What's going on YouTube? It's Matt Faircloth. Welcome, welcome to Mentorship Monday. My partner
in crime, Justin Fraser, come on in and Justin. Hey, Matt. What's happening, man?
That's how I'm doing. Let's bring on our first question asked-
[crosstalk 00:00:11] Awesome. So great to be here. So good to be
here. Thank you, Matt. Thank you, Justin. Reframe it. You don't have to read off the
screen there. Tell us what you were thinking? Yeah, well, so, and this comes from personal
people in my network that I've started. Kind of, they know what I'm doing now,
real estate investing, and I've got some background in it and a lot of family
history in it, but everyone, when it comes to actually going from, "Great idea," to,
"Here's thousands of dollars for you to invest on my behalf." And one of those people I talked with
recently, I honestly asked them, "Hey, I'm going on this thing, on this show, and what would you be
interested in?" And they're like, "You know, how are you going to not lose my money?"
How to not lose money? Let's talk about that. Yeah, right?
Yeah. Right.
And on the other side of that, so that's from the investor, someone who's going to be forking
over that money. They're like, "I don't want to lose it. I want it to grow," of course, but
that fear instinct of, well, it might just get lost. So how do you mitigate that? "What are you
going to do to ensure that I'm not going to only lose my money?" Then on the flip side, on the
general partner, on the investor who's doing the deals, it's like, "Well then, what can I do to
not just reassure them and just kind of tell them a good spiel, but to actually have a plan in
place, and how can I go into deals knowing that, 'Hey, I have a pretty high confidence that this
actually may work out,' and how can I do right by these investors the best way that I can?"
Okay, cool. So two different questions really, and that's totally fine. So,
LP side, due diligence to make sure they don't lose money, and GP side,
business planning and integrity to make sure you don't go losing people's money, right?
Mm-hmm (affirmative). Okay. Cool. All right, come on in, Justin.
Let's start. So here's LP side conversation first. Let's, me and Justin, do the LP side
and then we'll so the GP side. Cool.
LP, it's all about ensuring two things, what's the downside risk and what's the collateral,
okay? So how bad could things get? For a syndication, the worst thing that could
happen in most syndications is you don't get the preferred return you thought you were going to get
when you were going to get it and the site, the project, has to defer the pref for a little bit,
you get caught up. The probability of losing the site altogether is fairly slim, if not zero. This,
this happens on the GP side too. People get caught on the upside. I mean, they're like, "Oh
man, I can make 15% return," and, right, GPs want to be like, "I'm going to get you a huge return
on your money. Double digits for an apartment buildings, cashflow, [Xs 00:00:03:08]..."
Yay! You know? Right. Yeah. But, they
don't spend enough time... We do, but people don't spend enough time talking about what could happen
and what the other side of it is. So LPs need to get focused on,
"What's the downside risk and can I palate it?" And it's likely not going to be that you're going
to lose all your money in this deal is going to go bankrupt. That's possible, but it's probably not
anywhere near in the realm of possibility and today's world banks don't want these properties
back. And unless you invest with a bad actor, like someone who's literally out to steal your money,
odds are you're going to get your money back one way or another. It's just the worst
case really is that the delay on getting your money is going to be out there.
So, if you're an LP and you need that cash flow, syndications are probably not for you,
unless you want to get into something that's pref equity or high security. Making sure what the
downside is, and if there is collateral, what can I come and get that's something that I can
hold as a place marker to get my money back, like a mortgage on a property or whatever.
That's equity. There's really not a whole lot there aside from the GP, the sponsor's reputation.
Justin, what are your thoughts on how an LP can make sure they don't lose their money,
but also just make sure that they are getting into something that is what they think that it is?
Yeah, I mean, the answer to both of these questions, it's like one side of
the line is one way and one side of the line it's going... But it's the same answer either way.
Yeah. Yeah. Yeah. You want to look at the sponsor's reputation.
You want to know, have they done this before? So if we're projecting 90% returns on our next deal,
well, we've never done 90% returns before, as much as I would love to, right, it's just so of
the blue that I would not trust me if I tell you you're going to get 90%, unless there's a very,
very clear business case, right? So you want to see, what have those deals done before? What
has that sponsored done? You want to vet that track record. You want to know that they've
been successful. And it is a good question to ask, what is the worst case scenario?
Because, if you say, "Well, worst case scenario..." I mean, I love all the answers,
right? There's tons, but I get asked a lot, "What if the place burns down?" I say, "Well,
that sucks because that's someone's house. That's where someone's living, but we're
well insured. From a financial standpoint, the morality of someone's home burning down aside,
you're protected, right? We have great insurance coverage with an umbrella policy on top of it,
all these extra layers of security. It might delay a return. It might change how it gets
spent out. But, we're well protected there. So, even the whole building going down, there's all
these safeguards put in place." It really comes down to the worst case for every individual deal.
And a lot of times it comes down to the sponsor. Is the sponsor going to run this deal
well. Something that I talk about on my show, True Multifamily, all the time, which is [crosstalk
00:06:04] you have to run your assets well. There you go.
Plug. You have to run your assets well,
because that's the difference between driving an asset into the ground or excelling it and hitting
the returns projected by the underwriter. Nice. And I think that the worst case scenarios
that most people think are possible or really not possible. As Justin said, "What if the property
burns down?" Well, long as nobody dies, then you got insurance, and God forbid if somebody dies,
God forbid, there's ramifications on that too, and that's also what insurance is for. I hate to
say that, but it is covered. I mean, we do have coverage
for all of that kind of stuff. Yeah. Yeah. And that's the thing, so people tend
to worry about, "What if you can't raise rents? What if you can't do this? What if you can't..."
There are stop gaps for those things, and if your syndicator created enough worst case scenario
into their underwriting into their conservatisms, then you get through all those things. So, I...
I have a question for Justin, though. Were you asking... You said LP and GP, were you
thinking more in terms of syndication? Because your next question is about how you can raise
money. Are you thinking about something smaller, like a fix and flip, or something more local?
Yeah. So, the bigger game is the bigger multi-families down the road. I mean, currently
I have three properties. One's a two bed, one bath little house. One's a three unit and the
other is a seven unit. And so, as you can see the progression there, moving up and gradually getting
larger multi-families. And also, on our end, we're starting to hit that limit for our own funding,
so it's like, "Hey, in order to really scale and go bigger, I realize I'm going to need to partner
to really go bigger in the future." And so that is kind of the trajectory down, down the road.
Yeah. Yeah. So good, good stuff. And I mean,
my first GP deal was two single family homes. So it doesn't have to be a big ole apartment complex.
It can be whatever it is, but the GP has fiduciary duties and the LP has fiduciary duties too, right?
They both have their homework they should be doing, so for thinking about the size of the deal.
For the GP, and to reframe it here, let's touch on this. You want to talk about how the GP can
make your investors comfortable that they're not going to lose their money,
get their money stolen, right? Yeah. And kind of throughout, from A to Z,
from kind of initial conversation of, "And here's an opportunity that has come my way.
Here's the track record," and that initial kind of offering or that invitation to that conversation
to, "Okay, hey." Some skin in the game or the day before the skin is going into the game
and it's like, "Oh, what if..." Right? The [SF 00:08:56] comes in to roll them out. I was like,
"Oh yeah, that's happened," right? Or then, midway into it something in construction or
with any project something's going to happen that is going to change the game plan.
Something will happen and I'm sure that it will.
And not only, it might happen by two or three times or more, right, by the time
you get to the finish line. Anything could happen.
And so just going on that journey with people, and obviously communication is going to be super key.
That due diligence, like you're saying, is really knowing those numbers, knowing the tracker record,
having a great team, things like that, but kind of going through that journey from the
beginning of that conversation to when skin's almost going into the game to kind of, "That
things have now shifted and now it's not going to look like we expected," and just managing those
emotions, essentially, from A to Z. All right. Let me unpack a bit,
okay? A few things we want to touch on about when you're talking to investors,
what you really ought to be talking about versus what people think that you should talk about,
and also, skin in the game, right? So those are some pieces of what you just said that I want to
throw out there, right? Okay.
Number one, when folks are presenting to an investor, they think that they need to be like,
"I've got the most amazing return. It's 18, 19, 20% and all the money you're going to
make." That's important to investors, but it's not first, second or third. Put yourself in the LP,
"Are you going to steal my money? Is this deal over baked? Am I taking a risk?" Whatever.
That's the conversation they want to have, is about collateral risk, those kinds of things.
Additionally, I find my investors like it when we actually do this whole thing called giving a shit,
okay? Meaning, caring about them at all. "Hey, how old are you? Where are you from? How old are
you? When are you going to retire? You do what for a living?" I've talked to investors that I
was supposed to be talking about the deal that we were getting into, I ended up talking for a half
an hour about what they did for a living. Right.
People do interesting stuff. Yeah, it's fun.
Care about them, legit, not acting like you do, "Oh, that's interesting. Tell me more
about what you do." No. Care. Just like I said, give a hoot, man, about what they do and also
about their financial goals and how many kids they have, all that stuff. "When are your kids
going to college." And this isn't just about caring, this is also collecting data. That you
can help them get where they want to go if you can get that data. When are the kids
graduating high school is a fact that would be wonderful to know, because if their kids-
Motivation. Right. But if their kids are 15
and you're putting them into an investment that's got a seven year lock,
they should know right out of the gate. "Hey, man, listen. So you know, whatever you ink a check for
right now is going to be gone for seven years, right? And you and I can make returns on it, but
if you're planning on this being Johnny's first freshman year at Harvard..." So it's important to
collect that kind of data. That's number one, as a GP, care about them and their goals and understand
them and communicate with them from that fashion. The second thing is every investor loves to ask
about the skin in the game. And sometimes me and my GP team, we have skin in the game, sometimes
we don't. And you can either decide one of two things, just have skin in the game and it's easy
to answer like, "Oh yeah, sure. I've got $50,000 or I've got $100, I've got whatever in the deal,"
or be really good at explaining why skin in the game doesn't matter, which is it really doesn't.
Be prepared to answer that because it comes up all the time, "How much money do you have
in it?" What [inaudible 00:12:39]. I just want to interject,
no matter what, don't lie. Yeah.
They'll find out, right? At some point someone will find out, because you'll be saying one thing
to one person, you'll forget that little lie you told about, "Oh yeah, I got $50,000 in there," and
then you'll forget, right? So say what's true. Try to keep track of lies.
It's easier to just tell the truth. But if that's a legitimate concern that
you have, or that your investors have, that you don't have any money in the game. Well,
let's think about what we need. We need a general partner to have skin in the game,
so we can bring in someone that's going to invest, but they're in as a GP as well. Maybe
they're doing other things that add value and now general partnership is investing in the deal.
Hmm. Well, what I always quote is how much
our general partnership has in the deal, because doe it matter really how much you personally,
Justin, have in the deal? It matters how much the leadership team of the project has in the deal.
Right. And that's an easier number, and it's also a
more impressive number to quote, because if you've got EMD in the deal, earnest money deposit, down
and you have the property under contract, you've got to have EMD and it had to come from somewhere.
And if you're giving somebody equity for their contribution of fronting that EMD early for you,
then that's now a part of the leadership team. You're not BSing. They're one of your partners
now. They're not just loaning you the money, they are one of your partners. So you could say,
"The general partnership team has X." That is not a lie. That is the truth, right?
Now, if you make up a number and just say, "You know, several hundred thousand dollars,"
that sounds like a lie, but you can tell the truth in those fashions if you talk about your entire
general partnership team. The other thing you can do, which is what Cedric, my buddy here, is
asking, right? "What do I say if I don't have any funds to put in the game at all?" Fair enough.
You can say, "Well, Mr. Investor, guess what? I may not be inking a check like you are,
but I've got my reputation, a personal guarantee on the mortgage, a sponsorship. I've got probably
several years worth of my life invested in this company to get things to this level, so I've got
quite a bit invested in time and reputation and resources. And Mr. Investor, did you know
that there's something called a bad actor clause that says that if I end up just sneezing the wrong
way on this deal I'm getting fined or the SEC gets involved in whatever in this investment with you,
I cannot syndicate again. Did you know that?" So I have my career on the line as a syndicator.
Yes, a check is valuable, but everything I have on the line is just as valuable too,
and I would be leery working with investors that put their check above everything else
that you are producing for them," okay. So yeah, that's the whole skin... I know that it wasn't
directly but... No, that's great.
...you mentioned skin and skins is a big conversation.
It really sounds like knowing the people and knowing who they are, what their values are,
what their goals are, and it will really help to determine, "Well, is this even a great fit
for them?" Which, because down the road, if at the beginning, like you mentioned Matt,
"This is going to get locked up for the next seven years and you might really need it in five, so is
this really the best fit for you? But actually, down the road, we got this other deal that's in
the pipeline that actually might be an even better fit for you and your goals. How's that sound?"
I've redirected many investors to other things that we have to offer, and I've told dozens and
dozens of potential investors that had a lot of money out to invest with us, that we were not the
right fit for them, because a lot of times it's their goals weren't aligned. They wanted this,
we wanted that. I was like, "Listen, I could probably force a square peg into a round hole
and convince you that this is the right deal, but guess what, this ain't going to work."
And other times there's a smell. You kind of sometimes smell high maintenance on investors and
if you want to scale, you got to work with people that are going to trust you to do what you do in
that and they're going to go do what they do and you go do what you do and they take your updates
and they ask questions. And then they go back to letting you do what [inaudible 00:16:52] at.
And the backside to that is communication. Leading up to close, through close. Just for example,
on this last deal we did, we did webinars every week leading up to closing. Like, "Here's the
latest numbers from property. Here's the latest that's happening with COVID in North Carolina.
Here's the latest with this." Just keeping people informed about everything that was happening,
and then one month in, which we've never done, we did a webinar one month in and say, "Hey,
here's what happened one month in. Our financials aren't even finalized yet and we're giving you a
preview of everything that's been happening." Just to ease concerns, because a lot of people
are concerned. Because of COVID, a lot of people concerned about eviction moratoriums and this
and that, and so we have to overcommunicate so that people feel comfortable and the more
overcommunication we do on this deal, frankly, will lead to more investment on the next deal.
Right. Yep.
I bet. Integrity and trust, and if they trust you throughout that process and you do a great job,
well then, the repeat business and the relationship just keeps going.
Absolutely. Yeah. Yep.
No, thank you so much for having me. This is wonderful and looking
forward to next time. [inaudible 00:17:56].
No problem. Thanks. Anyway,
thanks for watching, guys, and have a great and [crosstalk 00:18:00] profitable week.