Ask The Guys – How To Invest In Real Estate With No Money

how to invest in real estate with no money - wallet

Overview

Ever wonder how to invest in real estate with no money? No money down is the Holy Grail of late night TV real estate infomercials.  But can you really do it?

In this edition of Ask The Guys, we field questions from around the world about how to buy real estate…even when you have next to nothing to start with.

Discussing how you can bring value to the table even when you have no dollars:

  • Your ask a question, but not in the form of an answer … this isn’t Jeopardy show host, Robert Helms
  • His “I’m no tv host. I just play one on the radio” co-host, Russell Gray

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(Show Transcript)

 

Welcome

Robert Helms: Welcome to the Real Estate Guys Radio Show, I’m your host Robert Helms. With me as usual co-host, financial strategist Russell Gray.

Russell Gray: Hey, Robert!

Robert Helms: You know, this is one of our favorite shows.

Russell Gray: It is, “Ask the Guys”.

Robert Helms: We do “Ask the Guys”, you know, every 6, 8, 10 weeks – whenever we can, and we could do it every week – we’re now to the point where we get enough questions that we could almost do this show every week, although there’s so many other things to talk about.

But here’s the idea – our listeners, like you, have questions. They go to the website, www.realestateguysradio.com. They click “Ask the Guys”, and we try to answer as many as we can that we feel will have some relevance to the entire listening community, not just one person.

We don’t answer them individually usually. But, here’s our only disclaimers – we are not tax or legal professionals. We don’t give advice; we only give ideas and information. Your job is to take that and to turn it into actual knowledge by enrolling whatever professionals you need. And we’re big proponents of using professionals, and that’s how you get things done.

 

How to Invest in Real Estate with No Money

So here we go, in no particular order. Number one, this question comes from Edward, in Surrey, United Kingdom. So he’s in the UK, and he says (and this will ring home, cause this is true for a lot of people in a lot of places).

“I have zero money to invest. Can you help me? I live and work in the UK at a very ordinary, low paid job, without a car. Can you help a guy in my circumstances?”

Well, you know what, congratulations for having the interest and wanting to invest, and recognizing that you don’t have much to start with. Almost everybody who does well in real estate investing started with practically nothing.

 

How to Invest in Real Estate with No Money – Invest in Education and Building Your Skills

Russell Gray: That’s true. And I would say, if there’s only one thing that you could invest in, it would be your education, and if you were going to focus on one thing to learn about, I would say sales skills.

Because if you learn sales skills, then you can go out and recruit all of the other resources you need. If you know how to sell, then you can find investors, you can make private loans, you can negotiate owner carry-backs. There’s all kinds of things you can do if you have the basic skill of knowing how to sell, and communicate with people, and get deals done.

how to invest in real estate with no money - educate yourself

And then, number two, some basic concept of how real estate gets done in terms of structuring deals, and the benefits – why somebody perhaps would want to carry-back, or make an investment, because again you’re going to be brokering your knowledge and your network in order to track all of the other resources you need.

 

How to Invest in Real Estate with No Money – Recognize and Use the Resources That You Do Have

Robert Helms: And the other thing is that you’ve got a lot of resources that are not necessarily money, and income, although you do have a job, right? So having a job is great, number one rule: Live below your means, just like you should in any productive society. You earn more than it costs you to live, so you’re putting away a little bit.

That little bit isn’t going to grow at a huge investment rate quickly, but it doesn’t have to. Because what you do have, is you have more time. Even a full time job, you still have time that you commit to learning, and networking, and listen to the show we did back on the idea of building your network in the new year, and figuring out some ways that you can add value.

Get around the real estate investors who have the opposite problem that you do – they have not enough time, and way too many deals, and way too much to go do. Figure out how you can help them, and learn as you do it.

 

How to Invest in Real Estate with No Money – Look for Ways to Get Experience, and Networking Opportunities

Russell Gray: And that’s a great way to potentially either earn a little extra money, if it’s a paying gig, or expand your knowledge, where maybe instead of paying to be in the room to go to the seminar, you are volunteering. And so you get to hear the material, and even though you’re not making any money, you’re not spending any money. So, there’s creative ways to get what you need by bringing what you can, and that’s ultimately what it always comes down to: adding value first, and then looking those opportunities.

One other thing strategically, Edward, is think about the people that would need to get to know. So, look for ways to get things onto your experience resume by volunteering with people, or working with people that are going to position you more professionally, or from an experiential point of view, as being better qualified later on. Because, in sales, it’s not just knowing how to communicate, or to negotiate a deal, or to uncover someone’s needs and match things up; it’s your positioning. It’s how do they view you?

And so, when you have things on your resume, or you have people in your network who are recommending you or endorsing you, then that becomes part of your credibility. And it may not be as good as having credit in terms of financials, but in terms of opening up doors when you get into relationships, when you have that kind of credibility from people, then it begins to help you access the resources you need until you can have more of your own resources.

 

How to Invest in Real Estate with No Money – Keep a Steady Job

Robert Helms: And if you are looking down the road to a point where you could qualify for a mortgage to buy real estate, then every job counts. Yeah, it’s a low paid job, but you know what? Don’t hop around from job, to job, to job.

If your resume looks like you’ve been at 10 different places in the last 20 months, that looks very different than if you’ve been at one place for 20 months. Even if it’s not a great job, sticking with it looks good in the eyes of a lender.

 

How to Invest in Real Estate with No Money – Meet With a Mortgage Professional to Discuss Goals

Russell Gray: It goes back to the idea – you’re painting a picture. That’s what we talked about building your brand, building your network. And you’re painting a picture. You’re painting a picture to the lender.

One thing you may do is go visit with a mortgage professional, and ask them to tell you how lendable you are, and if you could make changes, what changes should you make in order to become more lendable. Because it’s much easier to hit a target when you actually know what it is.

Again, these are things that don’t really cost you any money. It just takes some time, and a notebook, and you go listen. You take notes, and then you go do the things that you can do. And when you start having that action-oriented, can-do attitude, you’ll begin to start making some progress. It begins to pick up momentum, and pretty soon you will start feeling not so far out of position.

You won’t quite feel as despairing, and you’ll go, “Wow, really? You know what, maybe I don’t have a great, high paying job, maybe I don’t have a bunch of money in the bank, but I do have a lot to work with, and I’m getting more every day.”

Robert Helms: And the great news is, absolutely this is possible for you. We know so many people that started with less than zero, and have been able to acquire portfolios. It just takes time and diligence and doing the thing. So, congratulations on listening to the podcast. Listen to a lot of other stuff out there – it’s not just us – there’s all kinds of great information available, most of it for free. But great question, Edward, and good luck to you in the UK.

 

How To Learn about My Real Estate Market

This next question is from Toras in Lithuania.

“I wanted to ask you guys what should I begin to learn about the real estate market in my area? I intend to buy an apartment for life. Maybe what would you recommend?”

All right, well I’m confident that there’s a little bit of an English challenge there, but I’m certain that this person speaks better English than we speak Lithuanian.

Russell Gray: I would say that’s a for sure.

Robert Helms: So ok, so this is great. What do you begin to learn about a market in your area? If you’re new to real estate investing, and you don’t know, there’s a lot you’re looking for. I often say, live where you want to live, but invest where the numbers make sense. So just because you live somewhere doesn’t mean necessarily that it’s a good market to invest in, but it sure could be.

So what are you looking for? In a real estate market, you’re looking for a couple of macro factors.

The first is what we call net migration. Are more people coming into a market, or are more people leaving a market? Every single day, people are coming into your market. People are leaving your market. The question is, in which direction is it trending?

And then within that, who’s coming in? Are there companies locating, are there jobs coming in? Is there reason for people to be spending more time in your marketplace? Are there what we call drivers that are bringing folks and money into your marketplace? If so, that means the potential exists for rents to go up, for there to be good opportunities to buy investment property.

On the other hand, if it’s not that kind of a market, and your market doesn’t deliver those kinds of metrics, then you start looking at a larger area. It could be the next town over, the next city or state, right? You start to look at the areas geographically that you can get to.

I’m no longer limited by the geography to where I personally invest. But when I was starting, my thing was, anywhere I can get in a day would be fine. So when I started, I invested mostly 150 miles from my house, until I realized that a two hour drive by car was the same as a two hour flight, and there was a lot more real estate I could get to if I was willing to take a two hour flight, and again I’m thinking, “can I get there in a day and back? Can I fly in the morning, check out whatever I need to check out, fly back in a day.”

Today, that’s completely gone away, and it’s pretty much anywhere on this planet and any of the adjacent planets. So, you start with what’s close because that’s what you know.

how to invest in real estate with no money - jobs market analysis - scrabble words of jobs

And the kinds of things you want to find out in the market are: What are the jobs like? The people who are paying rent – those people would be your tenants – where are their jobs? How much are they getting paid? How regularly are they employed? What’s unemployment like? What industries are there, and how are they paid? There’s a lot to find out about the people who are in your real estate market.

Russell Gray: You know I get the feeling he might be asking about a personal residence – you know, an apartment for life. This is going to be a place I’m going to buy, and a place that I want to live. And then the questions you’re going to ask are completely different.

Because it may not be necessarily about all those other things, although you’re going to be interested about the local economy, and sure you care about the value of the property. And it’s obviously better if you buy a property and if you think somewhere down the road “I wouldn’t want leave,” it would be nice to be able to rent it back out. So all the questions – all those things you mentioned, Robert – are important.

But if it’s your personal residence, then there’s a whole other host of questions. Right? Is it where you want to live? Is it where your friends and family are located? Is it a part of the world that you enjoy being in? Is the floorplan, the neighborhood, and all of the things, and of course, the trend of the neighborhood right for you? So, lots of different things to think about, and the biggest thing is, you know, you said apartment for life. And I just wonder, are you talking about buying a property you’re planning on owning for the rest of your life?

Robert Helms: I don’t know if I would assume that just based on the disjointedness of this, because he specifically asks about the real estate market. So that terminology has me think investment. Apartment is also terminology that we think of as an investment, but not all over the world. You can buy apartments in many places. So, I think it’s ok on either side. Russ brings up a great point. Depending on your use, that’s going to dictate the questions that are important. And with different uses, there are different questions.

Russell Gray: And if you’re married, “A happy wife, happy life.” Just remember that.

Robert Helms: Do it her way.

Russell Gray: Do it her way.

 

When to Start Investing in Real Estate

Robert Helms: But congratulations, and hello from Lithuania. Our next question comes from Chris in Montreal, Quebec, Canada.

“Hey guys! I’m 30 years young. I want to start investing in revenue real estate.”

Well, hot dog! That’s awesome.

“I have over $100,000 in savings, and no debt. However, the market here in Canada seems to be very expensive, and has never had a price correction like the US did in 2008. The pricing of the average rental property in my city goes for 15 times yearly rental income, or around 3-5% ROI. Should I wait for the correction, or get started right away?”

Well that is great. So, before we get to what you should do (and again, we don’t give advice but ideas, and we’ve got a lot of them), let’s talk about this idea of the return.

He says, “In my city, the rent is 15 times yearly rental income,” which we can assume from his note, that translates to a 3-5% ROI. There’s some big assumptions there.

Russell Gray: Yeah, so 15 times is a little bit on the high side, even with today’s low interest rates. So that’s definitely a little bit frothy for income producing real estate.

The other thing is, just in the big picture with Canada, I mean right now, the big part of the Canadian economy is oil. And the Canadian economy is going to feel the impact. So I’d be paying a lot of attention; we talked about this quite a bit on the show and in the newsletter and in the blog, because oil’s a big story all around the world, and it’s especially a big story in a place like Canada.

canada oil production - oil tanker

Robert Helms: Not so much in Montreal; Montreal’s much more diverse. That’s definitely a place that has a lot of different stories, and probably less driven by oil, but Canada as a currency, right? For sure.

Russell Gray: Well you’ve got that going on, so your currency potentially could be a little bit weaker. And real estate is kind of a lagging type of an indicator, you know. When the economy gets strong, then the real estate gets strong as people can afford. When the economy gets weak, real estate kind of hangs on for a while. People don’t like to let go of what they think the value is.

You know, Robert’s spent a lot of time selling real estate, and one of the hardest times to sell real estate, especially retail real estate – residential real estate, is when you go talk to the home owner and he goes, “Well, wait a minute, you know, you come back with my comparative analysis and do the market report, and you tell me my house is worth this, well, a year ago, it was worth this plus 20%.”

Robert Helms: Right.

Russell Gray: “Well, that was a year ago, and we’re in a different direction.” And they don’t want to let that go, and they resist. And so, there’s some of that. So you have to really understand where you’re at in the local economy. So, real estate timing is a difficult thing to do. It’s really more does the individual deal make sense.

Even though a marketplace could be going for 15 times, you may find a unique opportunity. You may find an opportunity where something is being under-managed, where it has more income potential. Or maybe you can find a way to change the property, or the structure somehow, add a room, create a little extra storage space, add an amenity, and you can get more income than the current owner, and all of a sudden that 15 times drops down the more like 12. And then that starts to get more within spitting distance of numbers that make sense.

You may be able to find a neighborhood that’s in kind of the path of progress, and moving up, and maybe you want to stretch a little bit because you believe in this particular location.

Sometimes you can find a particular seller that is able to sweeten the deal a little bit. Maybe he needs to get his price for whatever reason, but he might be able to throw something else into the deal that would make sense. It could be personal property. It could be some other set of terms that would work for you.

So, the idea is that you know if you wait for a correction that never comes, then you miss out. A lot of people have criticized some of the perma-bears. You know, Peter Schiff gets this all the time, “Hey, gold’s going to 5,000. Gold’s going to 5,000.”  Well, meanwhile it went from 1,700 to you know, 1,100 or below.

Robert Helms: Well, he’s not wrong yet.

Russell Gray: He’s not wrong yet, but for the people who were bought in and then took the hit, well… but what if he would have been right? What if it went from 1,700 to 5,000? Everybody says, “Well I’m waiting til it goes back down to 12.” The point is, you don’t really know.

Robert Helms: No, I mean, you can’t try to play a correction. I would say this – the best time to invest in real estate was 20 years ago, and the second best time is today. Don’t wait.

Not only that, there’s other places in Canada and in the world where it’s not 15 times. Live where you want to live. Invest where the numbers make sense. When I see a market that is 15 times yearly rental income, I think that’s a great, great opportunity to develop property.

There’s much better returns when I get involved. And I know you’re thinking, “I only have 100 grand; I’m trying to buy my first property. How am I going to develop?” You don’t have to do the work. You can find a developer who needs what all developers need – capital – and figure out how to partner. There’s a lot of hot markets around the world right now where folks are making good money by producing the kinds of inventory that are getting these kinds of returns.

Russell Gray: The one thing, Chris, that I like about the question, is at least you’re thinking about whether or not it’s a good time. And so, the one thing that I would say, is just be very careful about you know, I agree with Robert – don’t wait, but don’t chase. Don’t chase the market. Don’t try to make a deal be something that it’s not.

In a market that’s a little hotter, you’re going to have to do more work to try to find a deal that makes sense. Just don’t try to squeeze a mediocre deal in just because you want to get started now.

Just work harder, look at more deals, crunch more numbers, look for out of the box ways to make a deal make sense when maybe on the surface it does. See something that somebody else doesn’t see, and then that’s probably where you’re going to end up finding a deal that’s going to make sense, no matter what the market. There are always deals in every market, but sometimes they’re easy to find, and sometimes you’ve really got to work to find them. 

 

How to Structure a Deal With a Private Lender

Robert Helms: It’s “Ask the Guys” – the first three questions from three different countries. This question comes from Dan in Reno, Nevada.

He says, “I’m messaging you today in hopes that I may get some advice on how to approach a private lender (my parents) in regards to financing my first turn-key real estate investment. I only need a down payment from them, as I should be able to finance the rest myself from a mortgage lender. Question – though I can pay my parents back in interest, I would like to know the best strategy for paying them back.

For example, option one, should I pay them back the monthly cash flow for an estimated 5-6 years until they’re paid, which will leave me with the refinance money to invest in another property. Or, option two, pocket the cash flow myself, and pay them back in whole with the cash out re-fi.

My priority is to start accumulating rental properties, so losing the cash flow in the first property to get started is not a big deal, if it means that I can use the cash out re-fi for my next property. I don’t know if my debt to income ratio will be adequate, though, after re-financing the first property. Thanks for your time. I will try to make the message a little shorter, next time. Love the show, and all of the great content.”

Alright, Dan. Well, there is no one way to skin a cat. There’s lots of different ways. And although we don’t have advice for you, we definitely have some ideas.

Russell Gray: Well I think this is deal making 101. What’s optimal for you, is going to maybe be a mathematical decision, but what’s optimal for the other person may not be what’s optimal for you. And so, if you’re going to make a deal, the first thing you have to do is determine optimal is what both parties are willing to do.

And so, you have to have a conversation with your folks. It’s like, “Hey guys, what are the options here? And I don’t know exactly how we’re going to put the deal together, but I want to get all of the pieces of the puzzle on the table. So let’s just hypothetically say, if you had to wait 5 years to get your money back, and we did it as a sale, or a cash out re-fi, how would you feel about that? What kind of return on investment would you want to see? If I were to pay you a monthly payment, is that something you would be interested in? Or you know would that create an income tax problem for you?”

Here’s another thing: you have more to work with than just the cash flow or the equity. You also have the tax breaks on the property depending on how you structure the deal. Sometimes an investment partner is going to be just as interested in getting a tax break, and if you factor in the value of that break into their scheme, it actually sweetens the return on investment without any money coming out of your pocket. So, that’s where you have to understand a little bit about what their criteria is, and then involve the appropriate professional who can help you understand it.

You also talked a little bit about debt to income ratios, which is great understanding. You just need to make sure that you’re working with your mortgage professional, not just today, but projecting forward in these different scenarios, because giving up that, if you promise to give someone a cash out re-fi and it puts you in a DTI where you can’t do that second or third property in your plan, maybe that’s something you think you’d be willing to do today, and then you realize, “Well, gosh, if I do that today, then in two years I’m going to be out of position.”

Robert Helms: Well, that’s a great point anyway. Anytime you look at investor financing, when you’re trying to finance a property that you’re going to hold as a rental property short term or long term, you always want to begin with the end in mind.

Lenders: I love lenders, they’re very necessary, but they look at the deal on their desk today, and they try to close it by the end of the month. They’re driven that way. They don’t necessarily look at you being the first of seven or eight or nine or ten or one hundred transactions. You need to start with that. “Listen, I’m going to buy a house every year. How do we structure my first loan in such a way that I get that win?”

For instance, a lot of lenders aren’t going to want to see a second or third party second on the property, which is what this would be, alone from your parents, but because it’s your parents, it’s maybe not documented that way. I’m not suggesting doing anything that’s not legal, I’m just saying, parents have more flexibility.

You start with a conversation, which is, “Mom, Dad, thanks for the help. What’s best for you?” Maybe it does make sense for you to give them 100% of the income until they’re just off and paid, and now you’ve got the property. That might make sense.

But think about the way most people put money to work who are lenders. They put out money, they expect a monthly return that is somewhere in the 4-10% range, depending on the kind of lenders they are. Maybe that works for them. So for sure, no matter who the partner is, what does the partner want to see, what do you want to see, and how do you come to common ground that works for everybody?

Russell Gray: Yeah, and part of it is the source of funds, you know, wherever your parents are coming up with the money, because whatever you’re going to offer them in their mind is compare to what? What else might they do?

Now because you’re their child, of course, they have a vested interest one would think in seeing you succeed, and maybe that’s good enough. Maybe they’d say, “Hey, you know what? I could make a higher rate of return on XYZ investment, but part of the return is seeing my son, Dan, get into his real estate investing career, and I want to be a part of that.”

And so, again, it goes back to what I said at the top of my comments on this question, Dan. It’s about really understanding the person on the other side of the table, and everything that they have to work with, everything that they are looking to get out of the deal. Then, you taking what you have to work with, and everything that you want to get out of the deal. And then looking what the deal will actually make available to both of you. Then figure out how to carve out each piece, so that everybody gets what they want out of it, and everybody can walk away.

And some of that’s going to be math. Some of that is going to be negotiation and understanding. Some of that is going to require technical expertise maybe from a tax adviser or a mortgage broker, but it’s actually one of the most fun components of being a real estate investor, being able to sit down and create these kinds of deals because this is creative real estate.

You may not even need to go to a conventional mortgage lender. You may decide not to do that. Maybe your parents or somebody else has better lendability, or perhaps they have other resources. “Well gosh, if you’re going to pay the mortgage company 4 %, I would love to get 4% or 5%, secured by a piece of real estate. So why don’t I make that a private loan, and now, you don’t have to worry about the down payment. I’ll give you the whole thing at 5%.”

Robert Helms: Now, you bring up another great point, Dan, which is perhaps a nuance, but I think it’s worth talking about. And that is this idea that you recognize you don’t necessarily need the monthly payment. You don’t need that red income, because you’ve got the ability to pay for the loan.

Too many real estate investors don’t think about that. All they focus on is “I need to get positive cash flow,” and they create a scenario where they go out and get a house, they save up a down payment, and they qualify for a loan, and they create $200 a month positive cash flow, and now what? $200 a month is nice, but it’s not going to turn you into a wealthy real estate mogul. Two hundred dollars a month if you’re accumulating that for every house or three hundred, pick a number, it takes a lot of houses to get to a meaningful number.

So the fact that it’s not all about the monthly positive cash flow today by you giving that in this case to the lender or your parents instead is a tool you have.

And I think most people should be more creative of what all the tools are. Russ mentioned tax benefits. Again, consult your tax professional, but there may be some ways to make it work out in their benefit and give them that much more reason to want to invest with you. So, great question.

And if you’ve got a great question for the Real Estate Guys, or even a mediocre question, send it to us. Go to our website at realestateguysradio.com and click “Ask the Guys.”

 

How to Invest in an Expensive Market

This question comes from Diana in Miami, Florida. Alright. She’s asking about a loan in California.

“Hi again, I’ve written you guys before and you answered my question on the podcast. Thank you. So, I’m reaching out to you again.”

You know, rarely do we let a second one slip through, but this time we will.

“My friend lives in Arcadia, California, and has a $240,000 combined income with her husband, great credit – but, saving 20% for their down payment has proven tough. Property there is generally more than $600,000, so FHA doesn’t apply. Could you guys offer any suggestions as to any of their options that may be available to her?”

Well, we sure can. When you go into an expensive market, whether it’s New York, or California, or even parts of Miami, then you’re always up against saving the down payment.

What’s crazy is you go to Memphis, Tennessee, and the people there also have a hard time saving the down payment, even though it might only be $10,000. So, someone making a quarter of a million dollars has a hard time putting away 20% – half of that for a down payment.

expensive california real estate - how to invest with little or no money

Well, sure, how many people could put away half of everything they make for a down payment? Only the most disciplined. So, what’s a person to do?

Well, in California, there’s a lot. In fact, there are particular loans, and you want to have your friend probably talk to a local lender, or perhaps you’re in that business because you seem to know a lot about it – about what local loans may be available.

California’s one of the states that has some good first time buyers’ programs. So, we don’t know about the situation here, if they’re a first time buyer, but if they are – that’s a potential opportunity. And there’s other things to consider.

Russell Gray: Well, yeah, I mean the big strength here is a good credit score and $20,000 a month of documentable income. So, that’s highly leverageable.

So, assuming the ratios are fine, it may be possible to actually borrow the down payment from a private lender, not secured by the real estate (maybe secured by something else on the balance sheet if there is something else, or maybe just a private, unsecured loan based on the strength of their credit profile, and their income.

And then you get those funds, it’s a private loan, you stick it in the account, you let it season for however long your mortgage professional tells you it needs to be there, you know. It still needs to show up on your balance sheet as a loan, but it isn’t showing up on the properties as an encumbrance, and so if the lender would not allow a second loan – and a lot of lenders will, so that’s not even an issue.

Robert Helms: Well, the issue is getting the money up front and then having it attached to the piece of property later – that takes a particular person to be willing to do that.

Russell Gray: Yeah, but again, that’s quite a bit of income even by California’s standards, and so I would think that you would be able to offer somebody a relatively attractive return, especially if you give them a term that’s reasonable. Meaning you’re not asking them for the money for 30 years; maybe you’re only asking for it for 3 years, or 5 years. And that way you’re in the property, and you’re counting on the property going up, maybe it’s a property that you have the opportunity to do what we call force equity; it’s a fixer upper, or somehow you can add something or do something to it to make sure that the value goes up even if the market doesn’t go up as fast as you’d like it to.

Robert Helms: The challenge with that is that a lot of fixer upper properties are going to have even less LTV because lenders aren’t going to want to be as exposed. So if we’re assuming a 20% down scenario, the collateral might not be well enough.

What about an 80, 10, and 10? What if you found a seller who is willing to not carry the entire thing, cause that doesn’t happen very often, but would carry 10%. You know, someone who bought this house that’s $300,000 and today it’s worth $600,000, they’re going sell and have whatever gain or whatever that looks like.

We don’t know if that’s an investment property to them, they’re residents, or whatever. But could they take 10%? See, if your friend only had to come up with half as much, would that be do-able?

Russell Gray: Yeah, so I mean, owner’s equity is always something that you should inquire about, and the way you do it is you ask, “Well, what are you going to do with the proceeds? Because maybe I can make you an offer that would be just as good or better backed up by a property that you already know and like. And maybe you’d be comfortable with that.”

Because if someone’s going to go stick the money in a CD and earn you know one quarter of one percent, or one percent, or two percent, and you’re offering them three, or four, or five, I mean that’s like triple the return! And that could be very attractive to somebody.

The other thing is, if you’re buying an owner occupied property, you know, maybe they’re going to say, “Hey, it’s tax free money to me.” But if it’s an income property, and they’re going to realize a capital gain, or if it is over the threshold, and they’ve got more than half a million dollars of appreciation in it, for a couple, they’re going to be looking at paying a capital gains tax on that.

Especially in California, maybe they don’t want to realize that just now. Maybe they want to wait a little bit. Maybe you can work out a deal with them. Again, this is where you have to have a decent working knowledge of the tax ramifications of decisions not just for yourself, but for the party on the other side, as we were sharing earlier. So it would be something to look into. Owner’s equity is always something that you want to ask about.

Robert Helms: I think a lease option would be possible – find a property that they can rent for a year that becomes the potential to be the property that they can purchase. That gives them time at a $240,000 income to put that money away, cause that’s a good income. And I’m sure they’re able to save some, but if they can’t save up 20%, give it a little more runway and a little more time, maybe they could. Maybe a 2 year lease option would make sense.

Russell Gray: Yeah, sometimes the seller, especially a seller who is either maybe asking a little bit higher price than the market wants to give in an area that maybe isn’t selling as fast as you know some areas are, would be willing to do that, because they can get more cash flow today. And even though, let’s say for example, you rent the property (and I’m just going to toss out numbers), let’s say it’s a $3,000 a month property at market, but you pay $4,000. But they’re giving you $1,000 a month credit towards the down payment.

That’s really equity build up to you, and that is receipt of equity to them. Of course, if you don’t close, they get to keep that money, but in the meanwhile, they get the cash flow. And based on your strong income, or your friend’s strong income, maybe that’s something they could swing.

Meanwhile, that gives you the opportunity to continue to work on the down payment, so down the road, when you get ready to do the loan to take out the seller completely, you’ve already got some down payment credited in the transaction from the $1,000, plus whatever else you’re able to save up outside of that.

Robert Helms: You know, we look at conforming loan limits today. They vary based on the areas of the country. Some are higher, some are lower. In a high area like this, you’re going to be right up at the top. I don’t make it a habit of staying right up to date on these things, but last I knew, about $417,000 was the conforming limit.

So if that were true, you’re not that much more than a 20% here, and maybe it makes sense to figure out some in between.

I’d come back to a local lender. Local banks have different lending parameters than the big guys do, and certainly the FHA does.

So, look around. You know, kiss some frogs, and get out in the market and see what’s available. But just think creatively, which I think we’ve demonstrated in the last 8 minutes, but there’s a lot more I’m sure. So come out to an event, and let’s continue this conversation over a beer.

 

How to Structure to Protect Your Assets

It’s our favorite guest! It’s you! “Ask the Guys” – your questions, our answers. This one comes from Arnold in Bur Ridge, Illinois, and he says,

“What’s the best structure to use to protect my assets? All my properties are currently in separate in LLC’s. Should I put these LLC’s into a trust? Should it be a domestic trust or international trust, revocable or irrevocable? What should I do?”

Alright, well great question, Arnold. And as you probably heard today, we don’t give advice. And “best” is such an interesting thing. “Best – what is the best structure?” and we’ve covered this before, the best structure is the one that works the best for you. We don’t know enough about your personal situation, but we can certainly talk around these various issues you bring out.

Rusel Gray: So without getting too far into the weeds, a basic structure is, you’re there at the top of the food chain, and off to the side you would have a living trust that kind of catches all of your personal property and avoids probate, and any good estate planning attorney can help you understand the benefits of a living trust.

You brought up the topic of an asset protection trust, which can be both domestic or foreign, and so depending on how private you want to be, depending on how inter-jurisdictional, or international you want to be, you might consider using a combination of domestic and foreign entities. And again, a good international attorney can help you with that.

Robert Helms: Well and certainly worth some time getting educated about that – you know, part of that is, it’s a whole order of magnitude more complex when you add an international structure in. But there’s a lot of great reasons to do it. So, you really have to begin with the end in mind.

If you plan to live all of your days in Illinois, and never leave the United States of America, never own anything or create any income outside of the US, probably not worth a lot of time and toil figuring out international structures.

If on the other hand, you like to travel, you might consider owning property in other places, you know, it’s a big old world out there with a lot of opportunity, then now you have the wonderful benefit of the fact that not every country’s laws are the same, not every asset protection structure is the same.

There’s a lot you can do, a lot when it comes to not only asset protection, but taxation and privacy. So it’s certainly worth getting educated about.

Russell Gray: Yeah, I mean there’s so many different ways. It’s just a complex question. You know, Robert, you brought it up great, it’s like, well, best, what is best? Well, I mean, you can really set the thing up bullet proof, and it can cost you a fortune. But you’re bullet proof, you’re private, you’ve got everything all set up.

Robert Helms: Well, let’s use an example. A lot of attorneys will say, put every property in a separate LLC, like you’ve already done here, Arnold, and well, I can see why attorneys would say that. They’re in the business of creating LLC’s, and that is the most bullet proof.

But you know what? Often, if I have 3 or 4 single family homes in the same neighborhood, I might put them all in one LLC, because I don’t perceive that there’s a huge liability hanging out, unless it’s a really low risk neighborhood. And they’re all about the same kind of asset, and they’re all in the same neighborhood. I’m comfortable with the risk. I’m just talking personally.

So, why am I putting them in a LLC? To protect assets. What else could I use? Insurance protects assets. So, there’s different ways to come out of it.

You might say, “I want every property in its own LLC, and I want that LLC owned by an offshore trust.” Ok, you could do that. I might say, “I’m going to put 4 properties in the same LLC. It’s going to firewall between the rest of my life, but not within each other, because I’m willing to take that risk.”

So part of it is getting out who you are, as an investor, and how much risk you are willing to take, and how much you are willing to pay to avoid that risk.

Russell Gray: Yeah, so, it’s a combination of asset protection structures, entities like LLC’s, and then jurisdictions, and then privacy, and then insurance policies. There’s a whole combination of how you put those together.

For example, if you have 5 properties all in 1 LLC, and there is 100% financing, no equity – there’s really not that much to go after, except the income streams on the individual properties.

And depending on if you use things the way you do the ownership structures, all anybody may end up with is the charging order, which means they realize the tax, but they don’t end up getting any of the income. And so, that’s a whole different structure. It’s kind of like this little poison pill that your attorneys can stick inside your deal.

So, it’s difficult to answer the question in great detail when someone asks a question like “best,” but I think big picture is, the idea that you have living trusts and asset protection trusts, Then underneath that you have holding companies that don’t do any business with any third party people. Because when you do business with third party people, that’s when you create a liability port, or a door, a way they can get to you.

And then you have operating companies, and management companies, and the operating companies would be these individual LLC’s, and you might have one management company with a directors and officers, or as an errors and omissions insurance policy that is operating all of these different LLC’s, each one holding an individual property, and each one of those properties would have a commercial, general liability policy, which would cover you against slip and falls, and some of those types of things.

It would trigger a defense. And if somebody went after the holding companies, or the managers, meaning you, then that’s where the directors and officers insurance, or your errors and omissions insurance would kick in.

So you have insurance that are funding your defense, you have insurance policies that can pay out a settlement, and on top of that, you can use a technique called equity stripping, and that’s where you might have a separate holding company somewhere else put a lien on your property for the full amount of the equity.

So when someone does an asset search on the property, they go, “Oh, well this property doesn’t have any equity in it. There’s a first lender, and there’s a second lender, which means that I would be third in line at best, and there’s nothing to go after.”

You know, someone who takes the time to sue you, and gets you all the way through, that they win, and then they do what’s called an order of examination to have you reveal where everything’s at – they’re going to find all that stuff. But the person who isn’t going to find it easily is just the opportunistic attorney who’s just running around looking for properties with bunches of equity that they can go after easily.

You just don’t want to be having your assets hanging out there uncovered, you know, where people can take a shot at them. So, if you use privacy, if you use insurance, you use asset protection, and you use multi-jurisdictions, you make it very, very difficult for the opportunistic, lazy, predatory people to come after you.

The only people who are going to get you are going to be the government if they’re coming after you for taxes, or somebody who really has a solid, legit claim, that they’re going to push all the way through the whole structure, and then have you come reveal where everything is.

Robert Helms: And two of the parties really to be involved in helping you make this decision, obviously, your tax attorney, and that may be a separate attorney than the person who sets up your entities, but then also your estate planner – whoever’s going to help you with that, because that has a lot to do with those, too.

 

How to Find Real Estate Investors

Good question, Arnold! If you have a question for the Real Estate Guys, go to our website at realestateguysradio.com and click “Ask the Guys.” This question comes from Dave in Mountain Home, Idaho.

“Hey guys, I’d like to find out the best way to find equity partners for our manufactured home community investments. We have two projects in Montana, and one in Colorado. All three are C-quality projects that need better management and a few homes brought in to fill up the vacancies. The initial cash flows are approximately 10%, and will go up to about 18% in 3-5 years. Any ideas in today’s world?”

Thank you, Dave. Well, Dave, yeah. Here’s the deal. There’s lots of money out there, and this is the kind of opportunity people are interested in. Right? A kind of value add opportunity.

Certainly mobile homes and manufactured housing have good returns as an asset class. So, pretty easy to find money for those deals. In fact, we have a couple of students that do exactly this. Mobile home parks in little cities all around the United States, and they’re offering, you know, 18% returns, 16% returns, 21% return.

So yeah, you can go out and find money for that. Where? Probably not institutions.

Russell Gray: Yeah, exactly. It’s really interesting, cause there’s that best again. What is the best way? The best is whatever works best for you. But at the end of the day, it’s going to come down to building your brand and building your network, something we talk about all the time at the syndication seminar.

It is getting to a place of professional positioning, where people believe that you’re credible, that you know what you’re doing, that you do quality projects, that you’re a reputable business person, someone that they can invest with.

So you start by building that up. You show people who are credible, like CPA’s and attorneys, and people that have networks of high net worth people. And you begin either retaining them to help you with your own practice, because now there just is a nature of networking. Business people refer other business people to business people. So the more people you have on your team, the more likely they’re going to bring people to the party. And so, you begin to do that.

The other thing is, you learn how to tell your story. You get good at telling your story. You may go to join investment clubs, or go other places where there are investors, and you begin to tell your story. And you start getting really, really good at it, so you can explain to people why what you’re doing makes sense, why it’s compelling, why it’s interesting.

And so now you’ve got some good endorsements, you’ve got some good professional communication skills. Now you want to think about the people that you want to be partners with.

Because, if you’re looking for private investors, these people are going to be your partners. They might not be voting partners, they may be limited partners (and hopefully they will be), but nonetheless they will be people that you have a degree of accountability to, you’re going to have to  interact with, and so you have to decide what kind of people that you want to do business with.

how to buy real estate with little or no money - fundraising word written in chalk on pavement

Now, once you’ve figured out who those people are, where are they? Where do they congregate? They do. Their eyeballs congregate somewhere, somewhere they socially congregate – could be a rotary club, it could be a networking event.

And here’s the great news: It used to be, until a couple of years ago, that you were not even able to advertise. But today you can. We’ve been talking about this for quite a while.

In fact, we have a report on this in our special reports section. I believe you can get it if you send an email to [email protected], because the new law that has come out basically allows you to go out and advertise these types of opportunities to accredited investors.

And then recently we did a show with attorney Mauricio Rauld about how even non-accredited investors it’s beginning to open up.

So the ability for someone who has a credible deal to go out and find investors with whom you did not have a prior relationship from a legal perspective, is opening up.

But that doesn’t mean you still don’t have to work on your brand, and your reputation, and your ability to communicate your offer. And of course, that means you’ve got to have an offer that’s compelling.

And so, if you take the time to go meet with a few people, and instead of trying to pitch them the deal, you ask for their feedback – say, “Hey, here’s what I do, here’s how it works, here’s how I’m thinking about putting it together. What do you think? What kind of questions do you have? What kind of returns do you think people out there would be interested in?”

Some of the people whose opinions you ask for are actually going to want to invest. You’re not really trying to sell them, you’re trying to get their opinion, and if that’s all you get out of it, you’ve won. But you may end up getting a lot more than that.

Robert Helms: If this is more than just three properties, if you’re thinking about doing more of this, Dave, I think I would strongly recommend you come out to the Secrets of Success full Syndication. It’s two full days and a big workbook, and a lot of great faculty.

Not only that, the people that come to the syndication event are top notch. It’s amazing. We are humbled every time at the great people we meet that are already doing deals and many that have a lot of property in their own account and are looking to get to the next level by raising capital.

You’ll meet great people, you’ll get all kinds of great advice, and who knows, maybe you’ll find another few folks in this same space that can give you some ideas. I know of a couple of guys who will be at the syndication seminar who do exactly what you’re doing, and they’ve raised money to do it. So that would be a great place to go meet folks like that. But, good good stuff. Those deals are absolutely do-able.

 

San Diego and Southern California Water Concerns

Time for one more question today. This comes from Laura in San Diego. She says,

“You and your podcast are awesome, and I listen to every show religiously!”

Well, thanks a lot, Laura!

“I would like to get your opinion on the drought situation in San Diego, California, and how it may change San Diego in general, and real estate market specifically. You know, prices for both rent and sales, in the short and long term. What are the best strategies” – there’s best again – “for real estate investors to hold real estate properties long term if it was planned originally, or sell everything and run away from San Diego before it runs out of water and becomes a desert? Thank you.”

Well, Laura, in case everyone is not up to speed on this, San Diego is one of many cities that faces a little bit of a drought issue in the fact that they are running out of water. Now having said that, do we think, as the Real Estate Guys, it is going to turn into a desolate desert, and no one will ever want to go there again? Not very likely.

Here’s the reality. If the business people and stake holders in San Diego have to ship water in in one pint bottles, they will get this problem solved. We’ve seen this happen again and again. We’ve seen this happen in multiple markets.

I remember more than 10 years ago when Las Vegas, Nevada, had the same exact issue, and they were running out of water, and developers weren’t even getting permits because there weren’t going to be water rights. Guess what? Today there is plenty of water in Las Vegas. It’s thriving. It’s all good.

I’m not trying to make light of the issue. I’m trying to say, don’t be alarmed about it, and don’t say I’ve got to cut and run and get rid of everything before it becomes a desert. Now just looking at where the market is price wise, who knows? Maybe you’ll look like a hero two years from now if you sell everything you own in San Diego today. Don’t know.

Russell Gray: I think the big picture is there’s a lot of things to worry about, and I probably worry about as much as anybody there is. I mean, I listen to everybody, I try to take everything seriously, and then you just have to ask yourself, “what’s most likely?”

And it always comes down to this notion that when you have a major economic population center, and you have a key piece of important infrastructure, and it’s hard to imagine anything much higher on the food chain than water, as far as being an important piece of infrastructure, there is enormous resource in political will to fix the problem.

Water exists somewhere. I mean, think about it right now. We have gone back and forth through this keystone pipeline, right? The idea that there’s tons and tons of oil way up north. And all we have to do is get that pipeline built over how many thousands of miles to bring that oil from where it is to where it’s needed.

There’s water in this world. It may not be in southern California, but there’s a big enough population base and economic base that they will build a pipeline – probably not one pint bottles, right? They’re going to build a big pipeline to get it where it needs to be. Not to mention, San Diego’s right on the ocean.

Robert Helms: Hello!

Russell Gray: There are people that have manufactured desalination plants. There are entire populations – islands, you know – where you get fresh water, and it comes straight from the sea water.

Robert Helms: The entire island of Grand Cayman is desal, and it’s desal by a publicly traded company. And the water is of high quality. It’s wonderful, and it’s easy to do.

Plus, they have so much beer produced in San Diego, they go through a lot of water there. I can’t imagine that they’re not going to want to brew more of their great hopped ales, with more water. So, you know, you’ve just got to look at whatever the risk you think is. I think San Diego’s a great marketplace for a lot of reasons. I also think it’s high up there, right? The prices are high, so.

Russell Gray: Well, I think the thing is, whatever thing you’re concerned about, what you need to do is figure out the people who are qualified to have an opinion on the matter.

In this case, it could be people in the water community, it could be people, you know, involved in civil engineering and planning – I mean, I don’t exactly know who, but you study the issue for a little while, you’re going to figure it out pretty quickly, and once you figure out who’s qualified to have an opinion, then try to understand what agenda they might have in swinging their opinioni one way or the other, and listen to a lot of different people, and then sit down and think about what really makes sense to you.

If you really believe in your heart of hearts that it’s on its way to become a desert waste land, then absolutely, the best strategy for you, is to sell everything and get out of dodge. If like us, you think, you know, that’s probably not a very likely scenario, then pay attention to it, but then turn your attention to other things that are more likely to help you make good investing decisions going forward.

Robert Helms: We have some great investor friends who own more than a dozen properties in San Diego, and are looking to acquire more, and they’ll be with us on the 14th annual Investor’s Summit at Sea. You can pick their brain. They’re going to do a round table discussion about their properties in San Diego, and I promise, they’re up to speed on this issue.

So come on out to the Investor’s Summit at Sea. There’s still a couple of cabins left. Join us, join sales legend Tom Hopkins, join best selling financial author in history Robert Kiyosaki all live, all in person at the Investor’s Summit at Sea, and get all the details on our website at realestateguysradio.com.

Big thanks to all the folks who submitted questions, whether we got to them today or not. If you have a question for the Real Estate Guys, get to that website, realestateguysradio.com, click “Ask the Guys,” and maybe next edition of “Ask the Guys,” we’ll answer your question.

Until next time, go out and make some equity happen.

 


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Crowdfunding for the Rest of Us – New Rules for Raising Capital

New Crowdfunding Rules for Non-Accredited Investors

 

new crowdfunding rules for real estate syndications and non accredited investors

Overview

Attorney Mauricio Rauld updates us on the new crowdfunding rules issued by the SEC.

Finally, the doors are opening for non-accredited real estate investors to get in on private equity opportunities.

While this is very exciting news, purveyors of private placements need to know the
rules…or risk running afoul of the regulators.

Bringing you the oh-so important information about the new crowdfunding rules:

  • Your regulated host, Robert Helms
  • His irregular co-host, Russell Gray
  • Syndication attorney and regular contributor, Mauricio Rauld

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(Show Transcript)

Welcome

Robert: Welcome to The Real Estate Guys Radio Program. Thanks for tuning into the show. I’m Robert Helms your host along with our co-host financial strategist, Russell Gray.

Russ: Hey, Robert.

Robert: It is the most wonderful time of the year.

Russ: Yes it is.

Robert: We are rounding down the year 2015 and off to the New Year, which we’re always excited about.

Russ: I don’t know man. After Thanksgiving, I think I’m kind of rounding out.

Robert: Definitely. Round is a shape, and I’m definitely in shape. In fact, our real estate trivia question, not jumping too far ahead, has something to do with that very topic, and it’s related to real estate if you can believe that.

 

Basic Crowdfunding Definition

Robert: We’ve got a lot to talk about today. There has just been some news at the very end of October about the SEC finally adopting the new rules for the part of crowdfunding, Title III of crowdfunding, that allows little guys and gals to invest in all kinds of new stuff. Just to bring everyone up to speed, no investor left behind, let’s talk about crowdfunding.

Russ: The basic concept is … it’s really more of a technology platform than anything else … but the basic notion is that you can raise money from the crowd, hence the name crowdfunding. Brilliant name. It really supposes that you have a crowd. So, the first order of business is to have a crowd. A lot of people are throwing these things up there just thinking, “hey, if we put it up there people will come”. But there’s rules involved. There’s always been rules involved in raising money.

 

How The SEC Is Involved

Russ: Before technology ever came into existence in the space, it was really just a matter of making sure that investments were suitable, if you will. They had to put that responsibility on somebody. So, if you wanted to go put money in somebody’s safekeeping and someone was going to turn a business into doing that, they called that a bank, and that was regulated. If you wanted to be in the insurance business and you wanted to pool money and then go out there and cover people for risks, that was a financial business covered under insurance laws.

real estate crowdfunding for non-accredited investors rules from the sec

If you wanted to go out there and raise money and then invest it on other people’s behalf, that was regulated by the Securities and Exchange Commission and laws regulated the rules by which you could do that. And most of them were that you could only do business with people you knew. You had to have a preexisting relationship. There had to be some basis. You just couldn’t go raise money from a bunch of strangers. It was designed, presumably, to protect people from guys just going out there and hustling, just conning people. Of course, it didn’t stop people from doing that because like with most laws, criminals don’t obey them. They just do what they want to do, but at least if you get caught doing something like that, the legal system has grounds to come in and shut you down.

In the Jobs Act a few years back, which was a fancy acronym for creating jobs, the government decided that it would be a good idea, because the banks and credit had basically seized up in the financial crisis, to loosen things up so that the money would be able to flow more quickly from people who had it to people who could put it to work. Inside of this legislation, there was a lot of different stuff, but there was a component of it that was going to open it up to where you could raise money from people that you did not have a preexisting relationship with, and they divided those groups of people into two categories.

 

Accredited vs. Non-Accredited Investors

One was accredited investors who have always been treated differently. That basically is if you have a million dollar net worth, make $200,000 a year as an individual or over $300,000 a year as a couple. And, that’s consistent. Meaning, it’s happened for the last couple of years and you have reasonable expectancy of doing it in the upcoming year. Then,  you’re qualified as accredited under the law. That means that if I’m out there and I’m a purveyor of some type of an investment opportunity, I can run and ad and stick you in a room and pitch you my deal. If you say yes, you could put the money in and now I’m compliant with the law. That was a big, big game changer. We’ve written a report on that. We’ve been talking about that for quite a while.

Robert: We’ve covered conferences of crowdfunding, and there’s been anticipation of this whole thing. Let’s step back for a minute. Crowdfunding started as non-economic participation model. Meaning, there were crowdfunding sites like Kickstarter, which is probably the best known one. But, there are several of them where an independent rock band or an artist can go out and raise money for their next show or recording or whatever it is, and individuals could put that money up, typically via websites and get something in return that was non-monetary. I couldn’t get a return on my investment, but I could a tee shirt from the band or an autographed CD. So, crowdfunding has been around even longer than the Jobs Act. The idea of saying well what if I put up money and wanted a return. That all of a sudden becomes a security and is regulated by the SEC.

Russ: It depends on if it becomes a security. Because there’s the equity side and there’s debt side like peer-to-peer lending platforms like Prosper and there’s a couple of other ones out there like that. These are platforms where people say, I want to borrow some money and so you can invest in my debt. You’re going to loan me some money and I’m go do whatever I’m going to do with it and then I pay you back. That was kind of the next level.

Where these Securities and Exchange Laws really come in to play are in the equity side. When you’re going to be an owner in the company or you’re going to be an owner in the entity if you will. That’s where they had divided people up to accredited, presumably you were sophisticated and could afford the risk and then non-accredited meant that you were underneath that million-dollar net worth threshold or you were underneath that $200,000 or $300,000 earning threshold.

Robert: Which most people are, by the way.

Russ: Which most people are, that’s where the bulk of people are. Those people have had to go into the publicly traded securities arenas, buy stocks, bonds …

Robert: Much safer. 😉

 

New Crowdfunding Rules Finally Being Implemented

Russ: Yeah, whatever. We could go off on that. The point is, these types of investments were really for insiders and they weren’t available for the little guy to get involved in. This latest iteration of the Jobs Act which is really … the way it works is Congress passes a law. It’s a statute. Then, they turn it over to the bureaucrats, the people that have to actually implement the law, and they create what are called regulations. In this particular case, this was a law called the Jobs Act that created a statute that made this permissible.

Robert: More than two years ago.

Russ: According to Congress, and then it got turned over to the SEC whose job it was to create the regulations that everybody would use to follow that. The first set of regulations they came out with was in September 2013 about how you could do this for accredited investors. The latest and greatest now here we are in late 2015 is that now the regulations have come out so how does the game get played when you’re going to make an offering to non-accredited investors, which arguably is a lot bigger market so we’re going to find out about that today.

Robert: Absolutely. It’s good news, but it also is brand new. So, when the first part of this came out and accredited investors could not be prospected by these various folks raising money, we call them promoters or syndicators, someone who is looking to raise capital from somebody, it opened up this new world of opportunity.

We have a report on that and it’s been a big topic of conversation in Real Estate Guys circles. To get your copy of the report, just send an email to [email protected] or you can visit the special reports section in our resource center at realestateguysradio.com.

 

New Crowdfunding Rules Mean New Opportunities … But Few Precedents Set

The big change now is the fact that there are a lot more rules, and there are companies that have been in position for this to happen for months and months and months and in fact years. Finally, we’re going to see where it all lays. Even though we had, since 2013 all the regulations for the accredited investors, as you probably heard on our Halloween horror stories episode, attorney Mauricio Rauld recounted the fact that one of his clients who used these exact rules and went out and prospected and got people in a room got contacted by the state saying, “hey, there’s been a complaint”. My point in that is even though it becomes law, it doesn’t mean that it’s evident yet.

Russ: In real estate circles the term LLC, the concept of an entity called the limited liability company has just been kicking around for a long time. It’s pretty ubiquitous. Everybody knows about it. Most people use it. The LLCs didn’t exist in the ’90s, right?

Robert: Right.

Russ: It was like the late ’90s, like ’97 or something LLCs really started to come out. The problem was a lot of attorneys back in the beginning were not willing to recommend it. They still recommended corporations or trusts. Why? Because there was a whole lot more established case law. Somebody has got to be the pioneer. Somebody has got to go out and take new law and then try it out and then figure out how the courts are really going to interpret it when there becomes a conflict. That’s because the way our system of law is, it isn’t so much what the law says, it’s really what the law intended. That leaves some room for interpretation and that’s where a lot of people get hung up.

When you go to your attorney and you’re asking them for legal advice, it’s harder for them to give it to you because they don’t have court precedents to look at. As this progresses and the pioneers go out and pave the way, what will happen is more and more of this will become more clear. In fact, one of the reasons we think that we’ve gotten these regulations finally from the SEC for the non-accredited, which is arguably the little guy they’re trying harder to protect than the big guy, is because they rolled out the regulations with the big guys a couple of years ago, and they really have had very few problems. Because of that, they presumably feel safer, “hey, let’s go ahead and roll it out for the little guys now too”. Or maybe it just takes two extra years to write those few extra lines of regulations. I don’t know.

 

Our Guest On This Episode, Attorney Mauricio Rauld

mauricio rauld on new crowdfunding rules for non accredited investors

Robert: That could be as well. Our guest today is attorney Mauricio Rauld, he’s a practicing attorney licensed in California but he does a lot of consultation with folks who are raising capital. In fact, he’s one of our featured speakers at our syndication events. When we come back, Mauricio will fill us in on the latest with crowd funding today on the Real Estate Guys Radio Program.

Welcome back to the Real Estate Guys Radio Program. We’re talking today about the new changes in the ability to raise capital through crowd funding. Joining us now, our good friend and attorney Mauricio Rauld. How are you sir?

Mauricio: I’m doing great Robert, thanks for having be back!

 

A Brief History On Jobs Act and Accredited vs. Non-Accredited

Robert: Well, absolutely. I’ve been waiting to do this show until the rules were finally set. For listeners that didn’t hear the show, probably our first one was a couple of years ago when this was announced, that all of a sudden the rules are changing in terms the ability to raise money and there were a couple of different ways to go about crowdfunding. But of course like anything that is actually law, it has taken a long time for the government to finally give us what the rules are. So, paint the picture of that. Where are we in the process of feeling like we know what’s happening?

Mauricio: Yeah, I feel like we’ve been talking about this forever. This started, just to kind of take a step back, this started back in April 2012. We’ve been talking about this for almost three-and-a-half years. This is the infamous Jobs Act. In that act, essentially there was two new ways of raising capital. One was allowing people to advertise and generally solicit the syndication that you were doing.

Robert: Which is a big one because previously you couldn’t do that. You couldn’t have any public display. You couldn’t go out and advertise, promote. You couldn’t put ads in the paper. You couldn’t do any of that in a private placement.

Mauricio: Absolutely. That was one of the big restrictions that we had and so that lifting of that ban was a huge, huge new rule for us investors. The only caveat with that of course, was that you had to limit your investors to accredited investors only, and you had to take some reasonable steps to verify that they were accredited. That was good. That took a couple of years to implement, not so much two years. It’s been in the books for a couple of years but this new one with the crowdfunding sort of addresses that gap which even though now you can advertise and solicit to accredited investors, you still can’t do for non-accredited investors and this law was meant to address that gap.

Robert: Accreditation, no investor left behind. Most of the folks listening understand that but if you don’t, it just means that there is a financial requirement for you to be able to invest. Accredited rules change all the time, but it has to do with how much income a person makes and what their net worth is. And you can find that out by Googling around.

Mauricio: I’ll tell you real quick because it does apply somewhat to what we’re going to talk about. Accredited investors, if you make over $200,000 a year for the last couple of years then you’re accredited. Or, if you have over a million dollars in net worth exclusive of your personal residence.

Robert: Okay, that’s the rule. Again, these things do change so make sure, depending on when you listen to this, that that’s still the rule. But the idea is, if I’ve earned that much money or I make that much money, the government feels that I’ve earned the right to make my own investment decisions. If I’m not accredited and I haven’t amassed a net worth of a million dollars separate from my house, and I don’t make $200,000 a year, obviously I can’t make my own financial decision, I need some help. To protect the folks out there from being fleeced by these promoters, these are the rules. Like it or not, doesn’t matter. The reality is I could make the argument that you could be a lot more fleeced in the stock market or in bonds or in whatever other pyramid scheme the government has going on, but it doesn’t matter. These are the rules. The thinking behind it, the more sophisticated an investor is, probably has some parallel to how much money they have made or make.

Mauricio: There’s a lot of controversy as to whether that’s a good measuring stick, but that’s exactly right. If you’re non-accredited, the law assumes you’re not sophisticated, and therefore, you have a requirement to provide additional disclosures to these investors, because again, they assume they’re not quite sophisticated.

 

The New Crowdfunding Rules For Non-Accredited Investors Are Finally Here

Robert: We knew kind of what the framework of this looked like but the actual law hadn’t been written. We didn’t have the concrete parameters we could go after and it’s my understanding that we now do.

Mauricio: We do, it actually happened October 30th, so on Halloween or just before Halloween. Again, it’s been three-and-a-half years in the making, because even though the laws are passed three-and-a-half years ago, they require that the Securities and Exchange Commission, the SEC actually make some rules. The law is a little bit broad, a little bit vague, and now somebody had to go and actually make the specific rules. We didn’t think it was going to take three-and-a-half years. They were actually mandated to do it within six months but they obviously didn’t listen, and it took a while.

Robert: It took longer, the government took longer, that’s amazing.

Mauricio: Amazing, right?

Robert: All right, now the good news is we have these rules. Now this doesn’t mean, those of you raising money for real estate projects that you can go out and assault people to invest. There are still some rules and parameters and the way that this money gets raised has also been dictated. Let’s talk about that.

Mauricio: Yeah, let’s talk about that a little bit. I’m going to talk very general here because the actual rule is 685 pages. It’s got some complexity into it, but I think I’ve sort of narrowed it down to really three important points that I want to discuss.

 

You Have To Use An Intermediary (Portal)

The first one is that you are, like you mentioned, you can’t just go out and start raising money on your own. You have to use what is called an intermediary, which essentially is a website. They call it a portal that is approved by the SEC.

Robert: We’ve already seen these kinds of websites out there and of course, there have been websites for traditional crowdfunding, which isn’t economically based, if I’m going to put some money in to support my friend’s independent film or recording project or whatever. But now the idea is it’s not necessarily vetted or sanctioned but the website is. This portal, this particular venue to accumulate these types of investors as well as these types of projects.

Mauricio: They’re going to be vetted pretty heavily by the SEC. You’re going to have financial disclosures. They’re going to have to show that you’re able to do this. You’re not allowed to go set it up on your own. It’s not like the other crowdfunding that we’ve heard about now with the accredited investors that we just talked about where you could set up your own website and advertise your deal. Here, you have to go through this portal, and all you can do really is point to the portal. In your advertising, you can say I’ve got a deal, it’s in this particular portal, go check it out over there and then the investor would have to go the portal, open up an account with them and then go through the process.

Robert: The point is these portals, and again, anticipating this law being finalized, these have been in the works for years. The idea is there’s two memberships bases of this. There’s the membership of the individual investors who want to see deals and then there’s the promoters, the syndicators that have deals to put up there, and both sides have to become vetted if you will from the portal.

Mauricio: Right. The portal is going to have all kinds of education material, obviously information about the syndication itself, which is most likely going to be provided by the sponsor. But the investor is going to have a lot of information available to them prior to making their investment decision.

 

The Parameters Of The Investment

Robert: Let’s talk about the parameters of an investment, because these are non-accredited investors, there are also rules about how much they can invest.

Mauricio: There are actually two main rules. One is the amount of money that you as the sponsor can raise through these portals.

Robert: Okay, if I’m out there doing a real estate deal and I want to raise money, I’ve got a maximum.

Mauricio: Your maximum is one million dollars for any 12-month period.

Robert: Okay, so I can do two deals at $500,00 each?

Mauricio: You can do two deals at $500,000 each, it’s an aggregate amount of how much money you raise over that 12-month period.

Robert: While we’re on that topic, here’s a quick question. Say I’m raising two million dollars and I have a buddy putting in a million. Can I raise the other million this way or is it just the project can be maximum of a million dollars?

Mauricio: There’s nothing that prevents you from still raising money sort of in a parallel course where you can raise a million dollars from this new … I’m going to call it regulated crowdfunding because that’s what the SEC is calling it. The regulated crowdfunding you can raise a million dollars but that doesn’t prevent you if you can find another exemption. You can raise another million or five million or ten million through another existing exemption to registration. But the one that relies on this particular law, limits you to a million dollars through this process.

Robert: What about the investor’s side? What’s their limitation?

Mauricio: It depends on how much money they make or how much net worth they have. It’s a little bit different than the accredited investors. The cut off is essentially $100,000. If your earn $100,000 or less or you have net worth of $100,000 or less, you’re limited to either $2,000 or 5% of the lowest of those two numbers. I’ll let you do the math, but that’s the restriction. I think most people will fit into that $2,000 number based on those numbers but that’s limitation number one.

Now, there are scenarios where you really could be an accredited investor for example. You could be a doctor or a lawyer making $200,000 a year but because of student loans, because of whatever other decisions you’ve made, your net worth might be $80,000. Even though you’re an accredited investor, you’re going to be limited to 5% of that $80,000 because that’s your lower amount.

Robert: Using a portal. You wouldn’t have that same limitation if you were just investing as a doctor or a lawyer that had good income but lower net worth.

Mauricio: That’s correct, using the portal, which again goes back to my prior point that if you have accredited investors, you may be able to rely on another exemption in order to raise additional funds and not really be part of this one million dollar traunch, let’s call it.

Robert: Let’s say this $2,000 number if that’s the amount, is that again per deal or per year?

Mauricio: It’s aggregate through the 12 months. You can invest up to $2,000 across the board, ten different deals at I guess, $200.

Robert: All right, $2,000 for the investor, a million dollars for the promoter. As you can tell, this is why The Real Estate Guys have not held this out as the end all, be all for syndication. Because most of the deals people eventually do are going to be bigger than that, and frankly, having done this for a long time raising capital, raising $2,000 from a person, that might be most the expensive money you ever took in terms of their sophistication, the questions they have, dealing with communication, all that. I would much rather have ten guys at $100,000 than a hundred guys at a couple thousand.

Mauricio: That’s one of the big challenges. You end up, if you’re going to raise half a million or a million dollars, you end up with 100 people or 150 investors that you have to now regularly communicate with and if things aren’t great, they’re going to have more people that are upset. But let’s not forget what happens if you have more than $100,000 in income or a net worth in excess of $100,00 …

Robert: But not yet accredited.

Mauricio: But not yet accredited. Then, your limitation is 10% of either your net worth or your income, whatever is lowest with and the big caveat of a cap, a complete cap of $100,000. If you’re an investor who has 10 million dollars in net worth and makes 5 million dollars a year, you’re not going to be able to invest $500,000. Your cap is going to be $100,000 for a 12-month period.

 

Deals That May Make Sense

Robert: Let’s talk about the kind of deals that make sense for this. Obviously, if I’m raising money to go buy a $60,000 house that’s a rental property, this might work perfect well for that. I’ll be able to stay within my limit. I could do 10 of those a year and still be within my limit. I took ten investors with a $1,000, $1,500, or $2,000 and that could be a great way to play. This definitely serves a need. It’s just not the right tool for everybody.

Mauricio: It’s also great I think if you’re raising money for a lending facility. If you’re trying to raise money that then in turn loans money, you can give yourself sort of a consistent rate of return. I think this also fits in part of your overall strategy. Again, this limitation is just for this particular exemption. Again, you could raise … Let’s say you’re doing a deal that you need 2.5 million dollars, a million of it can come from this regulated crowdfunding and then the other 1.5 million can be done through our traditional raises that we’re doing today either with accredited investors only through the preexisting relationships.

Robert: All right, good stuff. We’re talking with Mauricio Rauld about the new crowdfunding rules and requirements. We’ll continue our discussion when we come back plus we’ll play real estate trivia next. You’re tuned to the Real Estate Guys Radio Program. I’m you’re host, Robert Helms.

Syndicator, Sponsor, Promoter … Issuer Requirements

Robert: We’re talking about the new crowdfunding rules, specifically Title III crowdfunding, which is the new part that we’ve just finally gotten some clarity on, which is going to non-accredited investors through a portal and raising a smaller amount towards a smaller amount but still a lot of tools here.

We use the vernacular, Mauricio of the person who is doing the deal as the syndicator, or sometimes we call that person the sponsor or the promoter. In the regulations, they’re referring to this person as an issuer?

Mauricio: Right, that’s the legal term is an issuer, the person who is issuing or the company that is issuing the security.

Robert: Let’s talk about the issuer. What requirements do they have? If I’m doing a deal and I want to go to one of these portals and say, hey put my deal up, what does that look like?

Mauricio: It also depends on how much how money they’re raising. They’re really focusing on these limitations. It depends on how much you’re raising. If you’re raising less than $100,000 in your syndication, then all you need is a statement from your chief financial officer saying here are my financials. And basically the CFO gets to provide them, and you’re good.

If you’re raising between $100,000 and $500,000, then you have to have your financials reviewed by an independent CPA. If you are raising more than $500,000, then you are going to need audited financials.

Robert: Which are also expensive to get. Getting a CPA to take a look, that’s going to cost you something. Audited financials are a whole can of worms.

Mauricio: It’s a whole new can of worms and it’s usually a little bit pricey depending on how big your company is and how much … but your CPA literally goes through every single line item and requests receipts. If you said it was a dollar, they confirm it’s a dollar. There’s some expense there.

Then there are some general annual reporting requirements that the issuer needs to make every year just letting them know how the project is going and updating their financial information.

Robert: Which is good practice anyway, right? What we tend to do when we raise money for a project is we do either a quarterly report or it could be a monthly report if it’s a very fast moving deal. It could just be an annual report if it’s like a long-term land bank. But you’re going to report anyway, so it makes sense that that’s there. Is there any scrutiny on the financials of the person involved. Not just to say my company is a company raising money to buy rental houses. But what about me, my credit, my past history, that kind of stuff?

Mauricio: This is all dependent on the company that you’re issuing. A lot of times a company already exists. If your Microsoft and you want to go raise another 10 billion dollars or something. It’s an existing company, you’re already a startup. That’s one type of issuer that would require financials.

Then there are others where you literally start a brand new company. It’s a real estate deal. It’s a deal specific thing. In those situations, there really aren’t any financials to provide because it’s a brand new company. As long as it’s not a way for you to get around the financial requirements, you don’t just create a shell company to avoid your real company. But if it’s truly a new company, then there really aren’t any financials to provide.

Finally, there’s going to be some disclosure requirements that the issuer is going to have to make about their deal, which nobody should be surprised about. That’s what we do today. The difference is that the level of disclosure is not going to be anywhere near the type of disclosures we make now through private placement memorandums.

Robert: That’s an important point. If I’m raising money through a portal, that means I don’t have to complete a full private placement memorandum?

Mauricio: Right, you still have to make disclosures but they’re not going to be to the level of the disclosures that we typically make in a PPM, which are essentially the same disclosures you make if you’re going to register your security which are very detailed.

 

Due Diligence For The Portals And The Investors

Robert: I think about this from the investor’s point of view. They’re going to want to know the deal. You’re going to have what we may call an executive summary. Here’s the deal, here’s the parameters, here’s the market, here’s the property, here’s our best guesses about cost, or here’s the existing cost, all that stuff. Then you’re going to have these disclosures which say, “hey, you can lose money in real estate and here are some of the risks,” and those kinds of things. Are those disclosures and that executive summary, those are reviewed by the portal too to make sure they pass muster?

Mauricio: Yeah, these are things we don’t know yet because obviously these portals haven’t even been created yet. Yes, I’m going to imagine that the portal is going to want to review and vet the deal themselves just from an exposure and liability standpoint. They’re going to want to make sure this is not a fraudulent deal. I’m not sure how in depth and detailed they’re going to review it, but they are going to have a review process and you’re going to have to convince a portal that your deal is good enough and legitimate enough to be on their site.

Robert: I guess as an investor, I’m going to choose a portal that I feel comfortable is doing that work for me, but I also am going to have my own level of due diligence. Let’s take it from that point of view. Say you have an investor who is a client and they go, Mauricio I’m looking at putting $2,000 into this particular deal. Is there a reason or a place for my counsel to review a deal before I invest like it would typically be or do you get the feeling that, hey the portals handle all that?

Mauricio: No, I wouldn’t rely on the portals. It’s not clear what level of scrutiny the portals are going to do but if a client comes to me and wants me to review the deal, I’m going to go through the disclosures and any information that’s been provided the client and point out whatever deficiencies or red flags that I see. I wouldn’t necessarily rely on the portal. I’m not sure you’re going to be entitled to rely on the portal. I would do your own due diligence if I was the investor investing the money.

 

Still More To Learn With Portals

Robert: Just looking forward and already talking to a couple of the folks that are putting these portals together, there’s going to be a lot more, right? If you just go and look at any possible URL name that has crowdfunding in it, it’s been taken for years. People have already been anticipating this. I’m going to guess that we’re going to start to see personalities come out of these portals. They’re going to focus on certain niches or even geographies and things like that. It’s going to be incumbent upon the investor to make sure that the kind of deals that they’re interested in are being provided. I’m going to assume that either one side or other, and it’s probably the issuer, is going to pay a fee to the portal, maybe both sides. Any idea about any of that?

Mauricio: I’ve seen some noise about concern that the amount that they’re going to be charging, the portals are going to be charging. Again, we don’t know what they’re going to be charging because they don’t exist yet but it may hinder your ability to raise small amounts. If you’re going to raise $100,000 and your portal is going to charge you 15%, that’s probably going to mess up with your numbers. Again, it’s all speculation. None of the portals exist. In fact, the registration for portal doesn’t begin until the end of January. One thing I should have mentioned at the beginning, even though the good news is that this is now law, there is still a six-month wait period before it becomes effective. This is won’t actually become effective until May 21 I think is the date. May 21 of next year is when you’re actually going to be legally allowed to do this. There is a six-month window that we’ve got to wait still.

 

Learn More About Regulated Crowdfunding

Robert: All right well between now and then, you’re going to be with us at the Secrets of Successful Syndication in January in Arizona, and I know we’re going to talk more about crowdfunding this time because of that.

Mauricio: We are going to focus a lot of the time this time on crowdfunding because now that it’s final we know what it is and we’ll spend quite a bit of time with it.

Robert: At the last couple of events, you’ve been talking about “hey, it’s coming, it’s coming,” so this is great on that account.

For those of you who are driving or exercising or any of that kind of stuff and you weren’t taking notes, Mauricio has prepared a report. What he’s done is gone through the 600 plus pages and distilled it down. What’s in the report?

Mauricio: The report essentially is a summary of the 685 pages. I’ve kind of tried to translate into English, number one which is very technical. Second of all, I’ve put together a report that essentially gives my top good, bad, and ugly of the new crowdfunding rules, so you can kind of get my thoughts on that. I think what I’m going to do as well because there are a lot of questions about the new rules, I’m going to be holding a Q&A for anybody who is interested, probably an hour sometime at the beginning of next year so that if you’ve got specific questions about it, you can ask me. I encourage you to get the report because that way you can get on my list and I can send you the invite.

Robert: Perfect so that’s how it’s going to work. Before we’re done today, we’ll tell you how you can get your hands on the report and that will also get you alerted when Mauricio does his live Q&A session. If you have specific questions, there’s going to be lots of questions as this thing rolls out, but exciting stuff.

Just to be clear, we’ve been talking about this new part of Title III which allows us to raise money to non-accrediteds for lesser amounts. But for a while already the regulations were out about the accredited places people go. Whether you call them portals or not, there have been some websites, we’ve actually had guests from some of those sites on the program raising money for accrediteds. That already is up and running and it’s a pretty vibrant part of crowdfunding right now.

Mauricio: There was also a lot of confusion. Everybody calls everything crowdfunding but there was a distinction. I was distinguishing it between the little C and the big C, but now I’m going to call the regulated crowdfunding. The crowdfunding that already existed was this, I’m going to get technical, it was the 506C exemption, which allows you to advertise to accredited investors. That’s been going around now for just over two years. It was September of last year. What this is, it’s a separate, completely new exemption that specifically talks about the portals and what we’ve been talking about today. But it is a brand new law that again, technically doesn’t even go into effect until May of next year.

Robert: All right, good stuff. As always, counselor thanks for your great insight and we’ll see you at the Secrets of Successful syndication in January.

Mauricio: Thanks for having me.

Robert: All right. There’s attorney Mauricio Rauld. When we come back, we’ll have more about crowdfunding and it’s potential right here on the Real Estate Guys Radio Program. I’m your host, Robert Helms.

 

New Crowdfunding Rules Potential, Recap & Analysis

Welcome back to the Real Estate Guys Radio Program heard every weekend on this great radio station, all the time at realestateguysradio.com or your favorite podcast venues. We’re talking today about the changes and finally the final legislation if you will, the rules that we can live by as potential crowdfunders and good stuff from Mauricio.

Russ: I think it’s easy to get lost in the weeds, but that’s why you have advisors. That’s why you engage people who pay attention to these things on a tactical level because ultimately just saying, “I can go do this”. You still need to make sure that whatever you’re planning on doing is strictly compliant. You always want to make sure you have those guys and gals on your team who can help you do that. But conceptually, it’s very exciting because the idea is now we are beginning to take down some of the barriers. You can say what you want, and everybody has an opinion. And I’m certainly one of those people with an opinion about the role of government and what they do and what they don’t do.

In this particular case, government is getting out of the way. It’s not like they’re saying, you can go do something that you weren’t able to do before. Technically, what they’re doing is they’re saying, “we erected a big barrier and now we’re going to lower the barrier so more people can get over it”. But at the end of the day, look at it from whatever perspective you will, the bottom line is it’s a good thing that at least the government is beginning to recognize that we’ve got to get capital flowing.

new crowdfunding rules - invest in main street

Helping Capital Flow to Main Street

There are people who just absolutely want to be able to invest with a person that they know or Main Street. There are other people that want to invest with a professional advisor but there’s more and more people that are engaging and building social communities online and this is, I think, a real opportunity especially for the next generation. You and I, Robert are a couple of older guys.

Robert: Speak for yourself, my older co-host friend.

Russ: Ha ha. Yeah. You look at the way the younger generation is just growing up. I have children that were born before there was an internet. I have a couple who can remember before there was an internet. And then I have children who have no concept or memory of life before the internet. The only know a world with the internet in it. They’ve never seen an encyclopedia or a telephone book. They don’t understand what those things are. That’s not where you go to get information. A big part of their social life is online. You watch these guys, they get on Instagram or whatever and they start talking about something and the next thing you know, a month later they’ve got 5,000 people following them. I’m like, gosh it took us forever to get up to 5,000 people following us, but they understand that world.

 

Competition Will Drive Some Portals To The Top

It’s a natural progression in a social environment for people to share things including opportunities. When people have an opportunity and people have money, the technology, the online world, that community is a natural place for people to do that, and it’s inevitable that at some point again … You know, you could say whether it’s good or bad, but at some point the government is going to get involved beginning to try to regulate some of that. In this case, they’re trying to unleash the power of the online community, the internet, to be able to connect people and get money flowing. I think ultimately it will be a good thing. It’s just going to take some pioneering, and thank God there are people out there that are willing to go out into the wilderness and try something new. I’m really looking forward to seeing how this new innovation progresses.

Robert: Right and keep in mind as Mauricio said, that the big difference, one of the big differences here is that the only way you can, as a promoter, as a syndicator go after the non-accrediteds through crowdfunding is via an approved portal. You can’t just start your own website and raise money or go to Ebay.

Russ: Well, you can, (laughter) but it’s probably not a good idea.

Robert: Okay, you can’t legally. If you want to go to jail …

Russ: I could go out and rob a bank if I want to, but I don’t suppose that’s a good plan.

Robert: Your plan will be to vet these platforms and certain ones will appear. In fact, coming up at the Secrets of Successful Syndication, we’ll have an update on who’s in the game and what’s happening. We don’t have any horse in the race. We aren’t affiliated with any of these platforms. There’s lots of them vying for our attention right now. We thought it best at this point, rather than come up with any kind of recommendation or list, that we just alert you to the fact that this is happening so it gets on your radar. As we go through the next year, we’ll see. A lot of these folks are putting serious intellect and capital behind these platforms, expecting this will be a way that people who haven’t up until now perhaps even investing in real estate, be interested in investing in things like real estate.

Russ: Think about it, if you’re old enough to remember life before amazon.com there were many, many people … My very first internet marketing seminar was about Galaxy Mall. I went and saw the Galaxy Mall presentation. That was the first time I ever heard the word portal and began to understand that there were going to be places online, these virtual places, that people could enter into a whole world of shopping or whatever. Nobody hears about Galaxy Mall today. It’s all Amazon. All of these innovative companies are out there. Somebody is hoping to be the last one or two or three or four people standing. Amazon in online retail is by far and away the dominant force, just like Walmart and Costco are the two dominant forces in retail.

Robert: Depending upon when you’re listening to the archive, they may no longer be true.

Russ: I know, that may not longer be true. But watch the space as we’re going to be watching the space because probably over time, somebody is going to be emerging as the person who is dominant. You have to ask yourself, what is the main value proposition? One of the main value propositions is they’re going to have to be compliant. You’re going to have to make sure that they’ve done a good job vetting the people and following the regulations that they have to follow in terms of their responsibility allowing people to come in and show you what they have to offer.

The other big part of it is they’re going to have to have a crowd. If you put your offering out there and nobody’s got any eyeballs, what good is going to do?

 

Technology Can Help, But This Is Still A People Business

Robert: This is one of the big common misperceptions and you talked about this early in the show. But, there were a lot of folks two years ago and three years ago when crowdfunding was just starting to stick it’s head up and say, “we may be able to have equity-based crowdfunding,” who thought thank goodness. It’s the end all, be all. I’ll just throw up my property on some website, people will overbid for it and it’s be done. The reality is it’s not about the technology, it’s always about the deal. If you have a deal with a good story and it’s been vetted and it’s been inspected and all that’s been done, then finding the capital now has changed for some folks to be able to go to methodology like crowdfunding. But unless there’s a crowd, there is no deal.

A lot of what these portals have to do is develop that following, that crowd, those people that are going to be looking at, like peer-to-peer lending. There area a lot more people borrowing money than there are lending money on peer-to-peer lending. What’s it going to shape out for crowdfunding? Right now, we’ve already seen what’s happened to accredited. There are several big reputable sites that have the ability for accredited investors to register, be shown deals, and invest. And it’s working pretty well. This is very different because of the level of complexity, I’m guessing the level of deal size is going to be different, probably not as sophisticated of investors getting involved. It’s brand new territory, but it’ll be exciting to watch.

Russ: I think the other thing that you’ve got is just realizing, you know we do a lot of stuff online. Obviously, we appreciate guys … we do our radio show of course, and we put our podcast out there. And we do our email blasts and newsletter blogs and all that. People come out to our live events, and we’re able to meet them and that’s exciting. The number of people that come out to the live event is a small, small percentage of people that actually engage with us or hear our voices or read our stuff online, and that’s always going to be the case. But in terms of our business and the people who end up becoming the most valuable to us and our sponsors, if you will, are going to be the people who come to the live events. You still have to deal with the fact that this is a people business and technology is going to open up the number of people you can communicate with. But you still, on your side, we’re not talking about the crowdfunding side, but you as the individual person out there thinking, “I want to use a crowdfunding platform”, make sure you put some time and thought into how you’re going to handle the customer service side of it and all the interaction you’re going to have with those people as well.

Just getting the money in is only the beginning of the relationship, it isn’t the end. You’ve got a lot of responsibilities once you’ve got an investor into whatever it is that you’re offering to continue to build that relationship. Make sure that you’ve contemplated that and as you’re evaluating different crowdfunding platforms that you might choose to engage with, look at them through the whole thing. How are they bringing people eyeballs in? How are they vetting deals? How are they communicating? What type of added value services are they going to provide you after the fact in terms of supporting your customers and how all that works. There are still a lot of things yet to be developed. Continue to watch the space. We’re going to continue to watch the space, and we’ll bring you more news as we hear it.

 

Learn How To Raise Money For Bigger Deals

Robert: Crowdfunding is one of the potential ways to raise money for deals. If you’re out of your own cash and credit and want to go raise investor’s equity to do more deals and get bigger faster, come on out to the Secrets of Successful Syndication.

We’ll be in beautiful Phoenix, Arizona the last weekend of January. The only way we can do the event this time of year if it was not a football playoff weekend. It’s the weekend between the last playoffs and the Superbowl. Come on out. Ken McElroy will be there, syndicator extraordinaire and the Rich Dad advisor for real estate investing. Mauricio Rauld who was here on the program today will be out there, and we’ve got a bunch of great, great faculty members and guests. It’s always wonderful, the people that show up to the event, but it won’t be the same without you. Go to the website at realestateguysradio.com and click events to come out to the Secrets of Successful Syndication.

Big thanks to Mauricio for his time and research. If you want a copy of his report, he has basically put a synopsis together of all of this new information so you can read through it easily and he’ll give you a link to the full thing if you really want to read all of it. All you have to do is send us an email to “fund the crowd AT realestateguysradio.com.” Yup, just send an email to “fund the crowd AT realestateguysradio.com” and you’ll get Mauricio’s synopsis of everything you heard today. Until next week, go out and make some equity happen.

 


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5/15/11: Smart Money in the New Economy – Empowering Today’s Entrepreneur

As Joel Grey and Liza Minnelli sang in Cabaret, “Money makes the world go ’round”!  And, as we all found out in 2008, when the money stops moving, everything stops.

So for the last three years, we’ve paid extra attention to the macro-economic factors which affect the availability and cost of capital.  It’s become apparent that conventional money remains constipated because, in spite of ridiculously low interest rates, capital is not yet flowing.  Banks remain extremely cautious.  And when they can borrow from the Fed for next to nothing, they don’t really have a sense of urgency to make loans.

However, the need of the marketplace for money to operate remains strong.  Couple this with the need for investors to get yields on idle capital, and there’s an obvious opportunity.  We’ve dedicated several shows to taking a closer look at opportunities in private capital.  This episode continues that theme as The Real Estate Guys™ head to New York to get perspectives and coaching on organizing private money as a way to cash in on the many bargains available in today’s real estate and note markets.

Behind the mobile microphones on location in the great Northeast:

  • Your host and radio Cabaret operator, Robert Helms
  • Co-host and aspiring, but awful, Cabaret dancer, Russell Gray
  • Special guest, attorney and mayor, Jon Hornik

Before a private capital fund solicits deals and moves money, the organizers meet with an attorney to set the whole thing up.  So, although anecdotal, if such an attorney experiences an increase in requests to set up these funds, it’ an indicator of capital formation.  And when capital forms, it’s for the purpose of moving.  We always want to be in the flow of money, so we’re very interested in Jon’s comments about what he’s observing – since he’s on the front end of the private capital formation cycle.

Of course, we aren’t merely spectators, so when there’s opportunity in the marketplace, we want to get in on the action.  So we also make sure to pick Jon’s large and experienced brain for tips on how to set up and operate a successful fund.

So whether you’re a market watcher wanting to get a feel for the flow of capital, or you’re an aspiring fund former, listen in on our informative interview with attorney Jon Hornik.

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The Real Estate Guys™ Radio Show provides real estate investing news, education, training and resources to helps real estate investors succeed.

5/1/11: Art of the Comeback – One Small Developer’s Battle with the Bank Over a Broken Deal

Donald Trump’s legendary comeback is one of the great real estate stories in recent history.  But how do you relate to anything The Donald goes through?  We found a small developer whose David vs Goliath story has less zeros and lots of lessons for small fry like us.

In the mobile recording chariot for another race around the track of radio excellence:

  • Your broadcast Ben Hur and host, Robert Helms
  • Your co-host and chief chariot puller, Russell Gray
  • Special guest, real estate developer and syndicator, Malcolm Davies

So you’re a big shot small time developer.  You’ve raised money and built projects.  You’re a thirty-something self-made millionaire. The Great Recession isn’t even a glimmer in Ben Bernanke’s eye and life is good.

Now you’re 20 literally feet deep into your most ambitious project and a not-so-funny thing happens on the way to your next construction draw.  The bank who begged for your business gets cold feet and leaves you unloved and unfunded.  Ouch. And it get’s worse.

Welcome to Malcolm in the Middle…of a big mess. What do you do when Goliath Regional Bank (not their real name) with their legion of lawyers are lined up against you?  You can assume the position (fetal) and quit.  Or you can gird up your stones in a sling to stay and fight.

Tune into this exciting episode of The Real Estate Guys™ Radio Show and find out what happens next in this modern day tale of Davies vs Goliath.  You’ll gain valuable lessons about how tenacity, integrity and the right team can overcome even the most daunting odds.

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The Real Estate Guys™ Radio Show podcast provides education, information, training and resources to help investors make money with their real estate investing.

3/6/11: Practicing Safe Syndication

The idea of making big money as a real estate investment fund portfolio manager is enough to get most people all hot and bothered.  But before you go too far, we encourage you to cool down and consider practicing safe syndication.

In the broadcast clinic for this episode of The Real Estate Guys™ Radio Show:

  • Your guru of group deals, host Robert Helms
  • The doctor of details, co-host Russell Gray
  • Special guest and resident “wet blanket”, attorney Mauricio Rauld

We’ve had syndication on the brain for several weeks now.  It could be that spring is coming or more likely, that many factors have come together to magnify the attraction of organizing and managing an investment fund.

But this episode isn’t about all the fun and opportunity you”ll have.  Rather, we invited attorney Mauricio Rauld to talk about all the legal responsibilities that are part of setting up a syndication.  Even though these types of activities start out innocently enough, if you don’t have a firm understanding of where the boundaries are, it’s easy to cross them and end up afoul of regulators.  And that can just ruin the whole experience!

So tune in and discover important details about properly setting up your business entity, documenting your offering, and complying with the various restrictions on promoting to potential investors.  Because although syndicating is fun and exciting, it’s important to approach the whole experience in a safe and sane manner.  That way, it’s good for both you and your investors.

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The Real Estate Guys™ Radio Show podcast provides education, information, training and resources to help investors make money with their real estate investments.

2/27/11: Fast Track to Full Time – Starting Part Time

Why wait for a job or beg for a raise, when you can take matters into your own hands and make it happen now?  Good question!

To find the answer, we tracked down a good friend who successfully made the leap from a modest salary to professional investor – and he did it fast.

In the studio for some fast talk on this hot topic:

  • Your fast talking host, Robert Helms
  • Your part time co-host, Russell Gray
  • Special Guest, former school teacher turned full time real estate developer and syndicator, David Campbell

In good times and bad, there are always people who want to make more money, be their own boss and enjoy the rewards of running their own business.  Many people start out simply investing in real estate, but quickly become enamored with the thrill of the deal and the big money, so they decide to go full time.

Since it can take a decade or more to build up enough passive rental income to equate to a full time job, it’s not uncommon for serious investors to go into the real estate or mortgage brokerage business as a way to get make a full time income while getting into the deal flow.   But to do well in brokerage, you often need to focus on a narrow geographic, demographic and product niche.  Plus, brokerage is highly competitive, requiring constant selling to be successful.  There’s nothing wrong with that, but some people find it harder work than it’s worth.

But there are other ways.  Some people buy, rehab and re-sell houses.  Others build from the ground up.  Still others trade in real estate backed notes.  Some people raise a bunch of money and act as fund manager, providing capital to others, and earning a management fee and profit sharing for their efforts.   If you’re new, that may sound very intimidating.  But in this episode, David Campbell shares not just what he did, but where he got the belief, help, encouragement, training and support he needed to supercharge his investing career and get on the fast track to big opportunity.  You’re going to like this one!

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The Real Estate Guys™ Radio Show
podcast provides education, information, training and resources to help investors make money with their real estate investments.