estate, and everybody in it, as fractional owners are members of that trust. So a DST itself could be a single property, it could be a portfolio of two properties, three, eight, I’ve even seen 20 plus properties in one DST. That doesn’t happen every day. Because again, just to frame this, our company we work with probably at this point over 30. asset managers, very large companies, they’re the ones that are buying the real estate with their money in the format of a Delaware Statutory Trust,

That and again, they could be four properties as one Delaware statutory trust, it could be a single property. And they’re pretty large, I mean, 10s of most cases, 10s of millions of dollars. I’ve had properties deals that were hundreds of million. And I have had modest ones that, you know, some very high net worth investors have no problem owning a five or $10 million property. But the beauty of the dollar is that story trust is the ability to diversify, and also to be hands off and passive. So those are the biggies and maybe we’ll get into that a little bit later. But these firms firms that we work with go out they buy the real estate. And the deal is the deal is the deal. If the single property there’s nothing happening underneath it, that is what the investor ultimately is investing in, albeit fractionally, but just because somebody goes out and puts together a DST and buys a 300 unit apartment complex that way, or a single tenant net lease, Walgreens, or a corporate headquarters building, to a fortune 500 company or whatever, because again, they could be various asset classes. It could be, you know, let me let me touch on that also could be multifamily self storage. I eat these days you don’t really see traditional retail like what we call anchored retail kind of Neighborhood Center, which means that you have a grocery and a little bit of inline space in line space being like your barber shop pizzeria, nail place, that kind of thing. Community Center, that’s where you have a few more big boxes, but you all We’ll have that in line space that we referenced again, you know, you name it, maybe a Chinese restaurant, pizzeria nail place, Hallmark store, whatever, whatever it might be. And then you get into the power centers, which is all the big boxes. And then you get into what we call regional centers, and that’s malls. But I can tell you from experience, it’s been a really long time, since I’ve seen anything like that, at least in what I would consider the mainstream DST market years. And again, for obvious reasons, but single tenant net lease real estate, like a pharmacy, or like a medical building, or like a distribution center. These are the types of things that might be considered kind of pseudo retail. But really what you’re investing in when you’re investing with that, if you have a corporate guarantee, is the creditworthiness of the tenant and the lease behind it. Because that’s just kind of a different thing. And you do see that from time to time with Delaware statutory trust many people like like, just buy, you know, net lease real estate or triple net Real Estate’s true, but the great thing about when, when I do my job is I know that I can help my clients to diversify. And instead of having to have any concentration risk and buy the whole thing, they can own a portion of it and also other things. So, you know, multifamily Self Storage, like I mentioned, you do see more industrial and distribution now more than ever, certainly healthcare more now than ever. I think the last statistic that I remember was 10,000 baby boomers retiring every day. So obviously, it’s important health care related, just depends on the sign of, you know, the times. But, you know, again, it’s real estate, there’s always risks, and you just have to consider kind of how these are looking.

You know, as far as the real estate is concerned, one important point about the 1031 is that one has to buy equal or greater value. We talked about the light kind . With 1031 exchange you have to buy equal or greater value. So if you sell a property for a million dollars, let’s just assume without a mortgage on it, you have to buy a million dollars or greater of total real estate value example be, you sell a property for a million dollars and you pay a mortgage back of $400,000. Your $600,000 goes and sits in escrow with your Qualified Intermediary, that 600,000 still has to buy a million dollars equal or greater, to pull off the 1031. Otherwise, it’s called boot. And specifically in the case I mentioned mortgage boot, and that’s taxable. So you have to buy equal or greater value with the Delaware statutory trust. These DSPs come already, either with or without debt already attached to them. So it’s really important for people doing a 1031 somebody needs a mortgage. The great thing about DST is is it’s already attached to it, you know, any given deal that already have the dead on it, and the great Further is that it’s not recourse to the investor so they don’t have to sign for it. So that’s again, another way to kind of maybe potentially alleviate a burden for people and sort of free themselves to kind of live their life moving forward, you know, and on down the line. So it’s really important to note that structurally, with the DST, if there’s debt on it, it’s not recourse. The deals either come with or without debt. And the way our firm is set up is we work with, like I said, a few minutes ago, over 30 firms, they’re going out and buying these very large real estate deals. And then just because they have to deal doesn’t mean that it sees the light of day at least from our firm. So they come to us and we conduct a very stringent and thorough due diligence process. And when that through either the deal will or won’t be offered to our clients. If the deal does not pass our due diligence we do not offer to our clients. If a deal passes the due diligence, then it’s one of you know, Maybe 30, 40, even 50 and beyond deals at any given time that one of my clients has the opportunity to participate in. So, you know, it’s really a very collaborative decision. When I work with my clients, we talk about the deals, we talk about who’s running it, we talk about what their exit strategy is, it’s that’s another important point. You don’t go into these deals, and then you’re in them forever. There’s, you know, there’s an exit strategy, because these are 1031 vehicles. It’s not just like, you go in and then, you know, wake me up in 30 years, it’s not really how it goes. Usually, when these asset managers own the real estate, they might, you know, put an exit strategy in their own that they want to sell in seven to 10 years, or they want to sell in five to seven years. So people would know going in kind of what we’re looking at here, as far as what they have in mind to sell but ultimately, because these are passive investment Is the asset manager running the deal that makes the decision on when and how to sell? So, that was really long answer to a short question, frankly. And I know you asked me about structurally how it works. So entity wise, however, somebody owns their real estate that they sell, that’s if they do DST’s or frankly anything else, that’s probably that’s gonna be how they buy their replacement property. When it comes to the Delaware Statutory Trust itself. You’re in, you own a fractional interest, it’s called a beneficial ownership or beneficial interest. It’s units of the larger real estate deal.

J Darrin Gross 41:41

Got it? Now, I appreciate you running down that because I if you hadn’t I was going to ask you and I think the the thing that I wanted to reiterate there was that Kay Properties is not a deal sponsor but more of a vehicle to to provide access to the different deals, is that correct?

Jason Salmon 42:03

That’s right. Yeah. Yeah. So we work with these firms that are putting out, maybe between one or three, four or five even deals at a time, maybe beyond maybe none. Maybe they’re just waiting. And, and so when, when I’m working with clients, I’m, you know, while I have relationships with these managers, and I know who they are, I know that humans behind, you know, what they’re doing, why the way that our company is set up, is that, you know, we really work with our investors, because that’s kind of what we’re looking at here. It’s, that’s the role that that’s the pure relationship. It’s between us and the investor. Looking at these other deals, I mean, certainly these asset managers would love all of our clients to go into their deals, you know, every every single time but that’s just not how it works. It’s a phenomenon that we call suitability. So it’s really just the spirit of knowing that just because there’s a deal that’s out there doesn’t mean that it’s the best deal for every person, it just would be the right deal at the right time for the right person. And that’s part of our process, over time of getting to know people, and investors, when in the same for what they’re trying to do, to find them, the right deals to go into. And that’s, I think, a great advantage of our company and the platform we have, because we have so many relationships with so many of these asset managers to have the options, you know, to find the one that’s, you know, the one or the few that are just right, I mean, the, you know, somebody could if I had 30 deals at any given time, just because somebody wanted to diversify into those 30 deals, doesn’t mean that that’s the the right idea of the best idea. Because diversification for the sake of doing it is his sound, and a big part of my business and what I like my clients to accomplish. But just to go into deals to go into an extra deal, if that extra deal doesn’t make sense, then it doesn’t make sense. So don’t do it. You know. So that’s, that’s the thing. But for one reason or another, the deals that we have, I probably have clients in, in most, you know, as they come and go, you know, for one reason or another, again, it’s kind of the right thing at the right time for the right investor. So, you know that that’s a big part of it. But the place that we, the role that we play, is, you know, it’s securities. So that’s how I do what I do, but I don’t do stocks, or bonds or mutual funds. I do all private equity real estate all the time, with a bit of a specialization for 1031 exchange. But I do have a good amount of direct cash investors that prefer to own their real estate through, you know, this destructure in this channel

J Darrin Gross 45:04

A couple of questions. You know, and I think this relates based on the fact that you guys continually have sponsors providing you new deals that they’re trying to fund and or that are available for the DST investor to get into in the one of the important things I guess to understand is that as somebody gets into one, and you mentioned the prospectus, and the plan is to get out eventually, the important the importance of the fact that you will have additional opportunities for them when that time comes to replace that so that they won’t be faced with this, you know, what do I do kind of thing, that there’s the ability to continually roll that money and maintain that deferral on the tax from the original investment?

Jason Salmon 45:54

Yes. So, that With that said, You’re exactly right. So it’s Really important to note that for people that participate in Delaware statutory trust for their 1031 exchange, one of the great things about you know, the the way that this has been been put in place to revenue ruling 2004 dash 86 is you can 1031 in, and you can 1031 out and that’s when it ultimately sells. So when and I just had this happen three weeks ago, I think at this point at a handful of clients and a deal. It was actually sold after three years with a profit for profit. And, and leading up to that sale the investors in that deal. were contacted by an investor relations from the asset manager running it saying, hey, look, you know, it’s selling, you know, this is the timeline. If you’d like to do a like kind exchange 1031 exchange, please relay the contact information for your Qualified Intermediary, and that’s where they send the proceeds at closing. But further still, it’s really important to know Note that if one chooses to vote to go that route, it’s not they don’t, they’re not stuck in DST’s. So a few things with that one, if they don’t want to do another 1031, they can take their money and pay their taxes

Two, if they choose to do a 1031, First one doesn’t automatically roll into whatever deal is next. People might say that Yeah, just put me in whatever this asset managers neck deals are or dealers, that is not how it works, you actually have to go out to go back in so your money still does have to go to a Qualified Intermediary. And mechanically, you’ve got to do the 1031 exchange, kind of like we talked about earlier. They don’t put your money to a Qualified Intermediary and say, guess what, we sold it. You’re in a 1031. They don’t say hey, we sold it and now you have to pay your taxes. So they fully reach out, to let people at you know to ask them how they want to go next. And so with that said, if somebody doesn’t want to do dfts anymore, and they’re in a 1031, they can go buy another rental, you know, deal with their tenants, they can go buy a commercial property, you can do another 1031 when a DST sells, but in my experience, you know, this is that the industry has only grown. And, you know, with enough time and planning, it just gives people more and more options. So, I, you know, nobody can I had a crystal ball, you know, be a whole different story and nobody knows what the future will hold. But, you know, based on experience of mine, I have clients that have come out of DST’s that have sold for them. There have been deals, you know, and plenty of them as options. You know, again, the mechanics still go and apply. You know, do you Or don’t you need debt for your 1031? You know, what is the timing? What are the deals that are available, how much equity is left in the deals, you know, based on the timing and, you know, then we talk about the 45 days and the other timeline. So, those are all things that when we work with clients, we figure it out. But one does have the ability when a DST sells to do a 1031. And it is their option, how they want to go next. But I think you would ask about availability, and DSTs and 1031 vehicles for when they come out. In my experience. You know, every single time I’ve had somebody come out of a DST, there’s been, you know, at least a few dozen deals as as options generally speaking,

J Darrin Gross 49:44

Right. The one thing we haven’t really talked about, we you mentioned about the equal or greater then can you speak a little bit to the individual that has they’ve sell one property, it’s, say, $500,000 they’ve got this one deal that they want to do that’s maybe 300,000 they’ve got this balanced this 200 that they need to do something with or pay the tax. Can you speak a little bit to that?

Jason Salmon 50:16

Yeah, I mean, that’s, that’s, that happens from time to time. And it’s, I think that’s a really valuable tool for people. You know, to maybe can, you know, if you will have their cake and eat it too. I mean, you’re exactly right, somebody sells something for 500 they have their heart set on something for 300 placing the the remaining 200 could get, you know, may extend themselves just based on what they want or need. And rather than have to meet, you know, rather than that the boot in unplaced, 1031 funds, the dfts are really valuable for being the right They’re for that. So and I have that happen all the time, where people are buying something on their own people even use bsts as a backup, just in case, as long as they kind of follow the 1031 rules, which is nuanced. And, you know, we could probably speak for an hour and a half about that. But, um, yeah, I mean, your example 500 with, you know, somebody buy something for 300. And they need to place the 200, then, you know, we just kind of, you know, lay everything out, we determine what’s what, you know, figure out how much certainty of closing that they might have on that piece, but they’re buying what the timeline is. And then, you know, with that $200,000, figure out if they want to go into a deal or two.

And, you know, like I said, it happens pretty regularly for people that do that, although I will say once people start getting a sense of the passive nature of it, if they’ve kind of reached that point in their life where they just don’t want to have to do do with it all? Or they don’t want to have to deal with the stress of will or won’t they be able to close? And you know, will the seller perform while the seller tried to retrrade them, you know, at the 11th hour, even after they’ve identified, sometimes people once, you know, once they learn about dfts and get a comfort level with it, you know, do make a decision to kind of go that route, but it’s not the end all be all, anything mean, if somebody needs to buy something for, you know, $3 million, they’ve sold something for 3 million and they find something for 2.9 and they have $100,000 they’re going to be taxed on and if they don’t do it 1031 you know, I’m Johnny on the spot, you know, with situations like that. It’s a Okay, it works out. I see it all the time. And and it’s certainly doable.

J Darrin Gross 52:48

Well, and you mentioned DST as a backup, I think that’s something that’s worth reiterating. Given the the timeline that you referenced earlier and that 45 days to Identify, and the identification, if I understand correctly is you have to identify three properties, or three, three options. And then you have to close from those three, you know, you can’t, you know, bring 10 more and and it’s it’s there is a limitation on the number and the options available. Is that said, your understanding or is it consistent with what you were looking for?

Jason Salmon 53:28

Yeah, that one of the rules is the three property rule that basically says that one can identify up to three properties, as long as they can close on one, two or three, as long as they’ve identified them. And they by equal or greater value, another one of the rules, which by the way, they don’t all need to be followed simultaneously. It’s one or the other, the other. Another rule is called the 200% rule. And that basically says you can identify up to 200% of the value Your relinquished property. So that, you know, that does play into it. Sometimes with people that do DSTs when you think about it, you know, if you’re if you sold something for $2 million, and you identify three properties that are $2 million, that’s 6 million right there, use the 200% rule, you’re at 4 million. So it really just depends on kind of how you’re looking, and kind of really what you’re trying to do. But if you sold something for 2 million, and you’ve identified one property for 1,000,002 properties for 500, then, you know, it just there’s some variants there. There’s also another role called the 95%. Basically, you can identify whatever you want, but you must close on 95% of it. So that’s a tricky one. And the conventional wisdom is that that one is not often used, but but it is sometimes. So it just depends. We have pretty deep familiarity with how these rules are applied. With the timelines. So, if somebody is using a backup, if somebody is using DSTs, these are things that do factor and again, nuances like does the deal have debt or not have debt? Does the investor need or not need that for their 1031? You know, I have somebody right now, who is going into a DST with debt, but he’s buying a property that’s hands on without that. So that, you know, probably because of what I mentioned a little earlier in this conversation about the financing, be not non recourse to the investor. And this particular gentleman needs debt for his 1031 exchange. So, you know, he’s, that’s how he’s going. You know, I’ve, I’ve had, you know, I’ve seen a lot of different scenarios, based on my experience. Our firm helps clients by hundreds and hundreds of millions of dollars of real estate year over year over a year, and we kind of we feel a lot different situations. So, you know, I’ve seen each of those rules applied for 1031 exchange for identification. And, you know, as long as there’s kind of open dialogue about what the investor is trying to accomplish, you know, we can we can pretty much let them know, you know, what fits within the parameters of 1031 exchange, and identification and, and what’s, you know, not possible. So we will help with that we work with people as well.

J Darrin Gross 56:29

Yeah. Jason, if we could I unless there’s something that you feel like we’ve left out, I’d like to shift gears here. Are we do you think we’re at a good point there? I mean, based on the we’ve touched on the 1031. We’ve kind of walked through the different asset classes and the opportunities and DSTs Is there anything that that we that we should have the you you were waiting for me to ask you about?

Jason Salmon 56:58

No, I think we’ve covered a lot I mean, I think we, you know, maybe listeners can tell I, you know, I could probably talk about, you know, this stuff, you know, probably for another 10 hours, which I do, usually day, day by day. So, but you you cover the important points. I mean, it’s, uh, you know, it’s a very specific thing. It’s not that easy a topic, you know, to just automatically conceptualize, you know, commit to memory and understand, and that’s why when we work with our clients, it’s education is big for us. So, you know, that’s a process leading up to everything. And so I, you know, certainly I’ll make myself available to anybody that wants to know more about it. But I think we covered a ton of information. I think we, you know, we laid out kind of how a 1031 exchange is, we laid out how the DSTs fall within it, and how it might apply For real estate investors, and I think we’ve covered a tremendous amount of territory on this call.

J Darrin Gross 58:06

Agreed. Jason, if we could, I would like to shift gears here for a second. As I mentioned to you earlier by day, I’m an insurance broker, and they work with my clients to assess risk and determine what to do with the risk. There’s three different strategies that we typically consider when managing risk. The first is can we avoid the risk? Next, if we realize we can’t avoid it, is there any way to minimize the risk? And then if neither of those are options, we look to see if we can transfer the risk and insurance is typically the vehicle to transfer the risk. And I like to ask my guests if they can take a look at their situation. You can look at both your you know your professional situation and or your clients. And if you can identify and speak to what you consider to be the biggest risk. And for clarity, I just want to make certain you understand I’m not necessarily looking for an insurance related answer. So, if you are willing, I’d like to ask you, Jason salmon. What is the biggest risk?

Jason Salmon 59:25

Well, the biggest risk with any investment is losing your money. I mean, that’s really it. So then the question becomes how to mitigate that from there. So you talk about avoidance. And again, I’m compelled to tell people that anytime they make investments in private placements, there are risks, including what I just mentioned, no guarantee of returns, no guarantee of profits, no guarantee against losses and one can lose their money. So the way to avoid that is by not investing and you know, putting it onto the mattress, I guess, and then you have to figure out you know, what the match protected by, you know, because anytime it gets outside of, you know, under your thumb, you know, that’s, that’s one thing as far as minimizing and and, you know mitigating for me and our clients is diversification. So, you know, when one has all their eggs in one basket, they then are incurring concentration risk. So then again just because one diversifies doesn’t mean that they’re avoiding the risk, but they are spreading that risk around.

So we love the fact that DSTs give most investors the opportunity to diversify. And, you know, that’s, that’s a big motivator, and that’s part of my day to day and I remind people of that all the time. Beyond that, though, one also has to determine what their own appetite is for risk. I mean, I’ve had people tell me that they’re, you know, in a great place in life and they want to bring it on, you know, so we talked about with these deals, any of them, it’s a risk adjusted return. Now, there are deals and I don’t want to get into returns, you know, it’s just not something that we can do through this venue. But, you know, returns could be all over the board. So that’s, you know, your, what your annual returns are, and it’s a risk adjusted return. But for us, you know, it’s about you know, when you talk about diversification, we’re talking about real estate, so diversify in some cases across asset classes, type of real estate, diversify across geography. In some cases, some people love certain geography, you know, it’s okay. It’s things we talked about, and diversify across asset manager, different people running the deal. Sometimes people just like certain deals that certain asset managers are running. So That’s different ways and different permutations than that when we work with clients, we can mix and match to kind of try to mitigate that risk by way of diversification. But just because people diversify doesn’t mean that they’re protected from risk. And as far as transferring. You know, for us, I can’t really claim to be able to do that, because there is inherent risk, you know, with private placements, it is available to accredited investors. So one, you know, has to have be at a certain point in life, and in the spirit of that has to be comfortable with the potential for loss. And that’s why you hear all that, you know, all those disclaimers disclosures with any investing, whether you see it kind of on a screen, or you’re working with your friendly neighborhood, financial person, these are all parts of it. And I’m sure this is part of your day to day, but yeah, I mean, there’s risk, but hopefully, you know, again, through understanding, I think that’s the most important thing, know what you’re getting into, you know, manage the risk by really understanding what’s behind it. For us. It’s real estate. So the great thing is, you know, I oversimplify it sometimes, but really, it’s just a tenant or tenants in a building or buildings and their ability to pay their rent. And or, you know, does the deal have debt on it? Could there be a foreclosure? That could be trouble, if that’s the situation? So these are things that we talked about, what are the chances that happening? Something on, you know, without alone on it, you know, what does that mean? What’s, what’s kind of what are some worst case scenarios from a real estate standpoint, you know, as they weigh into each of these respective investments, but again, with any investment, you know, one does have the risk of losing principal.

J Darrin Gross 1:03:57

Now, that’s well said and, and It’s always a risk. So I appreciate you sharing that. Jason, where can listeners go if they’d like to learn more or connect with you?

Jason Salmon 1:04:08

Yeah, I’m happy to have direct dialogue with anybody, anytime. The most efficient way to get to me and hopefully that will get us to the point to get on the phone but simply emailing me at Jason@KPI1031.com is the best way to find me and to you know, find time to exchange telephone numbers to get on a call, talk about the situation and you know, kind of figure out if we if we can help also our website is KPI1031.com.

J Darrin Gross 1:04:50

Yeah. Jason, I want to say thanks for taking the time today. I’ve enjoyed our time and learned a lot and I hope we can Do it again soon.

Jason Salmon 1:05:02

Well, you’re welcome and thank you for having me. I appreciate it too. And I thought it was a great way to spend, you know, some time talking about my day to day. So thank you.

J Darrin Gross 1:05:14

Announcer 1:05:34

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Opportunity Zones Big Picture with David Sillaman – CREPN #272

David Sillaman 0:00

We offer a turnkey fund development platform where our team sets up the Opportunity Zone Fund which includes you know everything from your entity formation, your financial forecasts on the fund, your your you know our legal team takes cares of take care of the private placement documentations are raised the money term sheet, sub agreements ,are graphics video, video, web marketing team takes care of developing the website getting it distributed out you know doing the pitch decks, pitch videos, basically it is a full turnkey when you’re taking saying ,Hey, I got this project help me get this in front of investors the right way as an opportunity fund. Bring it to us day one, day 30 you’re able to connect with investors.

Announcer 0:42

Welcome to CREPN Radio for influential commercial real estate professionals who work with investors buyers and sellers of commercial real estate coast to coast whether you’re an investor, broker, lender, property manager, attorney or accountant We are here to learn from Experts.

J Darrin Gross 1:01

Today, my guest is David Silliman David is the CEO of Eazy Do It and he’s here to speak with us about Opportunity Zones, and Opportunity Zone Funds. And in just a minute, we’re going to speak with David about creating and utilizing an Opportunity Zone Fund. But first a quick reminder, if you like our show, CREPN Radio, there are a couple of things you can do to help us out. You can like, share, and subscribe. And as always, we would love to hear from you. Please leave a comment. Also, if you want to see how handsome our guests are, be sure to check out our YouTube channel. And you can find us on youtube at Commercial Real Estate Pro Network. And I also want to remind you there if you would, please consider subscribing. I always love to see more. And it always helps attract more people as well. With that, I want to welcome my guest, David, welcome to CREPN Radio.

David Sillaman 2:32

Thank you for having me.

J Darrin Gross 2:34

I’m looking forward to our conversation today. And before we get into Opportunity Zones, if you could just take a minute and share a little bit about your background.

David Sillaman 2:47

Sure, I got into the commercial real estate market. Basically I came into a hotel deal back in May of 2018. And this was a month prior to the basically our Opportunity Zone legislation coming out and it was a commercial deal. Like so many others looking for money and, you know, got brought in to figure out where, where the holes were at in the ship, so to speak, and to make some corrections. And once I learned that the Opportunity Zone program very quickly saw the opp, you know, looked at the deal, realized that it was in an Opportunity Zone made a pivot, launched it, the the equity raise for it, launched it as the fun and it ended up being the second Opportunity Fund in the country to ever open. And from there, it was kind of off to the races you know, once we started building that up a little bit and getting out there. And then basically it was from there. went on to develop the first business based Opportunity Zone Fund now since developed a little over $21 billion worth of project real estate related and business related Opportunity Zone Funds. Account for approximately one out of every eight one out of every nine in the country. We’ve got our name, you know our fingerprint on it in some way, shape or form and have kind of been elevated up to really, you know, one of the top 10 experts in the country on this subject matter on how to utilize this program the right way. We have a tendency to see things a little differently from a couple different lenses. And just, you know, believe in this program, this is going to either be one of the biggest game changing programs that this country has ever seen across all spectrums of real estate and business, or it’ll be one of the biggest tax giveaways in the history of our country. And I believe that it’s going to be the first of the two. And commercial real estate makes up you know, right now 85% of this market space. So this is a very, very hot topic, something still very, very new, very applicable and you know, really with 2020 being the year of with extensions and everything else like that, you know, this is a major year for capital gain investments because that’s what this program is basically built on is capital gain investors investing into an opportunity fund that is built and developed around You know, some sort of real estate or commercial development project that’s there to support part of the equity stack cap stack of that project. And it’s designed to these cap gain investors get in. And so you’ve got a mass tidal wave, given the amount of capital gains the amount of liquidity that’s in the market right now getting ready to kind of all hit with the proverbial Opportunity Zone shoreline between now and the end of the year. So this is a prime prime subject for the commercial real estate market.

J Darrin Gross 5:28

Yeah, I would say, you know, the stars are aligning, you know for for what I know about Opportunity Zones or what I’ve learned prior to this conversation. You know, it’s clearly looking for a way to stimulate investment in real estate, and places that need investment. I mean, that was kind of the the underlying thing there and assuming you’re able to turn the market with that investment The the value of that investment would be a significant increase there.

David Sillaman 6:05

Absolutely.

J Darrin Gross 6:07

Before we we get run along, I didn’t quite hear what was your background before getting into real estate there?

David Sillaman 6:15

I worked in tech consulting, doing capital raises. So I come into a company and you know, they want to raise around a raise. So, you know, I get involved and help them structure, all the documentation and everything else like that, that need to be done to adequately raise that.

J Darrin Gross 6:33

Okay, so capital raising is not something that’s, I mean, you’re very familiar with that. So that’s, that would be I think, a head start for for you versus somebody saying, that’s a great idea. Let’s, let’s, let’s go with that. So let’s back up just one step. And so we can all make certain that we’re on the same page. Can you define what the Opportunity Zone is or what an Opportunity Zone is?

David Sillaman 7:00

Absolutely. So the Opportunity Zones are number one, they’re in all 50 states, Guam, Puerto Rico and US Virgin Islands. So what they are, are they are they’re literally designated census tracts, where they’re, you know, the economic numbers and poverty rates and stuff like that are within certain thresholds. And every, every mayor, every governor, so is across all all 50 states submitted the census tracts saying, Hey, we recognize these areas that are in need of economic stimulus. From there, it was approved by the Department of Treasury. So now collectively, we’ve got 9000 plus Opportunity Zones. So for real estate purposes, it is literally comes down to an address being on one side of the street versus the other, being in a zone or not being in a zone. So you have a lot of these opportunities. I didn’t there’s a misconception that, you know that the Opportunity Zones themselves are so you know, impoverished that, you know, it really is not like an enticing investment for an investor to really want to kind of get into it, it’s high risk is that. You have a lot of Opportunity Zones that are, you know, poised for college growth, poised for, you know, already doing, you know, semi decent are on the upswing, and investments are spurring that economic growth. So, they’re not all, you know, bad but the program is is a very special tax incentive program, if utilize the right way.

For investors, they get a bunch of specialized tax benefits by being willing to take their capital gains and putting it into what’s called an Opportunity Zone Fund. And the fund is then designed by by structure and by terms, guide guidance from the IRS that has to redeploy that investors money into you know some sort of Opportunity Zone project. The tax incentives are what is the major benefit of the program to give you a really simple example, say that I sold some real estate and I’ve got, you know, a $500,000 capital gain. And for one reason or another, I wasn’t able to do a 1031 exchange or I had a failed one or I just wanted to get my principal back out, well, I got a I got a half a million dollar capital gain. So instead of paying taxes on the way that I would normally have to reporting it as taxable income for this tax year. The start of that is I roll my money into an Opportunity Fund. I now defer paying tax the tax year 2026. So I’m pushing that off for six years. The second thing is is in that six year push off, I hit one of the anniversary hold dates in the Opportunity Fund, which is the five year anniversary.

So what happens is as an as a capital gain investor, at the five year anniversary, I get a 10% step up in basis. So what that means is, is that on that half million dollars, I’m paying tax on 90% of it, not the full half million in 2026. But here’s the amazing thing, which is why investors, you know, are really beginning to take a look at this program in multitude of troves and outlets. It’s the 10 year benefit. As an investor, if I keep my money into an Opportunity Zone Fund for 10 years in one day, I get a full step up in basis to fair market value at time of exit. So let’s say my half million grew to 2 million. So I got a million and a half game. I have a half million dollar basis, I paid tax on 90% and a half million dollar basis, the other million and a half. I don’t pay any tax on whatsoever at time of exit.

J Darrin Gross 10:53

So that’s on the subsequent gain that the no tax , right? That the initial one you still have

David Sillaman 11:01

Just a slightly reduce rate.

J Darrin Gross 11:02

Based on your your hold time.

David Sillaman 11:04

Yeah. Yeah.

J Darrin Gross 11:07

No, I appreciate you you come taking us through that because I’ve, I’ve had conversations with multiple people. And I would dare say that everybody understands what they are or, I mean, what you explain me is the way I understand it, and I get it. The idea is that you you have this gain. If you if you don’t invest in an opportunity zone, you got to pay your tax it’s due. But if you if you choose to invest in this, we’re going to give you first of all the time, you’re going to get, what six years to pay

David Sillaman 11:43

Six years, to pay the tax,

J Darrin Gross 11:45

Right? You’re going to get a reduction in the tax owed. So you’ve got the time value plus the discount. And then like you said, the bonus of this is the hold for 10 years

David Sillaman 11:56

Extended hold, yeah.

J Darrin Gross 11:58

And is that 10 years from when you when you invest into the fund, is that how they is that when the clock starts?

David Sillaman 12:04

Yeah, yeah. Because the fund itself, you know, reports every six months to the IRS. A couple things, you know, number one, what the fund invested into, number two who invested into it? So yeah.

J Darrin Gross 12:18

Well, and I think the other thing that that you’ve touched on here that I, it took me a while to understand this thinking primarily as real estate and looking this as a real estate investment, the capital does not necessarily need to come from real estate. That was the challenge it took a didn’t resonate with me is that not everybody coming into this and Opportunity Fund is necessarily coming from real estate, they could have sold Apple stock or Tesla or whatever it was.

David Sillaman 12:44

You’re right, let’s let’s look at what happened in March, right? We had a mass you know, sell off in the stock market in March because of COVID. That sell off generated almost $700 billion in new capital gain money. And that mindset is not Real Estate based mindset. That mindset is very, very much, you know, I found stocks because I believe in the business, I see the product, I buy the product, you know, good earnings, good boards, all that kind of stuff when you go from that mindset as an investor and now you’ve got capital gains number one, up until now, you know, the stock market investors really didn’t take this program very seriously, because they didn’t have a need for it, very much. I mean, they were just riding through the stock market. Now they do. You’re taking a mindset that is almost primarily business and bringing it into a market space that’s 85% real estate.

And so, you know, in the commercial side, where we see the biggest disconnect is with the the fund managers that are raising the money around the development, being able to adequately connect with the investors in the right mindset and getting both on the same playing field and educating why this is a good investment. And not just because of how your money is going to grow. Not just Because what an IRR is, but most importantly, and almost always overlooked is the exit strategy. You know, with with people that invest in stock markets, they know that the moment there’s anything that begins to blip, man, I can trade, I can sell, I can I can I have an exit. With the Opportunity Zone market space, it’s a very different animal because it’s an extended period of time. And so, you know, these projects are going to be relying on leverage in the future. And you know, but if they can adequately explain to investors today that, hey, this is what we’re going to do this, this is the growth, the equity, this is how we’re going to exit out and we’re going to either pay you back and you can choose to exit or we’re going to reinvest again into whatever the next project is.

Because the 10 year time period is not project sensitive, meaning that the fund has to stay in a project for 10 years. It’s just 10 years sensitive to me as an individual investor. So fun can do, you know, for especially for you know, commercial Real estate developers, this is prime if they’re dealing, you know, multiple deals per year. And they’re juggling, you know, an Opportunity Fund could act as a real estate portfolio fund for them to support investments into all of their projects. But if the investors know the exit strategy and find that out there are a lot more inclined to want to pull the trigger. But yeah, mindset is a big thing. Big Big thing.

J Darrin Gross 15:24

Yeah, cuz I think again, just the, you know, I think real estate people have a certain view and even like with with syndication and stuff, it took me a while to to fully recognize that because of the, the in and out the speed of of getting in and out at 1031 wasn’t necessarily as much of a concern because your, your depreciation is minimal. It’s more of a capital gain, which is this totally plays to so if you if you have been in a syndication and hit home run, and you’ve got a big gain and you’re looking to park it in or defer the tax and you like real estate, this seems to be a natural, something to

David Sillaman 16:06

Well, you, you have a lot going on that when you look real estate at both today, tomorrow and you know, at time of various exit points, you know, you know investors are going to say, Okay, if I put my money in today who pays the tax in 2026? Right? Am I gonna have to just pull the money on my bank account? Which I would normally have to do anyway, but I would normally just pull it out of the capital gain, set it aside, and then use the capital gain differently. Right. So if I don’t have that ability, where does the money come from? And that’s a big, big question when you when you talk real estate and so what you’ve got to be able to look at is it’s not just you know, what the, what the economics are on the deal today, but really what’s going to drive the economics on the on the deal for exit tomorrow?

You know, we look at things like okay, well, you know, right now, most commercial real estate loans, which are really how they’re going to create the exit is going to be leverage. It’s either going to be sold or refinanced out, right. So it’ll be less In some way, shape or form, but what drives those loans? Well, if you’re borrowing against it, you know, most real estate commercial deals driven on the Libor rate today, but that’s phasing out by the next year. You know, it’s a completely different, you know, rating system that, you know, commercial real estate rates are gonna be based on, it’s gonna be based off the sofr and an offering rate. When you look at that, you know, that doesn’t correlate to how the libor moves with Treasury rates relative to how the sofr rate moves to the Fed funds rate, and funds rate is bottomed out right now. So we’ve got to look at say well okay, well, are we going to expect higher rates in the future and just being able to like, you know, really kind of put thought into articulating that today is what really makes these things you know, very viable, very attractive for investors to get into understand because there’s a mass amount of upside potential. You know, especially when you look at like the rioting and all the stuff that’s going on across the country, eventually, when that when it ceases, there’s going to be a mass amount of projects and property. They’re gonna be in these Opportunity Zones, the Opportunity Zones are going to be designated to include some of these areas, they’re gonna pick properties up for pennies on the dollar and walk into a mass amount of equity with a low, you know, flip time on it. And, you know, so there’s going to be huge, huge upsides for this.

J Darrin Gross 18:15

No, and again, the 10 year hold, that was the thing that caught my attention was the, you know, the the gain, and in 10 years time, especially if you’re buying in a, in an area that’s needing investment, you’ve got time to turn that and if you have a concentration of investment in that area, I would think that that’s, I mean, that’s kind of the recipe for a home run. Yeah, if you have enough investment going into an area that it can attract new business, new, you know, just just new activity. That’s that’s kind of I mean, because you in Portland, Oregon, where I live, we I can go to certain neighborhoods and show you What was versus what it is, and the amount of time 10 years is enough to to fully re re transform a neighborhood.

David Sillaman 19:10

And we’re already seeing the seedlings of transformation in neighborhoods all across America in this program, believe it or not. Baltimore, Erie, the list goes on and on and on of different places where money has been invested, you know, projects are going on jobs are being created, both in real estate short term for development purposes, but also for businesses in the area. And in those areas. We’re seeing very, very strong support from both state and localized municipality levels, you know, state taxes where they’re, they’re matching, you know, that the federal tax program at the local level, we’re seeing we’re localized community, you know, municipalities are bringing in additional benefits, sales, tax rebates, extensions on when taxes are due, discounted tax rates, all sorts of stuff to really try to take this and harness it because it has that potential.

J Darrin Gross 20:01

Right. So you’ve made the case for it’s a good idea. How How does a a or I guess, knowing knowing that like a zip code or I mean, I forget if it was a zip codes primarily are were there.

David Sillaman 20:19

They were there literally census tracts addresses, like all of an entire zip code would be in and opportunities and they’re there. They’re kind of Believe it or not, if you familiar with what the CDFI tracks are, that they use the Treasury level there, a lot of them are just those Plus, you know, extension areas from within those already predefined economic tracks.

J Darrin Gross 20:44

Right. Right. No, I guess where I was going with this is that so we’ve identified the area that qualifies. Let’s talk about the specific investment. You mentioned you started off with hotels If, if a if a fund has identified a, an area, a neighborhood track, and what what are the specifics of the property? That that, that make it qualify? Not that it’s just located in can it be new construction?

David Sillaman 21:19

It’s it does start off with the fact that number one, first and foremost is the property in an Opportunity Zone. Right. Okay. As far as the type of development whether it’s hotel, whether it’s apartment complexes, multifamily townhouses, single family resident trailer parks, storage parks you’ve seen I mean, we’ve seen the gamut of a mall, okay? Doesn’t matter starts with isn’t in an opportunity. Number two is is this something that is number one qualifying for a original usage or B, is it substantial improvement? Okay.

The most of these, most of these projects, the idea is the substantial improvement piece. Where the fund is going to come in, pick up, take an equity position, maybe even own it entirely and do the whole project as an opportunity fund, because there’s nothing that prevents a fund from being a 1% equity stake in a project and the cap stack to the full cap stack. Okay, so the fund will come in, and you know, it will have a couple things that it’s got to do. It has to meet its basis plus $1, in substantial improvements. So, you know, you’ve got that to take into consideration but if done, right, you still have huge, huge upsides after improvements are gone. Um, other than that, those are the two main things, you know, it’s not project type specific, it’s applicable to all. You know, there’s, there’s, believe it or not, there’s 22 different federal programs, two executive orders that support this Opportunity Zone initiatives, everything from the USDA to the FHA to HUD to VA, you name it, you know, all of this is a stackable program, where new market tax credits, low income tax credits, historic tax credits, all of that stuff is all applicable within this program. So you really have a robust and it was done and designed to be private by design, you know, to where you and I could get into great deals and invest, you know, I believe that the mindset was, hey, let’s spur investors to invest in their own backyard type thing. But it was it’s designed to support any type of commercial deal.

J Darrin Gross 23:40

You mentioned stackable, can you spend a minute and clarify?

David Sillaman 23:46

Sure, let’s say that you’ve got a project that, you know, let’s, let’s say it’s a housing development, right. You’re coming into a low income housing area and some low income tax credits for building out housing development. Right. Well You can use the Opportunity Zone Fund and the Opportunity Zone Fund can take advantage of when it does its taxes, there’s tax credits, even being a fund. So, you know, when you look at it, then the tax liability that then gets distributed out to either the members of the fund wish or the stockholders of the fund because the funds are going to be designed one of two ways, almost always virtually with real estate will be partnerships. So that’s what most real estate deals are done as So, you know, when the distributions go out on the K1 at the end of every year, you know, the fund can do take advantage of certain aspects and you know, stackable programs that can it can work in conjunction with EB-5 investments into, you know, a lot of EB-5 is centered around real estate deals, stuff like that. So you really can kind of be pretty robust with the usage of how this program is interconnected with other tax programs.

J Darrin Gross 24:47

That’s something that I hadn’t understood. I mean, that’s kind of like turbocharging the you know, the tax viability or just, I mean, because on on The the Opportunity Zone Fund., again, that’s that’s all about attracting investment. But a lot of those other tax programs are about in I don’t want to put a blanket

David Sillaman 25:16

Yeah, it’s a lot of rabbit holes to go down.

J Darrin Gross 25:17

Yeah. But I mean, some of them that I’m familiar with are our additional funding sources available

David Sillaman 25:25

Yeah, like EB-5 is a funding source that can be used in the capital stack on a project along with Opportunity Zone money,

J Darrin Gross 25:32

Right. So you can essentially lower your leverage based on all of these, which makes, which in the end makes the property perform that much better. And that’s that’s the point. I think, if you’re going to take something away that when you add all those additional programs together, it makes that that property perform even at a greater level than if you were just coming in a standard. Investors come in with the downpayment. You borrow the balance kind of thing. So on the properties on the on the substantial improvement, can you define that? Is there a Is there a measure of what substantial improvement means.

David Sillaman 26:13

So you’re going to have a cost basis to improve. So you’ve got to do that basis plus $1 minus the cost of land for substantial improvement.

J Darrin Gross 26:23

So if you if you bought something for a million and just for round numbers that the dirt

David Sillaman 26:28

if you bought it for a million, the dirt was worth 100, 200; 200, you got 800, you got to put 800 and 800,000 in $1. In

J Darrin Gross 26:36

Gotcha, gotcha, gotcha, gotcha. All right. So, all right,

David Sillaman 26:40

With original use, you don’t have to meet that threshold at all.

J Darrin Gross 26:45

Okay, originally, you should because you’re coming in with new new construction essentially, then or, are you not?

David Sillaman 26:50

Okay. Yeah, nine out of 10. eight out of 10 times will be new construction on original use.

J Darrin Gross 26:55

Okay. So we we’ve talked about the benefits of a fund, we’ve talked about essentially what types of properties qualify and what kind of projects. How tell me how easy easy I’m sorry Easy Do It right? Yeah. Easy Do It. Where do you guys fit? Are you guys creating the funds are you are

David Sillaman 27:19

We offer a turnkey fund development platform where our team sets up the opportunity’s own fund which includes you know, everything from your entity formation, your financial forecasts on the fund, your your you know, our legal team takes cares of take care of the private placement documentations are raised the money term sheets sub agreements, our graphics video video web marketing team takes care of developing off the website getting it distributed out you know, doing the pitch decks pitch videos, basically it is a full turnkey when you’re taking saying Hey, I got this project helped me get this in front of investors the right way as an Opportunity Fund. Bring it to us day one, day 30 you’re able to connect with investors. We integrate a third party fund administrator that oversees, you know, investor onboarding, compliance reporting, so that way, you know, none of that stuff is on the project manager of the fund manager, because they’re usually one of the same. You know, so it’s, it’s designed to be very, very turnkey, very easy. Flat rate, we’re not broker dealers, so we’re not getting paid on a raise. We’re not coming in, you know, on a commission or anything else to that nature. It’s just boom, done and built to spec ready to go anywhere. So we do that. And then we also have our own directory listing OZFunds.com. So since we’re talking about Opportunity Zone Funds, OZ Funds, OZFunds.com is our directory listing for Opportunity Zone Funds to be listed there and an education platform as well. We educate people, you know, on the subject of Opportunity Zones, from an advisory standpoint. And then also, you know, that’s what we kind of do. For our clients, it’s a turkey 30 day, in out.,

J Darrin Gross 29:04

Got it. So you’re taking something from an idea to the execution. I mean, you’re you know, I think a lot of times Yeah, the idea is that somebody goes, wow, an opportunity. I mean, Opportunity Zone we need I mean, that’s, that’s about the, you know,

David Sillaman 29:17

You know, the shortest distance between between two points, is a straight line. Right? Right. And when you look at what most people do when they start something new, because the reality is all an Opportunity Zone Fund is, is a shell company, selling equity, whether it’s a partnership, or whether it’s a stock doesn’t matter, because it’s selling equity to you and me, the investor for our capital gain money. When we invest we’re getting at a partnership or stock. It’s then funneling that money into an investment. So you got to look at the mechanical basis of what an Opportunity Zone Fund is, is a business, raising capital, selling equity. And so when you think through that then from an execution standpoint, most people zigzag their way. And all we’re saying is, guys, listen, we’ve done enough of these, we’ve been responsible from day one all the way up to today, you know, huge market share we’ve built, we’ve just have figured out how to build an assembly line process, to where instead of, you know, you’re you thinking one thing, and then, you know, you’re already trying to put the cart 5000 steps in front of the horse, we just keep everything in an assembly line. Order your Corvette, you come out, drive it off the lot. That’s our concept. And it’s easy, Easy Do It.

J Darrin Gross 30:36

Yeah, I think that’s the, the underlying, you know, takeaway from this is that it’s that it’s, it is Easy,Do It. I mean, it’s a great, great name for your, your, your company, because, like I said, I’ve, I’ve talked with numerous people, but they’ve been more of the sponsor, type and not that they’ve you know, dweld on the the back office or the all the, the bits and pieces but what I’m hearing you say and I guess, me confirm with you is that if somebody has an idea, they’ve got a property in mind and they’ve got access to capital and they’re looking to do a property in an Opportunity Zone. Okay, and but now they need all the the functionality, the the support, so they stay compliant. Because Yeah, if you don’t, if you don’t do all the compliance, you’ve basically your bust or, you know, jeopardize everybody in their in their potential gains. So, somebody that that define a perfect prospect for you, typical somebody that’s coming to you with, with a need for your product.

David Sillaman 31:51

Alright, so usually it’s, it’s number one, we work with the developers, you know, are they a first time developer or are they somebody who’s a seasoned You know, commercial develop developer, they they’ve got a great project. The Opportunity Zones are not designed Opportunity Zone Funds and zones are not designed to polish a turd. So if it’s a bad deal at the get go, this is not going to make it any better. Okay, but if this is a good deal, this will make this phenomenal when you look at the tax benefits to the investor. So you know, somebody who has a good deal, something where they’ve already got some stuff already figured out on the project, you know, maybe feasibility studies have been done, they’ve got a good business plan for what they want to achieve or good development plan for they’ve got a good project, highlight somebody who’s coming to the table with at least something that we can kind of take and run with. And we know that there’s a lot out there because we get solicited by so many projects looking for money. So we see these things all day long. And that’s I think that’s the the more bigger thing, I think is not what the ideal client is. I think it really is understanding if we could economics at the market space for a second. Because when you really kind of think about it when you’re when you’re in commercial development, you’re looking For money to get any type of project on, you’re trying to find either investors or, you know, traditional outlets or whatnot. With Opportunity Zones, there are only about 600 Opportunity Zone Funds out there. That’s it, about 600 of them that are real, actually taking money in doing it. But what’s really important that nobody talks about and this is why the economics of it, I scratch my head sometimes and this is perfect for your audience, okay? When you look at those 600, first of all 15% of them are business, meaning that they’re focused on making investments as either like a venture capital fund or just into supporting a startup or the growth of a business. So let’s exclude 15%. For the real estate purposes, we’re now working with 85% of the shared space. In that 85% by design, these are offerings to invest investors, which means there’s a private placement that goes along with it. It that private placement is following some sort of reg offering, whether it’s ABC or D offering. All right, most of these are C D offering some more Reg A, but that’s rabbit holes. When you look at that 60% of the 85% market space in real estate, 60% of them are single asset focused funds, meaning that they can’t take or invest into any other deal other than the one they showed you and me as an investor legally.

So now we have 40% that are multi asset, out of that 40% that are multi asset. All of them are highlighting anywhere between one to already three deals that they’ve got on their plate as an opportunity fund. So even them having excess capital to invest into an opportunities on project they don’t have right now. The problem is we have an inverted supply demand yield curve, but the market space doesn’t fully recognize it, because they’re missing the forest from the trees. What we have is we have a exponentially huge amount of capital gain investors. And we have a very small pool of Opportunity Zone Funds, the real estate market, commercial real estate developers, the worst thing they could be doing right now is trying to solicit an Opportunity Zone Fund, which we see all the time. I can direct any real estate guy to an Opportunity Zone directory that’s at 25,000 projects in these Opportunity Zones. Looking for funding right now. You have economic development agencies within municipalities, that other than tax benefits are themselves struggling on how do we implement working this program with funds, fund managers and projects getting developed?

If you look at what they’re doing that they’re mainly doing project solicitation as well. They’re saying these are the projects that we as a city have to be able to offer within an Opportunity Zone for Opportunity Zone Fund. The reality is the Opportunity Zone Funds far and few between are looking for extra projects right now. But you’ve got all this capital that’s looking for a spot to go into and there’s not enough. So the best thing that any developer could do right now is if you’ve got a great project in an Opportunity Zone, don’t go fishing in a small pond that doesn’t have any money in it, meaning the OZ Fund market go fishing in the capital gain market. As an OZ Fund, come out and be that 601. So that way, you can hit a much, much larger market share. Because if we look at the tidal wave of capital gain investors right now, because of all the different COVID extensions related to this program, we have investors that go all the way back to October of last year, that are still eligible for participation in this program. every investor has till the end of the year, stock in real estate. So we have this huge tidal wave, we have more liquid money sitting aside in people’s bank accounts than ever in the history of our country right now. We’ve got changes that have been made the Volcker rule from an SEC standpoint, for banks, and also from a CRA guidelines standpoint, for banks to now get involved with investing in Opportunity Zone Funds as an investor. You know, being able to you know, we’re there we’re at that spot where developer could set up an opportunity zone fun walk into the bank that they usually would get a loan from, and say, hey, let’s talk about the bank investing in this As a fund and the bank get benefits of it. We’re at that point now, but but the market, when you look at the economics of the market, we’re so inverted that we don’t have enough supply. The demand is there. We don’t have the supply chain to handle it. I mean, it’s like, you know, scratching the tip of an article with a toothpick.

J Darrin Gross 37:20

Yeah. No, that’s a good problem to have. If you’re in a, you’re selling the product everybody needs that’s, that’s where you want to be. So that’s good. That’s good. David, if we could, I’d like to shift gears here for a second. By day, I’m an insurance broker. And one of the things we do is we try and manage risk. And there’s a couple of different strategies we typically consider. The first is can we avoid the risk? If we can’t avoid it, we look to see if there’s a way we can minimize the risk and then If we’re not able to avoid or minimize we like to transfer the risk and that’s what an insurance policy is. And I like to ask my guests if they can identify what they consider to be the BIGGEST RISK. If you can take a look at your your customers and your business and identify what it is that you think would be the BIGGEST RISK, and then explain that. For clarity, I’m not looking for an insurance related answer. But if you’re willing, I’d like to ask you, David Sillamon, what is the BIGGEST RISK?

David Sillaman 38:47

I see. Okay, the absolute BIGGEST RISK to the whole program is going to be fraud. Alright? Fraud because these are private by design to be between you and me as individual investors into development, Alright? They’re long term in nature, which means that we’re not thinking about it every single solitary day. As an investor, we already know going into whatever we’re putting our money into long term, years, six years, 10 years because of how every last one of these and it’s such a brand new market that, you know, there’s no not not a single Opportunity Fund has a major prior performance track record. So taking money in from an investor promising them that we’re going to do this, we’re going to do that, and then closing up or never even filing the right way to begin with causing, you know, detriment to the investor from a tax standpoint, thinking that here they’re deferring and now they’ve been collecting interest on taxes that are due because the fund never did the right thing. And the people behind the fund made it look so great. That, you know, they took the people’s money and ran. And when we look at look back at the history of track record of government programs, I speak truth on this because I built and operated one of the most successful loan modification companies on the East Coast was called Cornerstone group 175 employees, two call centers. I built a multimillion dollar business on the back of a government program once before. Fraught the proverbial saying of a few bad apples will ruin the entire basket was absolutely true in that program. We heard horror stories that people that you know gave money to companies out in California told don’t make your mortgage payments and then ended up losing their houses and the company’s closed up shop. That program was very dramatically changed through legislation and strokes of Penn from executives at the White House. This program has an immense amount of propensity for overwhelming overwhelming Change in an amazing way opportunistic way, in America, an amazing way to make a lot of great money. What it lacks because of how it’s written, there is no set platform yet. There is no set directory yet. There is no set, hey, this is the proper process and what you need to be able to do when you build one of these things and so that way, all the way down the supply chain, it’s transparent and everybody can get into it and know that okay, no matter what, that doesn’t exist yet, because this market is a brand new financial market that is penetrating both real estate and business. And within that it has to grow. And it’s like a baby right now that’s teething. It has the ability to do amazing, and the legislative support behind it is bipartisan. But at the same time, biggest concern would be fraud. The second biggest concern I think that would be to go along with fraud and I briefly touched on it, I think it probably plays into that fraud. The biggest way is right now, as an opportunity fund being private, you’ve got SEC compliance, you’ve got, you know, state compliance, blue sky laws plus whatever your corporate entity, you know, is both, you know, registered in and foreign because most of the time, you’re gonna have two entities at a corporate level with these, just a lot of this is still the compliance side. And that would be the the second biggest risk, none of them are performing. Proven. And I can’t tell you as an investor, hey, listen, you know, this fun is performed at a 10% interest rate of return for the last 10 years. Not a one, I can tell you that, hey, my company has done you know, $50 million in development projects and so you can trust us. But at the end of the day, as an investor, you know, and that’s that’s the risk is at the moment because there is no centralization on really, you know, what it looks like? You know, from that mass propensity of fraud, and then you couple that with no performance, they’re ultra ultra ultra high risk investment vehicles with huge upside potential, but also really high risk up front.

J Darrin Gross 43:16

Yeah, know thy operator or no thy sponsor. That’s a well said. I think that you know, like you said, even the the lack of a track record and then just the time that the investment has to go is there’ll be a tale to be told. So

David Sillaman 43:34

it’s good there will be there will be there definitely will be and you know, what we build funds ar Easy Do It in our turnkey model, we do coordinate with a lot of broker dealers, RIA’s, family offices. A lot of accredited investors that, you know, we have gleaned a lot of experience from trying to build an Opportunity Zone Fund when you don’t have prior performance. Your next best thing is full transparency. So when we build, we really took the FINRA 1022 checklist that a lot of brokers use when they do underwriting and due diligence and vetting these things. And so from a documentation preparation standpoint, from a third party integration standpoint, we go above and beyond to set up measures to always protect the investor. So that way the underlying sponsor the fund, when it’s all said and done, you know, they set up a fund, let’s say raises, you know, $20 million. Now, they get access to that by submitting a release request to themselves, and it gets documented. And then that way, there’s third party transparency for investors to always know where the money went, what went into and, you know, knowing the value, and I think, you know, we don’t have a defined system yet. I’m hoping that you know, enough of us doing this the right way will help kind of create a proper guide path. And if we can, as professionals in the industry, that are know both business and real estate Within the Opportunity Zone we talk about, if we understand that, hey, the biggest risk is fraud. And like we briefly just said a minute ago, then if we can stay collected when we talk to our clients, when we, when we know that, hey, this is how things need to be done, we can have a better path to follow and hopefully, avoid, you know, drastic changes. Because if the change if the administration is smart, the changes that are are to come, are only going to incentivize investment into this program even more over the next six months. And you know, the fraud aspect of it, we still won’t know for another two, three years. And that’s a little scary. But I think, you know, if you’re cognisantly aware of it, and that’s the biggest risk going into it, always thinking that hey, just transparency. Be honest right , and you’ll have no problems.

J Darrin Gross 45:51

No, it makes good sense. David, Where can the listeners go if they would like to learn more or connect with you?

David Sillaman 45:57

Sure. You can visit us right online. At Eazydoit.com, eazydoit.com, Eazy Do It. Also, if you’re learning to look into get more educated, they can connect with us on OZfunds.com. If you’re an investor looking for an opportunity fund, we probably have the most robust fund directory available right now ozfunds.com along with an education platform.

J Darrin Gross 46:24

Great. David. Can’t say thanks enough for taking the time to talk. I’ve enjoyed, enjoyed our talk, learned a lot. And I hope we can do it again soon.

David Sillaman 46:34

I look forward to it. Thank you.

J Darrin Gross 46:36

All right. For our listeners. If you liked this episode, don’t forget to like, share and subscribe. Remember, the more you know, the more you grow? That’s all we’ve got this week. Until next time, thanks for listening to Commercial Real Estate Pro Networks. CREPN Radio.

Announcer 46:54

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Passive Real Estate Investing with Travis Watts – CREPN #271

Travis Watts 0:00

When somebody first told me about syndications and what what that is, I was pretty skeptical. To be honest with you. I didn’t think that I don’t know. I just felt like, Okay, if you’re buying apartment communities, you’re a billionaire or you’re I don’t know, there’s got to be a catch. There’s got to be something right. And so or or these are real estate, people who have been in this industry for 10, 20, 30, 40, 50 years doing real estate, and this is kind of where they graduated to. That was, those were my first thoughts, right. So I could imagine there’s some folks thinking something along those lines. What I discovered is when I got into this space and started networking with folks, the majority of people who invest like I do in limited partnerships, as a passive investor, are simply highly paid business professionals, athletes, doctors, dentists, lawyers, attorneys, folks like this, right? They have a career, they have a profession, they make good money at it and rightfully so. They don’t want to take their eye off the ball.

Announcer 1:03

J Darrin Gross 1:22

Today my guest is Travis Watts. Travis is a full time passive investor. He’s been investing in real estate since 2009 in multifamily single family and vacation rentals. Travis is the director of Investor Relations at Ashcroft Capital. And Travis has invested in over 30 syndications. And in just a minute, we’re going to speak with Travis about passive investing in real estate. But first, a quick reminder, if you liked our show CREPN Radio, there are a couple of things you can do to help us out. You can subscribe, like and share. And as always, we encourage you to consider leaving a comment. We love to hear from our listeners. Also, if you want to see how handsome our guests are, be sure to check out our YouTube channel. And you can find us on youtube at Commercial Real Estate Pro Network. And always please consider subscribing. With that on Welcome my guest, Travis, welcome to CREPN Radio.

Travis Watts 2:52

Hey DarrIn, thanks so much.

J Darrin Gross 2:54

Well, I’m looking forward to our conversation today. But before we get started if you could take just a minute and share a little bit about your background.

Travis Watts 3:04

Sure. First thing I want to say is please do go to YouTube and check out our very attractive guest, as you see. So diligently said, Yeah, okay, so sure. My background, basically starts in single family. I got started in real estate the way a lot of folks do, and I bought a single family home. And from there, started kind of trying to scale that model. I did a lot of different things in the single family space. I did some fix and flips vacation rentals, some house hacking some buy and hold. And all the while I was working in oilfield job. So I was working 98 hours a week, 14 hour days, a lot of that was away from home out of state out of country. I worked in the Middle East. So it was crazy, crazy times. But what happened was the more properties I was acquired The more the light at the end of the tunnel was kind of closing in on me and I didn’t see this being a scalable model. I just felt like I’m gonna max myself out at a certain point and that certain point came in 2015 when I completely burned myself out and thought, okay, I love real estate I love you know, cash flow the tax advantages the upside like I get it, it’s tangible touch it, feel it, see it, I just love real estate but I do not love being in the business of real estate managing tenants trying to spend all my my days off finding properties trying to compete with everybody out there. So what I discovered is there is a way to be completely passive in the space and that would be through private placement, investing or syndications kind of layman’s terms. So in 2015, is when I started switching over to passive investing. And over the next several years, I had liquidated my entire single family portfolio I’d gone 100% On the syndication path, and today, I guess I call myself a full time passive investor with the irony that it’s not completely passive because you have to still network you still have to find deals, you still have to do your due diligence, right? So it’s not like I’m just sitting out on the beach. But anyway, it’s been revolutionary. I mean, for my wife and I, it allows us to travel allows us a lot of freedom of lifestyle. And so what I do nowadays is I try to help educate in the space of passive investing to show folks this is a possibility. This is a real thing. And, you know, everybody kind of has their their why or their what, you know, if you had enough money, if you had the financial independence, what would you do with your time and that’s kind of my big message is something I call time freedom. And that’s something that I believe passive investing can give, folks so that’s kind of my background in a nutshell.

J Darrin Gross 5:57

No, sounds like a full plate of investing experience. I started off with one and and how many units Did you grow to? At your peak?

Travis Watts 6:09

Yeah, that’s a good question. So because I was doing all these different models, I constantly had turnover, right? Because some were flips and like the homes that I would buy to rehab that I lived in, I would only do that for two years. And I would be selling them and then flipping them over. So I don’t know I probably got up to maybe like eight or so at any given time. I don’t know how many that I did in total, but But yeah, there was a lot A lot, a lot of work a lot of turnover, a lot of changes, but at the time through most of that period, I was just single with no kids so I thought why not, right?

J Darrin Gross 6:43

Right and were you self managing all of these properties?

Travis Watts 6:48

Yeah, so the first thing that happened when I started reaching out in desperation before I was breaking down, you know, how do I become passive? The first set of advice I got was, why don’t you just hire a Property Manager, right? that’ll solve all your problems. So at the end, I did have a property management company. But quite honestly, it didn’t make it any more passive. I had to manage them. They had to manage the tenants, I still had to make all the decisions. What do you want to do with this? What do you want to do with that? You know, the age back the roof, whatever. So it didn’t solve my problems, but I did try it.

J Darrin Gross 7:24

And were you investing locally or did you deploy a nationwide plan or how are you?

Travis Watts 7:30

Yeah, this was all out in Colorado. I grew up in Fort Collins, Colorado, about an hour outside Denver north and so I had properties all the way from Fort Collins into Denver. So that’s about a 60 mile radius, give or take, and that’s where everything was, and I started feeling also simultaneously. Despite the passive and the active stuff, I started feeling pretty uncomfortable, knowing how much of my net worth and equity I had and just single family in one small All market one small area which granted, Colorado was booming. I mean, it was a great market. I mean that certainly I attribute that to a lot of the success that I had. But I knew that wouldn’t last I knew there’s going to come a turning point. And I didn’t want to just stick it all in one market and wait for that to happen. So part of the beauty of the syndications is investing nationwide, which I do now I’ve got properties in probably, I don’t know, six, seven states. So that’s, that’s nice for diversification.

J Darrin Gross 8:31

Yeah, I think kind of diverse. diversification is key to any investment strategy. You know, if you put all your money on red or Bitcoin or whatever, and and turns out not to be the, you know, the opportunity you thought, you could end up with nothing, so clearly not a good way to go. So you started off, did you say it was 2015 did I get right?

Travis Watts 9:00

So is my transition year where I went from single family active to multifamily passive. Yeah.

J Darrin Gross 9:06

Okay, so so what was the year that you when did you start investing?

Travis Watts 9:11

2009 in September so we were kind of, I’m pretty near the bottom but we and I get you know, everybody says, Oh, you couldn’t have time that better Well, in hindsight Yes, but I remember specifically at that time talking to family, you know, should I buy a home that kind of stuff? A lot of folks are saying no, they’re saying Absolutely not. The economy’s in shambles, like this thing could go down further you might be purchasing something that loses 30% more of its value. Everyone was scared there was a ton of fear at least in my my bubble my network and but I took the plunge anyway because I was ready to get started. I had read years before this, Robert Kiyosaki Rich Dad Prophecy so not Rich Dad, Poor Dad, but Rich Dad Prophecy. All that book really talks me in high school, I think is when I read that ,was don’t be in the stock market. We’re gonna have this big stock market meltdown. That was only like, like advice to anybody, cuz readers have him know, he doesn’t really give advice. So, so I didn’t so I had some money saved up for college. It was actually in stocks. I pulled that out in about 2006 maybe. And I just sat in cash because I knew one day I wanted to do real estate, I didn’t know when and then here here we were 2009 it happened, so to speak. And the government was also giving out of $8,000 tax credit for first time homebuyers. So I’m sitting there running the numbers for myself thinking well wait a second, you know, looking at this house that sold for 165 now it’s 95. I got an $8,000 tax credit, and I got the money for the down payment. I’m like, screw it. You know, at the end of the day, I’ll house hack it. I’ll rent a spare bedroom. I did do that. That ended up paying my entire mortgage. I thought, you know everyone’s got their opinion, but the only one that matters is your own. That was my takeaway.

J Darrin Gross 11:06

No, there’s, there’s real wisdom in that. I think that it’s especially in challenging times, like right now. I’m more and more convinced that nobody knows what’s gonna happen.

Travis Watts 11:18

Oh, yeah.

J Darrin Gross 11:19

Nobody’s we’ve not been here before. I think that everybody keeps trying to draw from past experience and paint a picture of this is where we’re going next. But there’s some compounding variables that I don’t think that everybody fully understands. Myself included. And, you know, I think the best thing you can do is assess. as best you can draw off informations from from various points, test your, your ideas and make sure you’re getting into something conservatively. So that and not risking more than you can lose, I guess, another good point. But But that aside, You know, it’s interesting your timing and the fact that you were able to recognize from a Kiyosaki book which I had not heard of Rich Dad Prophecies. I’ve gotta check that one out. But that you had the idea to get out of the stock market in 2006. I mean, that was still things running fast and up.

Travis Watts 12:22

Yeah.

J Darrin Gross 12:23

So whatever your spidey sense was that encouraged you to get out, I mean, that that sounds to me like you were, you were paying attention or had some sort of a solid reason for getting out and it certainly sounds like a paid paid well for us that you had the money to get into the real estate at the low time. I mean, that’s, you know, that. I also wanted to just touch on another thing you said, when you were asking friends, neighbors family about investing in 2009, and however, But he was saying, Oh my god, no, no, no, no, no. And how, how powerful? And how difficult was it for you to go against the feedback you were getting?

Travis Watts 13:13

Yeah, I think. So if we if we unwind a little further back in my life, I think there’s kind of a lot of this, trying to make a decision for myself, given my own, you know, interests and my own goals. And so I’ve kind of done that a lot in my life kind of so called going against the grain. So I didn’t make the mistake of asking about selling out of my stocks when I did right. Because had I asked that would have been absolutely not. That’s crazy. What do you think and right, we’re in the best bull market ever. But and we got to be frank here. There was some dumb luck to it, too, right? I mean, I’m attributing the fact that I read that book and I took that action, which I did, but who really knew like you said, the more you you study and learn, it’s like, who really knows Kiyosaki, by the way also called for the biggest meltdown ever in 2016. Did that happen? I mean, you know, so you might be right once, not twice. So he didn’t have the crystal ball and he didn’t give a specific deadline either. He just said, it’s coming, right? Well just scare the crap out of me as a teenager. I thought, well, if nothing else, I mean, what it can’t hurt too bad to be in cash. Like it’s not like I’m, I’m spending all my money, right? I’m just sitting on the sidelines. So it worked out. But anyway, my long response

J Darrin Gross 14:36

Well, no, I just I applaud your your action there because I think so often it’s the easiest thing to do is to sit on the sidelines and gather information and and analyze and assess and try and pick your spot and not act. The action is really the the difficult. I mean, that’s the test. Do you have Have the courage Do you have the the the willingness to test what you believe? Test what you you know, you know?

Travis Watts 15:08

Yeah, and yeah.

J Darrin Gross 15:09

And go forward. And you know, I believe and I would, I would love to hear what your thoughts are on real estate. But I would tend to think we’re similarly wired as far as the thought process is that real estate is it’s not I mean, while while the the the meltdown of the 2008 could be, I think probably more easily recognized if you put some hindsight just based on everything was in play. Historically, it’s been a pretty safe bet. As with respects to housing, primary need. It’s not something that you can replace on the internet. Yeah. You can’t go virtual. You can’t. I mean, you may have technology. I mean, we’re starting to see some things with COVID Yeah, effect Where people might live? Hmm, and why they might choose to live in a certain place. But But nonetheless, housing is just a, it’s a it’s a basic need. And yeah, as long as there’s inflation and rent increases, and and, you know valuations and interest rates as long as interest rates stay in a, a, you know, and I, it as long as interest rates stay competitive, and I don’t see how we can get out of this based on raising interest rates, because that affects so much of the consumers willingness to spend money, right. I think we’re, I think we’re locked in these low interest rates. Yeah, for a long time. But I’d love to hear anything you have any thoughts you have on just real estate, and then we’ll get more into the the passive side of things.

Travis Watts 16:54

Sure. You mentioned something earlier, which was spot on you know, like, it’s 2015 I didn’t just gamble and choose a shiny object and say, oh, multifamily, let’s try that out. Like Like a lot of folks do with Bitcoin. I think that’s what you mentioned earlier, right? And so everyone just wants to jump on the latest and the greatest and maybe this is the next big trend or whatever. But instead what I did is I knew my reasons for liking real estate. I already had a level of success there to an extent. And so what I did is I doubled down on the education aspect of real estate and I started looking at what happened in 2008 2009 2010 and multifamily what happened even before that, I started looking at a lot of data and default rates and you know, occupancy trends and all this kind of stuff. And then because here’s why I, I if I’m going to do all that work and all that education and really put everything I have into something more or less right. I want to make sure I can be in that Ideally for 10, 20, 30, maybe even 40 years, and not be losing my ass every 10 years, and starting over and trying to find next latest and greatest. So there’s a lot in what I invest in that there’s a lot backing, right? It’s not foolproof, it’s not recession proof. It’s not a guarantee. It’s none of those things, but value add properties that you’re improving and probably buying at a discount from day one. And the older sector but not too old. So like B class value add 1980s 1990s, early 2000s. I still really like that niche. It’s very affordable for most Americans, but you’re just above the subsidized housing and we’re not talking about section eight we’re talking about the rent is 1000 bucks a month, you know, so most families in America can afford that. And I feel like it’s always kind of a sweet spot. You’ve got that Folks that move down from the luxury a class into B, you’ve got people always improving their lives moving from C and D up to B. And a lot of people just staying put kind of in that so called, you know, middle class standard. And so I really like B class, you know, value add multifamily. So that that was my conclusion to the research that I conducted. And that’s that’s about 80% what I invest in, so.

J Darrin Gross 19:27

So when you you did your research, this is after you’ve already been in real estate, you’re looking on where to go,

Travis Watts 19:33

right when I was finally making that transition to pass it around. 2015 2015 was like books, podcasts, mentors research year. I went pretty crazy and overboard in 2015. So yeah, it was that year basically.

J Darrin Gross 19:48

Okay. And, and prior to that, you were you’re investing in single family doing some flips. You mentioned you had some vacation rentals, huh? And all of that. Can you sum up? The was there a frustration? Was it just the overwhelming you mentioned about the light at the end of the tunnel was getting dark? What What were the things that that were leading to that? Yeah. Which you saw?

Travis Watts 20:16

Yeah, it was all about my time. It was all about my time commitment. So I posted this this video the other day on I forget Instagram or LinkedIn. And it was this, comparing an example between what if you had a single family home that you self managed a rental property that gave you a 15% annualized return just to throw out a simple number, and then you have a syndication and multifamily that’s completely passive and hands off that that gives you a 10% return. On the surface, you’d go well, the single family is a better bet, right? That’s a better investment. Why wouldn’t I just get 15 instead of 10? But here’s the way I look at that. I see that as both of these Pay 10. But the single family home has a 5% Premium that you pay yourself in your time to manage it. So if it’s worth it to you, whatever that 5% equates to overall for the year say it’s, I don’t know, a couple thousand bucks is it worth a couple thousand bucks of your time to be the asset manager basically to go buy it and underwrite it and close it and sign the dotted line and to manage your tenants and to advertise into or whatever, hire property manager and deal with that whole fiasco. So it’s not that one’s right or wrong. It’s just realizing your time value and what that’s worth. And to me, I didn’t have the time. But my time was valued high on my days off because I spent almost all of my life at work in the oil industry. So I really, really valued those days off and when I had to spend them, driving neighborhoods or putting in 20 offers and getting nothing back, that kind of stuff. It was just so discouraging It was my biggest pain point is I felt like I was wasting my life away. So for me, that’s what it was. And that’s what I speak a lot to is kind of the time value and to factor that into your investing.

J Darrin Gross 22:15

No, that’s that’s a point that I think a lot of people don’t recognize. I know myself when I first got in, I was basically happy that the rent added up to the mortgage insurance and taxes had no idea that there was additional expenses coming, you know, like repairs or vacancies or turns are all that fun stuff. So now, that’s, that’s all good. So you made the decision to get into or to get out of the single family and to get into the passive investment. And one of the things that most people are aware of or think about with investing is the ability to To do an exchange, as far as I know, when you go from something you own to something you’re you’re participating in as a passive investor, the the 1031 exchange is not an option available to you, is that true?

Travis Watts 23:16

So, from my understanding, which clearly not a 1031 expert here, but it can be possible, it needs to be a light, kind, you know property and there’s different third party groups that can kind of walk you through the ins and outs of that if you’re interested. I didn’t do 1031’s going from single family to multifamily. And the reason is what I discovered after talking to several people that were doing syndication investing is, number one, it’s common when you’re 1031ing into a new syndication with a new group, there’s often a really high threshold that you have to hit it might be a million dollar minimum five million minimum, everyone’s got kind of a threshold there. So a that could be a barrier for you to that group often won’t offer a 1031 option on the back end of that deal to go into their next deal. So then you might kind of be left hanging again, several years down the road. Now you got to figure it out on your own again and switch to another group, where you have to pay those costs, you have to figure out the logistics behind it, yada, yada, and quite frankly, there there aren’t nearly as many deals in this private placement space as there are single family homes that you could potentially purchase as an investment property. by a longshot. My fear personally, is that I would do one 1031 then another than maybe another now let’s say I’m in my 40s 50s Well, now it’s not going to work anymore. For whatever reason, there’s no deals that I like or the markets changed or something happened. Now I might be stuck with owing $200 grand in taxes. So I never wanted that that unexpected explosion to pop up later in life. And so I’ve never done a 1031 myself, but not to bash it. I know plenty that have my dad has and it’s all great, but for me not a strategy that I do.

J Darrin Gross 25:18

Well, I think too, for somebody that was in a relatively short amount of time, I mean, from 09 to 15, roughly six years. Yeah. You haven’t eaten up a lot of depreciation. Right? I think it it’s something where if if you’ve held a property for 20 plus years, it becomes kind of more of a Yeah, something you’re you’re more attuned to or more you know, sensitive to

Travis Watts 25:44

Yeah. It’s one of those things that I feel like once you get on that, that that treadmill don’t get off. You know, right right I on that treadmill.

J Darrin Gross 25:54

Yeah,

Travis Watts 25:55

That’s the strategy.

J Darrin Gross 25:55

Exactly. Because if you if you maintain The flexibility where you pay the tax, you can port your money, wherever you choose, whether it be into another syndication a stock or, you know, whatever, you’ve got maximum flexibility because you paid the tax. So, and that’s something I think that there’s a, there was a point it took me a while to fully understand or recognize the why because I had always been kind of had kind of a long term view of real estate, as opposed to the value add kind of thing where you you get in and prove it and prove the value and you make your profit on the sale.

Travis Watts 26:11

Yeah.

J Darrin Gross 26:15

So it’s just, I think it’s just a it’s a line that people need to recognize the difference. And, and that’s, that’s about the some of that. Yeah. So, okay, so you, you you make the decision you get into, I mean, you’ve made the decision that multifamily is the space you want to be in, so you’re no longer driving for dollars. No longer spending all these hours making all these offers, you know, getting no deals kind of being frustrated. How How did you underwrite the deal sponsor that you selected to invest with?

Travis Watts 27:19

Yeah, that’s a excellent question. And quite frankly, I had it backwards when I first got started in syndications. And I put way too much emphasis on the deal itself, the Proforma, the projected returns, the the, the what ifs, the possibilities, the dreams, and I did not put near enough emphasis on the sponsorship team, the general partnership, and at the end of the day, obviously what I’ve what I’ve learned here over the past few years, is it’s it’s everything about the team. It’s everything about the execution of the business plan. It’s that team’s track record experience and capability executing what they say they’re gonna do. So how do you how do you know? Well, you’ve got to ask some questions, you’ve got to look at some data, you’ve got to check out their past performance. I mean, there’s things that you have to do proactively. So the the hierarchy that I give it is the team and sponsor the market, believe it or not, I say a second. The deal is last. And and I’ll give an example that I that Hi, that hierarchy, My belief is two out of three should do pretty well for you. Overall, I worked with a sponsor that was quite frankly, just no good and in one deal, and they did everything wrong. They made every mistake you could make, but they bought a great deal, a great property in a great location and a diversified job market and a growing time in the market. I mean, the market was just stellar, right. And so the deal in the market were in place, but the sponsorship team was just horrid, but we ended up crashing profitable and just about hitting our projected return, believe it or not, and that was incredible because I was so scared, I thought these people are gonna run this into the ground and it just and it didn’t. So they’re all important. But at the end of the day, I’d rather work with a very experienced competent group doing just a mediocre deal because they’re going to make it happen at least I’ve got a little more certainty around that. So you want to start with your criteria to answer your question more specifically, I had to write down my criteria I like value add the class multifamily and these particular states you know, whatever I like, monthly distributions monthly reporting. I like you know, great communication, good transparency, like whatever. I had a big list. And and I still do, but I don’t know what it was back then. But, and then I went seeking groups doing that, you know, and so yeah, that’s how I initially got affiliated with Joe Fairless and with Ashcroft was a friend of a friend introduced me. And it was just after I wrote down all of my criteria, and it turns out, they do 100% of what I’m looking to do. And so it was just that alignment, and it’s been a great partnership. So that’s most important. You just want to get along with these, these folks trust them, and know that, that they can do it, that they can do what they say they’re gonna do.

J Darrin Gross 30:26

No, I think there’s there’s a ton of value in what you just shared there because I think that investing by nature lends itself to returns, the expectation of returns, and more is better, right? But I think one of the things that’s often overlooked is the risk to get more and not fully understood. You know, specifically I think and cap rates Just as a, an easy example, I think that most people would look for a higher cap return. Not understanding that that cap rate pretty well predicts your ability to exit the investment. If you have a really high cap rate, okay, who’s who’s coming in behind you to buy that? Yeah. All right. Whereas if it’s a it’s a very low cap rate, that says that there’s a lot of competition and a lot of people want that property. Yeah. And that market that you’re in, so I think that there’s, there is kind of that you know, I guess it’s just more of an education, more of a full understanding of, of what the numbers represent, what your goal is, and how achievable is that goal. So that you can, you can hit the number and, and you know, still have your principal now. Put your principal at risk, right?

Travis Watts 32:01

Yeah. Number one for me that preservation of capital. So,

J Darrin Gross 32:05

Yeah, it’s it’s something that I think when you have nothing I guess there’s also the flip side that if you have nothing, all this doesn’t doesn’t matter, but if you’ve if you’ve accumulated something, it becomes much more of a concern. And, you know, it sounds like I mean, clearly you’ve you’ve whether you say it was luck in 2006, you got out he had some money, you know, you put that to work for you in real estate, you grew that you got frustrated. You got that out, and now you’re putting it in, in picking these passive deals. I’m assuming that you’ve, you’ve done well, I mean, even when, you know, you talked about the one operator that you were invested with that in sound like they, they were good at what they did, but they got lucky on market and a property. Everything’s gone up for you. Fair enough. I mean,

Travis Watts 32:59

With the exception Here’s one thing I’ll point out, I did at one point, take my eye off the ball, so to speak. And I, you know, I didn’t, I never want to have 100% of my portfolio in one asset class or with one group or in one investment or anything like that. So I allocate 20% of my overall portfolio to experimenting. I’ve done some self storage, some ATM machine investing some first lien notes, you know, some distressed debt funds. I have a lot of stuff in there, and it’s hit and miss, but I’ll give you a story of where I really kind of screwed myself. I, I had every reason to be doing this multifamily stuff. I’ve done my homework done my research. Well, I’m in part of I’m in a lot of investment groups, but I’m in a pretty big one out in Colorado, and there was a presenter, they’re doing this new fund of distressed debt. And a lot of people were investing with them and they didn’t have a huge track record, but I kind of let all my criteria fall to the side and go well, I’ll give it a shot. Put in way too much. And about a year and a half in one of their partners in this fund. That was not the people I did my due diligence on it was someone out on the East Coast doing their own little thing, but they were part of this fund ended up being a fraud. And so we all lost like 35% initially right off the bat of our total investment, and then now it’s trickled into be probably closer to 50%. So I lost a lot of money, you know, and that’s the Bitcoin example. And it scares me to death when people reach out to me on social media and say, do you want to I’m a Bitcoin trader, do you want to buy my program or whatever? And I asked him, What kind of returns are you getting? And they’re like, Oh, 300% a week, you know, it’s, you got to understand your risk profile and you got to understand reality. So that was my hard lesson learned. So.

J Darrin Gross 34:52

Well. Your, your lesson clearly cemented kind of what we’ve already talked about is Your priority priority one is the sponsor. Right? There’s right if there’s if there’s no credibility from the sponsor, right. The rest of it is really up to, you know, the shifting sands or the blowing winds. And, you know, I think, you know, sadly, I say, sadly, I think part of life is learning from experience. I know, my parents used to always say, Well, I could have told you, you know, and, and, you know, I, a lot of the lessons that I’ve learned that are so indelible are based on mistakes I’ve made. Yeah. So I think it’s, it’s a, it’s good to note that mistakes are going to happen. And even in some of these these best, most vetted cases, there are no guarantees correct. And even in this market, we’re in where we’ve already talked about, nobody really knows how this could play out. There will be lessons that are learned from this, this experience. That we can carry forward and apply to the next one, but the next one will be different than this one. So it’s it’s a constant trying, you know, get the information you know, make assumptions based on educated guesses based on experience and, and others and that shift to constant. So, it sounds to me like you’re a fairly would it be fair to say that you don’t want to be a control freak, but you’d like control?

Travis Watts 36:35

Actually, I would say a little bit of the opposite because I had no problem relinquishing control to do these passive deals. And I realized that what I was doing actively when I had full control, wasn’t that great and there was people all around me doing it better. So I would say that for the for the folks that really love to have control and they have to make decisions. And they have to you know where that the syndication space may not be a great option or you want to limit your exposure there, because you really are at the discretion of other people to make decisions on your behalf. So I don’t have a problem with finding a trustworthy individual that I personally believe in and trust and saying, You clearly can do this better than I can, here’s some money. You know, and that’s kind of my approach with it is I don’t think I can do any better personally, nor do I really want to, and so it’s a good match for me. So So now I would kind of say the other way with that.

J Darrin Gross 37:38

Well, in maybe I misstated that I guess what I was picking up on was the aggravation level that you were having in the beginning. And and then even you mentioned some anxiety about the the one investor that that was not good at anything. And now that that, you know, I can see like, Oh my god, oh my god. Yeah, yeah. Okay guys fine. So, but no, I think, to the, to the flip side of that the fact that you you are willing to turn your, you know, invest with others. And even, you know, the ones where you’ve had some some experiences or you know, some lessons learned. You know, you have your criteria and and you define that. And I guess my question is, when when you define that? How did you go about gathering the information sorting that what were you relying on? or How did you, how did you? Were you reading books?

Travis Watts 38:40

I’ll share with you something and for your listeners that I’ve done for a long time. It’s just kind of my own little strategy or philosophy here. So I don’t like to listen to any one source and then say, that’s the way it is. I agree. 100% I’m done listening. I’m done learning. That’s how it is. I like to answer I’ll read a book, say real estate book and it says something about real estate always do this. Okay, cool. I’ll take a note of that. I’ll read another real estate book. And if I happen to see commonalities, ah, two people say, absolutely do this, okay, there’s, there’s probably something to it. And I keep reading, but I’m an avid reader. I’m an avid educator. So, you know, after I get to 2, 3, 4, or 5 sources that are all kind of agreeing, like, here’s the general consensus, we all kind of think this. Then I implement that into what I believe or what I think and so the same goes for anything. So before COVID happened, I was going around nationwide to conferences, big multifamily and real estate networking events. And I’m talking with hundreds of probably thousands of investors. And something I did initially to well not initially right after initially, to start finding who I wanted to invest with, is asking people, who do you invest with? What is your experience been? And as I started hearing certain names of certain groups pop up over and over and over, and I started picking up who are the key players here who’s really in the space. And that’s who I I ended up investing with, and in most cases, so. So anyway, that’s kind of how I approached it is finding multiple sources to say basically the same thing.

J Darrin Gross 40:27

Well, it makes sense. You know, you do educate yourself, you get reinforcement to, you know, what’s that old saying? If you, you hear hoofs, don’t think zebras. First I mean, there’s just kind of that the you get the information, you keep getting confirmation. You know, you can try and go all the other ways. But if, if all the tried and true is, you know, had in this one direction And it’s proven or the experience has been mostly positive, it’d be hard to argue otherwise. So Travis, let me ask you so your experience you basically you were active, you made the decision to go passive. Who, who do you think? Or I guess if somebody listening, yeah, is currently trying to do it on their own. And they are reaching the frustrations. What are some, some frustrations that you would encourage them to look for? At and compare that to what your experience has been on the passive side?

Travis Watts 41:48

Sure, sure. And I guess I’ll start answering that with with just this realization that happened that was totally unsuspected from, from my standpoint, when somebody first told me about syndications and what what that is. I was pretty skeptical. To be honest with you. I didn’t think that I don’t know. I just felt like, Okay, if you’re buying apartment communities, you’re a billionaire or you’re I don’t know, there’s got to be a cast. There’s got to be something right. And so or these are real estate, people who have been in this industry for 10, 20, 30, 40, 50 years doing real estate, and this is kind of where they graduated to that that was those were my first thoughts, right. I could imagine there’s some folks thinking something along those lines. What I discovered is when I got into the space and started networking with folks, the majority of people who invest like I do in limited partnerships, as a passive investor, are simply highly paid business professionals, athletes, doctors, dentists, lawyers, attorneys, folks like this, right? They have a career, they have a profession, they make good money at it, and rightfully so. They don’t want Take their eye off the ball, right, they want to keep doing what they do for money. And then they need a place to park some capital, maybe they don’t want to put 100% of their, their capital into their 401k or into the stock market. So this gives an alternative to that. So, so that’s one thing. The other thing is in and so those are the folks that love their careers and want to keep doing them and just need a place to park capital. The other side of the coin is more like myself, who’s out there doing everything on my own, being active, grinding it out working a career that I hated, working a lot of hours, basically, I just wanted to leave that job. That was one of my biggest motivators. And when I realized that, you know, first of all, I’ve always been an avid saver. I was raised by two very frugal parents, right. So I’ve always had this like crazy over the top savings rate, you know, 50% Plus in my income kind of stuff. And so I was parking all of that into real estate in one day I sat down this is the first time I guess I’d actually sat down and calculated more or less my network. I thought, okay, if I, but I did in a weird way. I said, if I sold everything if I sold all my single family homes, if I sold the house I lived in, if I got rid of all this crap, I paid all the tax and the penalties and all this, what would I actually have leftover, right? I was like my real raw networth. I said, Okay, if I took that number, and I put it to work passively, with like a conservative cash flow amount, that would be my projection number. What would that amount to? Well, what I discovered was, it was enough for me to leave that job. And there couldn’t have been a bigger motivator at the time. And so that’s really what prompted me initially to pull the switch. And it wasn’t until later that I really started discovering this this time freedom concept in this. You know, the first thing I did is went to I went to worked for a brokerage firm. So I wanted to learn stocks, bonds and mutual funds. And it was just literally self interest. I could care less what my salary was I wanted to learn that was something I actually just wanted to do. And I ended up not liking it. So I went to go work for syndication groups, because as you know, I mean, that’s where I was transitioning into that world. And I thought, what better education than the work from the inside of this, and then be investing in it. So that’s kind of how it evolved. And I thought, this is cool. I have an ability to pivot careers, I have the ability to work part time or full time I have the ability to move. And that’s the thing for people this has nothing to do with me. By the way, I’m painting this picture to say that passive income when your passive income exceeds your living expenses, that gives you this type of freedom to make these different means or go to church more, be more charitable, spend more time with your family, traveled the world, whatever it is for you. Everyone has their wives we talked about earlier, but Yeah, that’s that’s the purpose. That’s the bigger picture here is that it doesn’t make much difference for most people to have 200 bucks a month passive income, that’s not necessarily going to be life changing for most people, but when you have 5000 a month or 6000 a month now it starts to be a little bit of a game changer, you can make a lot more but you know, positive changes in your life in different areas.

J Darrin Gross 46:24

No, I think that’s that’s a good way to kind of summarize the passive income, you know, that’s the goal is to to have more than your expenses add up to. So that’s good. Hey, Travis, if we could, I’d like to shift gears here for a second? Yeah, as I mentioned before, by day, I’m an insurance broker, and as such, we do risk management with our clients. We typically consider a couple of different strategies. First, we look and see can we avoid the risk? If that’s not an option, we’ll see. If we can minimize the risk, and when neither of those are an option, we look to see if we can transfer the risk. And that’s what an insurance policy is. And I like to ask my guests if they can take a look at their space, and how they work with their clients, and consider what they or explain what they consider to be the BIGGEST RISK. Sure. And for clarity, I’m not necessarily looking for an insurance related answer. But if you’re willing, I’d like to ask you, Travis Watts, what is the BIGGEST RISK?

Travis Watts 47:39

I would say the BIGGEST RISK in passive investing to me is partnering up with the wrong team. It can be disastrous, as we’ve talked about, but, you know, if you can’t execute a business plan, specifically if we’re not talking about value, add real estate. So say we’re talking about new development new construction, it can be a very bad scene. So I would say you’re aligning yourself with the right folks picking the right partners and doing your due diligence up front to mitigate those risks. And in the deal itself, you’re looking for a sponsor or or yourself if you’re doing your own deals to be as conservative as you possibly can be. You mentioned earlier on the call cap rates, you know, on real estate. So if you’re buying something at a five cap, you should be and you’re hoping to sell it in five years, you’d like to see a higher cap rate down the road, right? Maybe you project a sell at a six cap, you’re just being conservative in case the market softens in case COVID ends up being a, b, c or d. You’re using your best judgment to mitigate risk that way. So those are kind of the to two part question. Two part answer.

J Darrin Gross 48:57

Oh, that’s that’s good stuff. Travis, I can’t say thanks enough for taking the time to talk today. But before we wrap up, where can listeners go if they would like to learn more connect with you?

Travis Watts 49:15

Sure some that we didn’t talk about in as it pertains to that. I spend my weeks on these 15 minute, completely free no sales pitch q&a calls because I do a lot of videos and blogs and podcasting, a lot of folks have questions as it pertains to them specifically. So if you want to sign up for a free 15 minute call with me, literally free, no obligation, or I have a downloadable guide. It’s called Understanding Real Estate Private Placements. It’s about a 20 page downloadable guide. Both these are free and you can get them at AshcroftCapital.com/connectwithTravis and whether you just want the call or or the guide or both. That’s where you can go additionally, I’m on Instagram, LinkedIn, Bigger Pockets, Facebook, all these things, the the symbols @passiveinvestortips. And so I push a lot of content out there too and you know, everything’s free and just a resource to help others so feel free to connect if I can help in any way. anybody listening.

J Darrin Gross 50:23

Awesome. Travis, like said, I’ve enjoyed it. Hope we can do it again sometime soon. And stay well.

Travis Watts 50:34

Thank you for having me, Darrin. I really appreciate it.

J Darrin Gross 50:36

All right. For our listeners. If you liked this episode, don’t forget to like, share and subscribe. Remember, the more you know the more you grow? That’s all we’ve got this week. Until next time, thanks for listening to Commercial Real Estate Pro Networks CREPN Radio.

Announcer 50:55

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Credit Unions for Commercial Real Estate Loans with Mark Ritter – CREPN #270

Mark Ritter 0:00

We’re looking for people who want first of all want that relationship with your institution, that we can have a conversation and get to know who you are and you’re, who you are now and where you’re looking to go. And we really focus on the real estate side on three major buckets. You know, about a third of our business is that residential real estate investor. The other piece where we do a lot of is that owner occupied small business. And and the third bucket that we love, is that just a straight up commercial real estate investor. Maybe you have some some different projects that are credit worthy, but there’s an explanation behind them. We’re good where we can talk to you on that piece.

Announcer 0:47

Welcome to CREPN Radio for influential commercial real estate professionals who work with investors buyers and sellers of commercial real estate coast to coast whether you’re an investor, broker, Property Manager, attorney or accountant, we’re here to learn from the experts.

J Darrin Gross 1:06

But first a quick reminder, if you like our show CREPN Radio, there are a couple things you can do to help. You can like, share and subscribe. And as always, we’d love to hear from you please consider leaving a comment. Also, if you’d like to see all handsome our guests are, be sure to check out our YouTube YouTube channel. And on YouTube, we are Commercial Real Estate Pro Network. And if you’re inclined, please consider subscribing. That’s always the challenge, try and grow the subscription and appeal to more real estate investors. With that, I want to welcome my guest, Mark. Welcome to CREPN Radio.

Mark Ritter 2:48

Thank you for having me looking forward to the conversation.

J Darrin Gross 2:51

Likewise. And before we get into the meat of the conversation Mark, if you could take just a minute and share with the listeners a little bit about your background.

Mark Ritter 3:03

Sure. Like you said, my name is Mark Ritter. I’m the CEO of MBFS. And we are a company that’s owned by 13 credit unions and work with credit unions all throughout the East Coast. I’ve been involved in quit credit unions for close to 20 years now. And it’s just been involved in business lending, when this was a twinkle in somebody’s eye in a microscopic level of business out there, and it hardly even existed. But before that, I was a, you know, a banker work with different companies consulting with banks,. But and then grew up in Pennsylvania, lifelong Pennsylvania, nate. Resident other than a few years down south, and a graduate of Penn State where I root for those Penn State Nittany Lions.

J Darrin Gross 3:57

All right. Well, the Credit Union I grew up my dad was a banker. And I don’t know what the nature of was, but I know there was maybe it was a competitive thing, or we’re better than you kind of a thing I know. And in our house, there was always this nature of the distinction between banks, savings loans and credit unions. And I’m wondering if you could take just a minute and distinguish the difference between the the credit unions and the other lending institutions?

Mark Ritter 4:35

Sure. And it’s, as you said, there’s a long history there between banks and credit unions, and I try to stay out of those battles just because I let Congress worry about those more than anything. But when you walk into a credit union or meet with your local credit union representative, it looks and feels just like just about any Mainstreet financial institution. We have checking accounts, we have credit cards, we have car loans, and mortgages and investments and all those types of things that you have. But really what is different from that underlying structure is what a credit union is, is a cooperative. And it’s owned by the members, just like any other cooperative business. It’s run by a board of directors who have who’s elected by the members of the Associate of the of the organization. And really the profits, you know, kind of go back into helping make it a stronger organization. So what and and credit unions have, it used to be, you know, maybe when you were growing up, it was the local teachers credit union, or the local factories credit union, and they really tended to serve just that tight knit group. Unless you were an immediate employee there. But it you know, you probably couldn’t join, but that’s probably been the biggest change in the past 15, 20 years is that credit unions are much more open to people from wider groups. And what happened about 20 years ago, is so many people had credit union relationships. Well, and then maybe as they progress their life, they open up a business, they open up, start buying real estate, and they have this nice relationship. But they couldn’t help out their credit union. So the law was finally changed that allowed that to expand and be open. So but yeah, that so that’s kind of where we came into play and started building this up. But yeah, that was you know, when you look at it the same day, I hate to say it’s commodity and sometimes commodity products are very boring. But really, you know, we look at it as that co operative difference helps makes that the culture of the credit union network. A little bit different. It’s nice to work in an industry where nobody’s out there protesting on the streets against their local credit unions as evil people. We’`re usually considered the good guys in this business.

J Darrin Gross 7:12

I can say from personal experience, you know, I’ve used banks, savings and loans, and I have actually have a commercial mortgage through a credit union. And I was pleasantly pleased at how easy and personable it felt, you know, they’re easy to deal with and personable and and I can’t say as a user, that there’s any distinguishable difference as far as the look and feel like you mentioned. So I would, I would agree that So you mentioned 20 years ago, laws change. What what was it? congressional act or changed?

Mark Ritter 7:57

Yeah, they’re the it actually rolled back into the Federal Credit Union act, that it did two things. It it really made it clear that they wanted to open up the membership to multiple organizations or larger communities and allow different groups, many different groups to join into a credit union. And that’s why you see, you know why a lot of credit unions that you probably drive past in your neighborhood, if you really wanted to, you could probably go in and open an account. So that opened it up. And then in conjunction with that, they also opened up the commercial lending function, where it used to be very, very tightly regulated to the point where it’s almost impractical. So and that, like I said, that was about 20 years ago. And when I got into credit union business lending, you know, here in Pennsylvania, we had $13 million in credit union commercial loans among every credit union, and almost all of that was for Amish credit unions. So is a real narrow niche and hardly ever done. And today we have billions just here in Pennsylvania and credit unions, you know, each year we’re funding about 25 billion in commercial loans.

J Darrin Gross 9:16

Well, it’s great, great growth. Are you finding that that real estate investors are more regularly thinking of credit unions for commercial lending?

Mark Ritter 9:28

You know, that’s actually our biggest challenge is being that Top of Mind choice. You know, when you drive past your community bank, when you drive past the regional banks or the big banks, they all know that it’s a choice. But credit unions in the United States have over 100 million members. So really, you’re talking about a third of America belongs to a credit union, but they just don’t think to maybe put that you know, when they’re in the market to should go to that same place where they already have The relationship. And as you probably know, it’s it’s some of the easiest places and best places to get the terms or where you have that in show have that established relationship. So really getting people to expand. Now not every credit union does commercial lending. So sometimes maybe they have that membership at a credit union, but they don’t do it. And they think, oh, credit unions don’t do that. Where in fact in the truth is maybe they just have to shift to somebody else down the street or in the region. And that’s really where we help out is we’re kind of an aggregator for credit unions being owned by credit unions helping drive the business. So and sometimes credit unions are relatively small institutions, compared to you know, your regional banks. So being a cooperative industry, we basically partner credit unions together. You know, this year we’ve done deals over $20 million You know, that’s the anomaly some, you know, our average deal, maybe is a small balance real estate deal. It’s very common to do deals of a couple million dollars in size. So but but maybe that local credit union can’t fund the deal themselves. So but but it’s a very cooperative industry that works together for real estate investors.

J Darrin Gross 11:22

So when you say your your average deal size you mentioned, you know, a lot of the small balance real estate stuff. Are you guys actually do you hold the paper or are you is kind of a, you put it through Fannie or Freddie or?

Mark Ritter 11:39

Credit unions hold all their own paper, okay. They really don’t sell off to agencies. And I hate to say it, but the best years for credit unions are typically after a recession because credit unions, you know, they can sit down and talk with somebody about their transaction and make that decision based off of the facts. And credit unions are also after during a recession or tougher softer times are flush with cash. So they’re looking to make loans and they’re looking to have those conversations with real estate investors so that they can get that deal done. Whereas maybe a larger institution tends to have a box and if it’s in the box, that’s great. And if it’s out of the box, it doesn’t work. Where where somebody in our in our industry can sit down with the decision makers and they can sit down to the investors can sit down with the people behind the money.

J Darrin Gross 12:42

Yeah, I have to say from personal experience, the lending was fairly simple. With a credit union. I presented you know the the property in this case Kind of my estimates based on all the expenses, I was able to show the debt cover ratio. You know, and it was basically, I don’t remember the exact but I want to say that presented all that to my, I still call him a banker. But the person I worked with that credit credit union, and he presented to the loan committee and and you know, it was very shortly thereafter I got a call saying when you want the money,

Mark Ritter 13:33

It, they tend to be a much flatter organization where that person that you talk with and working on the transaction isn’t that far removed from the senior executives, so that everybody knows that conversation and they’re looking for those relationships to make that first deal and in the future?

J Darrin Gross 13:55

Yeah, and then even even kind of what’s been demonstrated during this COVID crisis, I’ve seen just the value of those relationships and the ability to have a conversation. You know, and to, you know, whether it be rents or whatever the, the, the concern might be, if there was any issues there, there was somebody that was available to talk with, as opposed to an 800 number, or on hold or go to the website kind of thing. That’s good. So what what are some challenges you find on on connecting with investors to make them, you know, recognize the opportunity with a credit union?

Mark Ritter 14:49

You know, what, once we usually get over that perception and choice, you know, then it’s a fairly easy conversation because what we’re selling is what a lot of people are looking for in that they people like that connection, they want those relationships directly with the lenders. They don’t want to be merged through another institution and then move down the ladder. But there’s over 5000 credit unions in this country. So and maybe, you know, maybe a quarter of them are really active hardcore lenders, some of them just dabble. Or maybe there’s, they’re too small for this. So sometimes people have to weed their way through and find that nice fit for them themselves, and not just kind of judge that first institution that they say and say, oh, credit unions don’t do that. Much like banks, people tend people tend to lump credit unions into this homogenous bucket. Whereas maybe they don’t do that with a bank. You know, they think oh, credit unions don’t do this, or credit unions, this is how they do things. When in reality there, there are many different distinct financial institutions. In many of the metro areas, you know, their billion dollar plus institutions, which people don’t think about, you know, the largest in the country is over a billion hundred billion dollars in assets. And people don’t, you know, people still think of them as their credit union that’s on the corner of the street. So getting over that perception and making us a choice is the by far the hardest part of our job. Because credit unions tend to be friendly on fees, they tend to be friendly on terms. Federal Credit Unions can’t charge a prepayment penalty. And that’s part of that’s in the federal Federal Credit Union act. So things like that, that make us very friendly. You know, that’s good. But get making a choice for somebody who may be the more you’ve been in the more real estate You’ve had, the longer you’ve been in it, maybe when you started out credit unions weren’t an option. But now we are.

J Darrin Gross 17:07

Yeah. And you mentioned the loan size. It didn’t sound like there is really a limitation on that. Can you speak a little bit to kind of the range of loan able to do?

Mark Ritter 17:22

Well, and that’s what’s nice with us being owned by many different credit unions and working with them. We do deals, maybe it’s the first property you’ve wanting to buy, and kind of get your toe get your get your feet wet in their toes in the water. We do those types of loans and help build some small ones. Plus, we’re in some major metro areas and do large scale traditional cre deals up to 15,20, $25 million. That you never would really think a credit union could be in the ball game of we’d like to be a lot of things to a lot of people. We do your know your multifamily. We do owner occupied real estate. You know, credit union, like we we tend to be what I’ll call Main Street and community lenders, when you say what do we like to do? Well, they like to do what’s in their marketplace to help out their community. That’s what they like to do. So and that’s, that’s a nice experience, as opposed to some financial institutions where you say, this is my box and it’s either in or out.

J Darrin Gross 18:30

Yeah, I think the box underwriting is kind of one of the hazards of the bigger, bigger institutions. And especially the more computerized things get, you know, if it’s a computer making a decision based on some preset parameters, I’ve seen, deals that make sense to me not make sense to the larger system. And, you know, so whereas, versus the ability to have a conversation with somebody and lay it out and talk through it, it seems like there’s a, an opportunity there. If somebody is having a challenge, you know, trying to get a loan from from a lender. Can you make a suggestion or is there is there a good? Is that a good time to say, you know, what about the credit union?

Mark Ritter 19:35

You’re exactly right. That what if you if we really strive, you know, our products are nice, but my dollar spends the same dollar as everybody else. If you’re having trouble having those conversations, if you’re looking for more of that relationship where somebody can come out and see your property and your project and talk through it, and meet with the credit team, and meet With the credit decisions, you’re a good fit for a credit union. If you’re, if you’re just looking for corporate, you know, here’s the box, this is what we do. That’s it. Well, now maybe we can see if we can help. But maybe there’s other people out there who can do it the same as everybody else. But But yeah, that that’s a perfect example of who we are and what we’re looking to do. You know, in today’s world, credit unions are funding loans. Despite we’re actually back in June, we were back to funding loans at the same pace we were prior to the pandemic. Do do we ask a couple more questions? Absolutely. You know, we’re stewards of our members money and for the institution. So we want to make smart decisions, but we’re making those decisions and out there making money and making loans for people to put to push it out there.

J Darrin Gross 21:00

Let me ask you about rate. I think one of the things that that I’ve seen happen a lot when I speak with real estate investors, and it depends a lot on where they’re coming from, if they’re, they’re used to getting a home loan, and then all of a sudden, they’re they’re trying to buy a piece of commercial real estate. And there, they’re used to having that conversation with the advertised rate. And, you know, thinking that they should have, you know, a certain rate, but not understanding the difficulty to get that rate for the type of product that they’re, that they’re looking for. Can you speak a little bit to that? Because I think that’s one of the things I found that, that when I talk with people, they their perception versus what they really wants the money?

Mark Ritter 21:49

Yes. Yeah. And where we sometimes struggle the most with is maybe that newer real estate investor or somebody who’s in the residential space. Looking for that same transaction that is that they have on their home, even though you’re buying a home or you’re buying a two unit property, it’s not the same. You know, we’re not selling these loans on the secondary market, it is a little bit more work. But it is a little bit higher of a rate. We try to be competitive on the rates and do things that are fair for the membership and for the borrower. But the rates are certainly certainly in line with what you see everybody else. The one thing that we’re that we’re proud of in the credit union is that we are lending our own money. You know, we’re not borrowing against it or hedging it. And so so we have more flexibility since it’s the credit union’s own cash to manage that relationship as it goes on. You know, this, as I mentioned, we didn’t have we don’t have a prepayment penalty. And that’s by that’s by design for federal credit unions. So when rates plummeted this year, credit unions could modify and even last year, credit unions could modify their loans down. Because it’s really that internal borrowed funds. They didn’t borrow and match funds against it and have a yield premium that they have to maintain where there’s a penalty on the back end. So with our flexibility, being a cooperative structure allows us to be fair on rates not just at closing, but as your pro as your project progresses in the future.

J Darrin Gross 23:39

Want to ask you a little bit more on that your money versus borrowed money. My understanding is that most banks, again, this is kind of a very basic description, but based on what they have on deposit, then they’re able to borrow at the federal level. And then that’s the money they they lend out. And based on the rate, that they can borrow the money, then they increase that rate to when they lend it out and set spread on that is essentially the way they’re they’re making their their fees. Is that not the case with credit union?

Mark Ritter 24:22

A credit union, almost every dollar dot, there’s a couple rare exceptions out there. But in today’s world, if for every dollar of credit union deposits, usually about 85 cents to 85 to 88 cents is lent out to borrowers. So it is indeed it’s not borrowed funds, where they have a note to pay. It is just internal funds that they’re lending against, based off of the deposits of people that have accounts at the credit union. So they’re not beholden to secondary markets, third party investors, other loans that they have out there to their people. It’s really they can just sit back. And you know, and unfortunately in today’s world, those deposits don’t pay a lot. You know that that’s the nature of the beast. But that also bleeds through to credit unions being able to have be much more flexible in the money that they lend out because it is indeed a cooperative structure of that money that’s in there. That through everybody’s accounts, that’s the actual dollar that’s being lent out to two real estate investors in small businesses.

J Darrin Gross 25:40

Hmm, I didn’t, didn’t know that, per se. I guess I hadn’t really thought it through. But that’s that’s interesting, because that’s always been kind of the model that I thought of a bank worked on. But clearly realized as of late, that that’s not the case at all. The banks or banks are basically, you know, they really don’t want cash they want just enough so they can borrow more. So they can lend more kind of thing. That’s the nature of them. Well, that’s, that’s good stuff. I appreciate you sharing that. And, and so if you were to identify a, a prospective, ideal borrower, could you sum up what a, what a good candidate for a credit union would be based on the loan size and the property type?

Mark Ritter 26:39

Sure. And I hate to give a broad answer, but we, you know, we deal with a lot of broad people, we’re looking for people who want first of all want that relationship with your institution. That we can have a conversation and get to know who you are and you’re, who you are now and where you’re looking to go. And we really focus on the real estate side on three major buckets. You know, about a third of our business is that residential real estate investor, maybe you have two units, maybe you have 100 units, maybe you have 200 units, we have a lot of relationships where people you know, they’re in that business of the residential real estate side. The other piece where we do a lot of is that owner occupied small business and I would call in that segment usually we’re, we’re in that small balance commercial real estate, maybe we’re under a few million dollars, you know, and it really we deal in Center City urban areas and we deal with small town America. So so we’re willing to go in those secondary markets a lot more.

And and the third bucket that we love, is that just a straight up commercial real estate investor. Maybe you have So some different projects that are credit worthy, but there’s an explanation behind them. We’re good where we can talk to you on that piece. You know, we’re not looking to finance a Manhattan skyscraper, but there’s a lot of apartment buildings and office buildings and medical offices. And, and maybe that average sized in your portfolio is two and a half million dollars. We do those all day. You know, like I said, and we do some bigger ones, and we’ll do some smaller ones. So and what we tend to do is, you know, not all credit unions are homogenous. So we tend to talk to our people and try to match them up with somebody in their area that’s lending that fits the scale on who they want to be and where they want to go in the future.

J Darrin Gross 28:49

No, that’s great. That’s great. Hey, Mark, if we could, I’d like to shift gears here for a second. I mentioned to you earlier by day I am an insurance broker and such I work with my clients to assess risk and determine what to do with it. And there’s a couple of different strategies we typically consider. The first is we ask, can we avoid the risk? The next one we ask is can we minimize the risk? And if we cannot avoid nor minimize the risk, we look to see if we can transfer the risk. And that’s what an insurance policy is. And I like to ask my guests if they can identify what they consider to be the BIGGEST RISK? And I’m looking for is kind of you can take a look at what your your clients and or your business across that, that spectrum. And just to be clear, I’m not necessarily looking for an insurance related answer. But if you’re willing, I’d like to ask you, Mark Ritter. What is the BIGGEST RISK?

Mark Ritter 30:00

As a lender and people who like to lend money for your real estate investments, my BIGGEST RISK that we come across is is it is kind of nothing to do with real estate. It has to do with the people behind it. When loans go bad in our cases, the vast majority of time it has to do with the people behind it. Maybe you had something go on in your personal life, maybe you you had that vise that you have to get taken care of. Maybe sometimes enough that some things are never enough, where you you can’t put the brakes on your growth. And because what happens is maybe when that personal life is out of whack, whether it be a whether it be a substance, whether it be some values, whether it be too much spending is that tends to cause people To make take too much risk in their commercial real estate business, where their margins and and window of error is much tighter. And then as soon as there’s a bump in the road, things start to snowball. So we really that’s why to manage that risk, we really want to get to know the people behind the transaction as much as the transaction itself. Because, you know, if we have good people who manage their personal life and their expenditures, all right, in a good manner, then all that then you’re much more prepared to manage the risk in your commercial real estate life.

J Darrin Gross 31:45

Makes a lot of sense. kind of messy life can turn to keep it all contained there. That’s, that’s, unfortunately, it’s true. But I think that, you know, I know as an insurance broker, there’s a lot of those types of questions. We look at as well. And, you know, they don’t always present themself up front. But usually there’s some clues. When you get to the claim, you know as to whether you could see it coming when you put all the pieces back. When you look in the rearview mirror and see all the pieces there so I can appreciate that. Mark, where can listeners go if they would like to learn more connect with you?

Mark Ritter 32:26

Sure. The easiest if you’re a real estate investor and want to get connected with a credit union, you can reach out to us at mbfs.org mbfs.org. And if we don’t have a credit union in your marketplace that can help you out. We have friends all over the country, with other credit unions that we match you up with and get you pointed in the right direction. We’re very active on LinkedIn. I’m a big LinkedIn user Mark Ritter, or they can they can also look up Member Business Financial Services. is on LinkedIn, but the website’s probably the easiest.

J Darrin Gross 33:06

Mark, I want to say thanks for taking the time to talk today. I’ve enjoyed it tremendously and learned a lot. And I hope we can do it again soon.

Mark Ritter 33:15

Appreciate the conversation. Thank you.

J Darrin Gross 33:18

All right. For our listeners, if you liked this episode, don’t forget to like, share and subscribe. Remember, the more you know, the more you grow? That’s all we’ve got this week. Until next time, thanks for listening to Commercial Real Estate Pro Networks. CREPN Radio.

Intro 33:38

You’re listening to CREPN Radio for influential commercial real estate professionals. For more information on this or any of our guests like us on Facebook CREPN Radio.

Reonomy Commercial Real Estate Property Data Provider with Rich Sarkis – CREPN #269

Rich Sarkis 0:00

We have a number of municipalities, tax assessors that use our system, ironically, to vet their own data because ultimately, because we’re multi sourcing it will have better or more timely data than they have access to. But to take it a step further, which is where you’re going, this has been a hot topic of conversation at a board level with us, because given the fact that we’ve got the system of record the Reonomy, ID, which you use the term backbone, which is exactly how we think about it, then yes, if you go all the way upstream, the natural extension is right at the source, if you can be if the Reonomy ID can be embedded as your recording and mortgage recording and deed transaction etc. Then to your point, it eliminates a lot of the friction, the cost the inefficiencies that are going on and that we’ve seen now during the COVID crisis, right when a lot of these assessors have had to shut down because literally the people can’t go there to record the mortgages because they do it the old fashioned way, right. It’s it’s analog. It’s not digital.

Announcer 1:00

Welcome to CREPN Radio for influential commercial real estate professionals who work with investors buyers and sellers of commercial real estate coast to coast whether you’re an investor, broker, lender, property manager, attorney or accountant We are here to learn from the experts.

J Darrin Gross 1:20

Welcome to Commercial Real Estate Pro Networks CREPN Radio. Thanks for joining us. My name is J. Darrin Gross. This is the podcast focused on commercial real estate investment and risk management strategies. Weekly we have conversations with commercial real estate investors and professionals who provide their experience and insight to help you grow your real estate portfolio. Today my guest is Rich Sarkis. Rich is the executive chairman of Reonomy, a leading provider of property intelligence to the commercial real estate industry. And in just a minute we’re going to speak with Rich about Reonomy and how you can utilize that to help grow your business. But first, a quick reminder, if you like our show CREPN Radio, there are a couple of things you can do. You can like, share and subscribe. And as always, please consider leaving a comment we’d love to hear from our listeners. Also, if you’d like to see how handsome our guests are, be sure to check out our YouTube channel. And you can find us on the YouTube at Commercial Real Estate Pro Network. And also there if you would please subscribe that always helps the the algorithm with the YouTube. With that I want to welcome my guest. Rich Welcome to CREPN Radio.

Rich Sarkis 2:42

Thanks for having me. Although I fear I’m going to disappoint your guests when they go on YouTube. And this is not one of the handsome guests. I’ll try to make up for it with insightful comments.

J Darrin Gross 2:52

Well, it’s always kind of a fun, fun, fun thought there but now you’re fine. You’re fine. lighting is good. So we’re good shape. So hey, before we get into this, if you could just take a second and share with listeners a little bit about your background.

Rich Sarkis 3:10

Sure, sure. So I actually grew up in London in the UK, but came over to the US several decades ago to go to school here and I never left. And it’s actually in school in college in northwestern Massachusetts that I caught the entrepreneurial bug. When I was a 19 year old, Junior, and started my first business many moons ago, the sexy way of saying that one was it was an international arbitrage business. What I found out is that you could find the exact same textbooks that were sold here for hundreds of dollars for a fraction of the cost overseas primarily in the UK. So I set up a whole supply chain and a network of student reps promoting these books. And that’s really was my first business and where I caught the bug as I mentioned, and I started and sold a number of businesses nothing really huge, but enough to sort of make ends meet over the subsequent years. And then I went to the dark side, went to business school because my liberal arts education was fantastic, but a education in business principles, it was not. So I went to Wharton, back in ’05 thinking that I’d meet a new founder or to make a bit of a miscalculation, because back then everyone at Wharton wanted to go into investment banking, sales and trading private equity. And so I was left sort of clutching at straws when it came to entrepreneurial sort of camaraderie for lack of a better term. So pure auction based reasoning, I went to management consulting, went to work at McKinsey in New York. Again, thinking that would be a great you know, not way to not pigeonhole myself into one specific sector or career and that out, after a couple years go and launch a new business. Ended up staying in McKinsey longer than I thought. The work was very Interesting. They’re good at sort of promoting at the right time and all that stuff back. But after about four or so years there and had just been promoted to associate partner, that’s when I realized I wanted to go back to my entrepreneurial roots. And that’s where, really Reonomy was born in the summer of 2012. So eight years ago now.

J Darrin Gross 5:20

Got it? Well, you did. I mean, I don’t know that much about McKinsey. But they’re always cited and all the big studies and kind of a finger on the pulse of what’s going on in business. So,

Rich Sarkis 5:34

Yeah, it was a lot of interesting stuff I started is pretty eclectic. My first ever project was doing a revenue assistance model for the National Basketball Association. So that was pretty cool. I get to hang out and they’re in their HQ Fifth Avenue and sort of ogle the stars and stuff like that. So it was it was fun.

J Darrin Gross 5:53

Yeah, no, but that’s a little bit different scene today. The COVID stuff Well, great, I appreciate you sharing a little bit about your background there. And so what I’d like to do is kind of talk a little bit about Reonomy. And and kind of if you could, could you basically just start with describing, you know what it is?

Rich Sarkis 6:18

Sure, sure. So maybe if I describe what it is today, it’ll be helpful for the listeners to hear what it was and what it started off as because there’s obviously been a big evolution and a, an increase in the number of products and features that we have. But initially, my thesis was that we needed to do for non single family homes, what others like Zillow and others had done for this single family home discovery experience. So when you and I would want to research our dream home or find out whether we should live in this town or that town we turn to Zillow, and unbeknownst to us because it’s a very easy to use tool. Use your Map based, searching your filters, there’s a lot of heavy computational work that goes on, not just with the zestimate and giving you an assessment of value, but also being able to bring all those myriad of different data points across all the MLS and all that stuff. So and that didn’t really exist at a ubiquitous level nationwide. And so that was the thesis. can we leverage technology on the back end to crunch all this data? leverage modern, elegant, intuitive software on the front end, so it is not heavyweight and burdensome to use? Right? It feels just that modern, right?

And so we set about doing that in New York. And lo and behold, after about a year of development, we had built a better mousetrap and the reason we knew that is because big lenders like JP Morgan, big brokerage firms like Cushman Wakefield developers, like Tishman Speyer, all their users were using our platform in New York City. To find information about properties, do some research on a sub market. A drill down and find out who actually owns the property. Who holds the debt, is there note holder all that stuff and it was very easy for them to use. So they used it day in day out. We used to like joke back then because we would pour over the the usage metrics that we could actually tell when people get up from their desk and go to the bathroom because there would be a 10 minute gap in their usage. That’s how much they’re using it right off the bat.

And so basically, that has evolved. And now we’ve got a platform that for the on the web application side, again, that the commercial version of Zillow is now available available nationwide coast to coast. And so we have scores of not just the brokers, lenders and investor developers, but we’ve got a lot of field service providers. We do have a lot of insurance brokers using our platform, as you know. And so it’s become this ubiquitous web portal where you can find out information on anything that’s not a single family home. And as the as the months have become quarters have become yours. We’ve also set up a slew of different products for medium sized companies and even large fortune 50 fortune 100 companies where they can access our data, our analytics, our insights by API and other means.

J Darrin Gross 9:15

Got it. So the when you started off at sound like you were the whole idea was basically kind of the Zillow for the commercial property. Was that that basically the

Rich Sarkis 9:26

Yes. On the on the web application side. Exactly. Yes. And one thing that was very interesting, and it was pure happenstance, and because we stumbled on this by doing that, because if you think about it, you can sort of wrap your hands around New York City, right? It’s the five boroughs. There’s a common data standard, borrow block, and lot. There’s something called the BIN to building identification number so you can take all these disparate datasets across these different government agencies and make them relational, but we really had a huge struggle when we have to try and replicate that nationwide because Now you’re talking 3000 counties plus 20,000, plus municipalities, each with its own data model. And so whatever we have built in New York sort of threw up on itself when we try to go to other markets. And what we ended up doing is creating our own data standard called the Reonomy. ID, which is a unique identifier the same way you and I have a social security number, which is our unique identifier. The same way in other areas of capital markets. There’s something called the CUSIP that all broker dealers, all lenders, all investors agree is the unique identifier for any company. We established that for the properties, right. And we built a huge machine learning knowledge graph, basically, that takes all of that data and is trained to resolve any record in a public or private data set to that unique ID. And that’s really our unfair competitive advantage and how we’ve been able to have not just a massive ubiquitous web application that covers every time every municipality No matter if it’s a, you know, one of the largest NFL cities or one of the secondary, tertiary, or even smaller towns in the middle of nowhere, but also how we’ve been able to stand up those enterprise products that do a lot of that entity resolution for our customers, again, fully automated, but then are able to layer on all these data sets on top of that.

J Darrin Gross 11:22

Got it. And so that the starting point, I guess I would ask, because I’m familiar with, you know, different municipalities and the way they they show the data and you’ll specifically look like where I’m at in Portland, Oregon, and the county I think it’s called Portland maps comm has a fairly rich program. It’s gotten I think it’s called Portland maps calm that’s that’s the name of it, but it it basically it goes to the lot, you’ve got a map and it’ll show the ownership and then it will show permits, it’ll show all the stuff but if you go across the county line to any of the other counties, it’s all like, you know, a whole new language. Yeah. All hidden in different places and all that. So I’m curious is you, you mentioned, you know, if you start in like one city, I could see how it’d be fairly easy from a standpoint of familiarity and create that model is you grew to nationwide. Yeah. The challenge is, how did you overcome the challenges? I mean, you mentioned the Reonomy ID number.

Rich Sarkis 12:31

Yeah, that and that’s how we did it. I mean, look, I sort of fast forward through all the pain and then the fact that I lost all my hair doing it, and but it took years to do and 10s of millions of dollars of R&D, because initially, frankly, we did not realize what you just articulated, which is there’s a huge heterogeneity in the data, accuracy in the data availability across county lines and across municipalities, right. And there’s no federal oversight to say this is how you should Should I record a mortgage? This is the data standard or anything like that. And so as a result, what we did is we were naive. And we said, okay, well, let’s do what we’ve done really well in New York and the second largest city, which is LA. And that’s where we realized that’s where we had our oh shit moment pardon my French, which is the fact that LA LA County is made up of over 80 different cities and municipalities, right. Encino, Beverly Hills, Calabasas, the list goes on and on. And each one of those is its own unique data snowflake. And so that’s where we really realize the size of the task that was ahead of us. And that’s where we went back to the R&D drawing board. And we were able to, luckily, thankfully come up with this idea to say, well, let’s build our own identifier because none existed out there.

Each one of those municipalities had a different way of recording and a different unique identifier, but let’s build our own one nationwide. And that’s truly turned to machine learning and AI Because we could not come up with all the rules ourselves across all these datasets, because when you zoom out and you look at all the non single family home, your your properties you’re talking about including vacant land about 50 million commercial assets, tax lots. So even if you’re just comparing two datasets, that’s 50 million times 50 million, that’s a really big number, a number of permutations on how you can match. And so we for the first time, this is about four years ago really turned to AI and machine learning and we’re able to crack the code doing that. So to answer a question, we returned to technology, truly not just from a marketing gimmick, point of view, to be able to to crack that code.

J Darrin Gross 14:44

Got it. So you you start out with an idea you you have a plan and to work into one area, you go to the next market, you realize, you know, one market doesn’t work like the other market. In each case, are you basically scraping data from public sites? Is that kind of were the starting point?

Rich Sarkis 15:04

Good question. Good question. So what we what happened is when we realized we had hit paydirt with this Reonomy, ID, and this machine learning classifier that enabled us to not just light up the top markets, but every market in the US, we said, well, let’s get as much data as we can, right? Because now we sort of eliminated the barrier to entry to stand up additional markets, as well as the barrier to entry to normalize and validate and cleanse data sets. Right? So what we did is yes, we collect at the source, but we supplement and that source being the local municipality, the tax assessor, the Secretary of State, but we’ve supplemented that with large third party partnerships that we have many of them exclusive. We’re really the only ones in commercial real estate that get access to that data. So these are companies the likes of Dun and Bradstreet, Corelogic, Black Knight, First American, Experian, the list goes on and on. We have these What I call our raw materials or ingredients, right? We’re like the chef, we have these very unique recipes, where we know how to take all these amazing ingredients, combine them in a way that makes the best cakes available. And that’s really what our end users are buying from us or licensing, whether it’s through our web application or API’s or data feed products. It is the reonomy dataset, which is derived, which takes all this raw materials across public and private data sources, as we mentioned, and compiles them in a way that is informative and valuable.

J Darrin Gross 16:36

Right. And I think one of the things is a user just having the uniform, the uniform presentation, yeah, data is, you know, just saves a lot of brain cells. When you know that you look at one property and you can look at another property and you’re going to get the information in a similar way. You don’t have to become a programmer to try and understand

Rich Sarkis 17:00

Exactly, you don’t need to you don’t need a PhD to figure it out. And look, that is that is a very important point you make because that is something in general, but especially I found in commercial real estate that gets overlooked is the UI, the user interface, the experience the the consistency of it, and making sure as I said, at the onset, it is modern, you know, my iPhone is essentially a supercomputer, but a three year olds can use it, right? And so getting to that level of sophistication and heavyweight analysis on the back end, but to some extent, shielding the end user from that and making sure it is consistent, elegant, intuitive and usable. is a very important flip side of the coin of machine learning and AI, it’s the delivery how you deliver it is crucial as well.

J Darrin Gross 17:47

Got it, so is your business. Would it be fair to kind of call it a data aggregator is it I mean as far as you’re going out, and again,

Rich Sarkis 17:58

Part of what we do that that that is Part of what we do I view that as means to an end the end being, what are the insights we can give? Really, it’s it’s an intelligence platform, right? Because we are providing intelligence, property intelligence, but also intelligence on companies and people and how they relate to those properties. As you and I were chatting before the show, right? But before we can do any of that, you’re absolutely right, we need to be able to aggregate disparate data sets that are messy, fragmented, and, and make them relational, basically put them in order, again, the same way as chef, you know, prepares all the ingredients before they figure out how to how to cook the dish. That is a necessary means. And that is a big part of our core IP. And our core competency is we’ve developed a system that’s just really good at aggregating data.

J Darrin Gross 18:50

Gotcha. And as far as the the data that you’re collecting, is there any I guess Quality control for lack of a better word?

Rich Sarkis 19:02

Yeah.

J Darrin Gross 19:03

To recognize, I guess, kind of boots on the ground to confirm the data, or how do you guys police that?

Rich Sarkis 19:10

Yeah, there’s multiple tiers of that. Really three main legs of that stool one is programmatically, those machine learning systems have built within. And that’s where the learning part of machine learning, we’re constantly retraining it with training sets, whether it’s new data sets, or training sets that come from the usage of our platform, the users themselves using the platform, and basically being able to signal an incorrect or incomplete data set. It feeds back into the system and it gets smarter over time and gets better at identifying what the correct value for an individual data point and we’re not perfect. We never will be but we’re constantly getting better. And every day that goes by as a data we are iterating or the system iterates and evolves and becomes stronger. So that’s the sort of technological component.

We do. amplify that with our own in house research team, it’s not a big research team, but it’s sort of we call it the SWAT team that goes deep and does two things. One is they help curate those training sets that are so valuable to the system. But they also help to crack the code on some of the really hairy problems, the edge cases that perhaps are not as well suited for the system. So that’s number two. And number three, and I alluded to this is we’ve got this unfair competitive advantage, where we have 100,000 plus users on our platform, that web app, the Zillow like experience, and their usage, and we never take, you know what one user sees or does and share it or everything, but in aggregate, when you can take all that usage data that is really valuable from a learning and data sanctity perspective, and so we leverage that heavily as well.

J Darrin Gross 20:46

On the uniformity of the information, I’m just kind of curious. All of these municipalities, I mean, it doesn’t matter whether it’s a state or company or county or whatever there, everybody invest so much money into creating a data collection system and maintaining that. And on and on. I’m just wondering, have you been approached? Or have you had any conversations with any mean municipalities about being the backbone, or the kind of the back office support for that? Because I could see that. As you know, every municipality is stretched for funding, for sure. And, you know, I would think that if there’s a better way, that’s a lesser cost, that would be of interest. And so is that anything like that?

Rich Sarkis 21:46

It is, it’s very topical. I would say two things. One is it’s something that is already in flight. We have a number of municipalities, tax assessors, they use our system, ironically to vet their own data because ultimately Because we’re multi sourcing it will have better or more timely data than they have access to. But to take it a step further, which is where you’re going, this has been a hot topic of conversation at a board level with us. Because given the fact that we’ve got this system of record, the Reonomy, ID, which you use the term backbone, which is exactly how we think about it, then yes, if you go all the way upstream, the natural extension is right at the source, if you can be if the Reonomy ID can be embedded as you’re recording a mortgage recording a deed transaction, etc, then to your point, it eliminates a lot of the friction, the cost, the inefficiencies that are going on, and that we’ve seen now during the COVID crisis, right when a lot of these assessors have had to shut down because literally the people can’t go there to record the mortgages because they do it the old fashioned way, right. It’s it’s analog, it’s not digital. And so yes, that is a stream of work that that is ongoing with us now. As you know, right elephant in the room, working with local government agencies is never, you know, fast. And so a lot of these things are going to take quarters, if not years to come to fruition. And you’re talking a lot of different agencies, but certainly it is something that that we believe is valuable, and, frankly, will benefit the overall market.

J Darrin Gross 23:24

Yeah, I’ve had a little bit of experience with just different public agencies. And you know, it’s never it’s, it’s amused me just how protective they can be about their position. based on historical This is the way we do it. Right kind of thing. Regardless of there’s an example. Local example I was on a committee and, and the the committee was, is responsible for one thing, and then there’s a whole nother branch. government that does a different thing, but calls on the exact same people for the exact same thing. And I was going like, that’s like two cars driving down the street will stop and at the same place, you know, taking up the consumers time twice. Once I’m gone how does that not? Does not does anybody else see that? You know, and they’re like, we do it totally differently our concerns are totally gone. You know, as a user, I just don’t see it. And I just but it was just it was a real eye opener just how territorial and I think it you know, as you look at politics and stuff you can see that real easy that it’s you know, if anybody’s gonna lose is not gonna be me it’s gonna be the other guy kind of thing. So I wish you well with that, but it does seem to make sense if if you know, the government’s are are stretched if there was a way that you can become the the backbone and they could feed your your platform. It seems like that’d be a win win for for you, because you would have the, the data, at least at the source, they’d have the backbone. So I wish you well with that. But I know I know, as a user, you know, there’s nothing more frustrating than if you buy, you know, a data set. I mean, I’ve done this with marketing before where you buy a list. And, you know, maybe 5% of it’s accurate. You know, you’re just I know that data is it’s just always a challenge. That’s why I’m kind of curious, like you, you know, we’re talking about some sort of verification or quality control that. Question I have for you, going forward, Are there additional data points that you recognize that would be useful that you could set on the platform, or that other people have, have approached you about?

Rich Sarkis 25:52

Yeah, so I alluded to this so so when we started off, and that’s where the system of record really we were very property centric, right? We were really They’re good at telling you most everything there is to know about a property. Right? Who owns it? Who owns the debt? How much dead, what zoning is, what the owner addresses are, etc, etc, etc.

J Darrin Gross 26:12

So, let me ask you that before it’s time to just say when you say that the the basics ownership great lender great, which would be to me kind of like a transactional stuff at a title. County is kind of a starting point. What about the property details, the square footage you’re built, and I’m thinking more about like the the permit all the county stuff that you know that that is an insurance professional that the the questions I always am trying to answer are, you know, when was this updated, you know, and if there’s permits, etc, kind of thing? Are those types of data points are those ones that you guys

Rich Sarkis 26:54

We do? We do but as you alluded to, it varies right and to some extent, we’re at the mercy What is recorded and how and when right? And that goes back to your whole question around? Well, if we could be the system of record, wouldn’t that be better for everyone? Certainly better for us, but better for you the end user, right, because we have a more timely and minimize the latency etc. So there are some counties that are pretty abysmal in terms of when and how they update their records. And unfortunately, we’re at the mercy. There are others where they’re at the forefront and it’s digitized. It’s available via API, they update it intraday multiple times a day, not just once a day, right? And there’s everything in between now, where we strive to be the best, but not perfect. And again, the bar varies by county is that we multi sources, we never just take one source and say, Okay, well, this is where we’re getting the data for county x, and this is where we’re getting it for county, why we get it from many redundant sources. And a lot of time you’ve asked, well, what’s the point because to your point, it’s like the same data set and you’ll get the same value for The same square footage point, but oftentimes you won’t and right. That’s where the algorithms come into play. And they’re learning, okay, for this type of property in this county, for this type of record this data point, what is the most accurate source? And that’s constantly iterating. And trying to figure out, you know, who wins in that scenario across our data set, and that’s the sophistication that goes in the background to try and assess what the most complete, most accurate picture is for any given property. As it relates to the data points that you’re saying.

J Darrin Gross 28:36

No, I think that the multiple sets I mean, that’s, that’s a real challenge I see just based on you know, if you start with the county record, and you assume that’s kind of the, I mean, assume, loosely, that that’s kind of the good starting point. But I’ve found, you know, many, many times that either it’s, it’s absent or incorrect? Or maybe the the assessor whoever’s in the field is having a bad day or maybe the property owner did some things that didn’t ever get recorded.

Rich Sarkis 29:12

Absolutely. There’s miriade of reasons.

J Darrin Gross 29:14

Yeah, yeah. Well, no, I think that it’s all fascinating and and the you know, I think the other thing that I’m really kind of recognizing is that for all these years that I’ve been putting data in the computer in the machine that I couldn’t understand, you know, what does this have to do with anything, you know, it feels like the era of big data and the ability or I guess, data science is really coming to life. And that all that information has been collected. Now there’s there are people that are able to comb through it and and whether it be you know, apply it in a situation like this, use it to forecast or to see trends or, or what have you. It’s it is kind of fascinating when you look at it from that standpoint. So let me ask you this that the obviously Reonomy you guys are a big player. I think I mentioned you have used Yardie and Costar before is this do you see this as like? Is that the field? Is it I guess I’m trying to understand the competition cuz I guess in your business, I would think probably the biggest potential challenger in this field would be Google itself.

Rich Sarkis 30:41

That’s true for any field, right?

J Darrin Gross 30:43

Yeah. No,

Rich Sarkis 30:44

As I chat with a lot of my founder friends is Google can basically wake up one day and go into any field and they’re going to make a dent.

J Darrin Gross 30:53

Yeah, I mean, insurance included. I’m just kind of curious. Do you, when looking at the the the current field, are there some distinctions that you see that Reonomy has that that sets you apart? In a way?

Rich Sarkis 31:10

To some extent what most, if not all, the legacy incumbents that you talked about? Right have been around for decades, right? And so and they’ve built great businesses, I mean, Costars market cap is north of 25 billion at this point, right. And so, and they are used by a lot of folks, but they have been built across several decades. And so it goes back to what I’m talking about modernity modern, what is the modern solution? So we like to think of ourselves and our users. More importantly, think of us as the modern solution to commercial real estate data and analytics and intelligence and insights, because we’ve had the benefit of hindsight and looking at what others do well and don’t do well. But we’ve also had the benefit of building our system from scratch on bleeding edge technology. Leading Edge databases, cloud computing, machine learning AI, and a lot of the software and tools we use just didn’t exist, even when we started the company, right? So that is our sort of differentiation when you look at the landscape. And then when you look at the new entrance, right, because there has been a proliferation of cre tech, prop tech companies over the last five or so years, to your point around reaching the critical mass getting to a certain point, we feel like we are one of very few companies out there that has managed to reach that critical mass, that adoption, and not just in terms of the fundraising that we’ve done right. With this series D last year, a lot of the banks participated because of the risk and underwriting that you can do with our data, but also just in terms of being in market and the validation we’ve got from our end users themselves. So we differentiate with the legacy incumbents by being more modern and we feel like we differentiate with somebody A new are your companies by being sort of more established and more validated and more trustworthy solution then, than those.

J Darrin Gross 33:11

Gotcha. And I ment to ask you earlier, in the beginning, when you guys started, were you Have you always been a subscription based?

Rich Sarkis 33:20

Yes. We’ve always been a subscription based? Yes. Whether it’s on our web application where it’s every user has a license, and it’s recurring and they renew and all that stuff. And on the data, you’re licensing our data on a recurring basis. Correct. It’s subscription based.

J Darrin Gross 33:36

Gotcha. I’m kind of curious, being somebody that’s so familiar with the data, like you are and just the commercial real estate. Today is what is today July 22nd, I believe 20 when we’re recording in the middle of a COVID, or the COVID-19 situation. I’m kind of curious if you can speak to or if you see any. Are you seeing anything? Are you able to identify anything that’s changing? Or do you have any kind of a crystal ball button on the application that says, you know, this is changing, just across the commercial real estate asset classes?

Rich Sarkis 34:23

Yeah, yeah. So we’ve actually got a whole part of Reonomy, our Reonomy research and we’ve got a bunch of very smart folks that leverage our data that put out a whole bunch of reports, analysis datasets, a lot of it dynamically update, etc. encourage everyone to go to Reonomy.com and click on our research section. And they’re putting out a lot of leading edge stuff that’s being used and picked up by government agencies and stuff. So yeah, we’re seeing a lot. I think some of the highlights we are seeing if I you know, rewind a few months is that we’re seeing a huge slowdown, not surprisingly, when you think about it on in terms of transaction velocity, right? Just the number of transactions that are happening or haven’t happened in Q2 certainly was a prodigious fall from where we were in Q1, but even, you know, Q2 last year, and that’s felt all the more acutely within Office, Retail and Hospitality.

Interestingly, multifamily has been somewhat resistance. Although, you know, questions remain as to how long they can be resistance. And equally interesting, we have seen some asset classes that have actually outperformed compared to where they were historically, specifically industrial, warehouse. Again, with a move to a lot of work from home, you need all these data centers, they take room and all that stuff. And so there has been a lot of interest on there. So yes, you can see a lot of that stuff on the platform. And again, I’d encourage everyone to go to the research section where a lot of that cutting edge data is being leveraged and shown in a very easy to digest way but it’s very very enlightening.

J Darrin Gross 36:02

I appreciate that. Typical user, obviously we’ve talked about the commercial real estate, people mentioned the, you know, a fair amount of insurance people use it. Is there a target user?

Rich Sarkis 36:22

The four main user groups if you will, our lenders so typically the loan originators we mentioned that a lot of the big banks and their originators use our platform to find which properties are in your refinance window, drill down under loans them and but they also use it increasingly for risk underwriting, compliance, etc, to find out information about who they’re lending to what is the portfolio of properties associated with any given person or company, right? So you’ve got lenders on the one hand, you’ve got a lot of institutional investors, developers, either people who buy the properties and they don’t just have to be the largest They can also be small local folks. But these are folks who do this day in, day out. These are the professionals who look for that assemblage that they can combine. Look for that repositioned opportunity from an asset point of view. Third is you have the brokers, not surprisingly, brokerage firms have widely adopted our platform our products for a number of years now. So these are typically of capital markets, folks, investment sales brokers, chief among them.

And then last but not least, and this is the one where we alluded to are the field service providers, we have a lot of roofers, solar folks, energy folks who use our platform from a lead gen perspective, because to your point around buying a list from a marketing perspective, typically those lists are pretty coarse and it’s the analogy is it’s a shotgun scatter approach and say somewhere in that list is a property owner or two that might have a need for your service. But good luck finding it right because you don’t have the ability to Take that list and filter it, right. And so if you think about what our platform really does for those field service providers and allows them to dial in the location, right, I’m interested in this area of the country, and they can literally draw on the map. I’m interested in this type of property multifamily only. And this size, and I’m only interested in ones that are old, right? Haven’t been renovated in the last 20 years or whatever. And then you go from 50 million assets throughout the US to the 13 that really are in your strike zone, and then you can tell me, okay, who owns those and what’s their phone number and all that stuff. That’s the type of lead list that you would want that the field service providers wants versus you know, 10s of thousands of people and to your point, only a very small percentage are even relevant, let alone accurate.

J Darrin Gross 38:49

Right. No, I’ve spent a lot of money on on lists that are you know, I mean, it’s it’s frustrating. I mean, there’s always a couple of golden nuggets in there that you figure it out, which I mean, but that’s just kind of the that’s no different than cold calling, you know, law of big numbers. If you, you know, whatever your numbers, are you if you call enough people, there’s somebody that needs to buy or somebody needs your product kind of thing. But no, I appreciate you sharing it.

Rich if we could, I’d like to shift gears here for a second. As I mentioned to you, by day, I’m an insurance broker. And I work with clients to assess risk and determine what to do with the risk. Yeah, and there’s a couple of different strategies we typically consider. The first is we look at can we avoid the risk? If that’s not a possibility, we look to see if there’s a way we can minimize the risk. And then if if neither of those are an option, we look to see if we can transfer the risk. And that’s essentially what an insurance policy is. And I like to ask my guests if they can take a look at, you know, their, their business their clients somewhere in that spectrum, and if they can identify what they consider to be the BIGGEST RISK. And, you know, again, for clarity, I’m not necessarily limiting this to a an insurance related answer. But if you’re willing, I’d like to ask you, Rich Sarkis, what is the BIGGEST RISK?

Rich Sarkis 40:28

So from my point of view, the BIGGEST RISK right now that folks within our industry have is the risk of complacency, the risk of getting crippled by what’s going on with COVID-19 and obviously, the situation is fluid, it’s evolving it’s it’s, to some extent, getting worse in many areas of the country and that is not good news. And there’s you know, no real light at the end of the tunnel because yes, there’s there’s vaccines in flight and therapeutics etc, but nothing really concrete. that’s readily available and where we can say, okay, by this date, you know, business as usual, right. And so in the face of such huge and unprecedented uncertainty, the BIGGEST RISK right now for companies and individuals alike is to almost freeze and to not make decisions that they ought to be making. In our world. That means specifically embracing data technology, information insights, to be able to when things do pick back up beyond the front foot and not get caught, shortchanged, basically. And to probe a little bit deeper, one of the things that recessions tend to do, right, and you don’t know if we’ve seen the last of the, you know, big dip that we had in March, April, and whether it’s a true V, you know, recovery, but there are going to be headwinds, at the very least, and we’re even seeing you know, job numbers come back and we’re was picking up now because states are having to shut down again, it’s going to create some more negative outlook, they’re one of the one of the benefits, perversely enough of a of a shock to the economic or financial system is it shines a light on inefficiencies. And whereas when the sun’s out and everyone’s making, hey, you can sort of throw more bodies at the problem and say all hire more people, and we’ll do this do that. When times are tough and belt tightening happens, it’s like, well, what are these people doing? Do I really need this? This? This is how we do that. And so when you are critically looking at those inefficiencies, there’s this almost this, this cleansing mechanism where you then say, Okay, well what is the most efficient way to do this function or to prospect to risk to assess risks to underwrite to whatever it is to conduct an appraisal? And that’s where invariably all roads lead to data technology, systems and machines doing what a lot of folks were doing. And don’t get me wrong, I’m not saying machines will do everything, but it’s really the highest best use and making sure that the appraisers, the brokers, the investors, the lenders, the insurance agents are focusing on their highest best use, which is doing bringing their local knowledge, their insights, their judgment. And that’s things that are very difficult to train a system to do, right? And let the computers and the machines and the data crunch through all the data and do the dirty work, frankly, right, the 80% of it, and let the people do the 20% of their highest best use. And so the BIGGEST RISK is to not embrace that not realize that there is this huge opportunity ahead of all of us to really sort of shift the paradigm and go to a much more efficient and I believe sustainable, long term outlook for the industry.

J Darrin Gross 43:55

Yeah, no, I think the future has a few more surprises in store. And I agree with you, I think one of the one of the healthy things that does come with these challenges is, you know, people get lean and and recognize that maybe there’s a better way more efficient way to do things and and she usually does it that’s kind of what propels the growth in the end. Yeah, yeah, that’s good. Hey, Rich, where can the listeners go? If they would like to learn more or connect with you?

Rich Sarkis 44:31

Absolutely, they should go to a Reonomy.com. As I mentioned, that is not only where they can find out more about the products and data that we offer, but also where there’s a bunch of free resources that folks can, can sign up for and and enjoy, whether it’s research on what the COVID impact has been on, on our markets or research at large about different asset types and markets and what we’ve seen historically.

J Darrin Gross 45:02

Awesome. Rich can’t say thanks enough for taking the time to talk today. I’ve enjoyed a greatly learned a lot, and I hope we can do it again soon.

Rich Sarkis 45:12

Likewise, thanks for having me.

J Darrin Gross 45:14

All right. For our listeners, if you like this episode, don’t forget to like, share and subscribe. Remember, the more you know, the more you grow? That’s all we’ve got this week. Until next time, thanks for listening to Commercial Real Estate Pro Networks. CREPN Radio.

Announcer 45:33

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Self Directed IRA Invests In Commercial Real Estate with Glen Mather – CREPN #268

Glen Mather 0:00

People are drawn to us that have unshakable belief in themselves. And if you think of a group of three, you wouldn’t want an airline pilot that’s insecure and not sure. Now, it doesn’t make them any necessarily an investor’s, but they believe they are. And, you know, they have the confidence. So those kind of people are drawn to us. But, you know, there’s lots of people that have those same psychographics that don’t have those qualifications. They’re also drawn to us. And what’s neat is, is they talk amongst themselves We do lots of events and we now we’re doing them of course remotely with COVID. But, but it gives them more confidence once they say yeah, you can do this. This is how you do it. And there’s a powerful component about this Darrin, which I love, is the fact that you can partner your IRAs

Intro 0:47

Welcome to CREPN Radio, for influential commercial real estate professionals who work with investors, buyers and sellers of commercial real estate coast to coast. Whether you’re an investor, broker, lender, property manager, attorney or accountant. We are here to learn from the experts.

J Darrin Gross 1:06

Welcome to Commercial Real Estate Pro Networks CREPN Radio. Thanks for joining us. My name is J Darrin Gross. This is a podcast focused on commercial real estate investment and risk management strategies. Weekly we have conversations with commercial real estate investors and professionals who provide their experience and insight to help you grow your real estate portfolio.

Today my guest is Glen Mather. Glen is the founder of NuView IRA and has been its leader since 2003. In 2018, he also created NuView Trust, expanding the growing business of self directed IRAs into new services to further reduce and eliminate taxes. In just a minute, we’re going to speak with Glenn about how you can use a self directed IRA and a little bit about the difference between a custodian and a fiduciary. And, but before we bring Glenn in, I’d like to remind you, if you like our show CREPN Radio, there are a couple things you can do to help. You can like, share and subscribe. And as always, we love to hear from our listeners, please consider leaving a comment. Also, if you’d like to see how handsome our guests are, be sure to check out our YouTube channel. And you can find us on youtube at Commercial Real Estate Pro Network. And I also would like to encourage you to subscribe there as well. With that, I’d like to welcome my guest, Glenn, welcome to CREPN Radio.

Glen Mather 2:51

Thanks Darrin. It is intimidating that you have a handsome test on your guests but I hope I am able to survive that.

J Darrin Gross 3:00

I think you’re gonna do just fine here where we’re in good shape. Glenn, before we get started here, if you could take just a minute and share with the listeners a little bit about your background.

Glen Mather 3:11

Yeah, it’s kind of interesting because it may not be much different than a lot of your listeners. I came out of college and and I got a job at a little company on the West Coast called Lockheed Missiles and Space Company. I worked there 13 years. One of the first things that I did in 1980, when I started was I got enrolled in their 401k program. And that was interesting. It was Northern California, expensive as heck to live. But I kind of talked myself into putting 2% in. It’s a great way to say, by the way is to promise in the future to do something and rather than doing it at the time, but I said to 2% and what I’m going to do is every time I get a pay raise or bonus, maybe I was too optimistic, but I was assuming that one would come, I’d put 50% more into my 401k After I left Lockheed 13 years later, I had a I had a massed what I thought was a lot of money about $125,000 completely painless, through the 401k program. So I understood the power of payroll deduction, because you don’t miss it. And best of all, your spouse never sees it. So through that process, I was able to do that. As I went on, and I became a strategy consultant, I was traveling a lot and I read about in the paper about the fact that you could actually take your IRA and invest in real estate. That thrilled me because I felt like I didn’t have a chance in real estate or in the equity markets. And in real estate, I’d had some small successes, I didn’t have a lot of money. My largest amount of money was in my 401k, which had rolled over and became an IRA. This is traditional for most Americans, most Americans wealth, at least their cash or disposable wealth is in their retirement plans. And so I just felt like real estate was my best option. I looked around Chicago for weeks to find someone that would do it. And I finally snuck into that process through the wealth department of of a bank in Chicago. And that bank did it as a favor. I didn’t deserve there. I didn’t have enough money. But because I knew some, some people in the company they allowed me in. And so for $2,000, I bought my first piece of real estate. That was their fees to do it. In my IRA, that was about 23 years ago, and that was my first inkling you could do it. I watched that double in price. It was a place in South Carolina in a in a gated community. It was just a lot. And I realized later on in my life. I had moved to Florida, and I decided to start my own business. I had read about this in the paper about a company that did it. So I opened up an affiliate of Entrust back in 2003. I knew nothing about the business except the fact that I was passionate about it myself and I figured other people would feel the same way. Most the people I’ve talked to over the years didn’t really know it. They still don’t know it today and how it works. It’s been transformative, not just for our clients, but from my own retirement. Because I have the enviable position, Darrin, of being able to learn how to invest through my clients. Because as a self directed administrator, custodian, I don’t direct our clients to do anything. I don’t sell anything. So it’s a safe place. It’s a Switzerland of investing, safe place to go. Our clients choose our clients direct. And it’s been an amazing, amazing ride for us. And we now have about $1.3 billion of client assets that are sitting on our platform. More than half of it is in real estate today.

J Darrin Gross 6:52

Wow. That definitely, percentage wise speaks to the attraction and the power of real estate. You mentioned custodian, and I was hoping we could we could take a little bit of time and just differentiate between the custodian role versus the fiduciary role, and how that different or how that is different from the traditional role of like, you know, a typical advisor, a financial advisor Now, can you do that?

Glen Mather 7:28

Well, sure, a financial advisor, according to the rules right now is that they they are acting in a fiduciary role generally. And what that means is they’re not just selling you something, they’re selling you something appropriate to your particular financial situation, age, etc. So as you can imagine, that means that you have to spend a lot of time with each investor to understand them. The processes are longer and the fees are pretty high because it has to represent the getting to know and potentially even the legal risk that the financial planner and advisor may be under. That is one type of investment and and they’re making it advices. And perhaps the older you are, they would put you in something with less risk or maybe generate more cash flow. It may be contrary to the desire of the of the individual doing the investing, but they still kind of have to follow along with that path based on industry standards. So that’s what you’re going to get is you’re going to get investments based on industry standards. A custodian has a different role a custodian Think of it as your church custodian or your school’s custodian. Their job is to take care of something that doesn’t belong to them. So in essence, as a your custodian at NuView, we take care of your money in the sense that we we place it wherever you direct it to be when it’s not directed. We maintain it. We Have to control control it, we put it in a bank that where it’s going to be safe, and we wait for your investment decisions and we direct those funds based on your investment decisions. The reason why Darrin, you need a custodian is you have to have one with an IRA. So in other words, there’s no there’s not a chance for you to opt out. You have to have a custodian. And so what what you’re looking for is a custodian that serves your needs, whether it’s education, certainly good record, keeping in administration or reporting to the IRS, and stability has been in the business a long period of time.

J Darrin Gross 9:36

Gotcha. And I think, correct me if I’m wrong, but the the, the opportunity for investments, the custodian, you have kind of the wide range, I mean, it’s like you said wherever the investor chooses to go, with just a few limitations. Were as a fiduciary, the traditional investment advisor is going to lean more towards the the non alternative investments Is that fair to say?

Glen Mather 10:07

I think in almost all cases, they’ll be it provided, what you’re looking for is legal shelter, if you’re a fiduciary, and the further you get away from the normal types of investments, the more you’re perceived or actually placed at risk. If things go badly, and investments, things can go badly, whether you self direct, or you’re certainly in the traditional markets, they can go badly.

J Darrin Gross 10:35

Because I was saying, I don’t think I’ve ever come across or talked with or met a, an investment advisor that even recognizes or or would encourage somebody to consider an alternative investment is that have you found anybody like that?

Glen Mather 10:54

Well, in a perverse way I have, they don’t recommend it to their clients, but guess what they do themselves.

J Darrin Gross 10:59

They do it. Gotcha. No, the the IRA, or so that. Are you saying that you found people that are doing their self directing their own IRA or is theirs? They’re acting as a financial advisor for others?

Glen Mather 11:14

Yes, very much so. And because they understand the limitations of what the traditional markets give, and they want exposure to other markets mean that the thing is it’s not choosing all it can be choose partial, you can have as many IRAs as you lie. So if you if you want to be with Charles Schwab or Fidelity, Fidelity is actually the largest IRA holder in the country, you can. But you can take if you want to invest in startups, for example, you can take 10, 15 20% of your portfolio, move it to self direction, go do it that way. If you want exposure to commercial real estate, you can take a piece over. I think the irony is, is we watch the money come and go so so we have lots of accounts that are just fractional. In other words, people have money other places, we don’t always Know that necessarily, we would have to be involved in the transfer the funds, but we see where the funds go and self direction is a very healthy narcotic, you basically want to do more and more of it and have less and less direction from other people that are charging commissions, etc for it. Because you simply measure, it’s the freedom, right how you feel about your investments, sometimes it’s just as valuable as the return you get. And so how you feel about your own ability and knowledge. That’s one of the reasons that that they’re going to watch and listen to your podcast. It gives people knowledge to act, and it’s not after the first session or the second session, but all of a sudden, you’re around a group of community of people just like your listeners and viewers. It makes them more confident in their own choices. And usually that lack of confidence is just lack of education.

J Darrin Gross 12:52

So I’m wondering, can you identify what a typical client of NuView can you kind of give a scenario who describe the average person that that kind of NuView.

Glen Mather 13:10

Okay, I’ll do that understand that I’m missing most of them when I do that, because it’s going to be a vanilla person. But I will tell you that within our our portfolio here or our group that is on our platform, the average person owns a little less than two assets. So whether it’s to apartment buildings, whether it’s to single family homes, whether it’s to loans, whether it’s to silver and gold and precious metals, they own two assets. This is the average so that’s what I’m giving you the average person is aged 50 to about 60%, male 40% female and the they have $150,000 or so self directed That’s the average. We have. We have three and four year old babies, toddlers that have IRAs with us. And I think our oldest client is 99. I don’t know if it makes you older or I mean, it makes you live longer. I think it live makes you live without less stress when you’re older, maybe it does make you live longer. So, we have many clients, I would say that probably I haven’t even looked at this, but I would guess it maybe 20% of our clients are in the retirement years and about 80% are still building towards them.

There’s a certain psychographics Darrin I mean, the psychographics think about this in it’s it’s really strange, but it plays out because one of the questions that we’re, we’re required to ask actually an IRA applications a strange one, but I have I’m supposed to know your profession. So we start to gather that data and look at it and we end up with a tremendous amount of attorneys, an airline pilots and doctors. So I’m thinking well, that’s good, you know? They’re well heeled, they have a lot of money. But it’s really the psychographics. The people are drawn to us that have unshakable belief in themselves. And if you think of a group of three, you wouldn’t want an airline pilot that’s insecure and not sure. Now, it doesn’t make them any necessarily and investors, but they believe they are. And, you know, they have the confidence. So those kind of people are drawn to us. But, you know, there’s lots of people that have those same psychographics that don’t have those qualifications. They’re also drawn to us. And what’s neat is, is they talk amongst themselves, we do lots of events, and we now we’re doing them, of course remotely with COVID. But, but it gives them more confidence. Once they say, yeah, you can do this, this is how you do it. And there’s a powerful component about this Darrin, which I love, is the fact that you can partner your IRAs, and I love doing this because why would you ever want to go out on your first venture alone when you could partner 50/50 with someone you get 50 percent of the reward by making 50% of the investment, and you get 100% of the brain and knowledge from your partner. I do this all the time I sell them on my own until I really feel good about the asset class. And then I go off on my own. And also by doing this, you get the phone calls, and you get the recept people saying, Hey, would you like to come in on me with this, would you like to do this, and it may be $10,000, it may be $100,000. But in any case, I get a percentage ownership of a pair pursue what I put in. So that’s a great way to learn through doing and not wait until you have all the knowledge to get comfortable.

J Darrin Gross 16:39

That’s a great point because I think that one of the thoughts I had had with with specifically real estate and that was more than that, that people were buying like a something in total. Whether it be a lot or a single family rental or or You know, something controlling it, solely. But as you mentioned me, one of the powers of real estate is that, you know, if you can, you know, you can either leverage or or pool with others so that you can control a bigger asset. That’s, that’s definitely one of the, the attractions.

Glen Mather 17:23

I think it’s one of the it’s one of the practical ways to invest in commercial simply because of the size, you don’t find commercial opportunities at $10,000 slices, you know, so there’s ways that you can get in and get exposure to a particular asset class without risking making a big risk first time out.

J Darrin Gross 17:45

So when people come to you, do they typically have an investment they want to participate in, in mind, or is it more of just the concept of I want to be able to direct my money?

Glen Mather 17:56

Wow. Darrin, you just asked one of the most important question questions that we struggle with and deal with as a custodian, which is I really wish it was the second part of this, which is, people need to understand the power of this and why they should get an account even before because it’s in essence, what happens is people usually do the opposite, which is exactly that they, they find out that they might be able to use their IRA sometimes even after they locate the investment. Here’s the problem with that, first of all, well, the problem is it gates the number of clients that were able to serve because they don’t come until, they have an impetus. Maybe they meet you, maybe they find out a syndication you’re doing or one of your one of your listeners are doing and that’s what caused them come. Here’s the problem. A lot of times in real estate, things come with a clock attached to it or a calendar attached to it, right, they have to be done within a certain period of time. So what we’ve seen many times is people will actually open an account to make an investment, but they’re out there. Going administrator that’s holding on to their money really tight like it’s their own won’t, won’t move it over quick. There is, by the way, there is no federal guideline or federal law that says that a custodian or an IRA administrator must move the funds over within a period of time. I’ve seen them held on to six weeks, really that because they want the asset counted on their platform, there may be some sort of bonus attached to it. And it’s a crime because they view that since my my clients leaving me, I’m going to punish them on the way out, I don’t care how I treat them. I mean, in our company, we don’t do that we pass everything out within within seven working days without question, but not everybody does that. So what happens is, is the fact that they may lose that investment, because of timing. That’s the one reason that I would suggest the other thing is, is of course they get to be part of the community and get to learn a lot more about this through a lot of session, a lot of education that we do, I would like it to be the fact but the fact right now is the greatest impetus is when you have to buy that forces people to get their act together and move those move from a traditional custodian to NuView.

J Darrin Gross 20:16

So, let me ask you just in the the mechanics of the the shifting from the traditional fiduciary investment advisor to working with NuView. If I like to do that in my current investments or in Mutual’s that are that are you know, common, Mutual’s they’re not like ones that are unique to a particular brokerage, right. Can I not move those in, in the vessel they’re in to you or do I have to liquidate those to get them into my self directed IRA?

Glen Mather 20:53

Well, there’s a practical answer to that. And there’s one that we can do. Certainly I think most custodians would rather, unless you’re on a on a stock, you have a stock trading platform, which we’ll have in about six months. We don’t have it right now. I would suggest you liquidate it. Bring it over. We have, we have a relationship with Ameritrade now, where that account can actually be opened under ours. You we can actually do the transfer with Ameritrade. But it’s uglier and it takes longer. So I would just suggest if you’re if your trading costs aren’t that high, and we’d even probably pay them for you. So it’s not it’s not like it has to the money has to do with that, you know, you won’t be exposed for the market for those days that you’ve moving it from one platform to our platform. The reason that you’d want it on our platform potentially is this. If you want to be able to dictate to ameritrade sell it and move the money over to new view in an expeditious, expeditious manner. We can cause that to really happen because we’ll have a relationship with NuView because it’ll be or with Ameritrade because it’s our umbrella over the top of it. That’s what makes it valuable. However, this may also get to a point of you have so much money that you want to expose to self direction, so much money in the market, just leave that alone. You know, if you like the way it’s working, just leave it alone, and just move over the amount that you want to invest. So there’s there’s choices, whichever way you want to do it, you can do it.

J Darrin Gross 22:24

I would think that would be a big win for you guys to have that additional option available just from a standpoint of his people age and you have to take your minimum distributions and trying to sort through everything and the sale of certain assets, and especially if you’re in real estate, trying to time that. Does that. Does that kind of make it? I mean, I think there’s a there’s a little bit of strategy that needs to be involved in order to work within the guidelines. Is that fair?

Glen Mather 22:57

I think it is fair, I mean, RMD’s are real required minimum distributions. As you may be aware, the Cares Act actually shifted the age it used to be 70 and a half, it’s now 72. And if this is for all investments that were made pre tax, so if you got the tax benefit upfront, unlike a Roth, then your start to force to take minimum distributions, and it’s relatively small, like 2% of starts 2%, at age 72. What that what you’re pointing towards that is you need to have a liquidity, right? You need to have cash in your account. If you’re 100% invested in real estate that is not producing cash, then you’re going to be in trouble. Now rmds can come from any IRA you have, so they don’t have to come from your self directed part. You could always sell stock if you had more assets on the other side. That’s one of the reasons that an IRA requires you to have a declaration of value every year because as you get older is for two purposes. The Treasury wants to forecast how much tax you’re going to get out of you. Even if you’re 30 They need to forecast out to when you’re 72. And in some sort of growth manner on that. So, yes, you do need a philosophy or strategy to make sure that you’re investing in things that are in cash, probably by the time you’re 72, it is a good idea that you have part of your portfolio generating cash, you probably shouldn’t be 100% speculative when you’re 72. So you just need to make sure that you have enough cash generated so that you can make those minimum distributions that are required.

J Darrin Gross 24:32

Right, no and again, it’s it’s, I feel like I’m kind of one of the slow skis and remember, there was a, some sort of an ad for the internet there, but that’s typically the way I learned it seems like I’m in the slow lane a lot of times on this stuff. But the just the realization of that there are these RMD’s you have to have in the mechanics of the how you get your money out. I think that’s one of the things I’m becoming more and more aware of is how much of our time is spent on how to grow something or invest in something or you know, to make it bigger and bigger and bigger irrespective or without any thought on how do you get the money out of the vehicle or you know, what’s involved on the back end kind of thing. And, you know, the RMD’s are clearly something that’s, that’s kind of something you have to pay attention to them. So

Glen Mather 25:21

Well, you call yourself a slow ski, I appreciate that. Because you’re all you’re communicating to me and I, I learned slowly so that’s, that’s a plus. You know, and what happens is as we get older, and I won’t ask you your age, because you’re not a client yet, but I’ll no one should become a client. But in any case, bait as we age, we do become naturally concerned about cash flow. I think it’s, you know, it’s like because we take a look at our end of our traditional work, whatever that might look like and you say, Okay, how am I going to fund the rest of my life will it be a drop off and I want to touch on this for just a minute if you’ll give me some airtime, because it, it really bothers me how traditional Investment Advisors look at you and your retirement. They look at you and your retirement. So your job is to amass and save, and we’re going to invest it alongside and maybe it’s an average, if you look at the stock market’s an average of 6%, you plug it in. And I’m not suggesting it’s not a good long term investment, I think it is, but it’s just one type. But what they do is they say your job is to pile up money. And if you’re a professional, maybe you need $3 million. Right? And based on maybe you’ll retire at 67, we’re also tend to be a little bit older now. So what we do is we take a look at that money, we take a look at your lifestyle needs and whatever else you’ve invested in, and let’s say you have to draw down 40,000 the first year or 45,000, nothing to do with the RMD’s just what you need to live on. And what they do is they basically watch that pile go down, and then there’s a safety piece that says maybe there’ll be half a million dollars left when you die. I think to myself, are you kidding me? Is that how is that how that yes, that’s how America plans.

What I want to do is when I die, I want to have more assets than I ever had before the day that I die, not less. Because you don’t have to do that with self direction. You don’t have to do that with real proper real estate investments. You don’t have to do this. So you won’t be searching for an annuity that pays you one and a half percent when you’re 70. Because you’re scared to death about losing your money. So that’s so basically have no more earnings, you’re basically got distributions with a little bit of frosting on top. That’s not what I want. Because I want to be able to pass this on to my children to charities, I want to pass on to my children, not just the equity, but understanding how equities work and how they build. And that’s the beauty and I think that’s what you do whether you’re inside an IRA or you’re outside an IRA. That’s what your goal should be. It should not be that you continue to have to sell off all your good stock to live on it and all of a sudden you have less of what was really good. I would suggest that you could have more that’s really good and it’s not. It takes a little bit more work. Yes. And it takes you stepping out of line with different advisors and different people by listening to podcasts like this. It can inspire you because we needed inspiration to move, but we need education to move smartly. And I and I, I see all of this available. I see what my clients are doing. And it’s stunning. One guy came over about nine years ago, he told me a story came over with 90,000 or $70,000. He had lost it. Almost all of it in the 2006 2007 crash. And he now has 1.3 million just by moves he’s made primarily real estate moves. And now is is getting bigger. What happens is you don’t have to make as big a bet you can lend money so he’s lending part of it. So he’s taking part of the risk off the shelf and doing it other ways. That’s the power of self direction. That’s the power of educating paying yourself by the way, a lot of people pay 1% of their asset fee to their financial planner. I would suggest you pay 1% a year on going to webinars and seminars and learning more and buying books and learning from masters. And now it’s all you’ll you’ll own all the knowledge asset and you won’t pay anything more for it.

J Darrin Gross 29:21

No, I appreciate you going into that because that that is one of the I guess the the concept that I grabbed hold of when I first understood investing in the stock market and I think it came from a place where dividend stocks were kind of you know, presented to me and that’s what I understood. I remember my dad talking now you invest in the company they pay a dividend and that was just that concept of that the the nest egg was still there working and producing. But since then, I think the the stock market I don’t have a ton in the market but it’s pretty much A very speculative thing, it’s about, you know, you’re hoping that you’re going to buy something for less today than somebody else would be willing to pay for it tomorrow, without any distribution of any cash without, you know, unless you sell. And it’s, I, it did not occur to me until, you know, more recently here where I’ve had to get kind of more involved with my mother’s finances and stuff and just become aware of just how the mechanics like you talked about. And, you know, the basically the financial advisors, you know, the map is, you know, well, you, your life expectancy is here, you know, yeah, you won’t outlive your money. That’s basically the that’s, that’s the summary there. I thought, wow. Not exactly the plan I had I was I was expecting to have, like you said a bigger pile of money then than ever before and something that was thrown off cash and, and could continue to work. So I like that. So Want to ask you? So the cost of you mentioned like the 1% is what? You know, I don’t know if it’s a 1% or whatever, there’s usually a percentage. Now everybody’s going into this assets under management kind of pricing model. How, what are the fees, the pricing for doing a self directed IRA?

Glen Mather 31:25

Well, there’s two elements of it. One is deciding to do it. And the second is what you’re actually buying and holding inside it. But But our fees are very simple. Our fees have not changed, I think in seven and a half years. And the way it works is $50. To open your account, it’s $95 to make your first investment, so let’s assume that you’re maybe in a syndication, real estate syndication and you’re putting $50,000 into a strip mall somewhere that would cost you $95 in it and then 295 a year to hold it. And with that, Do you get, you’re going to get our full custodian, our record keeping our tracking or reporting to the IRS. And also access to all of our events, which is probably just are more valuable than doing the accounting and the record keeping for your IRA. It gives you the ability to buy and sell on your portal or on your on your phone, you can actually buy a piece of real estate on your phone. So it’s very quick and basically get you in the game. What’s nice is that cost does not increase when your asset value increases. So don’t worry about what watch it go up and enjoy it. Your fees don’t go up, they stay the same. So it’s a relatively small price to pay for freedom. And that’s what what is freedom of choice. You’re making the choice. You’re doing the hard lifting, we’re not. But we are providing all of the tools, the techniques and the platform for you to make these choices.

J Darrin Gross 32:55

No, it’s great. I want to ask you You know, we’re in the middle of this COVID-19 thing. I’m curious, have you seen a change in the way people are viewing the self directed IRA or is it brought more opportunities to you? Has it made people rethink?

Glen Mather 33:21

Any disruption in the market is good for us. I mean, it’s it’s really strange, bad news is good for us. And, and although it’s not good for us individually, it’s good for us as company, you know, you know, all the way from running our company. I mean, we, we are fortunately designated as as required or necessary or what was the word they used? Very important workers that could continue working. And, and so, we’ve not we’ve not stopped at all working from a perspective of watching what our investors do, there was probably a two week period where there’s a run on cash, meaning people drawing down. And the Cares Act actually included a provision that said that you can take IRAs out without penalty as long as you pay them back in within three years. And so I expected all of that to be draining. It wasn’t significant at all. And but we thought there was there has been a pause on investments. The challenge here isn’t so much. It’s just figuring people figuring out where to go next. You know, there’s a period of indecision. So it’s unlike any other kind of market downturn. Typically market downturns come with clear winners and losers, right? And, you know, obviously in real estate, you can clean up right after that, that trough You know, a lot of people did in 06 & 07 and have been sort of buying it up and we’ve seen prices prices going up. We haven’t seen prices decline, certainly in Florida and probably probably about 40% of our clients are in Florida, but many pockets of the US. It’s been Because the government dumped in so much money. So they’ve artificially stimulated pricing. So what do you do as an investment, I expect people to scratch their heads a bit and kind of figure it out. We’ve seen, we’ve seen Wall Street bigger money from Wall Street in the private investment side moving towards those things that tend not to get hurt. So we’ve seen apartment complexes being extremely strong, because it’s first tier housing. You know, it’s where people have to go. We’ve seen things like storage facilities, any disruption where people are moving storage facilities get full. So they like those kind of investments, office buildings, you know, we’re not sure what this is going to do. People are working out of their own home, what types of office buildings are structures, we’ve seen really good move up in investment in in storage, commercial storage, and anything that has to do with moving and transporting, especially foods. That’s been excellent, cold storage and everything has been very, very strong. So what’s happening is individual investors have to find this because Don’t forget, that’s what we are. We’re we’re a group of individual investors. So as they find it, that’s the doors that I seem to be opening and people are investing more and then maybe the traditional vanilla stuff that, that as the traditional markets were moving up before this disruption they, they felt good about. So we’ve seen that the the, what I’m really proud of from an individual standpoint is people are contributing to their IRAs and 401k’s now, that’s great to see. That means they feel better about it. They haven’t stopped their contributions. And they’ve stopped taking out more than just their RMD’s that are required. They’re required minimum distributions so that I think it’s caused a pause in fairness, it’s caused a pause to think about what are those things that are going to do well in a sideways market? A choppy market that we’re really not sure that maybe based on when we find a cure, you know, that may be the thing. I just think that I can’t believe that when they find a cure, there’s not going to be like all sorts of craziness going on the market. Yeah, there will be so much coming into the alternative space. That that’s going to be amazing. And I think we’re gonna see that’s going to be where inflation is going to start to crop its head. When everybody feels like we’re back to square one, we can now grow. There’s going to be such a pent up demand for so many things that I think that’s when it’s come. But until until that until we get the cure, or some sort of ways to deal with COVID-19 I think things are still going to be uncertain in many ways.

J Darrin Gross 37:47

Yeah, no, I think uncertainty is kind of the theme. I’m convinced now that whatever opinions I hear just that there’s no nobody has a crystal ball. We’ve not been here. You know, So, take it all in and try and process it and just kind of keep, keep listening and paying attention to the, you know, what’s going on there. But definitely interesting times, that’s for sure.

Glenn, if we could, I’d like to shift gears here for a second. As I mentioned to you before we started recording by day, I’m an insurance broker. And I work with real estate clients to assess risk and determine what to do with risk. And we typically look at one of three strategies we look and see can we avoid the risk? If we can’t avoid it, we look to see if we can minimize the risk. And then if we can’t minimize it, we look to see if we could transfer the risk. And that’s what an insurance policy is risk transfer measure. And I like to ask my CREPN Radio guest if they can look at their business and their clients and identify what you consider to be the BIGGEST RISK. And for clarity, I just wanna make sure you understand I’m not necessarily looking for a, an insurance related answer. But with that, if you’re willing, I’d like to ask you, Glen Mather, what is the BIGGEST RISK?

Glen Mather 39:19

is this? Are you asking us for my clients and self directing?

J Darrin Gross 39:23

Yep, I’m gonna let you define it for you to kind of, however the BIGGEST RISK, you see, what would you see that is, if it’s a client’s that’s, that’s great.

Glen Mather 39:33

I think when you go well, with any kind of investment, you kind of have two choices. You can invest based on the recommendation of others, or you can invest based on your own knowledge. And certainly, maybe alongside recommendations for others where you can actually do your own due diligence on the process. That’s what self direction is all about. And if you just get tagged if you’re just coming along and doing an alt with a recommend from somebody else, that you don’t really know the basis of it, then you might as well be in the stock market. It’s no different. I think the the risks, the risks are no greater or less, it’s when what you’re doing is you’re mitigating some of those risks, as you said, or lessening some of those risks through your own knowledge. And, you know, I’ve certainly heard that Warren Buffett say several times about he won’t invest in any business he doesn’t understand and I take that to heart is I don’t invest in anything and I get some pretty creative things that are thrown at me. And I just recall something if I can tell a brief story, there’s a new freeway that’s going around Orlando, on the on the west side of Orlando, and it’s it just completed almost all of its stops. And, but when you when you build a ring around the city, you generally go through wilderness, right? There’s nothing there yet. The freeway effect which we learned in LA right, which is you put a freeway houses are going to come When you own the land around interchange, it’s valuable beyond belief, right? So I had I invested in something like this similar that worked out and then the guy told me, he said, I got another interchange, I go great. Bring it in and show it to me. You know, and by the way, it’s only for me, it’s not for my clients, I don’t share it with my clients. And he talked about how he has a land option is going through this company and then you taking that you’re splitting the depreciation off and you’re moving it to a third company. And then there’s a developer who gets 15% of the back end load. My head was about to split. You talk about being the slow guy in the room I was I couldn’t get it and I I stopped it after about 30 minutes of trying to sketch it out on a pad and I said I can’t invest in it. You guys got a phenomenal track record. All I’d be doing is throwing you money and I trusting you and I don’t want to do that I promised I’m not going to do that my with my IRA and or my any over my retirement. So that’s been my mantra, the less I know, the more I’ll go to partnering until I know, without a lot of money, so, so my risk is mitigated by the fact that generally on my investments until I get to an educated state, is that I’m in it with you. If and if I’m in it with you, Darrin, I suggest that you’re probably pretty interested in your money and your segment, you’re going to make sure it’s as good as your education. So that’s kind of as close as I get to risk is, I may look at a deal. I’ll educate as much as I can, and then I’ll go in at 20% with Darrin. And if Darrin is screwed me is screwed himself 80% you know, and you’re not going to do that. So I think it’s a pretty fair and easy way to learn and to reduce the risk. But make no mistake, it’s on you. No one else is making these selections. It’s on you. So that’s where the risk lies. And and I don’t think that you should be somebody anyone should be scared. Do it with their retirement plan and be Cavalier enough to shove it to somebody else and say go manage it for me. We’re in it’s stunning because I talk to well educated people. And they’re very quick to wave off and say, I don’t know anything about investing. I make 600,000 a year but I don’t know about investing. So I have my buddy take care of it. I just like it. It shocks me.

J Darrin Gross 43:26

Yeah, no, it’s there’s a lot of opportunists out there and and you know, if you’re not someone, yeah, I mean, guarded defensive of your, what you created, you can end up with, you know, nothing. So, I appreciate that.

Glen Mather 43:47

We would all like to think that there actually is a green path that you have to follow like Fidelity says and, you know, you have the happy couple who look like you know, they’re retiring very young and they Walk down hand in hand in this path and it just kind of rolls out in front of them. I mean, you talk about fiction. I mean, that’s completely fiction. The only they don’t show you that that Green Path actually stops before you do not right. Right. That’s the problem.

J Darrin Gross 44:18

Not good. Hey, Glenn, before we wrap up, Where can the listeners go? If they would like to learn more connect with you?

Glen Mather 44:26

Yeah, I think the best place to start is is where our website is, and but I don’t want you to end it that way. And, and, you know, one of the things that we that we pride ourselves in that is that we answer 98% or more of our calls with a live knowledgeable person. So do call in, but certainly to whet your appetite to learn more, go to NuViewTrust.com and it’s spelled misspelled NuViewTrust.com. Go there and it’ll kind of teach you we deal with very special money managers. And we also deal with individuals just like you and just like me, who are just trying to get started and understand it. There’s videos, there’s podcasts, if you don’t mind, we’ll put this podcast up so that people can find us that way too. And it’s a great way to kind of understand it and and maybe you can even learn from some of our clients that have their success stories up and what they’ve done to change their retirement too. So it’s NuViewTrust.com.

J Darrin Gross 45:27

Got it. We’ll have it in the show notes. Glenn, I want to say thanks for taking the time today. I’ve enjoyed speaking with you learned a lot and hope we can do it again soon.

Glen Mather 45:39

I appreciate the opportunity. Thanks so much.

J Darrin Gross 45:42

Intro 46:02

You’re listening to CREPN Radio for influential commercial real estate professionals. For more information on this or any of our guests like us on Facebook CREPN Radio.

Automate Capital Raising for Commercial Real Estate with Jake Marmulstein – CREPN #267

Jake Marmulstein 0:00

I would say that the big aha moment for groups is when they can put a deal out to investors. And each person has their own account, or they can log in. And you’ll see that the deal fills up pretty quickly with offers. And it’s something that happens automatically, because the people that invest can go in themselves see the deal and make an investment and choose the account that they want to use. But the traditional way would be that you’d have to sit by the phone or email and you’d be spending hours with your investors one on one, having calls and getting them in or out, figuring out the amounts that they would invest and booking that in your Excel spreadsheet.

Announcer 0:46

Welcome to CREPN Radio for influential commercial real estate professionals who work with investors, buyers and sellers of commercial real estate coast to coast whether you’re an investor broker lender property Manager, attorney or accountant We are here to learn from the experts.

J Darrin Gross 1:05

Today my guest is Jake Mermulstein. Before grant before founding his company Groundbreaker, Jake held a number of roles involving real estate and technology, supporting the growth of early stage digital technology ventures, while working with the government on foreign direct investment by Fortune 500 companies. In 2011, he started his career in real estate underwriting hotel investments for Watermark Capital Partners. He graduated from Cornell University with a major In Hospitality Management and minor in Real Estate. And at Groundbreaker Jake owns the company strategic vision and execution. He is responsible for sales, management of the departments and people leading them. And Jake also manages the company finances and capitalization as well as the board. And in just a minute, we’re going to speak with Jake about software automation, for real estate, fundraising, fundraising, and how it can be an asset to you. But first, a quick reminder, if you like our show, CREPN Radio, there are a couple things you can do to help us. You can like, share and subscribe. And as always, we encourage you to leave a comment we’d love to hear from our listeners. And also if you’d like to see our handsome our guests are, be sure to check out our YouTube channel. And you can find this on the YouTube at Commercial Real Estate Pro Network. And again, we we would love to have you consider subscribing to the channel. With that I want to welcome my guest, Jake, welcome to CREPN Radio.

Jake Marmulstein 3:13

Thanks so much, Darrin.

J Darrin Gross 3:15

Well, Jake, I am looking forward to our conversation today. But before we get started, if you could take just a minute and share a little bit more with your of your background with the listeners.

Jake Marmulstein 3:28

Yeah, absolutely. So I started really growing up in a restaurant family, went to school to learn Hospitality Management. And I got very interested in real estate investment and spent some time going and working in a few different countries and getting exposure to what’s out there in the world. And real estate was very fascinating to me. I got involved in investing in hotels. And when I was working in that, that field, I also had some experience in technology and was pretty pretty tech savvy just from being the default de facto nerd in the house to fix everything that was broken as I was growing up, so I looked at this problem the same way. You know, raising money and managing investors, using the current systems that we have available as investment management professionals, is is very manual and time consuming. And so I just thought there had to be a better way to do it. And then that seated the idea to form groundbreaker and we’ve been going six years in this business.

J Darrin Gross 4:52

Awesome. You mentioned your your background, or kind of, were you you saw or you were recognized the hurdles that real estate investors face when trying to raise capital. Can you elaborate a little bit on what it was that you saw that that the cumbersome challenges that you saw that there was a better way?

Jake Marmulstein 5:20

Sure. So I spent a lot of my time formatting PowerPoint presentations and printing them out and making sure that everything looked good. When you’re pitching to investors. You can’t have anything really stand out as an error formatting error, grammar, punctuation issue, or just the way that the information looks. It says a lot about your reputation and how well you’re going to possibly manage an asset, how detail oriented you are. So everything really reflects on on what you present to your investors. And so I wanted to find a better way to be able to package materials and present to investors, and I didn’t find any solutions that really could do that everyone relies on, you know, one to one email communication and phone calls.

But what we ended up doing was creating an online system so people can log in, see your deal. Its format into a beautiful looking online page where you have all the photos and documents and information you typically see in an offering memorandum. And then we take the friction out of the investment process so that it’s easier on the investor to be able to subscribe to a deal. And the solution that I run and groundbreaker automates a lot of the process that goes above and beyond why I was initially frustrated. But as you continue in real estate investing, the more investors you got, the more people you have to answer to and report to. And so on the servicing side, it gets cumbersome and quite complicated when it’s being managed an email and excel there’s A lot of ways to lose data and just have to resend things again. And that’s kind of just a high level overview, but I could definitely get into more details and specifics.

J Darrin Gross 7:16

Yeah, before we, before we go forward, I’d love to just go back a little bit. Now, were you directly involved with raising capital? You mentioned you’d invested in hotels, and I wasn’t exactly clear. Can you share a little bit about what was what your experience or your exposure was there?

Jake Marmulstein 7:36

Yeah, so we would get, we would get offer offerings from brokerage firms and different sources of deals that might meet our investment thesis. And then I would do all the underwriting and research to package the materials up for that deal. If it’s something that meant the back of the envelope calculations, which would hit our threshold for the returns. And then we would assess the risk and decide if we wanted to put something together. And I would be putting all the materials that would go in front of the Investment Committee. So I would sit on the Investment Committee calls, and, you know, get feedback from people. But before I even got on those calls, there was a long process of the due diligence, and the review of all the materials to make sure that it was appropriate to be able to share with Investment Committee. At in the actual capital raising, I was more administrative support and handling the stuff that we needed to do to get people subscribed. But I didn’t necessarily have to call investors directly during those times and, you know, get them to invest that was more than managing partner of the firm.

J Darrin Gross 8:40

Gotcha. And so you mentioned you were doing some administrative as far as the fundraising. So were you in charge of basically the tech that was facing the investors or was it primarily phone calls, emails or?

Jake Marmulstein 8:55

Yeah, a lot of it was just doing emails and sending information out and then using Excel to track that we had sent things. And we were waiting to get information back.

J Darrin Gross 9:09

Gotcha. Yeah. No, it’s amazing. And I’m really frustrated when I when I say this, but my dad was a banker and for years and years and years, I avoided online banking. Just because like it was something that was, you know, foolish kind of thing you needed to grind through, you know, the, balancing your checkbook as I was taught kind of thing. I mean, it was like, Holy moly, just to see that there was this it was effective. I mean, I could, I could balance my checkbook, but it was painful and I hated it. I put it off kind of thing, but just that, that recognizing there was an easier way and now switching to the online banking and it just all, you know, downloads and just to is your describing to, you know, the process that you were engaged in, because it kind of reminds me of the banking scenario of just, you know, you being tech savvy and and seeing whatever he’s going through with the emails and trying to track them in a spreadsheet and and i’m assuming that that you get a couple of iterations going and and possibly you can’t you know, distinguish one from the other kind of thing and, and maybe some redundancy kind of stuff when a lot of frustration that that compounds The situation was that my is any of that true or is that just me and the systems I create and recreate?

Jake Marmulstein 10:36

Now you’re you’re right, there’s a ton of redundancy. I mean, if you had to get access to what each investor invested across all of your deals, it would be really hard to find that because it’s logged in different spreadsheets in different folders. So just finding the deals is takes you time and then opening the store. spreadsheets. And then you’ve got to have one spreadsheet that links across all the different spreadsheets and gives you the data. And it just becomes very cumbersome. having to manually update things and know all the locations of all of your data as well. As you grow it, it just becomes more work and instead of the tool actually providing you efficiency, you’re kind of working for the tool to maintain it.

J Darrin Gross 11:29

Yeah, you are the tool, right?

Jake Marmulstein 11:30

Yes.

J Darrin Gross 11:34

So let me ask you when when you set out to start Groundbreaker, it sounds like there’s obviously record keeping, you know, is kind of a broad, broad topic as far as all of the different moving parts, but is there any one of the many tasks that groundbreaker takes care of that you identified as the the primary, or was it all kind of like this a global, more of like, there’s got to be a better way?

Jake Marmulstein 12:02

The different workflows that we have feed into each other. But I would say that the big aha moment for groups is when they can put a deal out to investors. And each person has their own account where they can log in. And you’ll see that the deal fills up pretty quickly with offers. And it’s something that happens automatically, because the people that invest can go in themselves see the deal and make an investment and choose the account that they want to use. But the traditional way would be that you’d have to sit by the phone or email and you’d be spending hours with your investors one on one, having calls and getting them in or out, figuring out the amounts that they would invest and booking that in your Excel spreadsheet. And when somebody can just put a deal out say at you know 6:30 at the end of the day, and then they wake up the next morning have dinner with their family wake up the next morning it’s fully subscribed and waiting for wires to hit. That’s an amazing feeling.

J Darrin Gross 13:14

Yeah, certainly wouldn’t make somebody miss the, the anxiety producing waiting by the phone and, and or outbound calls, knowing you’re missing calls. All that kind of thing. That’s, that’s, that’s pretty cool. So, let’s, let’s, I guess, give some I don’t know some right word I’m saying but can you describe kind of what Groundbreaker what all it does, I mean, we’ve talked a little bit about the, the the ability to track deals and investors and stuff but, but if you were saying Darrin, here’s, here’s, here’s what it here’s who it’s for, and here’s how it works. This is what Give me your your, your kind of description there if you would.

Jake Marmulstein 14:05

Yeah, sure, Darrin. So, if you’re investing in real estate as a deal sponsor, and you need to raise outside equity. Then using Groundbreaker automates and streamlines many of the processes you’ll have to go through putting your deal together, getting it out to investors, and then raising the money and service. Our clientele are mainly small to medium sized real estate investment firms that have a core team of five to 10 people and, or they could just be one guy, you know, on his own doing deals and growing the business. And the common denominator is they all raise capital from investors and they usually have a handful of investors in each deal. like five to 10 investors in each deal, sometimes hundreds of investors in each deal. And the more investors you have, the more work you have to do for each individual. So looking at groundbreaker using our tools, you increase your capacity, from a one to one relationship to a one to many relationship among all of the workflows; fundraising, collecting subscription agreements, processing them, keeping the data organized, being able to upload reports and disseminate information to investors, writing emails, and being able to pay your investors. So previously, each of those tasks you’d have to do. With you doing one task for one investor? Now you can do the one task but you can affect all of your investors in that deal at the same time.

J Darrin Gross 15:57

Nope, sounds pretty compelling. Especially if anybody’s had any experience with just the manual task of doing all these things and trying to keep it straight and a lot of excitement when you’re raising capital and trying to get a deal closed. But if you are pulling your hair out, you know trying to keep up with it all and I’m assuming frustrating investors. You know, if somebody is excited to invest with you and they can’t get get hold of you are missing opportunities that probably doesn’t speak well. Or probably turns them off too. You know, like you mentioned earlier about your, your style or your ability to manage the the project or the investment. You mentioned in the beginning that that your primary task when you were working with the hotel investment company that doing a lot of the PowerPoint presentations does the Does the groundbreaker platform does it? Does it have basically some formatted presentations? Whether it be raising capital or the deal or the you know, when the investors log in? Are there certain things that are formatted to make it a whole lot easier for the user?

Jake Marmulstein 17:22

Yeah, it looks really professional. When you go to the login page, it has your brand and photo of your assets and the investor can log in. So there’s a nice place where they can go to from your website, kind of seamlessly bolts on. And then once they’re in, there’s a dashboard that they can see and it shows how much capital they’ve contributed and how much capital they’ve just gotten, gotten back in terms of distributions and their return multiple.

And then there’s a place in there where they can track their investments, and they see a photo of the investment, what they have in it and their ownership and they can see any distributions that they’ve gotten out. And for new deals, they could see the deal cards summarized on a page that just gives high level information on the minimum investment amount, the return structure and the amount that they’re raising. And there’s photos, so looks visually appealing, it’s organized and clean and the way that it looks. And then you can click on a deal and look at the detail and, you know, specifically evaluate the information on that deal. And it is formatted in a way that makes it easy for the deal sponsor to put together a presentation quickly in the same consistent format. They’re sections that they can use to personalize it in whatever way they want for their specific offering. And it’s going to come out the same every single time and it’s going to look look the same. So there’s a lot less work that has to be done on creating those deals and formatting them to look good. We’re we’re not necessarily a offering memorandum builder. You still need to know what you’re going to put in there. But we make the process easier by providing somewhat of a template and a structure that’s consistent every time.

J Darrin Gross 19:07

So you do have that branding look and feel so it’s people see it, they’ve seen it before they know it you. Let’s talk a little bit about security online and and as an insurance broker, I know that that’s, that’s a big, big issue. How do you address the online security issues?

Jake Marmulstein 19:32

Well, we take security very seriously because our solution handles personally identifiable information and we have to store that in order to provide service to our clients. There’s investor account information and Groundbreaker that is reused to be able to invest in deals, and we want to make sure that it’s secure from the outside and the inside. So we use sock One, two and three compliant data centers for storing all the information There’s passwords for investors. And there’s a backup two factor authentication where your phone gets a text message to determine it’s really you in order to get access, and that’s available for both sponsors and investors. And then there’s encryption practices when data is stored and when it’s sent. So it’s encrypted end to end. And then internally, we have certain processes to make sure that only certain people are accessing the data in our client base, and we can isolate isolate problems. So

J Darrin Gross 20:37

Nope, sounds like you’ve you stay on top of that. It’s crazy similar schemes that I’ve I’ve heard you know, and had clients fall prey to and they seem crazy. But yet, you know, there’s a there’s a way a lot of people have You know, gotten uber creative on the digital with the digital capabilities to where they can make something look and and you know people think it’s something they know and they click on and all of a sudden they’ve got problems so I’m sure that your investors and your deal sponsors can appreciate your commitment to security.

Jake Marmulstein 21:25

Yeah, I wanted to say that with that there’s a lot of wire fraud in the real estate investment space. So we have all of the instructions in the portal you have to be logged in to get access to them. There’s creative ways that sponsors have come up with to be able to verify an investor is looking at the right instructions, such as sending them a text message and making sure that you know when they’re about to wire they have the right instructions and verifying they are indeed you know, the person Looking at it, but our software actually takes all that out of the equation because you have the login and you have the two factor authentication and it’s not like it’s in an email that can easily be spoofed and changed where a lot of wire fraud does occur.

J Darrin Gross 22:18

Yeah, that’s exactly where I’ve seen it and heard and talked to people about it. You know, the the email spoof you know, somebody you get an email and in even, it used to be that it was like an email that looked like us from somebody, but if you held your mouse over the, the address, you’d see that it was, you know, some crazy email address. But even now, I think they’re, they’re hacking into your email, waiting for a communication that they recognize as an opportunity and then sending instructions from you or to you or you know, that that are Actually from your, your email, but the the instructions are, you know, bogus and people there’s a link and and, you know, people lost. I mean, I know one account was over a million bucks and you know somebody they had worked with regularly they knew them and they did the instructions because if a million was not like an you know, it was an ordinary amount for what they do and but it’s it’s crazy. S`o it’s yeah i think that’s that’s something that I would think that users whether it be the deal sponsor or the investors would be of most interest in just the security of it because it’s one thing to have all the marketing pretty stuff but the you know when you’re putting in your social security number in your accounts and dates of birth and and all that identifiable information You’re basically given the keys for somebody that has some, you know, bad, bad ideas to create a lot of havoc. So that’s good.

Jake Marmulstein 24:11

Yeah, that security aspect is really important to people. That’s one of the main reasons they come to us.

J Darrin Gross 24:18

Got it. So in the field of this, that you that Groundbreaker, is it? Are there a lot of competitors? Or is this kind of are you like one of the few?

Jake Marmulstein 24:32

There’s a handful of solutions that compete and some of them are not specific to real estate. Some are pretty legacy and kind of have adapted or were not over the years to offer solutions for real estate. But it’s it’s a fairly new space. I think the reason why is because real estate people aren’t really that tech savvy and they’re not equipped to shift their business. So There’s not a lot of people who know the real estate space well enough to build a strong, powerful platform to mirror the workflows the way that they should be done. But I don’t know, there’s probably a lot of competitors that are gonna be chasing after and joining. As soon as something gets hot and has traction, you usually see a lot of folks come in so.

J Darrin Gross 25:27

Well, I mean, that’s, that’s kind of the nature of the business. If it’s if it’s an opportunity, there will be competitors, which just kind of reinforces the fact that it is an opportunity, if there’s no competitors might not be an opportunity. So

Jake Marmulstein 25:39

Yeah,

J Darrin Gross 25:40

That’s good. Talk about some of the feedback you’ve received from users.

Jake Marmulstein 25:48

So on the on the feedback I’ll give like, positive and and constructive feedback, because I can’t say everything is always on You know, rainbows and pots of gold. So Groundbreaker does a good job at making things professional, adding that level of security and peace of mind. And giving sponsors the ability to automate their transfers, their ACH transfers, that’s one of the features they really love. It’s fast, it’s reliable, it’s intuitive, I got those comments the other day from somebody looking at the software, who’s gonna sign on, and, and that’s all great, like our basis really be easy to use, and easy to understand, and also to be affordable.

On the constructive feedback, we really in order for us to accomplish more, we need to keep building into the solution. And some people want to be able to automate statement generation. So we’re we don’t currently offer that if you’re reporting and you want to give personalized reports to investors. Something that people have to do manually if they want to add that personal touch above what’s in our investor portal and what’s, you know, already being reported on for very complex distributions. We’re not at that point where we can fully automate end to end, a waterfall calculation. But we’re working on it. So there’s definitely things that people want us to be able to do when they store all their data with us. And just because software takes so long to build it, it’s just a work in progress. But yeah, but I think we’re doing pretty well as it is just with some of the functionality that we have.

J Darrin Gross 27:43

Yeah, I would think that that’s a challenge that any software developer faces, I know their platforms that I’m utilizing, and, you know, you run into a situation where like, this would be nice if it just would, you know, let me do this. And, you know, you raise your hand, but depending on their, their queue of problems that are on fire or things that they really want to solve may not happen for a while, but you know, I guess that’s the good news is is that, you know, people have have some ideas that are, you know, potentially helpful and could potentially help you develop the product, I guess, to make it more user friendly, or, or even that much more, you know, better than then potentially, you know, competitors for, or however that is that’s, that’s, you know, part of the, I think that’s part of your process and part of what you what you have to stay attuned to as a software developer just to make sure that you stay they’ve, you know, viable and, you know, you are the solution as opposed to not the solution kinda thing.

Jake Marmulstein 28:59

Yeah. It’s hard to just keep up with all the things that we could do. I mean, priorities are, the hardest part is picking the right thing to focus on at the right time.

J Darrin Gross 29:10

Got it? I want to touch real quick. I looked on the website a little bit. And I saw the pricing in that you, you do it, I believe it’s under assets under management. I’m just kind of curious how you chose that as opposed to like number of, of records, user Records, which is what I’ve seen on not not in this type of software, but other software, CRM that I’ve dealt with, it’s priced on the number of of users or do the to kind of be equate if you’ve got more assets under management, you’ve presumably got more users?

Jake Marmulstein 29:50

Yeah, that’s a good question. It took us a while to figure out what pricing would be both fair for the market and also fair for us. We’ve tinkered with many different models throughout the years. So one thing is we want people to be able to come on board and really grow with us wherever they start. If they’re just starting on their first deal, or if they’re managing a portfolio of, you know, 20 deals, we want to be able to fit with them. And it’s very hard to do that. There are weaknesses in this pricing model. But it does cover more bases than most other pricing that we tried to come up with. We like to be able to offer people the all you can eat option, which is you can do as many deals as you want. You can have as many investors as you want, and there’s no limits to your usage. So you can really adopt the solution fully and completely into your business without being concerned about cutoff points. Our pricing goes up as more equity is raised, so that as the company grows, they’re doing bigger size deals. with larger average investment amounts with more investors, they’re growing and we should be growing too. So it’s an easier way to see how well somebody is growing and what impact the solution might be having on their ability to scale to do it based on the equity under management, and also the way that it is, is done.

We only increase the price when capital is really contributed. So if you’re a fund and you’re raising $20 million to start the fund, you’re only going to be paying for the equity that’s actually contributed not committed in a signed agreement, but not in a bank account, collecting interest. And we just determined that in the software, so there’s tools that you know, show you how much capital is contributed and we’re using the same information to base the pricing off of

J Darrin Gross 31:59

Got it. Well I just see It when I saw that, uh huh. That’s kind of interesting, just the way that you you came up with that. But I would assume that, you know, if if, you know, you meet all the criteria and it helps investors really grow, it’s not limiting their growth because they’re no longer doing the spreadsheets and the emails and all that stuff that they’re used to doing that the tool is there’s value in the tool and that, you know, it’s helping them grow their assets under management, which would be a win for everybody. So I would assume that’s your, I’m assuming you don’t get any pushback on.

Jake Marmulstein 32:37

We we don’t right now, the pricing is really, at the very low, reasonable point for people who are just starting out because it, it goes all the way down to zero to 1 million in equity.

J Darrin Gross 32:51

Right, right. Hey, I want to ask you real quick about COVID-19 it’s it’s kind of shuffled most of our sense of work with time and space, has this affected Groundbreaker at all? Have you guys is it? How’s it affected you guys?

Jake Marmulstein 33:14

Well, as a company, we had to make swift moves to adjust our expectations on business and internal processes. And we address those very early in March. So we were, we were ahead of many companies that dealt with this, but it ended up being, I think, a net positive for us, because we’re working remotely and people are working remotely having more time to be able to focus on how to improve their business. And they’ve reached out to us and we’ve gotten a lot of interest in our solution. While people have been figuring out the deals that they were working on, whether they’re going to move forward or not. And having to deal with with Property Management situations, I think, you know, that was initially what people were occupied with. And so we saw a dip in an activity then. But then as soon as deals started to continue going, people were very interested in using this time to focus on how they can make their business more streamlined.

J Darrin Gross 34:21

Gotcha. Jake, I’d like to shift gears here for a minute. So I mentioned to you before we started recording by day, I’m an insurance broker. And I work with real estate investor clients. And we assess risk and determine what to do with the risk. And there’s three different strategies we typically consider. We we look and ask, can we avoid the risk? If we can’t avoid it and we look to see can we minimize the risk and if we cannot minimize or avoid the risk, we look to transfer risk. And that’s what an insurance policy is. And I like to ask my CREPN Radio guests, if they can take a look at their business and their clients to identify what they consider to be the BIGGEST RISK. And again, for clarity, I’m not necessarily looking for an insurance related answer to risk is far and wide. But if you’re willing, I’d like to ask you, Jake Marmulstein, what is the BIGGEST RISK?

Jake Marmulstein 35:38

So Darrin, the BIGGEST RISK for Groundbreaker in as I as I look at our business, and what we’re doing is really managing expectations with people. Software is a living, breathing thing. And it is very challenging for people to evaluate. who aren’t typically Software buyers and a lot of people in real estate aren’t. So our job is to be good stewards of the, you know, good stewards to other people, treat them with respect and give them the most transparent access to what’s really going on and what really our product provides when they’re evaluating it, and trying to understand how they can improve their business. And that’s how we mitigate that risk of mismanaged expectations and somebody getting something that they think does “x” when it really does “y”. And so it’s about just education, mainly.

J Darrin Gross 36:41

No, it’s that’s a it’s a risk that I think everybody faces daily. Managing expectations you know, and, and how much easier it is if you can, you know, start and stay on the on the straight and narrow as opposed to letting somebody their expectations get ahead of them or, or, you know, fall from reality is that’s good. Jake, before we wrap up, where can listeners go if they would like to learn more or connect with you?

Jake Marmulstein 37:13

Yeah, everyone, feel free to connect with me on LinkedIn if you want and also go to Groundbreaker. co. And if you’re interested in finding out more about our solution, you can go to the instant demo button, fill out a form and there’s ways to get in touch from there.

J Darrin Gross 37:33

Jake, I can’t say thanks enough for taking the time to talk. I’ve enjoyed talking with you and learned a lot. And I hope we can do it again soon.

Jake Marmulstein 37:45

Same here Darrin, thank you for having me.

J Darrin Gross 37:47

All right. For our listeners, if you liked this episode, don’t forget to like, share and subscribe. Remember, the more you know, the more you grow. That’s all we’ve got this week. Until next time, Thanks for listening to Commercial Real Estate Pro Networks, CREPN Radio.

Intro 38:08

You’re listening to CREPN Radio for influential commercial real estate professionals. For more information on this or any of our guests like us on Facebook, CREPN Radio

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