You are listening to The Millionacres podcast. Our mission at Millionacres is to educate and empower investors to make great decisions and achieve real estate investing success. We provide regular content and perspective for everyone from those just starting out to seasoned pros with decades of experience. At Millionacres, we work every day to help you demystify real estate investing.
Deidre Woollard: Hello, I'm Deidre Woollard, an editor at Millionacres, and thank you so much for tuning into the Millionacres Podcast. Here's the thing about real estate investing. It costs money. Most of us probably start out using our own capital, and that's usually the right way to go to start. But if you're going to scale and you want to grow big, you probably are going to have to use someone else's money at some point. Which I think for a lot of us ends up being a little bit of a hurdle. To get us beyond that, I'm here with Matt Faircloth, who's the author, Raising Private Capital. He's also the Co-Founder and President of the DeRosa Group, which owns residential and commercial real estate around the US. They've done over 30 million in transactions and he's had to ask other people for money. So he's a great person to talk. Welcome.
Matt Faircloth: Deidre thank you so much. That was a great intro and it's such an honor to be here.
Deidre Woollard: Let's start because the book is called Raising Private Capital. What exactly is private capital?
Matt Faircloth: That's such a great question. I got to tell you, I've never been asked that because people assume that folks understand what that mean. I think a lot of real estate investors misunderstand it because it's not hard money. It's not call it institutional capital or family office or things like that. Private capital as I defined it in Raising Private Capital, is money from people that may be in your network, but it is money that comes from individuals as I define it in the book. That money could be used as a loan in my business to help me bridge a property from dilapidated condition to bring it to its highest and best use, or it could be equity that wants to ride along and win alongside me on a rental project, whatever that may be that wants to co-own something in a passive position. I define private capital to be money that comes from an individual that's partnering with me, or lending to me on one of my projects. In Raising Private Capital, I call it the cash provider, because we provide the deal, they provide the cash. The deal provider, cash provider.
Deidre Woollard: Which I think is a nice, easy way to think about it. I like that in the book, it made it very clear, and it also defines responsibility, which I think is something that gets a little blurry and we'll talk about that a little bit later. Let's start with how you begun. Most of us, we go to family. Sometimes I've heard horror stories. I'm sure you've heard horror stories, but you did this and it worked out for you. What's the secret?
Matt Faircloth: I just got to lucky Deidre, that's it, no I am kidding, it's totally not. My own mama is a lender on some of our properties. But I don't treat her any different than I would anybody else. The horror stories that you've heard are, there are people like, ''Well it's just my sister,'' or ''It's just my cousin,'' or it's just fill in the blank. That person that I have other relationships with be that a friend or cousins we went high school with, my next door neighbor, somebody from a church, whatever. These are people that we sometimes encounter during walks of life. Eventually people that you don't know are approaching you because of your track record. But the secret that I've always done as you treat everybody equally and you don't treat my mom any more or less or just my mom is lending me some money. Let me not give for a loan agreement, or let me not do a proper documentation or things like that. We've done deals with relatives and friends and people I went to high school with and all those folks. Among many others, we treat them all the same, they all sign same loan agreements, will sign the same things or pay on the same terms. I think that is the secret in that you just have to establish a protocol and treat what you're doing as if you are a custodian of their capital because you are the, de-rose who they are, and treat the same as you would anybody else. I think that's one of the keys to success in this thing.
Deidre Woollard: I would absolutely agree with that. I think one of the things that when I hear these horror stories, it's usually like, there was no agreement. There wasn't any kind of contract. It was just like, ''Yeah, I'll lend you this money, and I'll give it back in certain amount of time." But then it just didn't work out. I think it's really important to treat anytime there's money involved with family or friends or anybody, contracts are good. Contracts are important.
Matt Faircloth: Yeah, and then a handshake is great, but in the other hand, you should have [laughs] a pen and a piece of paper for someone to sign.
Deidre Woollard: Let's talk about using your network. You mentioned like people you went to high-school, things like that. I used to train real estate agents and I would talk to them about their networks, the parents they meet at their kid's at school, all that stuff. Beginning agents get really uncomfortable with that. I think that's true if you're an investor and you're trying to raise capital. How you go from we're friends and we talk about things to, you should know that this is the thing I do and here's how you can get in on it. How do you make that bridge?
Matt Faircloth: It's funny. The first thing you could do, and this is like when you first get started, people ask you questions. When you go to the cocktail party, the backyard barbecue, the whatever. This one's about work, you're talking about your kids or your work, that's it. You might be tempted to talk about your day job and maybe how you don't like it and how you want to transition out of it. But it's actually more lucrative for you to tell people in your network about your very exciting real estate investing business. Not from our perspective, you can lend me money. It's just, hey, I really am loving this Millionacres podcast and I really love the show and it's so great. You know what I learned? Did you know there's this thing called the 1031 exchange, one of their guests talked about it. You start to share what either you're learning or what you're experiencing with people around you. There is a reason why shows like flip that house or flip or flop or whatever it is you want to say. There's reason a lot of people watch those shows us because real estate is interesting. We all experienced real estate. You and I are both sitting in real estate right now. Everyone is familiar with it, either as a investment vehicle or as something. People can relate to it, and they find real estate investing interesting into they'll typically asked questions like real estate investing? That's what you do, "So you're buying apartment buildings?" No. We're going to start with single-family homes and we're going to scale to apartment buildings is really great. You just make people aware of what it is that you do, and eventually people will say, "Well, that must cost a lot of money." It does, but I've read this great, this awesome book by Matt Faircloth called Raising Private Capital. It's probably about how I can get people in my network. Again, you don't close, you inform. The best capital raisers are simply educators. They're not good salespeople, they're just good teachers. You've got to just teach people because the majority of America, Deidre believe that you either can't or that it's illegal to invest with your retirement account in real estate. Because only like three percent of the retirement accounts in America are invested in something outside of Wall Street. Most people just don't want to do it or don't think you can do it. There's a lot of education you have to give people in teaching them how to do these things. I find that it's best to just educate your network and tell how exciting it is, and eventually they'll say, "Why don't you come over for coffee next week and tell me more about that" That's how we got going, not by soliciting, by just mentioning what we do. Then some days people say the magic words, which is, "Man, I wish I could do that too, I just don't have the time." Those are the words of a cash provider because the deal provider has done, the deal provider has resources, time, network opportunities. The cash provider has cash, but very little time, very little opportunities, very little resources, and they feel stuck because they don't want to just put another dollar into Wall Street, maybe they're already exposed to that, they want to put it in something else. The cash provider through the marriage of their time resources, knowledge network and the cash providers time, those two things married together, make a phenomenal combo. But it's education that creates that bridge.
Deidre Woollard: Do you find that people have to practice that a little bit like an elevator pitch. Do you find that you have to work with it in order to be able to say that fluidly and not have it sounds salesy?
Matt Faircloth: Yeah, we do because you've got to make it sound authentic. I don't suggest people rehearse. I suggest people just learn enough about it to where you can be comfortable speaking about it and then speak from your heart. Because I find that anybody can always see a sales pitch coming down Broadway. We've all bought a car, and say, here comes the car sales pitch, here we go. Now we're throwing in the under-coating. [laughs] Nobody wants that, but what we do want, is we all want something different. We all want to hear about something new, and we are all curious. I think if you're prepared to just go in and just teach and not, "Well, I happen to have another $100,000 left in this deal if you want to hear more about it." Unless people ask, don't bring it up. Just to educate and have the courage to just stop there. I think that just by talking about it more frequently, that that comes up. You got to find a way to say what you want to say in a tight fashion. You could say shtick lines like, what do you do for a living? Well, I'm a school teacher. What do you do for a living? Well, I buy rental properties, fix-and-flip properties using other people's capital. Or I hope people invest in real estate without any time. I'll help people invest in real estate without dealing with leaky toilets or bad tenants. You can compartmentalize it, but those things I think are less authentic than just yeah, I buy apartment buildings, I flip houses, it's what I do. It sounds like a pick-up line, [laughs] when you do the elevator pitch.
Deidre Woollard: I think the enthusiasm and the passion are what make it genuine.
Matt Faircloth: That's the best because people want to be excited. If you're excited, they'll be excited. That's great, I love you, you sound excited, I want to be excited too [laughs]. Tell me more about it.
Deidre Woollard: Exactly. I think one of the things that people they get excited about anybody wanting to give them money, that they don't necessarily vet the other side of it. One of the things you talk about in the book too, is that idea of they're vetting you, but you have to vet them too and make sure that they are the right partner. Not any cash provider, is the right provider, right?
Matt Faircloth: Yes, that's correct. I've worked with cash providers that really should have been deal providers. They really just want to be active. You know what it is Deidre, I'll bottom line it for you. The problem that you have if your cash provider has a lack of trust for you or views their position in the arrangement as better than, greater than, or having a leverage over you, don't do the deal. Meaning the deal provider and cash providers should be equal. They are. I think that there's a lot of people don't view it that way. If they don't, then if they view their position to be more important than yours is, forget it. I move on. It should be a pari passu, marriage hand-in-hand. I bring the deal opportunities, time and resources, you bring the capital. This is how we go. If they start asking questions that are about like, well, I want to say, I want to see this, I want to see that. I want ratchet clauses, meaning like my interest rate goes up for every month, you don't pay me or whatever, this a lack of trust. Then it's okay for people to do due diligence and vet you. But you can start to smell when somebody doesn't trust, can't you? It starts to seem like, "You know what? This isn't going to work out." I've done deals with people that I should've found another lender or another equity provider on, because it was clear in the beginning that they either weren't sure what they're getting themselves into, that they got in half blind. or that they got in without trust. These are two problems that showed up later down the road.
Deidre Woollard: I think the idea of trust is important and also the idea of making sure they know what they're getting into. I think a lot of times where that lack of trust can come from is not understanding what they're doing and how long their money is going to be tied up. How do you make sure that they really understand what they're dealing?
Matt Faircloth: We got to put it in writing. Typically will do for an equity position, which is primarily what we do now. We primarily do equity positions in multi-family assets, apartment buildings, bigger stuff, and everything like that because we've grown through several different milestones in the business, and we got started doing very small loans and small equity business. We've grown into larger stuff. But for the larger deals that we've done, and we've not always done it perfect. We still learned on the job in a lot of ways. But on the larger deals, we tend to put all the terms that need to be understood. Timeline, rate of return, what ifs and risk factors and things like that. We tend to put them into like a quick term sheet or a one-pager, that thing. Things that's really important for them to know. But how long is going to take for them to get your money back? [laughs] Those things. It's not buried in 40 pages worth of information, it's right there on the front page, for them to be on the same page on.
Deidre Woollard: Earlier you mentioned that only around three percent of people are using IRAs to invest in real estate. Want to talk to you about SDIRAs, self-directed IRAs, in real estate crowdfunding I've seen some sponsors, they don't want to mess with SDIRA capital. In the book, you sounded like you are a big fan of SDIRA capital. Why is that?
Matt Faircloth: I'll tell you why. It is the mission of my company to make what we do accessible to everyone. That's one of our missions. The true mission of DeRosa Group, my company is to transform lives through real estate. I don't want to just transform lives for the super duper wealthy. I can help them too, [laughs] and we do help them. Because they're already aware of what it is that we do. They don't really need as much education because they already know that real estate and sticks-and-bricks is a great place to grow and hold wealth. Now, beyond that, the very wealthy hold a lot of their wealth in cash, and that's a good thing because they can leverage tax benefits. They can leverage rates of return and compound returns and then take the money out and do cool things with it and things like that. Middle America holds the majority of wealth in their retirement account and their home, those two places. If I want to make what I do available to everybody, I need to become really good at helping people access their retirement accounts and put it somewhere else outside of Wall Street. Not that they shouldn't have any money there, but they should have alternatives as well in that. That's why I believe that it's a great resource and it is such an underutilized resource. Additionally, people say real estate has lots of benefits including tax benefits, which it does. It has a great tax leverage. It has income tax benefits and things like that until you sell it. Then when you sell it, you got to be at the piper and recapture all those things. Then there is 1031, but you can't do a 1031 through a limited partner investment. If you are in investment in a little tiny slice of a big apartment building, unless every investor wants to do a 1031 exchange, you can't do that. You're going to have to pay capital gains tax and those taxes are increasing. How great would it be to hold that apartment building in a tax vehicle, such as an IRA or something like that? I think that IRAs are great vehicles for people to do passive real estate investing. It just takes a little bit education because a lot of folks in America don't realize that they can truly put their IRA account, not their 401(k) just yet, but their IRA account can go into alternatives, such as real estate equity.
Deidre Woollard: I agree with that, that it's something that people miss out on. I think one of the things that we've learned with Mogul our premium service, we've got crowdfunding deals that are realized and then people want a 1031. It's like no, you're an LP, you can't do that. That's why the SDIRA capital is such a great idea. Why do you think most people don't know about it? Is it lack of awareness? Is at the fact that there is the extra step with the custodian? What do you think is the blocker there?
Matt Faircloth: I will tell you. Now we're going to get real. It's because the financial planners are not paid to tell them about that. Because financial planners that are presenting the original 401(k) or they're assembling the 401(k) program that was originally, let's go back further a little bit of education. An IRA is a former 401(k). [laughs] It sounds like Joe Smith or Jane Smith that used to work in one job had a 401(k), because they work for a great employer that had a retirement program. Then they left and went to another job. The 401(k) that Joe or Jane Smith used to have at job 1 is now qualified to be an IRA. All an IRA is, is a retirement account for a company you used to work for. They are financial planners. They will gladly manage that IRA for you, but they will not tell you that you can put it into things outside of the Wall Street. I have had financial planners tell their clients that it's not legal to put it into things outside of Wall Street. You have to run it through. No, they're misspoken. They don't know. I'm sure it's because they just don't have the education to understand that you can't do that, that that's not true. A lot of folks just don't realize that they can put it into things outside of Wall Street. You know what else? If you don't have something in front of you, you don't think about it. A lot of people forget that their IRA is there. I get so many phone calls, Deidre, from investors and they're like, "Well, I want to put some money into your investments. I have 50k that I've saved up, that I want to put into an alternative. I want to make some great cash flow from an apartment building." I say, great. I look at big picture. Tell me what else you have. Equity in your home, tell me all about your lifestyle, tell me when you want to retire, tell me the whole story. How old are your kids? The whole shooting match. By the way, how much is your retirement account? "My 401(k) can't do anything with that." I said, no your IRA. "I do have that one from that last job. Let me look. You know what? Just $300,000 in that." It was just sitting there in mutual funds and everything. Is it going to go up or down tomorrow? I'm not sure, who knows? I've been able to help people unlock that capital they forget about, because it's not in front of them, because they're not doing anything with it. It's just on autopilot mode, just sitting over there. With that custodian that's glad that's making fees for managing it for them, but they're not growing it for them. It's just sitting there maintaining. I think it's just because either there's no one screaming at them and telling them that, though the people they have asked about it have told them that no, this is what you can do or you can buy a REIT. [laughs] But that's different, very different than a private placement syndication.
Deidre Woollard: Absolutely. You talked about IRA as the other source of wealth that you've mentioned is people's equity in their homes. Right now is an interesting time because home prices keep going up. So many people have so much equity in their homes, because home prices are high. They're not really thinking of moving or doing anything like that. How can people tap into that safely, and what is your advice on using your home equity?
Matt Faircloth: That you have to be careful, because now we're talking about the roof over our heads, and the place we raised our children in, and everything like that. You got to be careful. You don't want to put it at anything speculative, or go put a HELOC on your house, and go buy some Bitcoin with it, or something like that. [laughs]
Deidre Woollard: Oh, God.
Matt Faircloth: What I have done in the past. Me and my wife, Liz, do this now. We have a HELOC on our home. The home I'm sitting in right now has a home equity line of credit on it. I've taken that HELOC, it cost me three-and-a-half percent. I have that money right now into our private loan at 12 percent. I'm making what they call fancy talk. We were making a yield spread of eight-and-a-half percent on that money. I do not recommend that unless you're investing in a syndication deal that has a preferred return, that's going to start producing immediately, and a lot of syndication deals don't right now. But if the syndicator that you're working with is going to start paying you soon after closing inside the first quarter of closing, then you can do it that way. But understand, there is no guarantee and there is no collateral that you have at a syndication. It's just you're buying equity and it just like buying shares of Microsoft stock, and if it produces a dividend, great, we win. The syndicators certainly has the right to not pay a dividend. They are not obligated to pay that to you. That's just money that deal is we'll pay you at some point and it's a return on your money you're supposed to make, but it doesn't have to give it to you every quarter. What I've seen people do is they put that HELOC on their home and they invested in something that might not cash flow, and then that investor then has to bear the burden of that interest until the investment starts producing, which is no fun. I don't like people writing cheques hoping that the investments get to start producing, that's a negative cash flow position, which I don't like. I'd rather see people either lend the money, which is what I do, or they can invest in a syndication, where there is a, you can't really use the G word, but they don't guarantee a regular production rate coming out of the investment. Even if it's something that on paper says that it's going to produce a nice return in the first year, it's a good place for home equity line of credit. Just do not forget that no matter what, you have to make that monthly payment. You can't just call your bank and say, "Well, my syndicator didn't pay me this quarter. Can I get a do over for next quarter?" No, you can't do that. [laughs]
Deidre Woollard: That's awesome. Let's take a quick break here.
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Deidre Woollard: I'm back with Matt Faircloth. We're talking about how to raise private capital. Let's talk about the investor experience. How do you determine how much money you're going to need as the deal provider, and when you're starting to think about how you ask, do you look at your existing pool of investors? Do you break it up? How do you go about that process?
Matt Faircloth: I'll give you two brief answers. There's how we do it now as the DeRosa Group. But we've been doing this for a bit. We're about to launch our 14th real estate syndication. We've got our model down. But I'll speak to beginning folks who want to start raising capital, 1, 2 or did read my book and are looking to do their first second deal, and then we'll talk about how you end up doing it in the long game. In the beginning, you have to budget for three different things: how much money you need to buy the deal, how much money you need to fix up the deal, and operating cash, aka just-in-case money, aka money on the shelf that you can use as you need it. That's the biggest mistake that a lot of real estate operators do, is they don't put enough money on the shelf for just-in-case. I hate this term, but rainy day money. Because it's like, well what if it's not raining? Well you might still need it. [laughs] It's just that capital that sits there, then maybe if you are a little short one month to bridge your expenses or something like that, you're going to need it, and sometimes you have to advance construction and things like that to contractors, all that stuff. We tend to, I would add up that math, of purchase, construction, and capital reserves. Add those three numbers up, that's how much money you need. Now the beginning investor, the beginning those who are looking for equity or debt for their deals, what they need to do is they need to start talking about real estate investing with their base before they have a deal. I even recommend, I'm dating myself a little bit, because is getting a little passe, but send out a newsletter. Now everybody's got a newsletter. Then I'll probably get three a day [laughs] from everybody. But you maybe do Facebook posts or do whatever it is you want to do to engage your base. We still do newsletters in that, but we've built up a really good following around it. Whatever you do to engage your people, your network, that you have built a interest level around real estate investing for, then you want to let them know, "Hey listen, I might be coming and do a deal here, and if I do, are you interested?", "Yeah, sure. I'd love to," whatever. This should not be the first conversation you've had with these people. These are people whose ears perked up when you just talked about real estate investing, or people that you happen to know have money in the three places that I talk about raising private capital, which is cash, IRA accounts, or real estate equity. Raising private capital talks about exactly what to look for, how to find those three buckets of money. Make your network reach outs and then marry the two together. I need 75,000. I'm going to break it down into bite-size chunks of 25k a piece. I'm going to have three investors at 25k a piece, and I'm going to bring those ends. That's how you would break down a small deal. The larger deals tend to go the same way except for, it gets a little more complex when it comes to how much capital you need. Because there's maybe some fees that you want to budget for and the closing costs can become significant. Where closing cost on a small little duplex maybe like a rounding error. But a closing cost on a $10 million apartment building can be very significant. So that is something you have to put in your budget, if you will. We just email it out to our base, and for a legal syndication you have to set a minimum investment, and so that just gets set there. You do the algebra to see how many investors you need to make the deal go down and you're off to the races from there.
Deidre Woollard: Do you have a team of lawyers that look at each your offering and the syndication before you set it up, and is it possible, do you have to have like a fresh look at it? Looking at each individual 1 or do you set up a template?
Matt Faircloth: The template we have is our offering memorandum. Meaning like our dealer say, "Hey, here's the deal, this is financials, this is why it is," because the offering tends to answer around the same questions, which is, why should I invest in real estate, why should I invest with you, and why should I invest in Lexington, Kentucky, and why should I invest in that property right there. They tend to answer the same questions over and over again. We use a template for that. Now for the syndication legal stuff, the operating agreement, the private placement memorandum, the subscription agreement and jazz, we typically hire an attorney every deal because you want that attorney's insurance, [laughs] and you want them bound to each agreement that you write, and that you launch, you've at least got an attorney's license and their street cred standing behind each deal that you do in that. We tend to hire an attorney every time that we do an offering, and it's likely [laughs] they pulled off for their shelf. But it's really I just want their eyes and I want to pass the liability of potential issues over to have there at least joining us in that. Because they know what they're doing with regards to the law around syndications. A lot has changed, it's changing regularly around what you can and can't do on these things.
Deidre Woollard: You brought up something interesting that I want to zero in on too, which is E&O insurance, errors and omissions. Anyone who's done real estate or anything regarding contract is probably familiar with that term. But I think that's an important thing that you mentioned right there, is that if there is a problem in the contract you've got that extra level of protection by having the attorney directly tied to that.
Matt Faircloth: If they misspelled something or spoke at a turn on their agreement or whatever, they can call that an error. Your company should have GL, general liability insurance, and once you get some cash flow coming in, you know afford insurance, you can afford directors and officers insurance, D&O insurance and those kinds of things. So those insurances is just so you can sleep a little better at night kind of things. Then that. But it's also good to have an attorney, that knows all the rules better than you do, write these things. As tempting as it is to just go buy one of these operating agreements off the Internet for 250 bucks, it's better to pay an attorney that can customize it for you.
Deidre Woollard: Yeah, absolutely. As you're looking at your different deals, do you match up the deals with the investors? Do know investors who are particularly interested in a certain market, like you mentioned, like Lexington, Kentucky, do you have some people who are like, "I only want to do multi-family, or I only want to do single-family, or I only want to do fix-and-flips," do you have to play that game of matching people up a little bit?
Matt Faircloth: When we used to do a lot of different things, it was that. Well, we got two fix and flip projects, we're also doing this multi-family deal or whatever. But Deidre, it really goes back to returns and time. If they're interested in investing with the operator, if they have researched the DeRosa Group, my company, and they see that we are of integrity, and they like our company mission, and they're in line with our core values, and everything like that. They just want to know what we're up to. What I find that really governs people's decisions are the perceive risk and the rate of return that you're going to pay, make sure it meets their investment goals. But most importantly above everything else is time. "When I'm going to get my money back? How soon are you going to start cash-flowing me?" Because we've done deals that had a 10-year time horizon. Ten years is a long time. But sometimes it takes that long for deals to come to fruition. In this very challenging economy, we're playing a long game on everything right now, like nothing is we're projecting short returns. We're looking at 10-year returns for most of our stuff now, because what I think that it's going to be better to stay in the game for longer than shorter these days. Some people want short returns, and so we also offer that. Great, you want your money back in two years, I can do that. You want your money back in 10 years, you want to set it and forget it, I can do that too. That's it. We find time to be the biggest governor of people's decisions. Once they've decided the risk factors for apartment buildings meet what their risk profile is, then it's really goes back to time.
Deidre Woollard: Interesting. When you're meeting someone who's new, maybe it's a referral from someone else you've already worked with, what's that first meeting like? How do you show them what you do without being in like full listing presentation mode, what does that look like?
Matt Faircloth: We've built a pretty good social presence for ourselves. I'm lucky enough to have gotten on to YouTube in the early years when YouTube was a lot easier to build a presence selling and build a following on. So we've got a pretty good YouTube following now as the DeRosa Group, in that. It's fairly easy for people to get to know us, and thanks to my book, and BiggerPockets, and Google, and those things. It's very easily to research our company. I rarely have to begin from the beginning with regards to what the DeRosa Group is all about, what we stand for, they typically can research that before they come in. Which is why I think it's so important for rising real estate investors to get themselves some presence online, a website of course, but create some content. Get on some podcasts, create or have your own podcasts, whatever you want to do. It's create some media that people can read before they talk to you because that begins the conversation before you even have to talk to these folks. But if they haven't, then I remind them what our core values are what we stand for, how long we've been doing this. The markets that we're invested in, what we will and won't do. I give them some examples, those things.
Deidre Woollard: I like that in the book you talked about videos, photos, all of that stuff as investor communication as well. One of the things I've seen more and more is that investors, cash providers, they want to see videos of in-progress stuff. They want to see that stuff on Instagram. I follow a lot of real estate investors now who are showing what it looks like when the places got it and things like that. How are you using photos and videos in your conversations with investors?
Matt Faircloth: We use it to teach, and we use it a teach little hacks. We redid a kitchen in one of our rentals for literally a couple of thousand dollars, and we did the whole kitchen with appliances and everything. Man this is cool. Who thought you could make a kitchen go from here to here, before, after, for that amount of money? We do a before and after like this is the skunky kitchen right here and look at this swanky kitchen with the backsplash and the new tops. We've shown our hacks, the things that we figured out and ways that we've navigated. So we use social videos, those things to say, "Hey come check, can you believe this?" I'm just as amazed they are in the video. [laughs] I'm like, "Look at that. Can you believe those cabinets?" I'll also talk about things that wished I'd known earlier. Like I did one video that did really well. I just talked about my favorite flooring in rental [laughs] and I ranked them from top to bottom with like hardwood floor that I can refinish being my favorite flooring and my least favorite ever that I wish was never in any of our rental properties ever is carpet. [laughs] I've ranked them all in between in that and I shot a video just teaching. So almost 90 percent of the time, we just teach what we do, but also we just try and teach people like, "Hey listen this is what it really is likely to be a full-time investor this is the day in the life." Or we just show, you want to see what life looks like we're not just sitting on the beach, drink, and monetize. This is really the scrappy sleeves up, life of real a real estate investor because I think it's probably one of the most misconceived professions out there.
Deidre Woollard: I think people love that it's the HGTV effect. People love seeing everything gutted and the problems with the worst, the basement is like more interesting it is, although not for the investor [laughs] because that can be awful. Let's talk about some of the tough stuff because I don't think there's ever an investment that goes 100 percent smoothly exactly the way that we think it's going to, there's always something. How do you communicate that when you're dealing with investors and when they panic and things like that?
Matt Faircloth: There's so many variables. I'm trying to sell an apartment building right now and the closings have been delayed three times because the first was this variable and of course, every vendor in the whole wide world points to COVID right now, "Oh well, because COVID we're delayed." You're delayed why? You can't do the appraisal for the next two weeks because of COVID, really? So tell me, can you diagram that for me? [laughs] But that was their excuse and that's a story and they're sticking to it. The time is probably the thing that that variable plays in the most. Then there's always the unexpected. Aside from just crazy tenant issues that just show up, and I could floor you with all the stuff that we've had happened in our years from a tenant-landlord experience standpoint or just miscommunication or just things that are just making scratch your head or shake your head like really that happened? There's those things and that, and I just think that sometimes it's, "Hey guys, you just can't make this stuff up. You're not going to believe what just happened, but let me explain it to you." I think that the best thing you can do, Deidre is coming in as you temper expectations on the way and it is the most under-promise and over-deliver industry I've ever been. I've been in a few or are friends that I have in other industries it is you have to under-promise and over-deliver because that under-promising is your hedge for any number of variables that are going to happen in the world. I've seen a lot of real estate investors unfortunately over-promise and then the world delivers and curveballs, and then it's like, you're not going to make this 22 percent investment. You thought you'd have return on investment, yeah, that I told you are going to make. It's only going to be 14 and 14, still really good, but because I told you you are going to make 22, [laughs] I now look like a schmuck because I told you something that didn't happen. I think it's way better to under-promise. Then you can do your best and account for all the many curveballs this business seems to love to throw us.
Deidre Woollard: [laughs] Yeah. I think you're absolutely right, so we would be absolutely psyched about 14 percent unless you told them 22 and then that's so much. [laughs]
Matt Faircloth: I told them, "Hey if the whole world falls apart and Chicken Little happens, unlikely it will be 10 percent." Then there is static that not all the bad things happen and, we made 14. [laughs]
Deidre Woollard: Exactly. That is a very good psychological technique there. One of the things you talked about in the book is that when the deal goes perfectly, the investor gets back their money everybody's happy, but a lot of times, as we just mentioned, things don't go as planned. How do you make that up sometimes, and how do you get them to invest in the next deal?
Matt Faircloth: I make sure they know that I'm doing my best. So I communicate a lot and I make sure that they know that I'm willing to fall on my sword. I've done fix-and-flips that got so far south. You couldn't see the original plan from where we were standing because things just got those scrawly, it just went the wrong way. But we were willing to, in those circumstances, put in our own capital or write checks from our own pocket or forgo our entire return as the owner to cover investor's returns, and I'm proud to say we have never lost investor principle. We have not returned what we thought we were going to on deals because hey, that's the variable roulette wheel comes up here. So because a lot of things do and can do happen in this business even with best expectations and best efforts. But I will say that we're happy to forgo our side to get investor's whole. I can tell you that crazy stories about how money got stolen or anything like that, or how things happened or whatnot that really curveballed what we thought were going to happen and we just covered investors with our side and said, you know what, we're going to let you guys take the proceeds on this one so you can at least get a reasonable return on your money. That's how we bridge it. Over communicate, and be willing to put our investors first.
Deidre Woollard: You mentioned earlier that you're doing both loan deals and equity deals. What does that look like, and why are you working with both of those structures?
Matt Faircloth: A loan is perceived to be a little more secure because it's got collateral. Loans have collateral and loans have a predictable fixed rate of return. Equity gets upside. Equity could go to zero, but it also could go to a bajillion. But a loan is perceived to be a more fixed-rate level of return. It can't go up, it can't down on your rate of return kind of thing. You also got this nice collateral, meaning a property with your lean on it. From an investor perspective, there are things that check both investors risk profile boxes. We don't do as many loans anymore. We do just more fixed-rate short-term stuff, but it's still an equity position. But I spoke at a turn because we're doing a blended private equity fund that invests in a lot of different things. I've got a blended private equity fund that invests in hard money loans and invests in short-term lending projects, and things like that. We do provide loans. We're not borrowing money directly from investors anymore, but we do put investors in the lending projects that we are involved in also if that makes sense.
Deidre Woollard: Interesting. Now you're making funds where it's not just this money for this deal, the money keeps going into different deals?
Matt Faircloth: This is one of these things I've been doing this for a little bit. I found that there are things that investors like about investing, that they can't get through a syndication. Those things are liquidity, meaning I can't call you up Matt and say, "Hey, I want my money back at some point. " In syndication, it's like, "Call me again in five years when we're done the business plan and that's when I can get your money back because once you're in, you're in." Sometimes turning around these apartment buildings can be like turning around a sea container. It takes a while to get these things repositioned, so getting capital back is very hard to do. That's number 1. Number 2, you can't compound interest because a syndication is a limited thing that there's only, but so much equity in the syndication so people can't buy more of it once it's closed down. That's what compounding is, it's buying more and more equity and the thing is I get returns. Instead of you writing me a check, it's me taking that check and me rolling it back into the fund and compounding my returns and obviously, diversification. If I invested in a multi-family syndication that's in Miami, Florida, I'm exposed to Miami, Florida, even it's a fund that's in a few different multi-family projects. That's what a lot of people do, is they offer, "Well, I've got this fund. Let's go and invest in deals in Miami and in Orlando," but you're still in multi-family real estate. It's rare to find a fund that has true diversification. We decided to start a fund that has liquidity. You want your money back, we'll give it to you. That has compounding interest. You want to recycle those returns you're getting back and buy more capital and enjoy exponential growth of your money? We can give that to you. We're also investing a bit in syndications and a bit in multi-family, but also in loans and in distressed assets and in really fun stuff like tax liens, distressed mortgages, those kinds of things. We're taking the money and we're truly diversifying it into real other asset classes. Probably the thing I'm the most excited about is that fund because it really gives something completely different than anybody else out there is offering, but it's really what investors want, is to get exposure to real estate on a couple of different fronts, but also be able to get your capital back and let it grow.
Deidre Woollard: Interesting. What are the rules on that? Do you have to be an accredited investor to be part of something like that?
Matt Faircloth: For that one, it is. Only because we're just getting started with it now, but that is not required by the SEC. It's just that accredited allows the syndicator to solicit. That means they can go chatter from the mountain top or put it on Facebook, "I'm starting a fund and you should invest in my fund." That's soliciting and that's reaching out to people they don't know and talking about, "Hey, I can make you this rate of return." Now we don't solicit, mostly, we put a lot of our stuff on YouTube, which is why we educate, it's not solicitations. We have done what's called 506(c) offering, which is for accredited only. We have done solicitations that way. We've also done 506(b), which is to your existing network and it allows you to do non-accredited as well. The fund, because it's new and because we want to build it and we want to grow it, it's accredited-only, but not because accreditors can invest in something that's sophisticated, as complex as that. It's got nothing to do with that. It has to do with how I'm allowed to get the word out by the SEC.
Deidre Woollard: As we wrap up, I want to talk a little bit about your evolution as an investor because we've talked all throughout this. It's clear that you started with a house or two and some fix and flips and now you're involved in some really complex and advanced different deals. What was that trajectory like?
Matt Faircloth: It's like sitting on a roller coaster, Deidre. [laughs] It's been quite a journey, but it's been great and it's gone well and I'm inspired and I pinch myself almost every day. But the few things that I can say that we attributed to is by always putting investors first even on the small deals and always asking for referrals because people know people, everybody knows people, everybody's got a Rolodex. I think a lot of people are looking for something different. They just don't know something different is out there to invest in. That's how we've grown and also we've been willing to stretch ourselves to try on and learn new spaces and ask people that are involved in those spaces about how to do what they're doing. We did not get started in apartment buildings, we got started in single-family homes and grew into multi-family over the years of investing. That's been probably the most interesting journey, is the growth into larger and larger real estate. I think it's just about stretching ourselves. I would say that to anybody listening, that's really how you grow, is you just get this much outside your comfort zone and commit to do right by people. That's going to create exponential growth, probably beyond what you could imagine.
Deidre Woollard: In terms of education, was that you reading books, was it going to RIAs, and things like that, was there schooling involved? How did you get to understand everything to the place where you got comfortable saying, "I'm willing to go from a house to a multi-family dwelling," because that's a big leap for a lot of people.
Matt Faircloth: We didn't jump from just there. We went from a house to small multi, to a little bit bigger multi, to a little bigger multi, but I always found that the most important thing you can do as you grow and expand is to find people that are a few steps down the road as either mentors. It doesn't mean you got to get Sam Zell's cellphone number and call Sam Zell and ask him how to buy apartment buildings.
Deidre Woollard: I wish. [laughs]
Matt Faircloth: I know. Somebody gets that. I love to talk to him. That's one of my bucket list. But that's not required, to go talk to somebody that's all the way up that level. It's just somebody that has done a little bit more than you have in that. Yes reading books, yes going to RIAs, yes going to a lot of courses, and stuff like that. Formal education, I got my degree in engineering. I was an engineer in college and everything like that. I did get my real estate license back in the day just because I thought it was a good way to learn the space, required maybe in that. [laughs] Not a real estate agent knows what there is to know about the space. You have to go to school longer to cut hair than you do to become a real estate agent in this world, but it's one of those things that it was good for me at the time. That was probably the only formal classroom education that I did aside from courses taught by experts like RIA level experts and stuff. The biggest thing we did was to reach out and talk to people that are a few steps down the road and say, "Hey, can you introduce me to your lawyer? Can you introduce me to your CPA?" To get access to their teams so I can make in my team too, and get their vendors, get their mortgage officers. See if they'll help me get access to some of their networks so that I can build my network out and have people that are willing to take me under their wing and maybe not harass them with questions all the time, but if I get myself into a bind, I have somebody that I know I can call if I need something.
Deidre Woollard: I love that. The engineer thing is so interesting. I've talked to so many successful investors that are engineers. I don't know what it is about engineering training that makes for really good real estate investor.
Matt Faircloth: I think it's a left-brain, right-brain thing, say analytical. When I said it, it reminded me of a lot of these syndicators I talked to just over the years and they are successful investors. That's been their background. They all were like, "I used to work for 3M and I was an engineer." It's like, "I was an engineer somewhere then I read Rich Dad, Poor Dad and here we are." [laughs]
Deidre Woollard: That is exactly the path that I've heard . That's awesome. Last question for you. What kinds of technology are you using to grow and maintain your business? Are you a CRM guy? What tech is working for you?
Matt Faircloth: We use ActiveCampaign. I'm a ActiveCampaign a whole lot, I love it. We used to use some other ones. I think ActiveCampaign is a good one. I use Slack just to keep in touch with my team because text messages, email just get buried in the minutia and just get lost and all of that. Slack is a good team communications tech that we use. We use Smartsheets for accountability and for developing dashboards. Each piece of my real estate has a dashboard so I can chart things out. Smartsheets is a means to just look at the property dashboard and say, "We're here, we were here." Those are some of the technology pieces that we use.
Deidre Woollard: Awesome. Well, Matt, this was fantastic. You can learn more at derosagroup.com. The book is Raising Private Capital. I really recommend it. It's a good, solid read. You can always email us at mediamillionacres.com to share your thoughts. Stay well and stay invested.
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