Unsophisticated investors buy off cap rates. I don’t really look at cap rates when I am purchasing because it is usually manipulated. If the seller or broker leaves out an expense or over counts revenue it greatly distorts the cap. Therefore it is a bad data point. I normally look at the Profit and Loss statement cause that is where you can drill in line by line.
NOI vs. Capex Yield – CPE 19.11.2 – “Variables such as age, location and property type can influence how much capex is required to operate an asset”
140-Character Bio: Father, Husband, Son. Industrial Engineering Consultant, part time options trader and real estate investor.
1) How much simple passive Cashflow are you making today and how are you doing it?
(You don’t need to give a number if you would like privacy. You can be vague such as halfway to quitting my job, cover my mortgage, Make 25% of my expenses, over $10k, although people like when people open up the kimono.)
About $1,700 per month PRO FORMA – accounting for a conservative amount of vacancy, maintenance, capex and management. 7 rental properties and counting. It is passive for the most part because they are all professionally managed. I spend very little time after the initial acquisition and rehab.
2) What is your Han Solo moment – Han Solo and his buddy Chewbacca from Star Wars were cruising around the galaxy as lowlife smugglers but then cross paths with Luke and Leia and his life took a pivot point. Describe the resistance that was the catalyst for change.
Did you “burn the boats” or did you let it happen naturally – was there an internal (you decided to make a change on own – what was thought process?) or external trigger (ie got fired from your job)?
I love Star Wars 🙂
I can talk about the moment when I realized I didn’t want to be a high powered consultant for the rest of my life. Then I realized that I had NO IDEA what I wanted to do with the rest of my life…
3) Worst life/business moment what did you do after? Lesson learned?
I could take this multiple directions…would like some examples of what others have answered…
4) Current 2-week experiment and 6-month project? (90-180 day goal) A mark of a high performer is to put your ego aside and accept the help of others and mastermind maybe folks can help you by you asking.
2 week experiment: I recently took on a “mentee” and asked him to help me find deals by driving for dollars.
6 month project: building a direct mail campaign to increase my deal flow.
5) What is your simple passive Cashflow number? Now imagine you had 2x that amount… Describe your ideal day, detailed routine, and what projects you are working on.
Assuming you mean how much cashflow I need to not work?
$6K per month and my wife and I could comfortably both not have to work, so that is the goal right now. That might increase depending on where we buy our next house (in a few years) and how many kids we have.
2x that amount…I’d wake up early, before the kids, and do my “Miracle Morning” routine, including meditation and a 1 hour workout. When the kids and my wife wake up, we would do something outside. One of our long term goals is to own a lake house, so I’d probably be working on improvement my lake house or future primary residence. I want my future primary residence and lake house to be value-add investments…
6) Something that you have recently or thought about “burning your cash” on for time savings or an improvement in quality of life.
I’ve made the decision to forgo making money on Fridays – Fridays are Daddy day for me to spend with my one and half year old son. I give up a lot of income but it is great for the soul to spend a whole day with just me and my son.
7) Something that you changed your mind on? Our ego often gets in the way of greatness.
I changed my mind about real estate – I used to treat it as a completely passive investment – I now think of it as a business and this mindset has opened up new possibilities and has opened up some fruitful relationships with property managers, contractors, etc.
8) In this sellers market… what are you investing in? What should a someone who does not have a substantial level of cashflow yet be investing in?
Value-add (also known as BRRRR’s) single family and multi-family properties. Less competition and opportunity to force appreciation and preserve capital.
Someone with little cash flow should buy a house hack – buy a multi family property, live in one of the units and rent the others out.
8) Tony Robbins identifies two large concepts that we are continually struggling to gain perfection at: #1-Art of Fulfillment and #2-Science of Achievement. If you died tomorrow and I were to email this to your kids a couple decades later… this is what they would hear.
What is your secret/hack for the “Science of Achievement?” Any secret habits to share? Morning or Nighttime ritual?
I talked about the morning routine that I try to do. I would say be strategic in everything you do and constantly be running if/then scenarios. Have backup plans for everything. Be constantly prepared to react to things beyond your control. For example what if rents drop 20%? What if we have another Great Recession? What if I have a health problem and can’t work?
What is your secret/hack for the “Art of Fulfillment?” How you do contribute back?
I would say just to act with integrity and honesty in everything you do. People like dealing with people they like…it’s pretty simple. Treat people with respect both in business and your personal life.
9) Anything we missed and contact info if you would like anyone to get a hold of you. URL?
My website iswww.realliferentals.com and I use it to track my monthly portfolio performance. I can be reached through the contact page on my website.
Notes from a lawyer learning to see beyond the maze
Imbued with the dream of becoming a lawyer — upholding the law, arguing in front of a judge and jury, defending the underserved or mastering the art of the deal — you head to law school and never look back. Three years and over $150,000 in student loans later, you graduate, eager to apply your newly minted legal mind. You pass the bar and proudly step into your new job at a law firm, corporate legal department, or government office. But unbeknownst to you, despite your juris doctorate degree and “Esq.” title, you’ve just entered the same rat race as the majority of the U.S. workforce.
I know all this because I’ve been there. After graduating from law school, I was lucky enough to find a job at a “biglaw” firm where I practiced corporate law in the mergers and acquisitions field. That meant many 80+ hour weeks representing companies and private equity firms in the fast-paced, high pressure world of buying and selling companies. My colleagues in litigation practices were subject to less ups and downs, but were still regularly cranking out 60+ hour weeks under intense deadlines and filings. We all got there by employing the same mentality we used all through our lives — work hard, perform well to achieve the goal at hand and collect applicable accolades. What I realized when I got to the “top” of the legal profession, however, was that the view wasn’t so pretty.
The Golden Ticket?
Landing a job at a top ranked biglaw firm, at first, appears to be a golden ticket to higher compensation, benefits, opportunities and ultimately, a better life. Biglaw firms were seen as the most “prestigious” in the legal world for handling the most complex work and servicing even more illustrious clients – big pharma, tech giants and oil companies. The associates and partners are paid top dollar in return for their expertise, ability and availability. For instance, right out of law school in 2018, a first year biglaw associate is paid $190,000 as base salary and is eligible for a $15,000 annual bonus. For the next eight years, the base salary and annual bonus at most biglaw firms increases in a lock-step fashion according to the market-setting Cravath pay scale. Beyond the compensation, top-ranked law firms boast taglines of “unparalleled legal training” and the opportunity to “work with like-minded intellectuals” and “sophisticated clients” on “diverse and challenging matters.” For these reasons, even after a long hard week where you may be subjected to extreme stress, no sleep and eighty billable hours (not counting the ten non-billable hours of face time at the office), you are supposed to put your head down, keep going and receive that big fat paycheck every other week. After all, it’s worth it, right?
Why We Do What We Do
A handful of lawyers enjoy the practice of biglaw and its intellectual rigor — the litigator’s ability to creatively craft a brief to sway the court’s decision (or checkmate the opposing side into settlement) or the dealmaker’s negotiating savvy that secures the client’s acquisition of a promising portfolio company. These select few are the ones willing to grind it out for years into a lucrative partnership with the firm.
But the vast majority of biglaw attorneys are young professionals who admit they are not particularly interested in partnership and are only looking to gain some experience and training to parlay into an in-house position in a company’s legal department or a smaller firm, where they will take a substantial paycut in return for a more balanced lifestyle.
Nearly all biglaw attorneys share one thing in common: a $150,000 plus student loan burden that makes a high-paying six figure job that much more appetizing. Lawyers are known for their risk aversion, and many think that this debt is a risk in the sense of impairing their ability to dump their earnings into savings and their 401k. As a result, it was common for colleagues to talk about surviving in the trenches of biglaw long enough to eliminate their student debt.
Finally, there is the phenomenon of the golden handcuffs. Law firm associates get used to the high income and adjust their lifestyles accordingly. As a result, they believe themselves to be stuck in their jobs. Of course, they don’t realize along the way how much money they are wasting to make themselves “happy” — buying the nice watches, a few bottles of wine each week to unwind at a fancy dinner, the new car — and that they are holding the keys to the handcuffs that keep them at their job and lavish lifestyles.
At What Cost?
Time = Money
Being a lawyer at a firm is the epitome of trading time for money. Your working life (and therefore the majority of your life) become ruled by the billable hour, and you start to see your life measured in .25 hour increments. Associates are expected to meet certain billable hours (i.e., hours actually billed on client matters) in order to be eligible to receive the annual bonus. With the billable hour as a metric, your value as an attorney is measured by how productive you are and how efficiently and precisely you can churn out work product per hour. These billable hours are the firm’s source of revenue, and it is not uncommon to have a billable hour requirement of 2,000 hours per year. 2,000 hours equates to a roughly 40 hour workweek. Not bad right? But that does not include lunch, bathroom and water breaks, and any minute away from your desk chatting with a friend or asking your secretary to file away old matters. It was not uncommon to work a 9 a.m. to 8 p.m. work day only to see my billable time for the day clocked in at a measly 7 hours. Sometimes, there was not even enough work to support that, and during these slow times, it was not uncommon to bill 4 hours or less even though I was in the office the entire day. Finally, not having steady work flow meant oftentimes getting reacquainted with matters that you had not seen for 3 weeks or so, and feeling pressured into writing off the first hour you spend getting your bearings so as to not look slow or inefficient. This “billing” pressure — having partners pressure you into billing more hours to pad their pockets, but also to be conscious about keeping the client’s bill down to create the image of efficiency — takes a toll on associates and even partners. Even at the most elite firms, the most senior partners who have worked 60-80 hour weeks for over 20 years earn at most in the low seven figures. Unless you are the plaintiff attorney taking down big tobacco or pharma, there is no such thing as “the sky is the limit” in the legal profession.
Serving Two Masters
Associates working at a law firm really have two clients: the partners they are working for and the clients who the firm is working for. Both partners and clients expect that associates be available at all hours of the day, 24/7. For instance, a client could email regarding an emergency before the break of dawn, but the associate is still expected to give a timely response (within the hour). Similarly, a partner could give an associate an assignment before he heads home for the day and expect to see the work product before the next morning. There are no boundaries on when partners and clients can expect an associate to work. It is even more frustrating when you realize that the client bossing you and your partner around is a 25 year-old who stepped into his current gig after working at an investment bank for two years after undergrad. He’s the one who dictates your weekend plans by needing an update on the deal memo and other docs “immediately” so he can let his own boss know that his trip to Vegas won’t be a disruption since the lawyers will still be turning drafts all weekend.
A Thankless Profession
Starting out as a young associate, one expects to be inundated with the trivial tasks, such as due diligence of companies’ customer contracts in a buy-side deal or doc review to find the smoking gun. One would think that the more senior an associate becomes in a law firm, the more control they would have over their schedule, perhaps by delegating work to younger associates. However, it’s the opposite. The more senior an associate, the more responsibilities he or she will have and oftentimes, it is too complex of a matter to delegate to younger associate. Partners’ responsibilities and commitments between doing the work for multiple important clients to business development (which does not count toward their own billable hour requirements) have it even worse and are often working earlier in the morning and late into the night.
One particular memory I have from my time working in biglaw was a conversation I had with a partner on the eve of a transaction’s closing. It was about 3 a.m. Friday morning at the end of a week of late nights, and we were leaving to get a couple hours of sleep before an 8 a.m. closing call. He said, “You know how we lawyers all think we are the smartest people in the room? How when a business guy says something way off, we roll our eyes and figure we’ll have to get it right in the contract and negotiation? Well, we’re actually the stupid ones. We’re in the wrong profession. That business guy went to bed early fully expecting that we’ll get this thing done. He’s getting paid big tomorrow morning and may not ever have to work again. And we’re here until 3 in the morning and all we’ll get is a thank you and a bottle of wine at best. But if we mess it up, we’re gonna have a lot to lose. And this is only one of the 3 deals I have closing tomorrow.” That conversation stuck with me. Granted, he’ll get a share of the legal bill for the deal, but here was this well-respected, well-paid partner in his late 40s admitting to me that he made a career and lifestyle mistake. He was out of shape and always looked stressed out. The worst part was that he was sticking to this career with no end in sight because his attitude was that he made his bed and he just has to lay in it. I knew definitively that I never wanted to be like him, at the peak of my career, telling a younger colleague that someone else out there was living the dream while I was toiling away, trading my time for money.
Life on the Run
Because associates are expected to be available 24/7 and to meet the billable hour requirements as mentioned above, it is nearly impossible to find work/life balance. It was normal for associates to be working in their office late into the night everyday and on weekends and holidays. I used to joke with colleagues that “of course I’ll be in on Monday, it’s Labor Day after all!” Clients like to take their holidays, which meant that you would often be stuck with something as they head out the door.
Your exercise and eating habits also fall by the wayside. And even when I was able to drag myself to the gym on mornings with only 6 hours of sleep, there was always the stress. Some of my friends refused to wake up early for the gym because that meant another hour of consciousness where you could be subject to an email that would ruin your day. Biglaw is notorious for being able to take a normal working day from a 2 out of 10 stress level to a 10 out of 10 client emergency, and you never know when the next fire will need to be put out. I’ve counted more than five of my own personal biglaw acquaintances who fell prey to stress manifesting in the form of severe illness.
Countless birthdays, Thanksgivings and family get-togethers were either missed or spent in the other room cursing under my breath as I tried to turn a document before an artificial deadline. I would make weekend plans while at dinner on a Friday night, only to get an email or phone call later that evening letting me know I had to be in the office all weekend. Breaking plans with loved ones and friends was one of the most soul-crushing feelings about legal practice, as you knew that you were directly affecting their lives, not just your own. Ensuing stints of depression were not uncommon. And you know it doesn’t get better when the partners and more senior associates are in on weekends earlier than you and there well into the night. Sometimes my fellow associates and I joke that maybe these partners secretly hate their families, because they’re always at the office. But sadly, the truth is that they have convinced themselves that this is the only way to make a living, and therefore trapped themselves for good.
The lack of your ability to have a social life, take control of your health or maintain your relationships gives the biglaw attorney the sense of playing Russian roulette, but instead of a “bang,” you dread the “ding” of your email on a Friday night. There was always the sense of looking over your shoulder, because sooner or later, biglaw was going to get you.
Learning to Love the Law After Drinking the Kool-Aid
I knew pretty quickly that I could never sacrifice my family life to the needs of my clients to such an extreme, and so I began to look around for a way out of biglaw and the life of a lawyer in general. On my long commutes to work, I stumbled on investing podcasts, and then real estate specific podcasts (even this light hearted on with this dude and his ukulele), and although I did not have a way out mapped yet, the one catalyst on interviews that everyone mentioned was, of course, Rich Dad Poor Dad by Robert Kiyosaki. Once I read that and his Cash Flow Quadrant, I knew that the universe was telling me that there had to be another way to live a meaningful life, and that it was passive income and cash flow investing.
Of course, it was nearly impossible to take action, since biglaw was an all-encompassing job. So I tried to learn what I could about the world of passive real estate investing so that when the time came where I had enough control over my life to start investing, I could be ready to pounce.
After listening to hundreds of podcast episodes and reading dozens of books on the subject, it became clear that to escape the rat race, leverage was an important factor. Not just in the sense of using debt to acquire cash flowing properties, but leveraging your time and your talents. So that begged the question: how can a lawyer’s skills and resources be parlayed into real estate investing?
Lawyers generally have higher incomes due to their advanced degrees. As mentioned earlier, biglaw associates straight out of law school make nearly $200,000. Outside of biglaw, even government lawyers can make six figures. This means quick accumulation of investment capital through earned income (W-2 wages). With the right knowledge on controlling finances, a lawyer can save well into five-figure portions of their salary per year, which can allow for the rapid growth of a cash-flowing asset portfolio. In addition, a lawyer’s personal network will invariably include many similarly situated legal professionals with disposable income for investing, which may prove useful for raising capital and attracting other investors to deals.
The skillset of a lawyer is also applicable to passive real estate investing. Lawyers have very strong reading comprehension, writing, research and negotiating skills. Real estate property analysis can be learned, but the ability to spot issues and inconsistencies and to tackle complexities is what lawyers are trained for, and this will inevitably come in handy when dealing with agreements involving your real estate investing (including term sheets, purchase and sale agreements and private placement memorandums). Due diligence is a familiar term of art for transactional attorneys, and similar principles apply in the real estate purchase context. Furthermore, managing more junior attorneys or specialists (especially in an M&A deal) is useful experience when applied to overseeing your own investment team of property managers, agents and other advisors.
Finally, a lawyer’s title carries a sense of professionalism and respect that translates well in the investing world. When I was a biglaw associate, sophisticated clients with 20 years of experience in investing often called me to ask me to explain a complex vesting mechanism or to handle the entire due diligence process in their purchase of a hundred million dollar company. Being a lawyer may bring some negative associations due to popular culture and general experience, such as being conniving, risk averse or not business minded, but by branding yourself as a business savvy and commercially-minded attorney trusted with great responsibilities in your W-2 job, you can stand apart with your less common background and skill set.
Planning the Escape
As a lawyer at a biglaw firm, I had little control over my life and free time. Eventually, after years of going through the grind, I was fortunate enough to land an in-house position, where I am generally on a 9 a.m. to 6 p.m. schedule. This was a crucial step that allowed me to devote more time and resources to passive real estate investing.
In order to get started on escaping the maze of a W-2 legal job and the rat race, an action plan is needed. Most important is an investment in one’s financial education. Start with Rich Dad Poor Dad and Cash Flow Quadrant to drink the koolaid (or SPC Latte) and indoctrinate yourself into the paradigm of being financially free and having real wealth. Listen to podcasts such as the Simple Passive Cashflow podcast, and read books on real estate investing.
Then, after a few books and podcasts to get yourself comfortable, it is time to take action. Do not get caught up in looking for the next shiny object that will be the magic pill to get out of the matrix. Financial independence and escaping the rat race takes time, and you should not be distracted by what others have done to amass total wealth if their situation is much different from yours. When observing the stories of other W-2 income earners and how they have mapped out their escape, one thing became clear: the investing must be passive, and intentional efforts and actions have to be made towards pursuing even those passive investments. Not to say that quitting your legal job now and diving into real estate or other investments cannot be done, but just realize what it is you’re trying to achieve. If it is financial independence and escaping your rat race job, then focus on attaining passive income that will cover your expenses, and then replace your salary. If you’re looking to get out of the law by jumping into flipping or wholesaling real estate, just realize that you’re just doing a career switch into another active endeavor and that you are not achieving financial independence in that way until you have a passive income stream from your investments.
Like Plato in the Myth of the Cave or Neo in the Matrix, the paradigm shift is the most important first step in seeing the truth. Without it, we are just highly educated esquires blindly fumbling through the corporate ladder or firm hierarchy until we reach 59 ½ years to collect our 401(k) payments. I am lucky enough to have gotten through the first level of the maze of the legal profession that is biglaw, where time is traded for dollars. I am now on my way in the second level, where the only way out is the accumulation of passive income. Many tell me that once I free myself of the day job or the need to collect a paycheck I will begin to ponder what else to do with my time and find difficulty to find fulfillment after. Well, I welcome that first world problem 😉
If you’d like to learn more about how to escape, start here on the Journey to Simple Passive Cash Flow.
As far as workouts go for you, Jeff asks what your goals are, why they are important to you, and what time availability you have throughout the week to get in sessions. Then he recommends if 1 if not 2 days a week is good for you depending on what you are looking to do.
“We specialize in creating a personalized 13 point training system that holds you accountable to attain your desired health and fitness goal in 3 months…GUARANTEED”
This is why you see me doing smaller deals that although they are not spectacular 300+ unit deals it is something that I and a small tight-knitted group can qualify for the debt ourselves and organically raise the money ourselves which…
1) eliminates the need for artificial dead weight and liability in our GP and deal (risk for even LPs) and
2) we don’t have to give a celebrity GP a large portion of the deal which allows us to be fairly compensated as GP’s and do generous 85/15 LP/GP splits and under 1-2% acquisition fee deals
If this is totally foreign to you do not hesitate to contact me or setup a call if you are currently a Hui Deal Pipeline Club Live investor.
“What I’m about to say, I say with no judgment. I write not with the intent to point fingers, but because I know many of you have families that you love and cherish. I want you all to be able to be present with your families and be able to fall asleep at night, instead of putting your families through several years of expensive, anxiety-inducing lawsuits, SEC proceedings, and financial stress.
Something odd has been happening in the real estate syndication industry over the past few years. There is a new breed of sponsors that call themselves “capital raisers”–many of whom are violating securities laws because they’re being paid transaction-based compensation, despite not having a broker-dealer license from FINRA. Capital raisers seem to be coming up with all kinds of creative “loopholes” around broker-dealer laws that just don’t hold up.
Over the past few months, I’ve seen or heard about the following suspect practices
Capital raisers getting paid from acquisition or asset management fees
Deals with over a dozen individuals in the sponsor team
“Deferred equity structures” where a capital raiser is rewarded with a slice of the management or sponsor entity depending on how much is raised
Capital raisers claiming to be “part of the General Partnership” when they’re not mentioned anywhere in the PPM or Investor Summary/Deck
Investors being presented with the same deal from multiple different people claiming to be part of the Sponsor
If you are considering any of the above, or considering bringing in a ‘capital raiser’ to be a part of the sponsor team, I recommend you reconsider.
If you want to know more about why many capital raisers are raising funds illegally, I explain the legal basis in more detail in this article.”
And more on 20.03.4:
Client Alert: Recent Real Estate Syndication SEC Actions
DISCLAIMER: The following is not legal advice and does not create attorney-client privilege. It’s purpose is to educate you on newsworthy events. You are advised to contact an attorney for legal advice.
Dear Clients and Friends,
Last week, we received several calls and emails from concerned syndicators regarding SEC letters and subpoenas recently sent to several prominent syndicators.
The subpoenas surround an investigation around one specific company and several related persons and companies related to that company. Passive investors in certain deals relating to the syndicators have also received letters asking that the investor preserve evidence and refrain from deleting or destroying certain materials.
Although the SEC is vague in its communications, we believe the main issue in the investigation appears, at this time, to be the “co-GP” or “capital raiser” issue—i.e., the compensation and inclusion of third parties into the sponsor or management group (or GP). Previously, some syndicators believed that merely including a third party into the management group whose sole purpose or job was to raise capital would not require broker-dealer licensure under the “issuer exemption.”
While this initial investigation is limited so a few specific parties, we do believe that the SEC investigation may lead to further enforcement against additional parties based on widespread practices we’ve been seeing in the real estate industry.
WHAT TO DO
Syndicators (generally): We’ve been told by many over the past several months that “everyone else is raising capital this way and I haven’t heard of anyone getting in trouble.” Well, this is our heads up to you that people are now potentially in trouble. So please heed the warning—don’t use third party capital raisers, limit the number of folks involved in your syndication, and make sure that EVERYONE in your sponsor group has legitimate, on-going roles in the syndicator other than raising capital, investor relations, and due diligence.
If this issue sounds new to you, you can read our previous client advisory on this topic here. We also recorded a Q&A session on this issue with the former Western Regional Director of FINRA (the agency that regulates broker dealers) here.
If none of this applies to you, then keep calm and carry on. You’re doing great
Syndicators who have received a subpoena (none of our clients, since we’d never let you): If you know a syndicator who has receive a subpoena, you should tell them to lawyer up immediately. Friends don’t let friends respond, communicate, or contact the SEC without having a lawyer. Once your friend has a lawyer, the SEC knows that it must communicate with your friend through that lawyer. Your friend also should not hire any regular lawyer—they should hire someone who specializes in defending against SEC enforcement actions and does this on a daily basis. Bonus points if this person was formerly a regulator. While our firm does not do this, we know folks who do, and are happy to give referrals.
Passive investors (generally): One question we’ve gotten is whether its still safe to invest with the parties under investigation. Well, that’s up to you. You should know going into any future deals that these syndicators may be spending a lot of time and resources dealing with the investigation for the foreseeable future. Additionally, they MUST disclose in their offerings that they are under investigation. Basically there’s going to be a lot of extra trouble due to legal risks.
In terms of what happens from here on out (and what options are available to you), you must remember that you invested in private securities, so these securities are not publicly tradable and hence are generally illiquid. If you want to exit the deal, you could attempt to sell them via a secondary transaction, but know that 1) you can only sell these 12 months after investing, 2) you would need to disclose the investigation to the buyer, 3) it’ll cost a significant amount of money to do the legal paperwork that transfers the securities (and you need to consult the original offering documents to see if it’s even allows), and 4) it will likely be at a discount.
It’s hard to say where to go from here because there are a lot of pieces in play. The SEC could do nothing or could merely order that any compensation received by capital raisers be given up. They could also go further and order rescission (the return of capital) to investors, amongst a number of other remedies. State regulators may feel inclined to get involved. Co-investors could file a civil suit (which may end up with investors footing the legal defense bill depending on the indemnification clause in the offering documents).
Passive Investors who have received letters: You should follow the instructions on the letter. We have also gotten questions about whether it’s a good idea to call the SEC, since they invite you to communicate with them. In general, it is never a good idea to talk to any law enforcement without an attorney.
Earlier this week, I did an interview with James Eng, Senior Director of Old Capital Lending. James and I were doing a little promotion for his Old Capital’s national convention next month in Dallas, where I will be speaking about an epidemic that has hit the syndication community.
More than any other issue out there, this one issue is the one I believe will really bring some Syndicators down whenever they start having problems with their deals, most likely caused by the next correction, whenever that happens.
The epidemic is simply this: bringing in people into the syndication as pure “equity raisers.”
In the old days (and by old days, I mean 2-3 years ago) it was common to see single syndicators or at most 2 syndicators. After all, most syndications can easily be done by 2 people and when you add more and more, you are watering down your returns as a sponsor.
Even when more than 2, these syndicators had been business partners for many years and had done multiple deals together.
However, over the past few years, we have seen the emergence of “money raisers” who’s sole or primary role is to simply raise money. They go from deal to deal, offering to raise money in exchange for a “piece of the pie.”
Well…. Here are the 5 things you must remember when you are thinking of bringing someone into your syndication team who has the ability to raise a lot of money for your deal.
1. You CAN NOT compensate someone for raising money, unless that person is an SEC licensed Broker/Dealer. Compensation is not just cash. It includes ANY type of compensation whether shares in the GP, sharing of fees or profits or old fashion cash.
2. If you are paying someone based on how much money they are bringing into the deal (ie: transaction-based compensation), you are dead in the water. Game over. End of story. Period!
3. Even if you are not paying someone transaction based compensation, this doesn’t mean you are good. It simply means you are allowed to proceed to the next level of analysis and look at the ‘Facts and Circumstances’ of your particular case.
4. You still can’t directly compensate people for raising money (even if not tied to the amount they raise). So giving Johnny 10% of the GP in exchange for simply bringing in money is still a no-no.
5. They must be legitimate co-sponsors in the deal so they can rely on what we call the “Issuer exemption” and rules that revolve around it. In order to comply here, the co-Sponsor must be doing “substantial” work and the “primary” responsibility must be something OTHER than raising money.
If a regulator were to ask you “What did Johnny do in exchange for their 10% GP interest”, you answer can not be “He helped me raise money”. You must prove to the regulator (and it is YOUR burden) that Johnny was compensated for something else and that needs to make sense.
If you want to see the video I did this a few months ago (which has been viewed over 1,000 times), then check it out here. https://bit.ly/2lHLlxO Hope
As I continue to sell of my annoying turnkey rentals I can proudly say I am down to my final 4 of 11 rentals!
I normally list at 95-98% of market value to inspire multiple offers and entice those cash buyers who are a lot less of a headache – trouble is they don’t bite on over priced properties.
This property in Atlanta that I put over $35,000 of work into was finally put onto the market on Wednesday August 28th. We received a lot of traffic and the following offers the first day.
The listing came out mid last week. We had lots of showings. I told my agent to take best and final offers due Monday. The key here is to have your agent go to those who offered and whisper “$140k cash and its yours” We had some good offers but I got lucky and got an even higher cash offer!
Hunter is a full-time real estate investor and founder of Cash Flow Connections, a private equity firm based out of Los Angeles, CA. Since starting CFC, Hunter has helped more than 200 investors allocate capital to over 100 properties, which have a combined asset value of more than $350,000,000. In connection with these investments, he has worked with some of the most experienced and well-respected asset teams across the United States and Canada.
1) How much simple passive Cashflow are you making today and how are you doing it?
(You don’t need to give a number if you would like privacy. You can be vague such as halfway to quitting my job, cover my mortgage, Make 25% of my expenses, over $10k, although people like when people open up the kimono.)
I am a full-time passive investor since I am a syndicator and the owner of a PE firm that focuses on passive investments. My goal is to have my passive income be 5x my monthly expenses by 35. I would be happy to go into how that can be achieved. Of course, that is not truly “passive” but I think your listeners will find it interesting.
2) What is your Han Solo moment – Han Solo and his buddy Chewbacca from Star Wars were cruising around the galaxy as lowlife smugglers but then cross paths with Luke and Leia and his life took a pivot point. Describe the resistance that was the catalyst for change.
For me the European debt crises was my last straw moment. Unlike most investors, I was really excited about the opportunity which was presented in 2008, but later realized that stocks are just not a good investment vehicle for predictability and cash flow.
Did you “burn the boats” or did you let it happen naturally – was there an internal (you decided to make a change on own – what was thought process?) or external trigger (ie got fired from your job)?
I have had many moments like this through my career. 1) I realized that I couldn’t invest in stocks. 2) Raising capital wasn’t as easy as I thought it would be. 3) I didn’t have any employable skills. 4) I had to make CFC work as it is truly my only option.
3) Worst life/business moment what did you do after? Lesson learned?
Working at a Google ads sales job. I had no place in corporate America.
4) Current 2-week experiment and 6-month project? (90-180 day goal) A mark of a high performer is to put your ego aside and accept the help of others and mastermind maybe folks can help you by you asking.
I am trying CrossFit workouts. I am really trying to increase my productivity. Meditation. I’m putting on my first conference and working with my fiance’ for the first time.
5) What is your simple passive Cashflow number? Now imagine you had 2x that amount… Describe your ideal day, detailed routine, and what projects you are working on.
This sounds like an infomercial, but my ideal/perfect day is almost exactly like today, but I wish their was even more time in my unique ability, there were more zeros, and I had more opportunities to build more relationships with investors.
6) Something that you have recently or thought about “burning your cash” on for time savings or an improvement in quality of life.
I am considering hiring a Marketing Manager.
7) Something that you changed your mind on? Our ego often gets in the way of greatness.
Focusing on a mentorship program. I created it and don’t know what to do with it.
8) In this sellers market… what are you investing in? What should a someone who does not have a substantial level of cashflow yet be investing in?
MHPs and self-storage.
8) Tony Robbins identifies two large concepts that we are continually struggling to gain perfection at: #1-Art of Fulfillment and #2-Science of Achievement. If you died tomorrow and I were to email this to your kids a couple decades later… this is what they would hear.
What is your secret/hack for the “Science of Achievement?” Any secret habits to share? Morning or Nighttime ritual?
What is your secret/hack for the “Art of Fulfillment?” How you do contribute back?
Happy to go into the details of my morning routine, I am still working on the art of fulfillment, I haven’t quite figured that out yet. I typically donate to disaster relief exclusively for reasons we can discuss.
Hunter is also the host of the Cash Flow Connections Real Estate Podcast, which helps investors learn the intricacies of commercial real estate from the comfort of their home, car, or office.
