J Darrin Gross Podcasts -

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.

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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

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 1:22

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

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 insight and experience to help you grow your real estate portfolio. Today, my guest is Mark Ritter. Mark is the CEO of MBFS and an expert in credit unions, real estate investment lending and small business lending. His primary role at MBFS is leading company efforts to assess assist credit unions and making commercial loans and helping businesses and investors. And in just a minute we’re going to speak with Mark about how credit unions are a force you should not overlook when financing your commercial real estate.

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

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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

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

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 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

Attract & Connect With Commercial Real Estate Investors on Linkedin with Yakov Smart – CREPN #266

Yakov Smart 0:00

It’s funny because LinkedIn has changed a lot which we can talk about the changes as well. But it’s funny because you know a lot of people in real estate a lot of real estate entrepreneurs, especially entrepreneurs, that commercial real estate may still see LinkedIn as a resume platform where people go to update their resumes and what we’re going to talk about today is a new way in a very prolific and powerful way of attracting high net worth individuals.

Announcer 0:24

J Darrin Gross 0:44

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 Yakov Smart. Yakov is considered to be the leading expert when it comes to attracting A list investors and raising capital using LinkedIn. He is the author of Disrupting LinkedIn and a sought after authority by top business owners and sales leaders worldwide. Yakov has shared the stage with Samantha DeBianchi of Bravo’s hit TV show Million Dollar Listing. And he’s been a guest on numerous media outlets. As a resident of Scottsdale, Arizona, today, Yakov is a proud leader of LinkedIn Enterprises, where his webinars on demand training programs and strategic consulting accelerators give people proven tools and techniques for transforming their LinkedIn profiles into priceless relationship building assets. And in just a minute, we’re going to speak with jack off about how To raise capital and attract high net worth investors using LinkedIn. 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 you can share and you can subscribe. And as always, we would love to hear from you. Please leave a comment. Also, if you’d like to see how handsome our guests are, be sure to check out our YouTube channel. And you’ll find this at Commercial Real Estate Pro Network on YouTube. And also don’t forget, please subscribe. With that, I want to welcome my guest. Yakov, welcome to CREPN Radio.

Yakov Smart 2:42

Good to be here. Thank you for having me.

J Darrin Gross 2:45

Well, I’m excited to talk with you in this digital age about marketing and leveraging LinkedIn. But before we get started, if you could take just a moment and share a little bit more about your background with the listeners,

Yakov Smart 3:01

Certainly. So I’ll give you some some brief insight into my background here. I started on social media and started you mentioned digital marketing and marketing online. I always you know what I tell people, the story I always start in a bit of an unusual place because I’ve been on social media since about the eighth grade. So I started back in My Space, and I think a lot of your listeners will remember My Space. That’s where I started my journey on digital marketing. And back then I wasn’t using it for business and successfully, I was using it to hit on girls. That’s when I got my start on social media.

The way I got started on LinkedIn was a bit more intentional and a bit different. I was selling software for a startup software firm. And I was having a lot of trouble and frustration from making cold calls. Basically, the only way that I had a prospecting and lead generation was smiling and dialing, it was driving me crazy. So out of necessity, I turned to LinkedIn as a different way and I inadvertently stumbled upon a new way of using LinkedIn for growing businesses. And you know, I live in Vegas at the time and started taking on private clients and turning it into a business. And you mentioned, Disrupting LinkedIn, I authored that book a little while ago and since then became known as one of the top authorities when it comes to using LinkedIn to generate leads, and attract A list clients. And the way that I got into working with people in the real estate space, especially when it comes to raising capital and attracting investors, which I know is the focus of our conversation today.

I was at a forum for entrepreneurs and a couple of gentlemen approached me and they were intrigued by the concept of using LinkedIn to connect angel investors. So people who are high net worth individuals and founders of companies, and they were putting together these deal clubs and they had a vision for running these deal clubs in major markets across the world. And they asked me if I thought it was possible to approach extremely high net worth individuals, people who were in venture capital, angel investors, people worth, sometimes hundreds of millions, if not billions of dollars and get them interested in this concept using LinkedIn. And I said that I thought it did. And I took them on as clients. And it was fascinating to see just the caliber of people who we could find on LinkedIn. And using the strategies and the methodologies that you and I are going to talk about today, getting them interested in, in their case, attending the deal clubs, and investing in these types of startups.

So those are some of the hardest to reach decision makers out there. And that was sort of a starting point. And my entry into the world of raising capital where, you know, at around the same time, I had a lot of influencers in the real estate syndication, real estate investment space, reach out to me and, you know, we worked on a couple different projects that at this point, my primary focus of the students I work with and the mentees that I have inside of our various programs is around a new way of using LinkedIn to attract high net worth investors and raise capital. It’s funny because LinkedIn has changed a lot which we can talk about the changes as well. But it’s funny because I know a lot of people in real estate, a lot of real estate entrepreneurs, especially entrepreneurs, that commercial real estate may still see LinkedIn as a resume platform where people go to update their resumes. And what we’re going to talk about today is a new way in a very prolific and powerful way of attracting high net worth individuals using LinkedIn.

J Darrin Gross 6:27

Well, I mean, everything you said there from the beginning of eighth grade and MySpace to you know, now you’re attracting high caliber angel investors. That’s, that’s, I mean, that’s a journey that I think everybody likes to have the fast track the the shortcut on. I’m assuming on on MySpace, you were kind of nurturing the, your perspective leads in order to attract the dates. Is that kind of the the that nurturing thing? Is that kind of a key to your, your approach? I mean, we can get into more detail, but I’m just kind of curious. I think a lot of times people think of sales as being like a, almost like a shopping cart mentality as opposed to more of the nurturing kind of thing.

Yakov Smart 7:21

So, you know, it’s funny, I don’t think anybody’s ever asked the question quite like that, comparing MySpace and LinkedIn and I would say that I wasn’t very successful using MySpace to hit on girls. So I think those strategies could sort of be be left behind us, but I see what you mean like because my space was a platform for at least making those connections in that context, right versus LinkedIn. And when people work with us and they want to accomplish this, the big thing is, yes, nurturing leads and there is a lot of value in nurturing and you know, getting in front of people and having that consistency in relevancy and it’s a big, LinkedIn has a lot of different tools and features for accomplishing that. But the biggest thing is, I don’t want people to put unnecessary hurdles between them and investors.

I’m a big proponent of direct response as well. And so I’ll give you the methodology. And we can go into, you know, any, any of the different nuances of it. But the first piece is finding being able to build a list of investors. So I call it magnetizing, to your list. And what that comes down to is using the various searches inside of LinkedIn, there’s several ways you can build lists of high net worth individuals on LinkedIn, and there’s different angles for building lists as well. And when I say magnetizing, your list I mean, finding a list of the people who are going to be perfect potential investors for you, right. So you know, I have people who want to attract institutional investors, I have people who want investors from family offices, I have people who want local dentist or attorneys or military personnel, these are all different angles, all people you can potentially find on LinkedIn because there’s 675 million users.

So it starts with magnetizing. And building that list and getting really specific. The next piece, and this is really if there’s a secret sauce here, or if there’s something that really makes this thing go, it’s the messaging, right? So I call it accelerating trust, using messaging, because what your listeners need to understand, and this is really key because of you know, the world has changed recently, building a relationship with an investor online outside of your current sphere of influence is significantly different than it would be in person, right? And the big difference is the level of trust or lack thereof, because let’s say you go to a local, you know, REI club meeting or a networking event or you know, whatever the case may be an in person event, and you meet someone as a prospective investor and you start to have a conversation. Unless they’re just completely rude and inconsiderate. They’re not going to walk away as you’re in mid sentence, they’re not just going to turn their shoulder walk away and go talk to someone else. Because that would just be really impolite and most people wouldn’t do that. Well online, if you don’t immediately grab their attention and start building curiosity and trust, they can say next, and they probably have five other windows open on their phone or on their computer. So there’s a lot more distraction. And it’s about getting them to care first and having them understand what’s in it for them.

So on LinkedIn, there’s three important places for your messaging. There is your LinkedIn content. So what you can be posting on to LinkedIn. There’s your LinkedIn profile, which you can make very attractive to those ideal investors, which is a big topic of conversation. And then there’s the actual messaging, the direct type of messages you can send to people where you can reach your potential investors directly. So that messaging tailoring it the right way to build trust, is of utmost importance. We can make the world of a difference between you getting somebody interested in responding and wanting to take that conversation beyond LinkedIn, versus somebody just not even giving you the time of day. So that mess accelerating trust is a big thing. And then the next part of the methodology, once you’ve got a system for doing that, you want to be able to delegate it, okay? Because it’s my contention that real estate entrepreneurs shouldn’t be doing the day to day management once they’ve got a system that’s reliable for generating investor leads on LinkedIn. So we want to look at how do we reverse engineer a system that you can then delegate to an assistant, intern, family member, you know, whatever the case may be, and get and make it very much so that they can follow along and just still for them make it a matter of what buttons to push.

And then the final piece is actually enrolling investors, okay. The transitions to getting a conversation offline, okay. And then what happens when they’re interested? How do you nurture that lead further, that when you have a project or a deal, you’re staying in front of them and top of mind. So there’s a lot of nuances, there’s a lot of different parts here, but it is no the best approach Darrin, and and you you mentioned you mentioned a really good point is yes, you want to nurture but you also want that direct type of lead generation as well for accelerating trust. So there’s there’s both facets to it.

J Darrin Gross 12:17

Well, and you know, everything you you mentioned there I’m familiar with the terms I think that there’s a kind of a thought process with online marketing that there’s a lot of sites have like a shopping cart, you know, and it’s a matter of somebody see something or Amazon’s think of amazon prime example you know, you you see the object you click it you buy now, and in a couple days it shows up on your doorstep unless you’ve got your your prime membership, some like that. And but I think the reality is, especially in higher ticket items, is that then the nurturing part of it I think sometimes people forget Get that just like if you were calling on somebody, you know, in, in person, you know, the first time you meet them, you might just kind of introduce yourself, get to know them and maybe send them a “It was nice to Nice to meet you” kind of know, then maybe follow up with something. You know, but just that that process kind of thing, understanding that the full cycle, you know of a, for something from sombody, from an unknown, maybe a suspect to a client kind of thing. And so, you mentioned three things are the the content, the profile and the messaging. And my guess I’m kind of curious, is there any one of those you find to be more important, or one that could more easily jeopardize a go forward.

Yakov Smart 13:56

So here’s the order of importance. And this is true in most cases when it comes to attracting investors. That profile. I mean, the LinkedIn profiles have gotten to be so important other than your website, for on for attracting investors online, it’s your most important marketing asset. It’s by far more important than any other social media profile. And it’s so much more than just a resume, right? I mean, there is a few big mistakes that I see real estate entrepreneurs making their LinkedIn profiles. There’s three big ones actually, besides not having one.

The first one is going the whole corporate resume approach, right. So it’s having something that sounds stuffy and professional, your LinkedIn profile, if you want to truly attract the high net worth investors and raise capital, it shouldn’t be an executive buyer. That’s not what we’re talking about here. Right. The next mistake that I see is what we call the wide eyed squirrel where someone looks like they’re doing five different businesses scattered all over the place. And again, that very quickly diminishes trust. And the third key mistake that I that I often see is what I call the 90s marketing brochure. It’s when somebody is trying really hard and it’s coming in, they’re talking all features and benefits, and it’s coming across as Super contrived and salesy, right so I don’t recommend any of those three approaches.

The approach that I recommend for your profile is what if you could get somebody when they look at your profile to instantly understand this is for them and start building intrigue and trust Okay, that’s what your profile needs to be accomplish the accomplishing no matter how long you’ve been in the business if somebody feels seen and understood, you can cut through the noise and that’s often the key to doing that. So the profile is a good foundational piece in getting people to decide whether or not they’re going to give you the time today whether or not you’re an authority I’m it’s funny, you mentioned Amazon and shopping cards because those things are all know for the most part product businesses are commodities. You know, you buy something 2030 bucks, okay, it’s a commodity A lot of us don’t think twice about it versus, you know, if you’re asking somebody To write you a check for 250 grand, that’s you know, there’s a little more thought and trust that goes into that, obviously. So you want to get past commoditization. And the best way to do that is to become an authority and your LinkedIn profile is certainly a great asset for doing that.

Now, other than your profile, your messaging, the direct messages dear able to send us someone on LinkedIn can be much more powerful and important than posting content. I mean, I tell people this all the time, you don’t necessarily even need to post content to generate significant leads on LinkedIn, its content as a way to supplement and nurture. But for the direct lead generation, you can distribute your concept through direct messages, right? You know, I never know the big mistake that I see with direct messaging people go for that sort of one shot killer, right where they, you know, try to come up with the perfect sales pitch and I call it the mama messenger. It’s like, they just like, you know, vomit vomit their entire life story and pitch and all the features and benefits there. And it’s just, it’s a complete turnoff, you know, to be on the receiving end of that. So It’s having multiple steps nurturing that lead. And the very first thing you have to do is that person needs to raise their hand and say yes, I’m interested in learning more. Yes, I’ve got questions. Yes. That sounds like it might be interesting.

J Darrin Gross 17:14

Yeah, I think we’re all you know, or at least speak for myself just the fatigue of, of, you know, your inbox with with messages that are the the full offer, when I’ve never met the person have no idea what they do. And it’s, you know, it’s not just a Hey, nice to meet you. It’s, it’s got the full meal deal with links and, you know, kind of thing and I’m, I’ve always been wondering, like, do they work I mean, cuz I just like kind of just, you know, a little overload there. So, what, let’s talk about the strategy, the direct messaging strategy that you you utilize it Is there a? Is there a formula to that? Is it kind of a an intro warm up? Do you have any kind of, you know, an approach that you recommend?

Yakov Smart 18:12

It what’s not a one size fits all? Okay? So a lot of this is gonna be just like your profile, just like content just like anything you do. That’s why we talk about magnetizing, you would talk to a college professor, for example, very differently than you would talk to a tech CEO. Probably different value systems, different ways of communicating, right? So there’s not like some magic, you three step formula that works every time guarantee that just gets people you know, to not be able to control themselves, right? That’s just not not really something that exists. However, as sort of a general rule of thumb. The very first piece is you’ve got to connect with that person, right? Because when you connect with that person, you have the ability to now message them directly. Okay, you have there now in your sort of LinkedIn database And when you are posting content, they’re going to be much more likely to see it, they’re gonna start to see you as much more relevant.

Next piece is rather than pitching anything or making an offer right out of the gate, I recommend having at least one piece of educational content that you share with them in your message. Okay, something and now without asking for anything either dislike, you can you can share something that maybe you found on a third party source like Forbes magazine or entrepreneur, for example, let’s say you’re doing apartment investing, right? And you found, you know, a Forbes article talking about the three surprising ways apartment investing is going to be one of the best alternative investments for the next 10 years, something like that. I just made that up. But it’s something that’s educational in favor of your type of investment. And you so you leave it at that and then the follow up can be rather than again, if you’re, if you’re ready to test the waters, ask them a question. Instead of laying the whole you know, me on them, like you talked about. So asking them and inside LinkedIn capital raising accelerator when I work with people we talk about, you know, magic question. So I’ll give you a couple of examples. They it’s all about how you start with a magic question. So have you ever could it be possible? Would you Would you ever consider what are your thoughts on right? These are type of open ended questions that you want to gauge somebody’s temperature, because if they’re, if they’re not aware, and if they’re not interested, you’ve got to get them to raise their hand first. Otherwise, it becomes you did the one big mistake that I see is you know, people talk to the wrong people, right? There’s no need to and the great thing about this too is you can automate a lot of the legwork about 90% of this can be automated without looking automated. But the big thing is, you know, if you if they’re not interested yet, if they’re not aware, then you have no business talking to them. about the specifics of a deal, or you know, even scheduling a call, it’s a big waste of your time in theirs. So the messaging, you know, this real strategic way to think about it is, what are all the different angles that they care about that’s relevant to make your messaging relevant to them? And can you get them to raise their hand and ask you a question or respond or say that they’re interested.

J Darrin Gross 21:35

So you mentioned kind of the different angles and kind of qualifying I’m kind of curious because, you know, a lot of times I think digital marketing, a lot of times it’s thought of as more of like a masses, kind of a thing as opposed to more of a select, you know, I guess I’m, I tend to think of it more of like the it’s in the numbers. kind of thing. Do you find that by being more selective? Like, first of all, I guess, do you identify your What do you call it? The there’s a there’s an acronym or there’s some sort of word for but if you don’t identify your specific type of you’re your best possible client by character trait. And then you identify that, you know, Yakov has these characteristics, he’d be a good prospect. And then do you, does that, do you find that the, I guess what I’m trying to ask is a percentage chance of getting into a conversation. I mean, I assume there’s still a numbers aspect to this from a standpoint of not everybody’s going to say, Oh, my God, does the I’ve been waiting for you to call. I mean, I’ve been looking for somebody on LinkedIn to talk to and finally you’ve you’ve, you know, you’ve answered the bell. Can you speak a little bit to the percentage success you find when when people are more more selective about this and do this more of like in a personal way as opposed to, you know, we’ve already talked about all the ways that can annoy people with you know, the full meal deal out of the chute with never not even introducing yourself.

Yakov Smart 23:16

So this is all about quality, right? This is about being specific and finding that quality investor you are there is strengthen numbers, especially as you’re building this up. But what’s great for a lot of people is if you find just one or two good high net worth relevant investors on LinkedIn, you build those relationships and they invest with you and they receive a return and they have a good experience. There’s a certain psychology where they’re likely to tell other people who are just like them so it tends to snowball into referrals. That’s why you know, it’s this isn’t digital marketing where you need 10s of thousands of leads, right? I think those days especially for attracting investors are in the past. This is about you know, for for a lot of people listening maybe To your pool of potential investors on LinkedIn is 500, or 2000, or 3000 or 5000 people, right? And so not huge numbers, quality, though, being really specific. And you can do that when you build a list on LinkedIn. What’s great though, is I’m big on automating the initial piece, right? So there’s different software’s available where you can automate the legwork of the initial outreach and you know, the way that I always described it’s like good plastic surgery, right? When you have good plastic surgery, people shouldn’t be able to tell like it’s and when you see bad plastic surgery, you can almost always tell right we have a lot of plastic surgery in Arizona so I’m sort of become well versed in that in that regard, but my point is, with plastic surgery, right, it’s like you there is a you know, there is a natural element to it right? Where you know, even though the message is short, concise, you’re you’re not manually reaching out to people. But it’s feels manual, it feels personalized, it feels specific based on the messaging. And then when they raise their hand or in fact interested in the right person, that’s when you can transition that conversation, that’s when you could ask additional questions and move that relationship off of LinkedIn. So it’s, you know, not being in that there’s, there’s two sides of the coin, right? I don’t want anyone being in that scarcity mindset of Oh, no, there’s only, you know, x finite amount of people who have money, it’s just not true. It’s never been true. It’s not true now. However, at the same time, you know, if you’ve got a very specific criteria, and there’s only a couple hundred people that you know, would match really well. It’s going deep with that group and really, you know, creating this big fish small pond phenomenon, which works really, really well on LinkedIn.

J Darrin Gross 25:56

I think when when you’re you know, Talking about that it kind of reminded me that, you know, the goal, keep in mind, what is the goal, the goal is first to get the connection so you can have that conversation. And then two, the goal is to get the conversation offline, is it not? I mean that you’re not meant to stay online and it just be a click, click Yes. for, you know, I’ve got, I’ve got millions, I’ll give you that. That’s not an option on the, you know, on the landing page. Right. Right. So it I think that’s, those are, I think two things that I think get lost. And again, I like your your sentiment about automating because I think there’s the initial stuff if you if you can automate it, but I’d be kind of curious on your experience when when starting out, I’m assuming that people are still manually doing the messaging, trying to find what works for the process. Do you do you advise that people kind of keep track of You know the process from from those that work versus those that didn’t work to try and then to be able to then, you know, I guess turn over that to some sort of an automated process? Or what are your thoughts on that?

Yakov Smart 27:14

I think to have something and have metrics and everything, it needs to be metric based. You need to it’s all about the numbers, right? where we want to be as scientific as humanly possible. And you’re absolutely right with reverse engineering that out, right. So I don’t, is for someone who’s an entrepreneur, I don’t recommend that they manually sit there and manually send messages at first. It’s just not the highest and best use of your time I recommend, once you have the messaging down, automating out of the gate, the software actually tells you the metrics, it keeps track of that for you all in one place. It saves you a ton of time, and then you have some numbers, right because if you only have if you’re without getting too, you know, scientific and analytical here, but if you only have 30 people that you’ve tested a message with, you know, I mean, you don’t really, you don’t know much no matter you know how many people have responded, you don’t know much. But what you’re going to, you’re going to notice are some common patterns you’re going to notice. I call them the eight buckets of different responses. And you’re going to notice what some of those are, as you start reaching hundreds of people, and then you’re going to be able to course correct or double down on what’s working. So I recommend automating right out of the gate. Now, there’s best practices for automation, right? If you don’t have any connections yet, not a good idea. But once you’re past, like, let’s say that 500 plus connections mark and you have a bit of a foundation to start testing different messages and different approaches, absolutely automated because what automation allows you to do is let’s say you’ve got a list of 1000 prospective investors, for example, on LinkedIn, you build that list. You can get really specific.

I think LinkedIn is the best list building tool in the world for getting accurate, real time. data, the old way to do it was you had to go pay a list broker a few thousand bucks. For a list of accredited investors. By the time you got the list, half the list was outdated. This is they’re really online, you can reach them on their mobile devices. Now. So let’s say you have a list of 1000 potential investors, you plug them into the software, you’ve got your messaging, you press that button. Every day, there’s 100 connection requests going out from you, there’s gonna be a percentage of those people that accept and the follow up the and I call it a messenger funnel, it’s all automated. And as soon as they respond, that’s when the automation stops. So it never looks canned. It never looks robotic when you’ve got the right messaging, and then that’s when it’s worth manually following up and transitioning that relationship and moving it outside of LinkedIn. So they’re actually getting to know you and getting into the process of investing in your projects.

J Darrin Gross 29:55

But you’re at least you’re initiating the conversation, and you’re kind of trying to get them to kind of the fish to bite without being the, you know, manually doing all that that makes a lot of sense. So, for real estate investors are there any, you know, I guess, must do best kept secrets, ways that you’re seeing the people have have really had success. I mean is is basically like what we’re talking about is make sure you’ve got your, your criteria, you’ve got your profile setup and then start the messaging.

Yakov Smart 30:42

Well, it’s all about messaging, right? I mean, the best kept secret is that this is a lot of people don’t even know what they don’t know that this is possible. And that you can attract investors from anywhere in the world using this strategy. But the biggest thing is you need to build trust using your messaging. I cannot emphasize Is that enough? I mean, it’s if you don’t have that trust your, your shoot, you’re shooting yourself in the foot really. So it’s having concise messaging, having messaging that gets people to raise their hand first and not talking to people like you would offline, right? Because it’s online is really, really different. And it’s to have a methodology to write it’s to be intentional about it. The the other big thing, and I’m gonna get on a soapbox for a second is there’s a lot of quote unquote, digital marketers and gurus out there who talk about posting, right, you’ve got to post five times a day, like that’s BS man. I mean, it’s, it’s nothing to do with posting frequency just because you put more time into something doesn’t mean it’s going to pay off more that’s like the whole work hard but not work smart deal. It’s just not really what generates the results that you want. So instead of doing that, have a methodology where you can actually generate real leads. And if you’re going to post something, use it to supplement that and make yourself more relevant that That’s, that’s another big thing.

J Darrin Gross 32:03

No, I love that because I think there is this notion that if you’re not posting, you know, five times a day and you know, staying up all night or I mean, I don’t know how people do it other than that that’s basically become their job is posting online especially if they’re doing it themselves. And I don’t know I, I tend to think there’s so much I mean, there’s so many people that are trying to compete for your attention. After a while it almost like it feels like there’s a lot of noise whereas if you have a specific it’s almost like getting a handwritten letter anymore. In a really stands out just like what you’re saying is if there is a message that’s specific to you, and you open it up, and it’s not some lengthy, blah, kind of a message. I mean, I know I’ve had success in reaching out to people on LinkedIn and basically doing like you’re saying just kind of a small not an ask for a, you know, buy or something like that. But hey, I saw you on this. Just wanted to say I really appreciate it. You know, like if I heard somebody on a podcast or if I read something where they were mentioned or you know, congratulate them on something I saw I’ve been pleasantly surprised by the positive, you know, response as opposed to some of the, the overwhelming dread I get when I see my inbox and it’s just full of these, you know, complete offers just sign here. kind of thing. So, that’s good. And just looking down here, as far as the ideal, you know, who would you say is an ideal candidate for implementing LinkedIn is a strategy to, you know, is there anybody that this doesn’t work for?

Yakov Smart 34:09

Um, who this doesn’t work for. So today’s conversation is specifically around a strategy for attracting investors and raising capital. So, but overall, I mean, there’s I work with people in some different niches and industries. This doesn’t work for someone, for example, who wants to sell trinkets online or do e commerce. I mean, it’s not, not what we’re talking about here. Right? So it’s about high quality lead generation. With a methodology we’re talking about today specifically, is for real estate entrepreneurs or people who you know are building up syndications or maybe wanting to reinvent themselves or maybe they’ve been in the business for a while and, you know, they want to raise more capital or now that they’re not networking with people in person, they want a way to create those key contacts. So that’s who this is really designed. For and it’s designed, the way that I look at it always is big picture is that it’s designed for a system that you can rely on. Because the biggest thing I think, you know, if you sliced it down to one thing, this is a way for you if you’re listening right now to put yourself back in control of you to lead generation to not have to sporadically scramble to raise capital or only rely on people in your sphere of influence. This completely gets rid of those limits for you and puts you back in control. And that’s who this is really for.

J Darrin Gross 35:34

Another question that occurred to me. You you’ve not mentioned once paid advertising on LinkedIn. You’ve spoken pretty much about the profile, which last I checked free account will give you a profile. And I believe you can message people you’re connected to unless you have a paid account. Is that still the case? I don’t know.

Yakov Smart 35:59

You can do it with a free account. So LinkedIn advertising for most people right now doesn’t make sense. I mean, it’s it’s an expensive place to advertise and all of these strategies that we’re talking about the direct messaging profile, you can do that organically without spending any money on digital advertising. The different things that I recommend, you know, spending money on what I personally spend money on when it comes to LinkedIn marketing is on the premium account, Sales Navigator because that’s its own type of CRM, and it’s, it gives you much better and more specific searches. So it’s well worth it. And then you know, the different automation software and then obviously, you know, whatever people’s back end and CRM so we’ll do things a little differently there. So there’s no need for paid LinkedIn advertising is just not not a good investment right now. And, and even if it was paid advertising is a whole different conversation because that requires a whole different marketing and advertising skill set that the good news is isn’t really necessary on LinkedIn. attract investors.

J Darrin Gross 37:02

Gotcha. One of the things I know that on all the platforms is there’s constantly changes occurring. Are there any recent changes are coming changes to LinkedIn that people should be aware of?

Yakov Smart 37:22

Well, the big change, is that just the caliber of audience, right? I mean, it’s, it’s been evolving. I think that the thing that really triggered a lot of these changes it was a few years ago, Microsoft purchased LinkedIn, they bought it for 26.2 billion. And since buying LinkedIn, they’ve completely revamped the platform. It’s much easier to use than it’s ever been. You don’t have to be a tech whiz. And you know, just to give you some stats at LinkedIn has about 675 million users right now that number has grown significantly in the past few years. Fastest Growing age group on LinkedIn 25 35 year olds, so you have people who are actually younger and successful. And they’re there for very different reasons than other social media. And a lot of people are getting tired of Facebook because of politics and different things. And the only social media that they’re spending any significant amount of time on has become LinkedIn.

Same thing with C level executives, high level business professionals, LinkedIn has become their social media of choice. I mean, so much so that the average household income on LinkedIn is 115,000. And that’s an average household income. So you know, you think about all those things. And you also think about their vision they want because the reason LinkedIn makes money is when people invest in premium accounts and paid ads and businesses and all those different things. Um, but the big thing is they want people to spend more time there. So they’ve made it more user friendly. They have a bigger sense of community than ever before. And so people are spending more time their vision as a company, they want to get to 2.2 2 billion users by the end of 2022. So they’re actively expanding, they’re growing in other countries as well. So that audience, right, no matter who your ideal investor is, you can either reach them directly on LinkedIn or you can reach somebody who’s a trusted adviser to that ideal audience. So you there is that direct opportunity for you on LinkedIn? The other big change? And this also is a good way to answer your question is video and content. Personality driven content has really come onto the scene. Okay, because it used to be stuffy and professional and boring. People are tired of that, especially now they want to feel connected. They want some personality. So personality driven content is a great thing to include video is getting more exposure. LinkedIn live is coming onto the scene. LinkedIn stories are coming out of the scene. So it’s just becoming more of a personality driven platform and it’s becoming a place where people are paying more attention. They’re everywhere. Looking for something refreshing, especially right now everyone’s you know, people who wouldn’t have otherwise been open to, let’s say alternative investment opportunities or new ideas. There’s a different openness right now, when a message is delivered the right way.

J Darrin Gross 40:17

That’s good. I know. It’s changed a lot in the time I’ve used and I remember when I first got on, I didn’t know what it was or how to use it. Talked to some friends, they didn’t quite understand it either. But I know it’s been a great opportunity to connect with professionals and make some business connections and stuff and, and this is all these are all good, good ideas and good points.

If we could, I’d like to shift gears for a second. As I mentioned you before we started by day, I’m an insurance broker. And I work with my clients to assess risk. and determine what to do with risk. And we typically consider one of three different strategies. The first is we look to see, can we avoid the risk if we can’t avoid the risk and we consider as our way to minimize the risk? And if neither are an option, and we look to see if there’s a way to transfer the risk, and that’s what an insurance policy is. And so, what I like to do is I like to ask my guests if they can identify what they consider to be the BIGGEST RISK. And for clarity sake, I’m not necessarily looking for an insurance related answer. But if you’re willing, I’d like to ask you Yakov Smart, What is the BIGGEST RISK?

Yakov Smart 41:51

Right and it’s a it’s a great question. It’s not something that I you know, honestly think about on a daily basis. I guess I’m you’re a little more. You know, you see, you see A lot more different scenarios as being an insurance than I probably do when it comes to risk. But I’m gonna I’m gonna give a bit of what might be a bit of a surprising answer here. I think the BIGGEST RISK is a combination of plagiarism and misinformation because in the space, let’s call it mentorship or online programs or coaching, consulting. There’s a lot of knockoffs. There’s a lot of people who are trying who here’s something, it’s good, they claim it as their own, or they put a slightly different flavor on it and they go and they completely knock off content ideas, intellectual property. And they you know, sometimes do it without repercussions sometimes do it for a while. So, you know, it has a lot of people in the space that I met and also, you know, a lot of coaches in the real estate space as well specifically, a lot of us understand that the bigger we get, especially if we And scalability reach or impact that’s just a risk that naturally comes up. So you know to mitigate that risk and what puts me at ease around it is somebody could duplicate content okay? I mean and plagiarize and and do whatever but you know what I know at the end of the day is the unique way that I have delivering it and also with working with people, that’s just not duplicatable because that’s personally my unique perspective, my insight, my approach my methodology. So and the other side of that is misinformation. Someone you know, can play the blame game and say, well, you they can do something stupid, for example, on LinkedIn and post their deal and, you know, not be compliant with the SEC not something that I would tell them to do first of all, but then they could say, well that that guy said I can mark it on LinkedIn. So I can’t I post my deal and say invest now on it just to the public. Like it’s, you know, obviously something that I wouldn’t recommend anybody does. But sometimes there’s misinformation or people misconstrue things and human error. So it’s always a risk to I mean, humans are humans.

J Darrin Gross 44:11

Yeah, that’s, that’s something you don’t want to get sideways with the SEC or, or any of the authorities on that. But I think that that’s a risk that I don’t know that everybody fully understands, I think, you know, in the age of Twitter, and all these other things where people are, like, so compelled to, you know, get a reaction or or, you know, get their voice out there, you do run the risk of, you know, having regret for something you put out there or maybe, you know, not having all the facts. That’s, that’s good.

Yakov Smart 44:44

Yeah. And the key thing I want to add to that real quick, right, because, and I want people to understand this, because it’s really important. Nothing that we talked about today was a you’ve got to deal just put it out to the public. Ah, that’s not we’re talking about we’re talking about building a relationship. And then what’s the relationship is built with that investor talking about specific deals and numbers. That’s that’s really, really important.

J Darrin Gross 45:07

Right. And and even I think the thing that I take away from this morning, I think the goal is to get offline.

Yakov Smart 45:13

Absolutely.

J Darrin Gross 45:14

You know, I mean, it’s that’s as much as we become, you know, kind of used to the online relationship. The goal really to have a relationship is to get an offline so that’s, that’s a good reminder. Yakov, where can listeners go if they’d like to learn more or connect with you?

Yakov Smart 45:37

So there’s a couple things the easiest way is if they go to linkedleads.us/ forward slash I’m sure we can include this in the notes as well the link to leads that us not LinkedIn leads linkedleads.us/raising capitalwebinar. If you like this stuff, if it appeals to you, if you listen to this, and you want to know more about free training, you can go and uh, we usually run a couple of these a week, you can sign up for the free training. And it’s a webinar where I’ll cover this methodology in greater detail on how to raise more capital and make you real estate contacts using LinkedIn. And then of course, anyone who would like you can send me a connection request on LinkedIn. Yakov Smart, let me know you heard about me on the show. We’ll be glad to get connected with each and every one of you on LinkedIn as well.

J Darrin Gross 46:28

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

Yakov Smart 46:40

You’re welcome. It was a pleasure.

J Darrin Gross 46:42

Intro 47:02

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Commercial Real Estate Investing With a Self Directed IRA with Jason DeBono – CREPN #265

Jason DeBono 0:00

You can take $150,000 IRA and go buy $150,000 rental property and for the average kind of, I won’t say lay investor but but novice investor that’s a pretty, pretty easy entry point. Obviously, you know, rental real estate is is a big piece of the market because of its its ability to generate cash and appreciation. We see a lot of that moving up into syndicated deals. So we see a lot of multifamily, some syndicated some not, small apartment complexes, duplexes, triplexes quads and then we see full blown multifamily and then we and a lot of that is syndicated. So we see a lot of investors that own bits and pieces of apartment complexes all under syndication.

Announcer 0:06

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 you Experts!

J Darrin Gross 0:56

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 Jason De Bono. Jason is the NuView Trust Company, Vice President and in a little bit he’s going to share with us the benefits of using a self directed IRA. And but first I want to remind you if you like our show, Commercial Real Estate Pro Networks, CREPN Radio, there are a couple things you can do. You can like you can share and you can subscribe. As always, we encourage you to leave a comment, we love to hear from our listeners. Also if you’d like to see it handsome our guests are, be sure to check out our YouTube channel. And you’ll find us at Commercial Real Estate Pro Network on the YouTube. And also please consider subscribing there as well. With that, I want to welcome my guest, Jason, welcome to CREPN Radio.

Jason DeBono 2:10

Darrin, Good day. Good to be here. Thanks for having me.

J Darrin Gross 2:12

Well, thank you for joining us. I’m looking forward to talking with you about self directed IRAs. But before we jump into that, if you could take just a second and share a little bit about your background.

Jason DeBono 2:35

Sure. So I started I started in this industry 15 years ago, I was a a senior in college and looking for something to sink my teeth in and I stumbled across a company that helped people use retirement money to buy real estate. And it was complete, probably opposite of what I thought I would be doing when I got out of school. It wasn’t as sexy or glamorous sounding as some of the other kind of finance and sales jobs, but it was really my dad’s reaction when I talked to him about the interview that caused me to take the job. And he, you know, I remember him saying, wow, you know, I didn’t know you could do that. I asked my broker about buying real estate about five years ago, and he told me it was illegal. And so dad said, No, obviously it got me even more intrigued. And here we are 15 years later, but it’s been a fun ride and certainly an interesting one, as I’ve watched the really the industry of people using their IRAs for non traditional investments grow from a you can’t do it, it’s illegal. What is that to? Wow, that’s a powerful tool. How do I access it?

J Darrin Gross 3:39

Well, that’s actually probably a pretty good transition here into you know, kind of the the topic here. I mean, your dad’s reaction, because I think that you know, a lot of people if you have a W2 job, you’re conditioned to recognize a 401k or possibly if you’re self employed to an IRA, but, you know, I think there is a lot of unknown and there’s a lot of misinformation or just, you know, you haven’t really pursued, or people haven’t really pursued the question to understand what the options are available to them. And so I was wondering if we could start with just, you know, what is a self directed IRA? And if you can compare that to, like a 401k, and just kind of who, who’s eligible for this kind of thing?

Jason DeBono 4:36

Yeah, great, great question. And I’ll break it into two. The first part and kind of, you know, as far as what is the plan itself, an IRA is an IRA. So there’s a few different types based on how you earn money, and how you want to pay the taxes. So you have your traditional Roth, right one is pre tax, meaning you pay tax at the end, what the Roth is tax free growth. So you paid the tax at the beginning, you have a simple IRA, which is a a an IRA for small businesses. And then you have a SEP IRA, which is a an IRA for people that are self employed. A 401k works nearly identical from a tax standpoint, to those accounts, there’s a Roth component, just like there isn’t an IRA. But a 401k is really designed to be an employer plan, right? It’s not an individual account, it’s set up by an employer. So if you work for a company that offers it, and many do, and in today’s day and age, then you’re participating in their plan.

Jason DeBono 5:33

While you’re under their plan, you got to live by their rules. So most 401k plans, you know, from a planning standpoint, or great from an investment standpoint, are very limited. So if you work at AT&T and you’re covered under their 401k plan, they may only offer you eight or 10 or 12 mutual fund investment options, and it’s because they want it’s their plan and they want to reduce the risk for the plan itself so they don’t want to give you a large amount of choices. Most people when they leave Employers they move their 401k to an IRA. So you don’t have to most people with IRA money don’t necessarily contribute through an IRA they contributed through their 401k and rolled it over when they left their employment. The plan works the same way from a tax perspective. So whether it stays in a 401k or sits in an IRA is really irrelevant. The reason people do it is an IRA gives you the full breadth and scope of investment choices. So if you have an IRA account, you really have two places that you can get it custody. One is that your traditional break bank and brokerage so you can go to a Schwab or Fidelity, Bank of America, they will hold custody the account, and they’ll give you unlimited choices, so long as they’re publicly available securities. So you can buy any publicly traded stock bond or mutual fund.

Where a company like new view comes in. And the other option for individuals is we don’t make your IRA any different. So we don’t change the tax code. We don’t do any of that we still provide the same level of custody, that a Charles Schwab would. But what we do and what is self directed does that’s unique is it gives you two things, it gives you more choices and more control. So the more choices part means that as a custodian new view doesn’t have investment limitations like Schwab does. So we don’t care if you buy a publicly traded security or you buy a rental house or you buy a, a, you know, a commercial building where you invest into an industrial complex. And we’ll talk a little bit more about how those deals are structured here in a bit. The second thing it gives you is more control. So self directed account gives you the ability to pick your own investments. In fact, NuView will not help you with the investment selection process. That’s the self and self directed. So, you know, kind of two key things to take away is his plans or plans, right? They all work a little bit different based on how you earn your money. But investments are really the key difference of a self directed account, because you get to make your own investment choices and you get an investment menu that’s not limited to public securities.

J Darrin Gross 7:56

Gotcha. That’s a great, great breakdown of the differences there. On on the the IRA thing, when I asked you if you are employed by a, you know, normal or traditional employer and you’ve got a 401 K, are you eligible to then create a separate IRA account?

Jason DeBono 8:22

You so the the short answer to that is yes. I think like everything in the tax code, there’s always a little caveat based on how much income you earn, you know, that may cause some exclusions or may limit tax deductibility. So, you know, take this answer is as a generality, and certainly, you know, talk to a, you know, your own tax professional as it relates to, you know, any limitations you may personally run into, but, but yes, I mean, an IRA is separate from a 401k. So, if I have a 401k and I make my contributions, I as an individual can choose to contribute to an IRA as long as I have eligible earned income to do so which obviously my W2 job provides me Um, what what you cannot do while you’re gainfully employed is move the 401k money into the IRA. So they’re separate accounts. And while you’re and this is a general rule, but while you’re employed with the company in which you have a 401k plan, it’s their plan their rules, and so you have to keep the money under the auspice of the plan. But yeah, we see a lot of clients that have 401k plans, and then in addition make IRA contributions as well.

J Darrin Gross 9:26

And along those lines, is it is there a limitation on the number you can have? So if somebody has a W2, but they’ve got a couple of side hustles or whatever, is there a I mean, are they limited to any one number? Could they create one for each or or does it matter?

Jason DeBono 9:48

Well, it does matter as it relates to total contribution amount. So when it comes to IRAs, the depends on the structure, what type of IRA is I mentioned that the traditional IRA Law really have nothing to do with any with how you earn your money. As long as you earn it, they don’t care, you don’t have to be self employed to qualify. Something like a SEP IRA, you know, if you were using your side hustle, self employment income to qualify you for the SEP, you could do that you could make contributions to it, you probably wouldn’t set up a set for each of your businesses, I can’t see a scenario in which you would, but it’s possible. I mean, there’s some, maybe some underlying reason why someone would do it. But no matter what you’re going to be capped on the overall contribution limit, regardless of the number of planes you contribute to. So that’s really the thing you got to be more aware of and more concerned with is the contribution cap, there is no necessary limit. In theory, if you have a $7,000 contribution limit, if you’re over the age of 50. Let’s just say to a Roth IRA, you could go set up 10 Roth accounts, and you could put a $700 contribution into each one. Right. So as long as your overall

J Darrin Gross 10:58

Your overall contributions capped there.

Jason DeBono 11:00

You got it. And there’s not a lot of benefit to have a bunch, but maybe to create some increased eligibility in a self employed retirement account like a SEP it’s possible there may be some scenarios where that’s applicable.

J Darrin Gross 11:12

Gotcha. So, a self directed IRA, you mentioned that gives you basically the control and choice. Is is the primary way that you see people funding this. Is it a rollover from a 401k? Or do you find that it’s more of self employed? People are, are creating these?

Jason DeBono 11:37

Well, it’s it’s all of the above. There’s no doubt the the biggest contributor is 401 K’s, right? I mean, people with 401k plans have payroll deduction. You know, they may work a long period of time it’s getting taken out of their paycheck. They don’t really realize it, and over time it accumulates. So yeah, the vast majority of IRA money does rollover from 401 K’s. We do have a lot of self employed individuals because a SEP IRA has a contribution limit and don’t quote me on the exact number, but I think it’s 56,000 is the cap, you know, you start getting into much more significant amounts of money. So, yeah, we have a good portion of people that are self employed that do, in fact, set up a SEP IRA with us. And there is a plan called a Solo 401k. For those out there that are self employed, that that I would strongly encourage you to talk to our team about, because it’s, it’s a SEP IRA on steroids. It’s basically a 401k without having a third party employer. So you’re You are the employer and you get to you get to wear the hat of the employee and the employer in the plan and really double dip on contributions. So it’s a it’s a fantastic plan. At any rate, back to your kind of question. When you have a a, a set that has a higher contribution limit. Yeah, we do see a lot more clients utilizing that. It’s pretty hard to get a lot of value out of self directing an account if you’re putting $6,000 you know, a year into a traditional IRA. So most of our clients Even though they are contributing, they’re starting their account with us with money that existed somewhere else.

J Darrin Gross 13:05

Gotcha, gotcha. So you mentioned I guess the difference is if you are self employed, or for a self directed IRA, I think it’s somewhere in the mid 50s. As opposed to you know, as a, I guess, a traditional employee. For an employer that has a sponsored plan you’d be limited to the to the amount you can contribute. That seems pretty dramatic. It seems like anybody that’s that self employed would be all in on this kind of thing. If you’re obviously I guess if your business is successful, and you’re making enough money to do you know, investing in stuff, but it seems like that would be a just almost like a no brainer. Do you find that people know about this or they have they never heard of this. What’s your experience talking to people?

Jason DeBono 14:03

You know, the hardest? First of all, you’re absolutely right. I mean, at face value, it is a no brainer, right? If you’re self employed, why wouldn’t you want to take advantage of your ability to contribute much higher amounts. It doesn’t mean you have to it just means you can and so in, in good years put more in and in, you know, in years that aren’t as good or more lean than put less than that. It’s really two issues, Darrin that we see out in the marketplace. The first issue is plan, type and saving as a whole, right? Because if you think about it, who cares what you invest into, right, that’s really secondary, you can invest if you don’t save the money to invest. So what we see with a lot of self employed individuals, and obviously, you know, a lot of real estate professionals fall into this camp and, unfortunately, self employed individuals while they have lots of great tools available to them, they’re not very good Savers, just generally. And and some of that is is excusable meaning, you know, they’re they’re in a business by They’re trying to grow a business. They’re reinvesting in the business. And, you know, they’re not, they’re not saying that they don’t want to save. They’re just their view is if I don’t contribute to a retirement account, and I put the money back in the company, I’m building wealth, you know, in the same manner. So, from that perspective, it makes sense, and I understand it.

Jason DeBono 15:17

Unfortunately, a lot of people, they have very successful years and they don’t change their saving patterns, because they don’t have an employer taking it out of their paycheck, right? They have to be proactive. And that’s a tough thing for a lot of people to do when it comes to saving and especially saving for retirement because it’s, you know, it’s it’s one thing to move money out of your checking account into your savings account where it’s, it’s there, if you want to go take a trip or buy something or whatever it may be that you spend your money on. You pump it into a retirement account and you’re making a commitment not to touch it for some time and that’s that’s a hard decision for a lot of people to make. It’s the right decision and one they should make but for a lot of self employed individuals, they’re just not making it.

J Darrin Gross 15:55

Yeah, it’s unfortunate that that is the case. I know just the kind of mental tality of delayed gratification or, you know, some future date as opposed to, you know, and like you mentioned, if you’re in business and you’re trying to make the business successful, I mean, there’s, there’s probably some immediate needs that a lot of businesses face, but still, just to have the discipline to, you know, create, create something. So you’ve got something regardless if the, or what happens to the economy or your business or whatever that’s, that’s seems like, you know, a missing piece for a lot of people and that’s, that’s unfortunate. So, we talked about or you’ve kind of mentioned and distinguished between the IRA and the 401k. We’ve kind of talked a little bit about what you you can put in there. Let’s talk about the investment options, because like you mentioned, you you save the money now you’ve got the money to invest. What what are the investment options?

Jason DeBono 17:02

Yeah, so the the investment options really are anything except, and when I say except it’s because the IRS has guidance around around the the permissible investments in an IRA are actually built the other way. There’s no listing of permissible investments, there’s no word in code that says you can buy a stock or bond or mutual fund in an IRA. The code is designed to tell you what you can’t do, because that’s a much shorter list right? Then then what you can do so so if you really think about it, the the IRA regulation is really telling us, you know, stay away from this, this and this, and whatever else is available is available to your IRA. There’s really only two major asset or two two rules that we have to follow. And I think the key thing to understand and we haven’t talked too much about this, and it may well be worth taking five minutes to talk a little bit about the tax benefits to a retirement account. Because what what people tend to overlook is saving money is one thing, saving it in the right vehicle is a much bigger decision. And I’ll talk about that here in a second and illustrate how valuable it is from an IRA standpoint and tax advantaged growth.

Jason DeBono 18:09

But putting that aside for a minute, the rules are really around protecting the tax integrity inside the IRA. So they’re not concerned so much about the investment integrity, as long as you’re, you’re using that as an investment vehicle that’s passive. What they don’t want is people to funnel money into an IRA for all the tax breaks and then use it for investments that benefit themselves or, you know, funnel money in or out and really created as a tool for tax evasion.

So the only two rules that really play into an account as to whether or not you can make an investment is number one, no life insurance or collectible. So you’ve got to steer clear of, you know, anything, any life insurance, you know, you cannot own in an IRA, and then collectibles and they define that as works of art rugs, metal and gems, stamps, coins, alcoholic beverages. There is an exception to the metal standpoint. You can buy gold, silver, platinum and palladium as long as it’s bought for its intrinsic value or weight value. So if you bought a, you know, two ounce gold coin, and you paid what, you know, spot price on gold, and it was a pure gold coin, right? That would be permissible. If you wanted to buy a gold coin that that was, you know, found in the Titanic, that would be impermissible because it’s really, it’s numismatic value that you’re buying, you’re not buying its intrinsic value. So one little caveat there.

Rule number two really is and that’s it. That’s the list of prohibited investments. I mean, it’s it’s it’s negligible, right? I mean, there’s really no issues there. Their bigger issue is, is what are the relationships and the parties of the transaction. So for those in commercial real estate, I mean, you probably are familiar with the term self dealing, you know, or, you know, this would be the equivalent of if somebody was was losing their property to a short sale and you know, the bank’s not going to allow them to short sale it, you know, to their wife, right? Because they understand, hey, that’s not arm’s length, right. And obviously, we want the integrity of the transaction to be intact. Same set of rules in an IRA. They defined the people that an IRA cannot do business with in any way, shape, or form, as you and your spouse, your parents and grandparents, your children and grandchildren, and the spouses and businesses of those parties. So my IRA, because it’s a tax advantaged vehicle cannot loan my wife money, right? Because obviously, I’d loaned it to her at a discount, which would get money out of my IRA tax free, or I’d loaned it to her at a premium right, which would allow us to make big payments back to the IRA, which would be tax free growth, and allow us to sock money away maybe even higher than the contribution limits. So for that reason, the IRS has no life insurance, no collectibles, and no doing business with family members, you know, that we believe are too close to the flame to really be done in an arm’s length, outside of that, whatever you want to do, by sell etc is all permissible.

J Darrin Gross 21:01

Gotcha. So like, with that family thing, if I understand right, the the UP DOWN is the the issue. But if I had like a nephew or something further out is that is that permissible or is that? Are we still too close?

Jason DeBono 21:19

No, it’s absolutely permissible. There is a little caveat all hit on But yeah, I mean brothers, sisters, aunts, uncles, cousins, nieces, nephews. They’re not defined in IRS code. They don’t the IRS doesn’t have any issues. But they do require they have a little kind of statement or declaration that they’d be arm’s length. So if you’re going to loan money to your nephew, for example, just because it’s kind of easiest example. If you loaned it to them at 30%, the IRS would have an issue with that, right? They’re going to say, hey, look, that’s not a market rate loan. The relationship of the parties obviously dictated that or if you loaned it to them at 2%, right, the other end, the IRS could take issue, so What I want to make sure everyone takes away from this is, is the people that are not disqualified are truly fair game. But you always want to act within market rates. Otherwise the IRS could come in and say, Hey, this is an issue because you did business with your nephew. This is an issue because this is an arm’s length transaction. Right? The relationship of the parties is dictating the terms. And one of the things that I usually ask customers when I do talk to them about, you know, a specific deal, and I’ll get questions like, you know, I’m going to do this deal, and this is why it’s so awesome. It’ll give me all the details. And you can tell they’re trying to kind of convince me which you know, is not I’m not the one that should be convinced in this case, right. But I’ll ask him the question, if you were buying this investment, you know, or, or if this investment is available, but you weren’t going to buy it and instead I was going to buy it. Would they offer me the same terms that you’re getting? And if the answer is yes, right unequivocably, then then sure that’s probably an arm’s length transaction. If the answer starts with Well, you know, then I usually let them know, then yeah, then the deal is being dictated by the relationship of the parties. And while it’s not disqualified directly, it could clearly be a violation of the arm’s length provision. And that’s something that you want to make sure. So as long as you’re buying at arm’s length selling at arm’s length and and, you know, not buying life insurance, not buying collectibles, the world is your oyster in terms of what you invest into, literally.

J Darrin Gross 23:27

Gotcha. So, tell me the are the kind of the real estate side of things. We talked about the relationship. But let’s talk a little bit about the investing in and the types of real estate. I mean, we’ve kind of talked about loans a little bit here, but what about investing in a specific property? And can we talk a little bit about that as far as what our options are or how that governed?

Jason DeBono 24:02

Of course, real estate, you know, obviously comes in many different shapes and sizes. I thought when I started this in this business 15 years ago, I thought I knew what real estate was. And it didn’t take but a couple of hours here for me to realize I didn’t know a whole lot about how many, you know, ways groups are making money in real estate and how many different ways you can plug into the market. But really any type of real estate I mean, obviously, going down to its most simplistic state, right, we’re all in you know, raw land is some we have clients that own everything you could ever imagine. So, you know, things like raw land. We have clients that own citrus farms and dairy farms, you know, the land underneath citrus and dairy. They can lease that out. We have clients who don’t hunting leases and lease it out. We have clients that own land, and they have billboards on it, right. We have clients that own raw land that’s in the tractor, you know, the they’re hopeful in future progress, and they do nothing with it. They just simply pay the tax bill you know, try to get an ag exemption and hold it for the long term till like you need to be rezoned or or developed into something bigger. Moving up into, you know, single family obviously that’s a big piece of our business because it’s a very easy thing for people to access with an IRA right? You can take $150,000 IRA and go buy $150,000 rental property and for the average kind of, I won’t say lay investor but but novice investor that’s a pretty entry pretty easy entry point. Obviously, you know, rental real estate is is a big piece of of the market because of its its ability to generate cash and appreciation. We see a lot of that moving up into syndicated deals. So we see a lot of multifamily, some syndicated some not small apartment complexes, duplexes, triplexes quads, and then we see full blown multifamily and we and a lot of that is syndicated so we see a lot of investors that own bits and pieces of apartment complexes all under a syndication. We see that in all forms of commercial real estate, lots of syndicated deals for assisted living facilities and grocery, you know, stores and industrial properties and, you know, triple net type properties. All of which can be be held wholly in an IRA or fractionally through some sort of syndication, office industrial, it really doesn’t matter. At the end of the day, you can either own a piece or all of that particular asset, as you know, from a real estate standpoint,

J Darrin Gross 26:29

Gotcha. Now, are there any issues with buying a property that has any debt against it?

Jason DeBono 26:38

There’s no limitations on your ability to do it other than the fact that the debt must be non recourse right now in the commercial world, obviously, that’s a very common term. But But for those that may not know what that is, non recourse means that that the debt is not tied to the individual. It’s simply tied to the asset. So if you think about how most people buy single family homes, right Especially the the owner occupied stuff, it’s all bought on recourse debt, the the bank is doesn’t really care much about the property other than its appraised value. They care about your ability to repay it. So if there’s an $1,800 mortgage, they want to know that you’re going to make enough money and have a high likelihood through the life of the mortgage of making enough money to support that 1$,800 payment. In a non recourse loan, they don’t care about you, they care about the underlying asset. So they want income producing real estate, that instead of looking to you to pay the $1,800, they can look to the asset, so they’re gonna look at that mortgage, you know, payment, and then they’re gonna look at what can that asset deliver. And if they believe that we’ll deliver more so using a single family example, obviously, easiest calculation, right? If you’ve got an $1,800 mortgage on that house, you’ve got to be able to prove that the comps will support it writing for $1,800 bucks. If the comps support it writing for 1500 bucks, they’re gonna have you put more money down until they get under the threshold. So it’s an asset based loan. It’s non recourse by nature to you as an individual. Even if it’s an IRA loan, it’s still non recourse to you as an individual. It’s only the underlying asset that that, that they’re looking at. So pretty straightforward. We see tons of non recourse stuff in the commercial side, we see a decent amount of it in the residential side but there’s very few banks that will do non recourse loans to single family we we can provide clients a list if they’re interested in most banks that do commercial lending are very familiar with non recourse loan, they’re going to require 20 to 30% down obviously, they want to make sure there’s some skin in the game for the the the operators and owners of that asset. But yeah, it’s it’s a great way to leverage.

Jason DeBono 28:44

One thing that’s worth, you know, maybe maybe stepping aside and chatting about here and I’ll just hit on is as a normal course of action, any cash investment in an IRA is not taxable. So, if you go out and buy a house and sell a house, you know, and you make a million dollars, there’s no tax if you go Buy, you know, an office building and sell the office building. If you paid cash for it, you pay no tax on the growth whether you made $1 or a billion dollars. In a leveraged scenario, the IRS is going to levy a little tax called Unrelated Debt Financed Income. And they’re going to levy a tax not on the entire profit like they would if you bought it personally. They’re simply going to levy a tax on the the borrowed portion. So if you’ve got a an investment you make with 70% debt, then you can expect to pay tax on 70% of your profit. Not a bad thing because it’s going back to the IRA income tax free, but they’re going to levy a little tax to ensure that the money you’re using to grow your IRA that really is outside the IRA money, they want to clip a little off the top and while I you’ll rarely hear me say it’s a fair tax, but it’s application is very fair.

J Darrin Gross 29:50

Gotcha. I was unrelated debt financed UDFI is a

Jason DeBono 29:56

UDFI

J Darrin Gross 29:58

Gotcha, gotcha. So, I mean, real estate, you’re like said you’re pretty wide open as far as the opportunities. It sounds like you mentioned land and that it? Is that a pretty common one that you find people going to or if you had to, like, I guess, look across the spectrum of the opportunities what’s what do you find to be the most common? One or is there a most common one?

Jason DeBono 30:29

Um, you know, it’s a tough question to answer because this custodian we aren’t really involved. We’re involved in the closing and we’re sending the money to the closing and the clients providing us the paperwork, but we’re not really looking through appraisals and you know, looking to see if it’s undeveloped land or develop, you know, or approved property. If I had to guess just kind of throw in lawn darts here. I would say probably, you know, without a doubt, asset real estate assets that have income, you know, income producing is A higher bit of our business than non income producing. But that said, there’s a lot of raw land type investments that our clients make. So our portion certainly going to be lower than then some of the income producing stuff but but a good portion nonetheless.

J Darrin Gross 31:16

It just occurred to me I talked with somebody else here recently and we were talking about flipping land, you know, and and seems as though there’s there are those that have figured out how to do that on kind of a volume basis where you can you can buy a piece of land and remarketed and and then either liquidated in total or put it on some sort of a payment plan or something like that. I was caught like, this would be a pretty good vehicle for getting involved in that if I’m understanding right one because if you if you’re able to purchase the land outright and have no loan against it, you can then create loan against it, which would then I would assume would would that income would go into your, your self directed IRA. But it would seem like a pretty clean way. Because you’re not talking about buying from family you’re not lending to family and you would be outside of the UDFI if I understand things properly.

Announcer 32:26

Yeah, that’s, that’s certainly a strategy we see deployed. We see we see it in a few different formats. You know, obviously there’s speculative land investing, right, you know, which is if we all look back and in our respective communities, there was definitely areas that we you know, that we we look back and go man that was cow patties 20 years ago, and boy, I wish I bought it when it was cow patties because what you know, the the amount of money that that you know, an acre is selling for now is you know, the 200 300 x you know what I could have bought it for not too long ago. So we do we see that we see a lot of people speculate in path of progress type investments. But we also see a lot of people that deploy that strategy on in a variety of formats we do. I’ve seen groups they do, it’s not land banking, if you will, but it’s kind of under that. They’ll go into areas where they can buy up a good portion of lots or they may go to a master community where it’s being developed and they may buy up 20% of the lots and negotiate a discount and and it alleviates the marketing concern for that developer to have to go sell them and then it also gives them the ability to do contract for deed and finance the lots for the individual. So you know if I go out to a you know in a town and doesn’t really matter where it is and I buy up 10 or 20 lots I can now advertise it I’ve got you know, raw land with with cheap financing available, and because financing raw lands a pain, but if I can take a lot I paid $8,000 for and sell them for $10,000 but I can offer very fast terms where you can pay me cat, you know, pay me back, you know, over a three or five year period to pay that loan off. Now it’s a very attractive option. So I made the $2,000 on the land deal, right, which the quicker I sold it, the higher my return. And then I got a $10,000 debt, you know, note, if you will, that I’m getting payments on and so I can finance it at six or 7% over a three year period and allow someone to go own land that maybe otherwise couldn’t have done it. So yeah, you’re you’re you absolutely are hitting on a strategy and something that we I won’t say we see all the time, but we certainly see that and it’s a great option.

J Darrin Gross 34:37

No. I guess just the your clean from all these other potential issues kind of thing is kind of what what triggered that thought for me. Sure. So on as far as the the tax strategies you’re still in a tax deferral mode, correct. I mean, this is there’s I mean, there’s no secret when you pull the money out of this investment or this vehicle, that’s when the tax is due. Is that is that right?

Jason DeBono 35:09

Mostly right. Most IRAs are taxed at the end, they’re they’re considered tax deferred programs, you get a tax benefit to put the money in and you pay tax when you take it out. But there is a Roth IRA and a Roth IRA and there’s a Roth component to a 401k as well. But the Roth basically says I don’t want to pay tax at the end, I’ll pay it as I put it in. So you’re, you’re likely paying at a higher tax rate because you’re paying during your peak earnings years, but you’re paying at a much lower amount. So I use the example of paying on the seed versus paying on the crop and when people ask me which one is better, I asked him how good a farmer are you? Right? I mean, if if you’re going to put money into a CD and just put it in a conservative investments and hope to get three to 5% for the next 15 years, I would tell you take the deferral right. But if you’re going to go out and Our clients have a much higher proportion of Roth accounts than most custodians because our clients are taking their investments more seriously. And they’re making double digit returns, not everybody and not to say that we have clients that lose money and that there’s no risk. But we see clients do very well at a lot of deals. And if you know the deal is a slam dunk. The beauty is that at any point, you can move money to a Roth. So if you’ve got a you know, using yourself as an example, and you know, let’s just assume you’ve worked in industry for 15 years, you got a couple hundred thousand dollars in an IRA that you’ve rolled over from your old 401k and you go out and you see a deal, maybe it’s a syndication on a on an industrial park, right. And so you’re going to put 50 grand into that deal. If you believe that man, this is the perfect timing this deal is going to be incredible. You know, I know the market I understand that the developers I know what they’re doing. And there’s just such a strong need for this. I’m going to see two or three x return on my money over five years. You could declare right before you make the investment by simply filling out a form for NuView, a $50,000 Roth conversion. So you’re going to move 50,000 from that couple hundred thousand dollar account into a Roth, you’re going to pay tax in that tax year, whatever your tax rate is on that 50 grand. But if that 50 grand grows to 200 grand, five years later, it’s 100% tax free. And the beauty is it’s not just tax free on that transaction, you can take that 200 grand and go put it into a deal and turn it into 300. And that’s tax free and turn into 400 and 500. And if it grows to a billion dollars, right, it’s completely tax free forever. So the Roth is a very attractive tool and one that you don’t have to pre plan for you can plan as you go.

J Darrin Gross 37:45

I love the Roth. Just the concept there. I mean, it takes all that you know, at the end when you need the money, you’re not having to do the calculation on you know, your whatever your tax rate rate is a percentage that you end up with your you know, it’s it is what it is based on what the Yeah, what your account value is. That’s great. So, I asked you about kind of the typical type of deal. Can you describe the typical investor who takes advantage of a self directed IRA?

Jason DeBono 38:21

Yeah, our our, you know, it’s really hard to pinpoint exactly what makes a self directed IRA, a self directed IRA, you know, investor, but I’ll give you kind of what we see. So the first thing that that I can tell you is, most not all, but most of our clients are engaging in the types of investments they would hold in their IRA outside their IRA currently. So most people don’t on a whim decide I’m going to go by become a real estate investor, and I’m gonna use my self directed IRA to do it. There’s some that do and they’re, you know, they they they run the ideas parallel to getting into the investment market and using their IRA. But most of the people, if for everyone that’s listening to us today, you know, if you got to ask yourself, are am I interested in the opportunities that a self directed account provides me that a traditional account of Charles Schwab doesn’t?

If the answer is yes, then you are the profile of our customer. So the reason that that’s so important and I’m gonna just step aside for a second and talk about kind of the the opportunity. So most people that buy and sell real estate do it for a variety of reasons, right? I mean, they buy it because they like the asset class, they understand it, it’s much easier to understand then stocks and bonds, you can use leverage a lot easier than you can in the stock market and you have a lot more control than you do in the stock market all great reasons to own real estate of any kind, residential or commercial or anything in between. But what people don’t realize is the opportunity from a tax standpoint that an IRA can provide. So if you’re an investor today and you buy and sell real estate, again, residential commercial doesn’t matter while you’re getting some tax benefits, Right depreciation and write offs and other things. It’s still a taxable activity. So as you generate income, you got to follow it on your tax return. And what people are realizing is they can make the same investments. But if they do it inside their IRA, they’re not subject to having to add it to their tax return. So while they give up depreciation, right, which gets recaptured anyways, and while they give up some write offs, they’re giving it up because they’re, they’re eliminating a tax bill from the get go. And I’ll illustrate how powerful this is.

If you take $1 and you double it for 20 years, so $1 becomes $2 and $2 becomes $4. Four becomes eight becomes 16. If you double it for 20 years, and you do it in a taxable account, meaning you got a 25% annual tax rate so you do it in your personal bank account. If you start with $1 at the end of 20 years, you will have 75 ish thousand dollars. Right now obviously that’s great, right? We turned $1 into 75,000 bucks. I mean, who would was would be upset about that. But if you take that same dollar and before making the investment, you put it into an IRA, and then you invest it every year, doubling it for 20 years, instead of $75,000, you end up with over a million dollars. Wow. So the numbers are staggering. So So for those that are listening today, if you’re taking you’re looking at your real estate portfolio, and it may be fantastic. I’m not telling you that you made a bad choice. And I’m not telling you shouldn’t use your personal money to buy real estate, I think it’s a fantastic option. But if you want to use you’re going to gain two things with a self directed account, you’re going to gain one the ability to cherry pick the investments before you make them that you think may have the biggest gains and those belong in your IRA because they’re going to have the least amount of taxes at zero. The second thing that you do is you get to mirror the likely what you’re doing and using to build your personal wealth already right. And you’re simply doing it in your IRA and if you go look at the numbers, you know, it doesn’t take long If you look at the millionaire list or the billionaire list, the vast majority of the investments for all of the people on that list are you guessed it, real estate, right? So it’s a great asset class. And so we don’t, we’re not here to tell you that the asset class only belongs in an IRA. We’re here to tell you it belongs in an IRA and your personal account. And it gives you the ability to invest in what you know and understand without putting that money into the stock market, which I think we’d all agree is is a real tough place to even make sense of let alone you can make money but making money without knowing what you did is kind of like going to Vegas, right? It’s hard to repeat and it involves a lot of luck making money in real estate. While it involves some luck, we all need it. Right? Right timing right property, etc. Most people in real estate 80% of their success is not luck based.

J Darrin Gross 42:48

No, no, it makes a lot of sense. And I appreciate you sharing that example of the, you know, one with tax and one without credit tax. It’s It is incredible when you look at it over time how the money really adds up.

Jason DeBono 43:05

Yeah, you’re not kidding.

J Darrin Gross 43:08

So, Jason, if we could, I’d like to shift gears here for a second. As I mentioned to you before we started by day, I’m an insurance broker. And I work with my clients to assess risk and determine what we can do with the risk risk management. And there’s three strategies we typically look at. The first is can we avoid the risk? If we cannot avoid it, we look to see if we can minimize the risk. And if that’s not an option, then we look to see if we can transfer the risk. And that’s what a an insurance policy is. And so, I like to ask my my guests, if they can take a look at their you know, profession, what are the clients are doing? Let you define, you know, the the who or the how you want to apply this question, but if you You can take a look at and describe what you see is the BIGGEST RISK. And just again, for clarity, I’m not necessarily looking for an insurance related answer. So, with that, I’d like to ask you, Jason de Bono. What is the BIGGEST RISK?

Jason DeBono 44:22

I think the BIGGEST RISK for a self directed account is that you take responsibility for all the investments, and it’s a risk of personal accountability, right? If you keep your IRA in the stock market, one really nice benefit is that when it goes up and goes down, you know, you can kind of finger point your way around around it. Risking in a self directed account means you’re taking on all the risk. There is no broker, there’s no third party, you know that that’s making your investments on your behalf. Now, in a self directed account, you can certainly rely on professionals right. Commercial brokers that can give you guidance and Advice insurance agents that can help you walk through the process. So you can get professional opinions, but at the end of the day, you’re the one saying I want to buy that. And so that is your risk that you’re inheriting. Obviously, you know, I love your, your example of kind of the three approaches, right? Which is to, to, you know, to look at risk, and understand whether or not we can avoid it, minimize it or transfer it. And I think excuse me, in a self directed account. From an investment standpoint, you can do all three of those things, you know, you can certainly, you know, avoid the risk by buying investments that have less risk, right? You can minimizing it, minimize it by educating yourself, right? So many people look at investing and wonder what went wrong and you know, there’s a good saying I rely on all the time and that is the cheapest lesson that you’ll ever learn is somebody else’s. And you know, we we all learned lots of lessons the hard way and some of those can be very costly in terms of time, energy and money. So when it comes to Investing seeking advice and counsel and knowledge and expertise is is a wise thing to do, literally and figuratively. So you can minimize your risk by investing into what you know and understand it. And then transferring risk, you know, make no mistake, if you move money from stocks and bonds into the real estate market, you’re transferring risk, right? you’re transferring the risk and exposure in the stock market to the risk and exposure in the real estate market. And that’s a personal decision that each and every person that makes that, you know, choice has to look at. And for a lot of our clients, they’re reducing risk by moving it right. They’re transferring risk from one asset class that they don’t know a whole lot about to an asset class that they in most cases know a good deal about. So all of those kind of long answer to a short question. But But without a doubt, if you’re going to self direct your account, the risk you’re taking on is that you are 100% responsible, NuView will not offer you an investment put you in an investment recommended endorse it, approve it. It’s 100% self directed

J Darrin Gross 47:01

No, I appreciate you sharing that, you know, risk reward there if you know and I guess the flip side of that is when you’re participating in the other defined vehicles the rewards probably more limited based on the risk tolerance that the people who have defined those investment vehicles have your setup so that’s good. Jason before we wrap up, where can listeners go if they would like to learn more or connect with you?

Jason DeBono 47:31

Sure, the easiest way to to at least get some more information and find us is our website. That’s NuViewtrust.com and it’s new view with a u, NuViewtrust.com. Obviously, it’s chock full of information there. Our contact info and everything is there as well. And or you can email me personally at Jay for Jason de Bono D Eb o at new view, trust jdebono@nuviewtrust.com.

J Darrin Gross 48:00

Jason I can’t say thanks enough for taking the time. I learned a lot. And I hope we can do it again soon.

Jason DeBono 48:08

Oh, Darrin, thanks so much for having me. It was fantastic. I really enjoyed being here.

J Darrin Gross 48:12

Intro 48:32

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.

Cash Flowing Short Term Rentals with Jon Bell _ CREPN #264

Jon Bell 0:00

It is straight cash generated monthly literally reason why the program that we created is vacation rental machine is because this is a machine. It’s an engine that just spits out cash. And yes it is very lightweight on the maintenance and the kind of oversight that you would have versus owning the property, having to renovate it. Really the downpayment right? If you were to take $40,000 and put down on the home, technically that’s four units for me four units can generate me around 1500 dollars a month. So for I mean per unit.

Announcer 0:37

J Darrin Gross 0:56

Welcome 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 to provide their experience and insight to help you grow your real estate portfolio. Today, my guest is Jon Bell. Jon is an IT professional turned real estate investor. He’s a he specializes in vacation rentals, and today we’re going to speak with him about Airbnb. He’s also got a podcast he hosts the podcast Vacation Rental Machine Podcast. And he’s also the co founder of the Vacation Rental Machine Formula an online training. And before we speak with Jon about this, or about Airbnb’s and all that, I want to remind you That if you like our show CREPN Radio, there are a couple of things you can do. You can subscribe, like and share the program. And please consider leaving a comment We always 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’ll find this at Commercial Real Estate Pro Network on YouTube. And also, please consider subscribing. With that, I want to welcome my guest, Jon, welcome to CREPN Radio.

Jon Bell 2:36

Thank you, Darrin, thank you for having me on. It is a pleasure to speak with you and your audience.

J Darrin Gross 2:42

Well, I’m so glad we were able to make this work. And looking forward to our talk. Before we get started, if you could share just a little bit about your background with the listeners.

Jon Bell 2:55

Gotcha. As you said, I started out as an IT professional, I still do that by day. That’s my full time job. However, I stumbled upon short term rentals just as a pet project to just find some extra money and it turned into this monster of a thing to where right now I have over 40 apartments or homes that I manage. And I’m actually just excited to bring that to a bunch of different people and also to try to grow my portfolio. So one day, when I’m stressed out enough, I can go ahead and just switch over and do this full time. But I’m all about systems and standards and that makes this business easy and I’m really in this whole thing just to tell people how easy it could be and how they can create a nest egg on the side.

J Darrin Gross 3:43

Awesome. Well, the side hustle as they call it. Sounds like you’ve you’ve definitely got a little more than a side hustle. In as far as the the short term rentals I was wondering if you could first kind of define what defines a short term rental.

Jon Bell 4:04

Gotcha.

J Darrin Gross 4:05

And then maybe talk a little bit about how you got into it.

Jon Bell 4:08

Alright, so short term rentals are really classified as any rental that happens within 28 days or less. So anything that within the month of February shorter than that, that’s a short term rental. Anything longer, that means six months to 12 months is technically outside of that range. But then you have your yearly rentals which are really what people think are long term. So there’s short term mid term and long term.

J Darrin Gross 4:35

Gotcha. All right. And then as far as the how you got started, what what I think typically people well, Airbnb is a fairly recent phenomena. Can you tell us a little bit about how you got in into it?

Jon Bell 4:54

Yep. I was a home investor franchisee which basically made I was one of the We buy ugly homes people. That’s the national brand that that’s out there. I was visiting another franchisee who was having like some great success out in California who was also in my class when I went to study. So I’m out there visiting him and it’s I think it was Long Beach or somewhere around the beach. I can’t remember the exact location but it was a it was either stay at an Airbnb for the first time, or stay at the Ritz. There were really only the two options. Because I was going to be there for like 15 days or so I said, Well, I really don’t want the hotel feel. Let me stay at this Airbnb. I got there. And I discovered it was in a regular REIT. And I was like, wait, this is just a regular apartment building. I can tell nobody lives here. I can tell that it’s set up just for guests. And I already know how much they pay because it’s marketed right they pay. I want to say it was like $2,700 for this one bedroom apartment. I’m paying $170 a night; did the math, and I was like, wow, this is this is unique. I mean, I really know the cost. I mean, what are the utilities cost on top. So this guy has to be raking in 1000 $2,000 a month, just by renting this place out. That stayed with me for two years. Before I really acted on it.

One day, I just happened just to flip a home and I sold it and I got my money. And I was just thinking, that was a lot of work for this amount of money. What can I do with it now and like, you know, you’re running from capital gains, and you got to find the next deal. And I just said, Okay, you know what, remember that idea I had a couple years ago about trying to pursue this. I just started going out trying to find apartments buying them or renting them in a business name. And I finally got an apartment or two in that group of four and the money just started coming In and that was really the start of this monster. That is technically my rental arbitrage portfolio slash co hosted portfolio.

J Darrin Gross 7:11

So just to make sure I’m on the same page here, so you’re not these are not properties you own their properties that you’re leasing that you’re then releasing or subletting on a on a short term basis.

Jon Bell 7:23

Yep. So there’s a couple different strategies. And the first strategy that you might hear a lot of people talk about is rental arbitrage. The best way to think of it is I rent from somebody to re rent or sublet. Of course, with their permission, that is key. You want to make sure you’re doing it with that. The next way of doing things is to co host a property. That technically means you’re the owner of the property. And you allow me to manage just like you would a long term rental manager, manage the home for short term rentals and you see a big jump in the revenue that you generate for month in and month out. Outside of that, there’s the bur method, which we all should be familiar with, with right? That’s when you buy your renovate you refinance. You get it all right going now your exit is Airbnb or short term rentals.

J Darrin Gross 8:16

So you, I mean, this is kind of an interesting twist on this because A, you’ve stepped out of all of the maintenance, kind of headache of a landlord. You also don’t have the investment needed for the acquisition, the financing, you don’t have the equity, kind of a gain or any kind of 1031 or any, you know, what are you going to do with any? It’s just straight up income, right passive income is that.

Jon Bell 8:46

it is straight cash generated monthly, literally, reason why the program that we created is Vacation Rental Machine is because this is a machine it’s an engine that just spits out cash. And yes, it is very lightweight on the maintenance and the kind of oversight that you would have versus owning the property, having to renovate it. Really the downpayment, right? If you were to take $40,000 and put down on the home, technically that’s four units for me four units can generate me around 1500 dollars a month. So for I mean, per unit. So now we see how the cash kind of just starts flowing in versus a regular rental, which I might make on a good day. $500 a month in profit. So it’s like three times with the less amount of money okay, yes, you can say I don’t have the equity. I don’t have the actual physical asset. But what I do have is a nice revenue. And if we listen to Rich Dad, Poor Dad, he says invest for revenue or cash flow.

J Darrin Gross 9:55

Oh, absolutely. And then also, you know, If things do get tough, if the market dries up or whatever, all you’ve got is at least that’s, it comes in, you’re done. You don’t have the weight of a mortgage. Yeah. That’s, that’s fascinating. I hadn’t I guess the way it’s always been laid out or presented to me has been more on the ownership rent model and then the rent being more of a, just a just a way to accelerate your income stream as opposed to the the traditional long term rental, where you make the little spread and it’s kind of more of the equity play I guess, long term even though that you know, Rich Dad, Poor Dad promotes the revenue stream. I think that for most, there’s it’s more of some sort of an equity thing in the in the end, unless you’re flipping and you’re doing a lot of the BRRRR kind of stuff, but interesting. Well, so tell me about how you go about selecting a market that you get in. And then as we go through this I where I’d like to get to is kind of understanding the way things were operating and pre COVID to, you know, the the situation that we’re in where we’re in right now.

Jon Bell 11:15

Alright, so really, the first thing that you want to do is before you go and look at a place, you really want to figure out who’s going to come stay. And that really could be based on the location that you’re at. So let’s just say you’re in Orlando, Florida. You automatically know you need to house families, because that’s the draw. That’s the type of people that kind of come in and out of there. Let’s just say we’re going to Chicago. Okay, well, Chicago, it’s got a big business presence, so you probably just need a single bedroom place. So once you identify the type of person that you’re actually going to have come in and stay with you, that helps you know what you need to go out and look for. I would highly just say don’t go get a three bedroom place. Chicago because there’s probably not going to be enough people that travel with that many people to come there. Versus I wouldn’t say just get a one bedroom place in Florida, because what are you going to do about all the kids? The kids need a place to go? I don’t want them jumping on the bed with me all night, and we’re going to Disney.

J Darrin Gross 12:16

Right, right. That’s funny. So, so more of just kind of like, think through. I mean, you’re not worried about schools, you’re not worried about, you know, employment, I guess would be maybe a sense if you’re looking for people that might be traveling to or from like, you mentioned Chicago with professional kind of downtown stuff. But I guess more just understanding the the attraction, as opposed to the long term. You know, fundamentals that, that somebody’s looking for a neighborhood would look for.

Jon Bell 12:56

Correct. There, there’s a thing called Walk Score. You know, that is one thing to really kind of look at the higher the Walk Score typically the, the better the rental is in general. But really what that means is you’re in a metropolitan area, so you have the most opportunity to grab people. But that doesn’t mean if you’re in a rural area that you can’t listed on any type of short term rental anything site like Airbnb, VRBO, whatever. That really just means you need to play up on the experience that the guest is going to have. So for instance, if you got like a little pet farm or something like that, you can have those attractions where people come, they can stay, they can play with the animals, or maybe they can come plant some crops for free. Just give people an experience that they won’t have a lot of city goers will go out and just Hey, I want to go get dirty. I want to go do this. I can’t do it anywhere else. Right. So that’s one of the advantages of short term rentals. That’s one of the things that Airbnb started out with. Doing great. They really built experience based travel.

J Darrin Gross 14:04

And I think who can’t remember who started that? Airbnb? Who who is the founder of?

Jon Bell 14:12

Brian Chesky?

J Darrin Gross 14:13

Okay, I think there was an interview I heard on some podcasts and they’re talking about the experience and about from the beginning. And in the beginning, I guess they were going out and taking pictures of the properties themselves and getting the, you know, the learning from their, their hosts on how to do this kind of thing. And, and, but, but again, it kind of that experience model is really what remember resonated from the interview there. So that’s great. So what Tell me what market you’re in, you said you’ve got 40 of these right now.

Jon Bell 14:48

I’m heavily based in Virginia and DC, also in New Orleans, and we manage a couple down in Florida.

J Darrin Gross 14:59

Gotcha. And so let’s talk about your marketing. Being an IT guy, I’m assuming, correct me if I’m wrong but you you might be prone to systems and and you know not doing everything you know handcrafted solutions every time but you have more of kind of a steady like auto autoplay. Can you tell us a little bit about that and start with, I guess the marketing tool if you could,

Jon Bell 15:26

Gotcha. So so marketing in the business really, if we really think about all the booking channels, you should use them as all of your available marketing channels. Why? Because they pay for ad spend to actually grab new people. So Airbnb will pay for people like commercials and stuff and we’ll get it put on TV that’s more draw that you have Booking.com, TripAdvisor all the places that you would go and book your own travel, you can post your listing on those platforms and have it as a potential option for them to book. So that’s the easy part of marketing is you just put it on there for them. They take a commission from the actual reservation, but you also can direct book or have your own website and drive people or repeat customers to your website. I do a lot of pounding the pavement. So when I’m looking for my business travelers, I’m really going to go to the businesses that are around the unit and just let them know, Hey, I’m here, do you have anybody that ever comes and stays, and that has been one of those methods that kind of helps sustainability across the year, because, hey, you know, this place is going to have at least four conferences a year and they’re going to need at least every place that you have available in this one particular location, whether it’s two, four or eight. They’re just needed because they they have all these people coming. So when you start to, like reach out to them and they start booking your place, that’s easy marketing, because; one, they’re gonna get it booked for you. Two, the people that come and stay, if they have a good experience, they’re going to tell other people. And most of the time what I find in DC is those people will come outside of their business trip with their families to come explore the museums and everything else around. So it’s always a good thing to kind of go out and just let people know, hey, I’m here, I’m here and available for you, I have a great service. And once they figure it out, they actually stay that actually if you do do a good job, they will come back repeatedly over and over again.

J Darrin Gross 17:31

So you do have kind of the the long tail word of mouth kind of thing, if you’re marketing to the local attractions as far as opportunities. When you you do that, is it again, primarily attraction based? I mean, is it are you looking at you mentioned conferences? That makes sense I presume like conference centers are you do you have what would be somebody? What would be something to thing to look for when you’re out, kind of checking out the area?

Jon Bell 18:04

Literally I just go to a map. And I just look within maybe a mile radius, sometimes a half mile if it’s really dense, and I’ll just go and I’ll just send something either to the business by email, I might give a phone call, depending on the type of business, most of your consulting firms, they, they have people that come in and out. And hospitals are great, right? They have guests, they have outpatient treatments, where people might get, you know, go in for surgery, but they are not able or not comfortable flying back home just yet. So they need a place to kind of stay close. They don’t want to go upstairs, stuff like that. Those are great ways to just have some, some people come and stay without taking on the extra spend of, “Hey, I’m going to go do some SEO. generation” and you know, that’s just the bucket that you continually just throw in. And I think when people start out, they might think that it’s a good idea to just go ahead and start but remember, the travel industry is very, very, very populated. There’s so many places, people, companies that do all of this stuff, you can never really compete as a sole owner of whatever, to grab somebody. So you have to leverage what you can.

J Darrin Gross 19:22

No, that’s a great point. I mean, especially if you’re local and somebody coming in from out and they’re looking for a place to stay and they mentioned Where’s a good place to stay? And you know, especially if they’re you know if it means like renting a car and traveling, you know, great distance or I can walk there as opposed to not having to mess with that. That makes a lot of sense to me. So that’s awesome. So is that been primarily one of your best lead sources as far as it goes?

Jon Bell 19:52

That is the best! Now of course, I will have to say I did go out and I did try to do some SEO stuff, some blog, things and stuff. It just wasn’t fruitful. And that’s one of your lessons learned is, hey, if I go out and I spend $400 a month and I don’t make a single dollar from it, I need to stop spending it. I rather just send this email to this directive person.

J Darrin Gross 20:16

Right, right. It’s so true. It’s the the internet’s are willing. You know, they’re they’re glad to take all the money you want to spend.

Jon Bell 20:27

Yeah, worse than casinos.

J Darrin Gross 20:29

Yeah. It’s it’s definitely true. So, in normal times, conferences, I would guess would be a great opportunity mentioned hospitals, for procedures and stuff would be a great opportunity. Given that we’re in a, you know, pandemic, I guess we’re we’re coming out of it. Although I see cases increasing, I don’t know. I don’t know what that’s going to impact look like in a week or two. I you know, who knows? What that’ll look like but I guess my question, how, how has business been? Since March was March 13 ish, kind of, kind of a day on our calendar here.

Jon Bell 21:15

So, um, March, March is the start of our high season here in Virginia and DC. It’s starting to warm up, spring break, and then the museums are open, everybody wants to come in visit. So, right when all of this hit, there were so many bookings that I had on the calendar. From the 15th on, they pretty much all canceled. So it was a little depressing at that time, just because, hey, I had all this money on the books. Now. It’s never going to be realized to go on and going through and doing what we call now the pivot right, that is the pivot from short term bookings to mid term bookings and even long term. So because we have Have a furnished apartment, we technically can market ourselves in any one of those fashions, it’s just you have to accept the differences in revenue when you do that. So when we do short term, it’s higher revenue mid term, it’s pretty good. Long term. ahh, it’s the same as somewhat the landlord’s would get, but you kind of got to think that we’re overtop of the landlord. So you know where the landlord might make $500. Well, maybe you can only squeeze an extra $200 on top of it, just because it’s already got the profit built in and you got a furnished place. So there’s some value in a furnished apartment.

There was a lot of people in this area that needed a place to stay because they got sent back to the US via State Department or whatever. So having some of those alliances has definitely helped, because now I have mid to long term bookings, at a decent monthly rate. Now it’s not like I’m making 1500 dollars a month on each apartment. However, I am being able to to scrape by I’ll say, jokingly with $400 a month on those people that are coming to stay. Really, this was a big lesson in seasonality and how to manage cash flow. So, for me, generally, what I would end up doing is have just enough to get through the low season and then get right to the high season. So right around March, I’m like, Okay, great. I can spend all the cash that I got, because I got plenty of cash coming back. Well, that wasn’t the case this time. Luckily, I didn’t spend it. I did get some forewarning about this. So that that was good. Either way, just knowing and managing cash flow. That was that was key. Also, some of the SBA stuff did help out. We were included in on some of that relief. So all of the other hosts and I believe the gig economy, we’re all included. So that was a good thing that the government did for us? So that’s how we got through it. Now, this answer as far as the recovery keeps changing, technically daily, because as of the last three weeks, bookings have started to increase, people are back out traveling. And that is a good thing. But just like you just alluded to, I am fearful of a double lockdown. I know cases are going up. And I don’t know. It’s it’s possible. But is that when 200,000 deaths or is the news just going to stop covering it? And we just won’t know.

J Darrin Gross 24:39

Yeah, I mean, I’ve come to the conclusion that nobody knows. Anybody that’s trying to explain this is grasping at what we went through last time, trying to to, you know, find where we are on the line from last time that this time kind of thing and I’ve just I’ve concluded That is so different. The economy was doing fine for most. I mean, there was plenty of concern that we were at the top and it was overdue for a correction. But the banks were fine. And employment was good. There was no overbuilding of, you know, units kind of thing. So this is kind of a unique animal and I’ve given up on. I mean, I’m listening to it all, but I’ve given up on saying, Oh, that’s what it is. I think that’s interesting. Because I, you know, I just everybody I talked to is got either an opinion or you know, we share ideas and stuff and, you know, kind of think of where things are at, but I honestly I mean that, you know, the stock market is almost back to where it was. Today is what we had June 10 10th. Yep. As we record this who knows what the next Several months of Play, play on some but to the point about the the, you know whether or not we have an infection. I have a question for you about turnovers. You know, when you when you have a long term rental, it’s a pretty big deal somebody is announcing they’re going hopefully, they don’t just leave in the middle of night. They take all their stuff with them. Hopefully you don’t have place leftover stuff. And then you you basically may have to repaint free carpet, whatever you might have to do in this situation. You’re basically similar to a hotel. You’ve got nightly guests, they’ve left, sheets, linens, clean, how do you how do you do that in a normal situation? And then tell us what you’re doing now given the the concern of COVID.

Jon Bell 26:56

All right, so yes, just like a hotel. We have turns, which is what we call them. Pretty much before COVID-19, we would go in strip the linens, you know, mop, similar to you calling a maid over to the house, we would do all of those things, but because our places are cleaned pretty frequently, it’s not like a deep clean every time, right? We’re not we don’t have to wipe windows or anything like that. If somebody comes in stays for a week, and then they check out. We do do that on a periodic rotation, where we go ahead and just do all the baseboards and all that stuff. But for the most part turns for us for a one bedroom apartment takes about 45 minutes. And that’s really stripping linens, setting the beds, vacuuming, mopping dishes, stuff like that. Post COVID 19 we have a lot of extra steps. And these are actually steps that we’re going to continue on no matter what. Just because we’ve incorporated it in. It’s not too much of a heavy lift. It’s just more of a check. Like hey, did that Did I wipe down the door handles with something that is definitely going to kill the virus within 10 seconds or 15 seconds. So we do stuff like that we also ozone each room before somebody actually touches the linens because we want to make sure that one our crew is safe. Even though CDC has recently kind of come out and loosened up some of the transmission from surfaces, we still want to play it extra safe. Of course my personal team is where I want to keep. I want to keep them whole, right? They all are healthy, they all have families. I don’t want anybody catching anything from just working and then taking it back home. So we ozone, we make sure we get all the certain CDC guidelines stuff and we go back through and we just check everything. We also We ask our guests before they check out if they feel sick if they have been diagnosed and if they have we will block that apartment for the next three days. And then go in and clean And we won’t let anybody stay. So we definitely don’t want anybody to catch it by coming and staying with us. So we we approach it in two different ways.

J Darrin Gross 29:11

It’s interesting. How have your guests responded to these? I guess the communication from from you about this before and after?

Jon Bell 29:23

Well, everybody accepts the message. I just send it a couple days before checkout. They just let us know. I mean, I feel like this is just now the normal thing, right? Hey, how are you feeling? Are you feeling sick or anything? Have you had a fever? If so, would you let us know? Have you tested okay? No, I haven’t. But I had a great stay. That’s normally the response that I get back. Some people do say hey, but if I said yes, I mean, you still should be cleaning it. You know, whatever. We still let them know that. Hey, this is our cleaning process. If you were to say yes, we would just reserve the unit for three days. Make sure that it nobody enters or whatever. And then we Go in and still do the CDC guidelines. So we just want to make sure that everybody knows that we are actually being safe. And travelers I think are liking that more than a hotel at this point.

J Darrin Gross 30:14

It’s interesting, because I think that’s one of the other that well, the travel industry was the one that was kind of hit right, right between the eyes with this. From hotels to travel, you know, airlines to restaurants, all that hospitality was really kind of hit hard. You mentioned that traffic is picking back up. bookings are picking back up, how are they tracking compared to what you would have expected or experienced in prior years?

Jon Bell 30:45

I would say maybe at a 27% drop from what it would have been this time last year, as far as occupancy goes and really how I’m measuring that is how far out things are getting kind of booked up. I’m booked up Immediate. But as time goes on, there’s more gaps in the calendar than it would be if things just didn’t happen.

J Darrin Gross 31:09

Gotcha. And as far as the the types of bookings are they more of the mid term, long term? Are you Are they kind of trending back to the short term,

Jon Bell 31:19

We are definitely trending back to the short term. So some of our mid and long term guests are either being called back to the country that they came from, or they are just ending that reservation or it’s just ending in general and new shorter term bookings are coming in. Still about five days or so. So that’s still very good.

J Darrin Gross 31:44

Got it. Tell us a little bit about your systems. You mentioned kind of the cleaning and the turning kind of thing but but isn’t it guy I’d love to hear a little bit about how you have this set up. I mean, we talked about the different booking sites. If I go on one, I like your place I click Yes, it’s reserved, to me have some sort of a calendar on it.

Jon Bell 32:09

So So behind all of that is a unified calendar that we call a PMS or management system, everything funnels to there. And that’s how you keep double bookings from happening. Pricing is pushed out from there, that is really the lifeblood of just being on multiple channels. Without it, it’s very hard to kind of manage from one to the other. It also does help when you have something that integrates automated messaging. So like all the check in messages, and just that general check that we just talked about for COVID that goes out in an automated fashion. So most of the standard communication is just sent via a system questions outside of what the system can do. That has to be answered by person and right now it’s just me. I don’t have any VA’s or anything else because I don’t see a need, or I don’t have enough pain to actually just get somebody to go out and do it. The system that I use for messaging has an AI built in, so it can identify, hey, this questions about Wi Fi. Let me just send this Wi Fi information and I typed a response that is generic enough to reply back to anything you almost think I sent it.

J Darrin Gross 33:26

Right. That’s fascinating. You know, how much of that can be unless you have some sort of a real urgent problem, but I would think that as long as people can get in and out you know, you’d be in pretty good shape. This is fascinating. Again, just starting from the premise of you’re leasing a property and then subletting it as opposed to you know, having to do all the purchasing and then then leasing it. Have you It sounds like you. You mentioned the You’ve you’ve cleared all this with each one of the landlords Have you run into any kind of zoning restrictions or cities or others that have had, you know, rules or laws that have been created to?

Jon Bell 34:13

Absolutely. So, of course, there are state regulations, there’s local and then there’s also sometimes like an HOA in place that says, hey, although the state allows it, this HOA says you cannot do it. So you really have to look at each different layer of any type of governance to make sure you’re okay. And you should do that before you go out and look for a place. But most states and cities are somewhat coming around to the idea. Mainly the metropolitan areas. I have a lot of units in Old Town Alexandria, here in Old Town, Alexandria, if you’ve ever come here. It’s just one of those like towns where people just like to walk and find the local shops. So without The tourists technically, who’s really going to be buying from the shops on a repeated basis? So they openly welcome short term rentals and just any type of lodging.

J Darrin Gross 35:12

Yeah, that’s, that’s great. Yeah, it’s funny. I know. here locally, in Portland, I know, there’s been some resistance and stuff. And a lot of it’s been by I guess, you know, probably the people that invested in hotels in the first place, you know, that are like, Hey, you know, we’ve got this over here, what are you doing? kind of thing. But, you know, I think the great disruption of the economy continues. Thank you internet. Right. So we, we have the right to go with Is there any other you know, keys to, you know, successfully navigating the the pandemic that you’ve that you’ve uncovered?

Jon Bell 35:58

Yeah, I mean, Literally the pivot. And I’ll just keep calling it the pivot because we all had to do it. And the pivot was was something that we didn’t expect. But it is something that we’ve learned and it will always be a part of business, I never knew that I can book a place for eight months at a great rate. It just lets me know that, hey, I don’t always have to play the short term game, I can play a little longer play and still be satisfied. Of course, you would do it for the winter months here or the slow season, but then you’d want to kind of kick those people out so you can get back to some higher profits. Well, okay, maybe I don’t, I won’t be so much in a rush to kind of kick those people out. I’ll continue them until they can’t stay anymore. And then I’ll just go ahead and backfill some other stuff. It really just helps the overall portfolio in a sense. So before I was looking to create a portfolio that manage seasonality, so for me that meant in December, it Had a high occupancy maybe like in Vegas. But now I’m looking for Hey, let’s just try to keep some of this sustainability keep the cash flow the same year round. How could I do that?

J Darrin Gross 37:12

No, that makes good sense. Have you are you actively looking to grow your your unit count or?

Jon Bell 37:23

Absolutely.

J Darrin Gross 37:24

Okay,

Jon Bell 37:24

Absolutely. Literally I challenged myself to figure out when it’s too much for me to actually just quit my day job right right now because I’m doing all the messaging for the 44 units. It’s still not enough, right? There’s my phone isn’t like just bothering me. It’s not messing up relationships or anything like that. So there’s really no pain there. And that’s really all that I would need to just say, Hey, I’m just going to jump into it. Now. I do have a small team that do run the day to day I just meet with them in the morning. And that’s it. So, for me, I am looking to grow. I think, right around 500 units or so I’ll probably say Okay, enough is enough.

J Darrin Gross 38:10

Gotcha. Well, this is a, this is a very interesting you know, like you said, your model from a basically, you know, leasing and and releasing and marketing and turns and having to pivot. I think that’s a, that’s a, you know, definitely an experience that you can use in any business. Things are going to change and there’s nothing that’s guaranteed to life, that’s for sure. So I appreciate you sharing it.

Jon, if we could, I’d like to shift gears here for a second. As I mentioned you before we started recording by day I’m an insurance broker. And I work with clients to assess risk and determine whtat what we can do with the risk? There’s a couple of strategies we look at. Typically we consider, can we avoid the risk? If we can’t avoid the risk? And we look to see, can we minimize the risk? And if that’s not possible, then we look to see if we could transfer the risk. And that’s what an insurance policy is. And I like to ask my guests if they can identify, you know, what they consider to be a or the BIGGEST RISK. And just for clarity, I’m not necessarily looking for an insurance related answer. Risk is everywhere. But if you’re willing, I like to ask you, Jon Bell, what is the BIGGEST RISK?

Jon Bell 39:50

I’ll answer it and maybe the most common risk that people assume when they think of short term rentals or specifically Airbnb s and that is major parties. People messing up your your place. With my experience, it’s not the major risk, it is something you can hedge off. And this is how you do it. You pretty much need to make sure that you have proper systems in place and technology. And that really looks like you need to have some type of external camera and a noise monitor or a noise monitor, in general in every place if you cannot put a camera that lets you know before anybody else is pissed off enough to contact anybody else or call the police that something is going on that you need to pay attention to. And you can back that up with evidence and you can evict the guests and keep the revenue without creating a major problem.

J Darrin Gross 40:48

Got it, got it. So let me ask you with that. You mentioned you’ve got some that are in varying states not all of them sound like they’re local near you, do you have people on the ground that you could deploy if, if something like this happened in one of your distant locations?

Jon Bell 41:07

If needed, there is somebody that can go. But really, we got it down to a science we can really just communicate with the guests get it tamed down. If not, we just go ahead and just call the police and they can technically just handle it for us without us being there.

J Darrin Gross 41:28

Well, Jon, this has been just very entertaining and very educational. Where can listeners go if they’d like to learn more or connect with you?

Jon Bell 41:39

Definitely. You can find all of our resources that we offer, through Shorttermsage.com, you can connect with us within our Facebook group, which is The Host Nation. And yeah, we’re always in the group. You can always just ask a question for free to answer if you’re looking for management, you can also find that through Short Term Sage or CoHostit .com.

J Darrin Gross 42:06

Got it. Jon, again, I can’t say thanks enough for taking the time to talk. I’ve enjoyed it. And like I said, learned a lot. And I hope we can do it again soon.

Jon Bell 42:18

All right.

J Darrin Gross 42:20

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 42:39

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

Forever Cash Through Real Estate with Michelle Bosch – CREPN #263

Michelle Bosch 0:00

The flipping of the land is a J O B because if you don’t not send letters if you are not selling, you are not going to have income coming in unless you sold a chunk of those properties, you know, on notes, but even that income is going to come to an end. You know, when they pay off the note that passive cash flow comes to an end as well. So, so it’s, we call that you know, the land flips for cash, we call them one time cash, the notes we call them temporary cash. And you know, the single families and apartment buildings we call that forever cash that’s pretty much it can sit on that asset, you know, for as long as you want to. And you know, if you’re operating it at a good you know, in a good way it’s going to continue to spit out cash flow for you and I mean, hopefully for for many generations to come.

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 1:08

Today, my guest is Michelle Bosh. She and her husband are real estate investors, entrepreneurs. They have multiple businesses and they have taken businesses multiple businesses they’ve built from scratch to seven and eight figure income revenue streams. And their business platforms include land auctions, rental portfolios, they’ve all authored a an Amazon number one bestseller called Forever Cash. And also, they host together the podcast Forever Cash. And Michelle also hosts the podcast In Flow. And in just a minute we’re going to speak with Michelle about forever cash. But first a quick reminder, if you like our show CREPN Radio, there are a couple things you can do to help us grow and grow the audience. One you can subscribe, like and share. And also don’t forget, you can leave a comment we’d love to hear from our listeners. Also, if you want to see how attractive our guests are, be sure to check out our YouTube channel and that’s at Commercial Real Estate Pro Network on YouTube. Also when you do that if you would consider subscribing that also helps grow the reach of our program. With that I want to welcome my guest Michelle Welcome to CREPN Radio

Michelle Bosch 2:58

Thank you so much for having me, it’s such a pleasure to be here with you from coming from nice, sunny Phoenix, Arizona, which in a few days is going to turn into 109 degrees. So we’ll see. But thank you so much for having me.

J Darrin Gross 3:14

I’m delighted to have you and I’m looking forward to our talk. Before we get started, if you could share with the listeners a little bit about your background.

Michelle Bosch 3:23

Yeah, absolutely. So I am actually an immigrant from Honduras. I came here to the US in 1995. My husband is also an immigrant from Germany in 1997. We came here to study get our MBAs and we did pretty much what you know, you’re supposed to be doing good. We got jobs in corporate America that, you know, luckily, we’re sponsoring our green cards. But after a little bit of that, you know, two, three years of that we were deeply unfulfilled, we found ourselves with, you know, no fulfillment, no freedom. And definitely our paychecks did not match the level of energy and effort that we were putting into our jobs. But we can lead Go with those jobs because our permanent residency dependent on those.

So we started looking for something you know to do on the side a side hustle. um you know, my family back home owns commercial real estate and I thought well you know, perhaps this would be a thing to you know start with and we actually didn’t start with commercial we looked at a single family home that we wanted to basically rehab. It was a Junker here in Phoenix Arizona and being the immigrants that we are we found ourselves a little bit way over our heads in terms of we had no idea how to estimate repairs. You know on foundations on a kitchen on our roof. You know, no real expertise and managing a crew. It’s not that we had bad credit we just had no credit and and so there’s a series of things that you know, after having that very first Junker under contract we thought okay, you know, real estate it is, I know it’s worked for my family. My family has been able to create forever cash, you know, passive cash flow from it now. For years, but we probably need to start with something that, you know, is easier for us that we can wrap our minds around.

And we stumbled across something very interesting Darrin, and that is here in the US. There is such a thing as being able to lose your property to delinquent taxes. And I found about tax liens and tax deeds. And I remember going to a tax auction out in California. And needless to say, it was incredibly competitive. It was like being in a shark infested tank. But what I noticed was that a lot of the properties that were coming, you know, for, for sale, you know, there at the auction where vacant land was vacant, vacant pieces of land. And it occurred to me that if people had already, you know, checked out from these properties, because they have to be delinquent for five years in the state of California, in order to be able to be sold at tax deed auction, that people were probably checking out mentally and emotionally from these properties way, way earlier. And so we decided to go ahead and reach out to, you know, sellers or owners of vacant land we perfected a letter or you know, in a method where we could buy these properties for five to 25 cents on the dollars. Because we’re not looking for motivated sellers we’re looking really for non wanters. And we’re able to quickly turn around and sell those for 60 80 you know 100% of market value. We sell in one of two ways, we either sell for cash, you know, for a quick wholesale, that would be something you know, 60 70% of market value and if we sell for 100% of market value, we we sell them using seller financing, where we become the bank and therefore, we create a note and we have residual, you know, cash flow monthly cash flow from a property that for example, we bought for $1,000 that we sell for $10,000 and that where we can get you know, $9,000 being paid over a period of five years in monthly installments of 150 to 200. dollars, and one property doesn’t sound as, as attractive. But when you have two to 300 loans of those, you know what I mean? We were able, you know, over a course of, you know, several years, you know, once we perfected our methodology to really put the pedal to the metal do over 4000 flips, create $70,000 worth of passive cash flow. That became an eight figure business. And we’ve continued to do that to this day. However, you know, as as we have grown as investors in the US people, our, I would say, our sophistication when it comes to investing has also you know, grown.

So then we found ourselves in 2009, here in Phoenix with a ton of liquidity from cash profits from the land, from the passive cash flow from the notes on the land, and we could buy properties for $50,000 single family homes and rent them for 900 to $1,000. And so we started doing that here in Phoenix and we did it and you know, to other markets, and kind of been, you know, really wrap our hands around how to operate, you know, single family homes really, really well remotely because we’re doing it, you know, into other markets other than Phoenix. And, and we, you know, we came about to almost 50 rentals. And, and we thought well 2015 then came around and we thought, how can we start looking instead of one door at a time, you know, so that we can continue to build this passive cash flow this what we call forever cash. And instead of looking at one door at a time, how can we start looking at, you know, 100 doors at a time and that’s when we started, you know, looking into multifamily. We bought our first 90 units in Louisiana and, and then 94 units in North Carolina and then 147 units in Oklahoma City.

So those are the three markets we’re we’re in multifamily. And I think, you know, that’s pretty much you know, in essence What you know, my story is, which is very similar probably to many of your listeners who find themselves either in a corporate job or in some kind of lifestyle, where they’re not fulfilled where they have no freedom and where their paycheck does not equate, you know, the time and effort that you’re putting in that that was pretty much us It came out of, you know, I would say a cosmic four by four of pain and discomfort from being 100% traveling every single week of the year, you know, I mean, because we’re both consultants, and not seeing each other and not having so much to you know, show for it because we were living the American Dream by having payments on our cars on our house, on our laundromats on our sofa on our bed frame. I mean, I’m pretty much everything you know what I mean? And, and, and yeah, that’s real estate has been and specifically land has been the cornerstone of our wealth. We continue to do it to this day. And it’s it’s It’s a little bit of a sophisticated strategy I would say that we’ve been using now over the years and that is we create a lot of cash flow and cash profits for the land. And then we ask, you know, allocate that cash and park it into multifamily now. Because the benefit of multifamily is that all the active income that I generate on the land flips I’m able to feel that income with depreciation from the multifamily you know what I mean? So I feel like I get to you know, have a cake and eat it too. So it’s it’s, it’s like the best of both worlds. So yeah, that’s that’s that’s kind of a story.

That’s how we started it was I think, incredible. Like I said, dissatisfaction but having a little bit of immigrant disadvantage, but also immigrant advantage, zero fear hard work and seeing opportunities where others probably would have missed it, you know, specifically on the land side because now, you know, now we we teach others how to do that as well. And so the land has become something that has given You know, the four freedoms that I think every entrepreneur and investor is looking for, which is freedom of time, freedom, money, freedom of relationships, and freedom of purpose. Because now I’m, you know, on a mission to affect, you know, 1000 families in in a positive way, with a very simple method that we’ve been using now for almost 18 years, you know, to flip land. So, so yeah, so it’s, it’s, you know, as you grow you, your sophistication, basically, in terms of the asset class has grown for us. So, it’s,

J Darrin Gross 11:34

Yeah, that’s a very impressive story. I mean, come in here with, you know, essentially no relationships, no kind of a base. I always am impressed and I do I do find that I think somebody that’s willing to come to this country, or anything seeking opportunity is just really it’s kind of the the backbone of what you know the melting pot it was made America, America and So I love to hear that and appreciate you sharing that with us. I want to go back to you know, you mentioned when you guys first came here and you were working a corporate job and you had everything financed. I mean, I think that’s the the thing that I think is so easy to do in America is, you know, you can get everything on terms. To where, basically you can I forget what people say it’s something about renting the lifestyle to impress people you don’t know, or, you know, something.

Michelle Bosch 12:32

I’ve heard that expression. Yeah.

J Darrin Gross 12:34

You know, and and I’m kind of curious. So was there an awareness that that was that you were doing that or is that just basically kind of caught up in that because to break from that and to get to where you’re at now. I mean, obviously, there were a lot of steps and I want to talk with you a little bit more about the the marketing on your land, because you mentioned the systems that you put in there, but just the the mindset, I guess You know going from was it more of that you use recognized you What more did you realize where you were at? I think that’s kind of the thing. I don’t know that everybody realizes they’re in this, this pot and you know, they keep looking at one more finance contract or it’s just, you know, another contract and other payment, but that not understanding that the weight of those payments Did you did you guys understand the weight of those payments,

Michelle Bosch 13:25

I think we understood the weight of the of the payments, but at the same time, it’s what everyone else is doing. It’s what is expected. You go to college, you get a job and you you know, you get married, you buy a home and you start making payments on everything pretty much, you know, starting at the bottom of the food chain, I think what was incredibly, I think a pivotal moment for both Jack and I was, you know, I was I was I went to school here at Thunderbird and Robert Kiyosaki actually the author of the Rich Dad, Poor Dad. You know better selling book he lives here in town and back then, you know, when I was a graduate student there, he had a some kind of a relationship with the university where a group of students were helping him develop and market and brand and package his Cash Flow Game. And I remember you know, me being friends with one of those because I wasn’t part of that group, but I remember going to, you know, a friend’s home and he telling us all about it and you know, what he was working on and even giving us a copy of the book and us reading that book and realizing oh my gosh, we need to move you know, from you know, the, you know, the employee, you know, quadrant into ideally as fast as possible into a business and even from a business into the investor side, you know, as quickly as we can. And I knew it also from home you know, that that that was the way to go. That was a way to really create, you know, cash flow that is truly truly passive because Because when, when I was young, my father passed away, but two years prior to him passing away, um, he had made a an investment in a commercial property back home. And it wasn’t his hot, you know, hot shot, you know, lawyer profession, what kept my mother and I afloat to this day we own this property. It was that investment in that commercial property. And so how passive can it be that a person is not there physically, but continues to take care of you financially?

So I knew from my background, you know, from my family that I had experienced this firsthand that it was possible that would, you know, what he was describing on that book, that, that that was, you know, that that’s real, that it’s not just ink on a page. And, and I think it took my husband a little bit of a longer time, because he comes from Germany, from a society where, you know, government is there to take care of you, you know, I mean, you know, in a way and so on and so forth. And, and I come from Third World country where there’s nothing, you know, nothing that is gonna prevent you from going down the drain and circling the drain pretty much. And, and so I think it was it took him a little bit but once he got it, he understood it. And I think it hit home for him when 2001 came around, and we had already actually, you know, jumped on the green card process with his company because we were doing it in parallel. And then, you know, September 11 comes around and his company is going from, you know, 15,000 employees to 7000 in one day, and we’re hoping, oh my gosh, that he’s not one because our green card process depends on that job. You know what I mean? So I think for him, it really hit home, you know, within a short period of time. I you know, I was going to school in 1999 2000 is when we’re exposed to the book 2001 you know, It hits him. And we’re like, okay, we need to put the pedal to the metal You’re right, and let’s start doing something. And I think it was, again, it was it was a, you know, a rude awakening, but based on the circumstances where you’re like, you know, on the spot with your back against the wall, that you’re next, you know, we need to find a job within the next 60 days or we have to leave the country, you know what I mean? That is willing to sponsor that you know, that working visa and that green card you know, status and paperwork and so on and so forth.

So yeah, so it’s it’s a little bit of being with your back against the wall with a little bit of experience from you know, what I had, you know, had in my family happened to us, you know, firsthand that brought us to the point where like, okay, you know, we know that we need to break up the cycle that it is possible, because I’ve seen others possible in a much smaller scale, of course, and we have done right now, but still, you know what I mean? I’m my mother as an elementary teacher would have never been able to afford a private schooling for me, send me to the US. To study, you know what I mean? It’s, it’s all been the results of that one decision that he made, you know, two years prior to invest. So it’s been for me now, you know, I see it as like, wow, it’s a it was a legacy for the unborn because I wasn’t even born back then when he purchased it, and now I’m on that same mission to create that legacy of prosperity for others for families, you know, for generations to come for people on my never know, but for some reason, you know, run into us now. And, and if we can share a little bit about what we’ve learned and how we’ve done it, we, it would be, I would have said it would have been a life well lived.

J Darrin Gross 18:40

Yeah. Well, it’s amazing. You know, two things you said there one is the kind of serendipity of the fact that your father did make this investment and the the cash flow from that was able to provide, you know, your family existence and sounds like you’re able to live fairly well and that you’re able to you know, make your And do things.

Michelle Bosch 19:01

Yeah. I mean, even learning English right now to be talking to you, Darrin, because without going to a bilingual school or private school back home, I would have not even learned a second language. You know what I mean?

J Darrin Gross 19:10

Right. Right. Well, just the opportunities. I mean, again, and I don’t know that everybody. Well, I think so much of what I think people get without those kinds of experiences is kind of the here and now it’s all about money and how fast kind of spend the money kind of thing. But the fact that you had this, and then also that the Kiyosaki experience. I know I’ve read a couple of his books. I think my favorite that I’ve read was the I think it was The Cashflow Quadrant. Think that one really spoke to me talk about the box or an employee back, there it is. But to me, it just again, is that mindset shift from employee to an investor kind of thing and just that mentality thing there. So that’s it. That’s awesome. I appreciate you sharing that with us.

Michelle Bosch 20:02

You can’t You can’t start a business with an employee mindset, you know that that’s something different also, it’s probably, you know, a different discussion but that’s, you know, you’re, you’re gonna have to give it your all, you’re gonna have to, you know, say yes to everything at the beginning, you’re going to have to, you know, work 80 hour weeks, you know, now so that you can live later, like, others are not willing to right now and so on and so forth. But, um, but yeah, it was, um, we were doing it anyways, you know, working for someone else. So what was the difference? You know?

J Darrin Gross 20:38

Sure. Sure. So I want to ask you, so you, you’re in multiple asset classes. You started off you did your first single family flip and it sounds like that there were some challenges there. You you found your way

Michelle Bosch 20:52

We actually didn’t we actually didn’t go through with a Darrin. We chickend out because, you know, we had our inspection period and we thought oh my god. We’re way over our heads, we chickened out and backed out of that.

J Darrin Gross 21:03

Okay? But you didn’t stop.

But you didn’t stop there. So, so then Okay, so you find your way to land. And you you recognize it’s not about getting to the courthouse, it’s getting to the people before property shows up at the courthouse. I understood, you know, and you mentioned there that you you perfected a letter. And I’m just curious about if you can share with us a little bit about maybe the first iteration and what you know, how long it took you to kind of work the kinks out to where your response was higher to where you you actually had a business what what kind of timeline was that?

Michelle Bosch 21:43

Oh, it was about three years, but um, but it was, but we had small successes such that you know, there were the carrot but was big enough to continue exploring it and both jack and I are similar in that once we put our sights into something And we see that it is possible to have a little bit of success that you know that that small success can translate into bigger explosive growth. It’s about you know, we’re both very perseverant. We’re complete Bulldogs when we like, decide that we’re going to, you know, perfect and master something. It’s, it’s, uh, we’re complete diehards. So So that’s, that’s, that’s one thing i think that you know helped us figure out the land and and really, you know, go through many many iterations of that letter where we would change you know, split testing, where you change you know, the first sentence award in the first sentence and then you send you know what you had before and you go and test that and then you, you see which of those wins and then that winner one you change another sentence and you know what I mean? And it took a little bit at the letter plus the process in the background. You know how to buy it, how to sell it. We became students of online marketing, you know, to be able to sell our, you know, our land online. So it was a process and eventually, you know, we came across a model. That is not something that we invented, but we came across a big auction company that was auctioning houses back in, I would say 2002 or three here in Arizona, and we thought, wow, if they’re auctioning houses, we could probably auction our our properties because we had no problem buying the properties. To this day, you know, we’re able to buy for five to 25 cents on the dollar very easily for every 750 to 1000 letters that we send, we get anywhere between six and 15 callbacks. And it’s people that got just really don’t want their property at all anymore. It’s not they’re not just motivated and just don’t want it. And for many reasons, maybe, you know, maybe we’re dealing with the heirs and the heirs live someplace else. Maybe they decided to buy two pieces of property at some point. where they were going to retire and they bought one here in Arizona and one in Florida. And they decided to, you know, retire here in Arizona. But now the Florida one is, you know, they don’t have their kids don’t want it, or divorce or time circumstances, you know, they need money for some reason. And they’re willing to, you know, lead gold property for very, very little money. So, so yeah, I took it, you know, between the buying and the selling, it took us a little bit. And on the selling side, like I said, we became, you know, students of online marketing. And then we came across this other model where we could flush 200 properties, properties pretty much in one day, I were buying, you know, having one a quarter buying about 80 properties a month. And with a team of 20 30 people at that point, you know, it was it was a business it is it continues to be a business right now. It’s just that now we have so much more technology, so much more automation that goes into that I’m able to do what I was able to do back then was a much smaller team. And I In Yeah, the investments in technology and in, I would say in, in mentorship in order to us be able to grow as business owners, you know, and get out of that employee mindset. Because it’s not just hard work, you know, the mindset, it’s also working on strategy for your business, for growth and so on and so forth. And building and recruiting amazing team that is there, you know, to really make decisions like you would, if they are aligning with your vision, and they’re aligning with your core values. I mean, a lot of those things I didn’t understand when I started, you know what I mean, but I understand now, and, and we’re able to continue to do it with a lot of ease and grace, you know, and, and not have a J O B, even though the flipping of the land is a J O B because if you don’t not send letters, if you are not selling, you are not going to have income coming in unless you sold a chunk of those properties. You know, But even that income is going to come to an end, you know, when they pay off the note that passive cash flow comes to an end as well.

So, so it’s, we call that, you know, the land flips for cash, we call them one time cash, the notes, we call them temporary cash. And, you know, the single families and apartment buildings, we call that forever cash, that’s pretty much you can sit on that asset, you know, for as long as you want to. And, you know, if you’re operating it at a good, you know, in a good way, it’s going to continue to spit out cash flow for you. And I mean, hopefully for for many generations to come because that’s what we want, you know, for Sophia, you know, I’m able to stand on the shoulders of my father, and I want her to stand on, you know, jack and my shoulders and, you know, grow this and continue building upon that for many generations to come.

J Darrin Gross 26:49

No, I love that. That’s, that to me, really is the power of real estate. Yeah. What I just ask you real quick, the, you know, the So you said you perfect system in a particular asset class, raw land, right? Yeah. So many people get content or just they they kind of keep the blinders on and they stay in their lane, if you will. And there I find it kind of the rare few that are able to recognize opportunities in multiple asset classes or be able to shift gears or recognize the opportunity. Can you speak a little bit to what it was that allowed you to say, Okay, we’ve got this going on. Let’s see what else we can do. Because you mentioned that you went to single family local, and then subsequently the multifamily.

Michelle Bosch 27:39

Yeah, I think in part, it’s the entrepreneurial bug, in that entrepreneurs by nature are incredibly curious. And, and that if you add that to, you know, a desire for always a bigger future check in our eternal optimists and, you know, we’re always of the belief that our Future is gonna be better than our past. And so in part was, I think it was it’s that in and also, like I said recognizing that one, that one asset class doesn’t entirely do the job for your long term vision, you know what I mean? And, and that you will have to, you know, start looking elsewhere at some point but it is incredibly important to, you know, when you’re starting because there’s so many ways to skin this cat in real estate to really focus otherwise, you do suffer, you know, the risk of shiny Penny syndrome, and completely diverting your your energy and having movement a lot, a lot, a lot of busy movement that doesn’t bring you forward. So I would say for a period of almost six years, we really focus exclusively on mastery for the land, you know. And what I mean by my mastery is like 4000 flips Like iteration after iteration after iteration because that repetition you know the scale allowed us repetition we you know that is an asset class because we’re able to you know buy so many and sell so many quickly that it that scale gives you the benefit of repetition and with repetition comes what I call mastery you know, I mean you cannot master something you can’t repeat like you know you can do I don’t know how many homes a year and if you’re doing I don’t know five or six because it’s a side hustle because you have a main you know, your main job I don’t know if that’s you’re gonna get a lot of mastery from it you’re gonna definitely learn but if you have thousands and thousands of transactions you know what that skill allows us repetition mastery. And once you have mastery in that one lane like you call it, you know, it’s like having a PhD and making money. And you can have you know, you can find a head to the horse that lane, because that lane is perfected, you know what I mean? And you can start, you know, focusing on Okay, where else can I innovate? Or where else can I accelerate my growth or my cash? Now my passive cash flow. And for us, you know, we, we kind of lifted our heads in 2009 after the 2008 recession, and everyone around us was losing their shirt and we’re like, oh my gosh, we continue flipping land. And, you know, let’s go now it makes sense to buy $50,000 homes put in there, you know, 5 10 thousand repairs, and go rent them before you know, prices here in Phoenix, where are wages it really didn’t make sense. So, um, we just, you know, kept discipline to what we knew how to do best, you know, and we specialize only in three types of properties even in the land, you know, we don’t look at all kinds of land, either it’s got to be infill lots, or path of growth lots or recreational property that is no more than two hours away from a major city that is experiencing growth of some sort. You know I mean?

So you know in either way I would say for the first two types of property for the land my exit my buyer is a builder is a financial model you know buyer, you know, that has a financial mindset. And the third one is much more of a retail customer someone that wants to go and you know, hike, be able to go fishing here in the White Mountain Lakes area up in northern Arizona or wherever it is, you know, because we don’t do it just in Arizona. We now you do it across 17 states and very little competition, because the last thing people think about when you think about real estate is a piece of land, but we don’t specialize and you know, the million dollar you know, infill lot here in downtown Phoenix, you know, I’m talking there’s a residential subdivision, and there’s houses everywhere and there’s one infill lot. You know, I mean, that has been sitting there forever, or path of growth, you know, between here Phoenix and Tucson. These two cities will eventually You know, merge, you know, anything between here and there here in Las Vegas. And it’s not just in Phoenix, like, you can find that same dynamic in Texas, in North Carolina, and Florida. You know what I mean? You you find that same dynamic and many of the southern states, which we like to actually focus from the, you know, middle of the US south, so that we can market year round because it’s hard to market a piece of land. Um, when it’s under, you know, a few feet of snow. Right, right. Yeah.

J Darrin Gross 32:30

Yeah, I can appreciate that.

Michelle Bosch 32:33

So, yeah.

J Darrin Gross 32:35

So and I guess the thing that I love that you shared there is just the kind of the mastering the one that was actually a cash flow vehicle. I mean, kind of like that, that that really was kind of the vehicle that gave you the opportunity

Michelle Bosch 32:47

That’s how we got out of the rat race with the land, you know,

J Darrin Gross 32:50

Right. And it wasn’t like you went from there and then you said, we’re going to go do Amazon stores or some but you stayed in real estate recognize that the real estate That there was a another and that you’re buying below the market. You mean you were aware of what was going on in the market, which I think a lot of awareness is really what you know, creates opportunity. I think that so often people are attracted to something with all the press and that’s at the height of the market, which is not necessarily the time to create an opportunity. Or, you know, it’s an opportunity for the seller, but maybe not necessarily for the buyer to create instant equity. I want to ask you, given the in Today is May 27 to 2020. We’re somewhere in the middle of this COVID crisis. States are reopening but the economy is taking a major hit. Before we we pressed record, we were talking a little bit and I’d like if you can kind of speak to how the different asset classes are performing in this time of economic uncertainty.

Michelle Bosch 34:03

So in the land space, like I was sharing with you, we cannot, that’s the land is selling like hotcakes. We cannot keep it long enough. And I think it’s partly possibly because people want to get out of their home in the city and have something to go and look forward to for a weekend without wearing a mask. And without, you know, any risk of infection. You know, we’re also seeing a lot of you know, financial buyers right now a lot of builders that were looking probably four times like now to go out there and buy so there’s an influx of also people looking for bargains out there. Um, and in, in so on the land. I continue seeing basically no difference in any if anything, there’s an improvement right now and even over the long term. What was our, you know, experience back in 2008 was that, you know, landed type of land that we specialize on is maybe lagging six months behind, you know, commercial and single family. And that we, if we see the effects, we’re going to probably see the effects that we saw back then. Which is we’re going to have to buy for lower, you know, and sell for lower, you know? But if you can buy for lower, you can sell for lower and still make, you know, 10, 20 $30,000 profits, you know, spreads because our typical spread is between 10 and $20,000 on a piece of land. And so we’re, we’re going to continue to be able to generate those on just perhaps, you know, instead of 10 to 20, maybe they become, you know, seven to $15,000. But it’s still I mean, it’s still a good deal. You know, from my perspective, and in on the on the single family homes. What we have seen so far is 100% collections, you know, on all three markets. We’re here in Phoenix, we’re in Cleveland, and we’re in Omaha, Nebraska and our single family home. 100% collection.

Um, and, you know, we, we anticipate that to remain that way if anything, maybe, you know, a slight decrease, but, I mean, we we are, if anything here the, you know, City of Phoenix is the only one where I could say, well, maybe some of you know, I’m gonna see some of my values drop, you know, in terms of you know, the, the properties, but we are not necessarily an investor is looking for appreciation when it comes to the single family when we started investing a single family in 2009. You know, we were looking at 1960s homes that are brick built that are not made out of the drywall, you know, or and, and that that, you know, there were brick built that we thought it families need to, you know, come together and live together in order to come out of an economic you know, situation that it needs to be strong walls a strong home. And so on and so forth. And so it was never with a mindset of like, Oh my gosh, you’re going to appreciate which they did, you know, four or five times of what we paid for them. And in some of the, you know, real estate that we bought here in Phoenix, we actually when we hit that, you know, I would say three, four years ago, we started selling some of that and you know, in selling a home that I bought for 50,000 I sold it for 200 and then when again and started buying the same home and Cleveland for 50 and in Omaha, Nebraska for 50 again, you know, I mean, sort of one sale of one home I was able to buy for and in other markets were basically there were at a different you know, cycle at a different part in the market. Yeah. And and so I predict that that will continue to happen. Like I said, I’m we had the appreciation and we would love it, but that’s not what we’re going for. We’re going for the cash flow. And on the multifamily side on the multifamily side, I have seen right now. You know, our property in Louisiana, North Carolina and Oklahoma City, what we have is anywhere between 90 and 96% collection rate. And it’s kind of normal to what we’ve experienced in the past without a pandemic without an economic downturn. And we’re pretty much in line where we’re at.

And I think the reason why is that in all, you know, in two of those three markets, at least in two of those three markets, we have a, what we call a cone of prosperity from the government in that I’m very close to in North Carolina to Fort Bragg. And I’m very close to Tinker Air Force Base and in Oklahoma City. And a lot of the tenant base basically is either military or retired military. And if I do have, you know, a percentage of people that is workforce, people that might lose their jobs. It’s It’s, it’s, it’s much smaller than if you weren’t in in other areas. You know what I mean? Because of that, we’ve been able to mitigate and we purchased those assets. With that in mind that if something was to happen in the economy that we would want to have a, a, we call it a, you know, a artificial cone of prosperity with a government agency with a government as an employer or a big employer like an Amazon or whatever, you know what I mean? I always look for such a, an economic cone of prosperity close by to the property where we’re going to be buying.

So um, but but it’s still you know, there I know that we’re probably getting out you know, gearing up to you know, the, your your risk mitigation and I you know, I can already start talking about that on all three, you know, asset classes, but specifically on their apartment side, you know, the BIGGEST RISK that we have right now is that for the percentage of the tenant base that is unemployed, or that has lost their job because it is worked for housing, we buy c properties and B neighborhoods you know, that that if they’ve lost their job and unemployment you know, kept gets cut down, that they might not be able to To make their rent payments, so though, that’s a big risk right there. Another risk is that you know, the economic recovery is longer than expected. And that therefore, you know, we are seeing having to carry, you know, a delinquency or a vacancy, you know, well right now not even a vacancy because we cannot evict So, so you know, that we’re carrying a delinquency for longer than we want to, you know, what I mean? And some of the measures that we’ve taken it, you know, in order to preserve cash is in the beginning we are funded in order to be able to have you know, well capitalized asset number one, but now we’ve we’ve pretty much you know, cancel any big CAP X project for all three properties. We stopped already immediately because we were coming to the point where we were going to have to make payments you know, cuz on two of those three properties, we we’ve syndicated the asset and it’s So we we stopped, you know, payments to our investors just out of precaution. And the properties have had amazing collection rates that I could have paid them. But I continue to hold on to that cash, because I want to have a little bit more time and visibility into what happens right now come July, August, you know what I mean, in terms of where we’re at, you know, with the economy where we’re at with unemployment and, and yeah, so those those are some of the things that we’re doing but we hope that by being a from an asset management perspective, a first in class community because that’s what we strive for, you know, when we come across a sea, you know, class acid in the neighborhood, we want to become the best. C there is such that there is a if there is an economic pressure, you know, that even people that are in a B property right now, that might be slightly nicer that when they have to downgrade that they’re going to downgrade into the next nicest C which would be us, you know what I mean? Um, so.

So that’s kind of how we’re going about doing that is just making sure that we’re well capitalized. I’m not excited about forbearance at all, I believe in making pay if I can pay my bills, pay my bills. And, and yeah, so now our conversation is starting to shift actually with, you know, our investors and into opportunities, because we know that there, there are owners and operators, large multifamily that bought in the last year, even within the, you know, last quarter of, you know, to 2019 that we’re expecting, you know, in forecasting in their models, rent increases, you know, 3 5 7 percent and now, those increases are not materializing. I mean, they are gonna leave and there’ll be opportunities out there for us to go and Again, just like we bought here in Phoenix back in 2008. This time we’re going to be buying large multifamily. So kind of positioning ourselves for that, you know, having that, you know, that conversation and opening that mindset to the investor that, you know, that wants to invest with us that, that this is the right time to buy, you know, when this happens, and even though everyone else is trying to sell and trying to get out that it’s okay to be a contrarian, but it’s okay to, you know, you have to stomach and go against the grain of what everyone else is doing, because we’ve done it before and it’s, it’s paid off tremendously. So, um, so that’s kind of where we’re at right now. Yeah.

J Darrin Gross 43:41

No, I appreciate you sharing that with us. The other risk, like I do like to ask people, you know, what they consider to be the BIGGEST RISK. Clearly, the, the, you know, the economic uncertainty we’re in, you know, is is it’s going to create some opportunities. I mean, I think that’s the one thing that’s always and I think your story is illustrated at well, is that, you know, when when, when there is a situation it’s not only a I mean it’s trouble for some but it’s opportunity for others that are well prepared. Yeah, it sounds like you’ve been able to take advantage of that. So I appreciate you sharing that. Well, you knocked out the the BIGGEST RISK question and I appreciate you doing that. Michelle, Where can the listeners go if they would like to learn more or connect with you?

Michelle Bosch 44:34

If you’re at all interested in learning about land, you can go to LandProfitFun.com because it’s fun to make money with land. And so land profit fun calm. You can also go to Michelle calm MichelleBosh.com. I’m sorry, MichelleBosh Bosch. And, yeah, from there, you can connect with me on Facebook. I’m on Facebook as Michelle Bosh, Instagram Michelle Bosh, official. And our podcasts, you know, Forever Cash, podcasts and the Inflow podcast.

J Darrin Gross 45:06

Got it. Well Michelle, I have enjoyed this immensely, and I can’t say thanks enough for taking the time to talk. I learned a lot, and I hope we can do it again soon.

Michelle Bosch 45:18

Absolutely. It was my pleasure. Thank you so much for having me.

J Darrin Gross 45:21

Intro 45:39

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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