Investing in Real Estate Syndications – Exclusive Webinar Replay
This week on the podcast, I’m doing something a little different. Instead of the usual guest interview, I’m releasing the real estate syndication webinar that I co-hosted with Erik Van Horn for our community.
Not only is Erik a highly successful entrepreneur, but he’s a good friend and over the years, we’ve done a bunch of successful deals together.
This webinar is chock-full of helpful advice for investing in real estate syndication deals and covers the good, the bad, and the ugly!
✅ Why syndication deals aren’t what they used to be. The easy money is OVER! Learn how to choose the right sponsor, so you don’t get burned!
✅ The major benefits to investing in a real estate syndicate.
✅ The biggest mistakes to avoid AND steps you can take to de-risk any syndication deal.
… That, and a whole lot more!
You also won’t want to miss the Q&A session at the end where we help our members overcome the biggest obstacles standing in their way from investing in syndications.
Whether you’re just getting started OR you’ve done syndication deals in the past, there’s lots of great insight and information for investors at different levels.
- What is a real estate syndication deal?
- The benefits to investing in a real estate syndicate
- Real Estate Syndication: General Partner VS. Limited Partner
- Real Estate Syndication: the easy money is over!
- Real Estate Syndication: metrics that investors should know
- De-risking real estate syndication deals
- Investing in off-market real estate syndication deals
- How to fund real estate syndication deals
- Due diligence questions to ask a sponsor
- Don’t over-allocate your investment portfolio
- Lifestyle Investor opportunities
- Q&A Session w/ Lifestyle Investor members
- Negotiating when not in a power position
- Why whole life insurance gets a bad rap
- Using Roth IRA to invest in syndications
- Metrics for measuring syndication deals
- Choosing a solid real estate sponsor
- Real estate deals with a capital call
- Real Estate Syndication vs. Fund of Funds
- Q: Does Justin personally invest in the syndication deals he finds for his members? [49:18]
- Q: How do you negotiate preferred terms or de-risk a deal when you’re not in a power position? I.e., when investing the minimum [52:09]
- Q: Why do whole life policies have such a negative connotation? [52:58]
- Q: How do you use a self-directed Roth IRA to invest in syndications? [57:05]
- Q: Is there a better metric other than IRR to measure successful deals? [59:05]
- Q: I am really afraid of being taken for a ride and taken advantage of and not finding the right person to invest in. What advice do you have? [01:02:00]
- Q: Do you invest in franchises within the mastermind group? [01:06:01]
- Q: Some of the deals I invested in are having a capital call. Should I continue to invest or pull my money out? What should I do? [01:07:42]
- Q: Are there any publicly traded vehicles I can invest in that offer similar benefits to a syndication? [01:14:03]
- Q: Can you clarify the definition of Cash-on-Cash return? [01:17:11]
- Q: What are the pros and cons of going directly with a syndicator versus joining a Fund of Funds? [01:19:10]
- Q: Do you follow Brandon Turner’s Open Door Capital and their mobile home syndication generational wealth fund? [01:26:11]
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Justin Donald | De-Risking Real Estate Syndication Deals
Tweetables“The deals you want are the deals that are not advertised on social media. I like to invest with people whose investor base is so strong, they don't need my money and they're kind enough to allow me into the investment.” – Justin Donald Click To Tweet
- Erik van Horn on LinkedIn | Instagram | YouTube
- Franchise Secrets
- Peter Thiel
- Orangetheory Fitness
- Chicago Atlantic Group
- Brandon Turner
- Open Door Capital
- Frank Rolfe
- David Reynolds
- Strategic MHP Fund!
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Read the Full Transcript – Real Estate Syndication Webinar
Erik van Horn: So, let’s go ahead and get started. Justin.
Justin Donald: I love it. Yeah, let’s do so. Tell everyone a little bit about you.
Erik van Horn: Well, I come from the franchising background, franchisee, franchisor, do a lot of investing in franchising, and a lot of advisories in franchising, equity plays, and whatnot. So, franchising has been my world for 20-plus years. I’ve been investing for quite a while as well. And I got my start in apartment syndications. My passive investing started with apartment syndications.
And then I met Justin Donald. And my world has opened up into many different classes of cash flow passive investing. So, really deep into franchising is my background. And then, you and I have been able to do some different things together and started masterminds together and businesses. And so, it’s just been a pleasure becoming friends.
Justin Donald: Yeah, I couldn’t agree more. I’ve had so much fun getting to know you. And part of the reason I thought it would be fun for us to do this together is because you and I have explored a lot of different investments together now. We not only are friends, we’re business partners. We got several ventures together from a partnership standpoint but also from an investment standpoint. And so, we’ve had many conversations over the last few years all revolving around really trying to protect investments and how do we avoid losing money when it seems like you can’t lose, right? And people are investing money in things that I scratch my head at, and I’m like, how is this working out?
And by the way, many of these worked out, even though in any other time, in any other era, in any other economic situation, they likely wouldn’t have. And moving forward, we’re just going to see a different world of investing. So, for those of you that don’t know Erik van Horn, he is brilliant in the world of anything and everything franchising, on the franchisee side, on the franchisor side. He has a bunch of communities and groups, masterminds that support those in the franchising space. So, glad that we could do this together, Erik.
Erik van Horn: Same here. Well, let’s hop into it. One of the things, I’d make sure everyone’s on mute, and as you have questions, hold those questions because we will have time for Q&A. I promise you, we will get into Q&A and you’ll be able to have your questions answered. So, Justin, why don’t we start with some basic stuff? What is a syndicate?
Justin Donald: Yeah. So, when you hear about a syndicate, a syndication, so this has been super popular here for the last 10 years, but you’re basically hearing about an investment where there is a partnership with a GP, a general partner, and then LPs, limited partners. And so, the general partners run an investment. It’s usually a single asset. It can be a portfolio of assets, but it’s different than a fund.
A fund is pooling tons of assets under one entity. This one is generally, most of the time, it will be a single asset, but every now and again, you might get a portfolio of assets, but you’re pooling money. The LPs and the GPs will pool money to be able to purchase an asset or a portfolio of assets collectively. And so, this is a way that you can get kind of fractional ownership in real estate, be able to invest in bigger assets than what you would be able to invest in on your own.
Erik van Horn: So, why would people invest in a syndicate?
Justin Donald: So, great question. There’s this whole idea a lot of people want to invest in their own real estate, own the deeded property, meaning like the deed is in your name, you get all the benefits of that property. You’re a single investor or maybe just a small group of investors, whereas a syndication is going to have many limited partners, but you’ve got a general partner or several general partners that run that asset. They do the work. They often have a team that’s inbound and part of the GP. Other times, they’ll outsource it to a very competent group that can run property management, that can do all the things to actually run the asset, make sure that payments are happening, make sure that issues are being fixed so that you, as the investor, don’t have to worry about that.
If you own the deeded property, it’s your responsibility. But in a syndication, the responsibility doesn’t fall on you. You’re limited, your partnership and participation is limited, which is nice, so it protects you on the liability side. Something goes wrong, you can’t get sued. But then it also saves time because someone else is managing that asset.
Erik van Horn: The grass is always greener. So, I’ve done commercial buildings, residential buildings, and multifamily myself or with partners. We did not raise money so as not the GP, but I’ve done it myself and I’ve been on the LP side a number of times. And when you’re on the limited partner side, you’re always looking at the GP, and that’s where the real money is. And sometimes that’s true, but why not be just on the GP side? Or why not just buy a house or a building or a property yourself?
Justin Donald: Well, there are a lot of reasons why it might make sense to do it. If you’re trying to get the best return and you’re trying to really multiply your money, it might make sense to take an asset down yourself if you have the funds. Most people don’t have the funds to take down some big assets, so it makes sense to do a syndication if you want to get into larger deals, if you don’t have the expertise, if you don’t have the time. Remember, if you own the property, you’re in charge of the maintenance of that property, you’re in charge of the tenants and collecting rent and doing all the things.
Certainly, you can hire property management groups to do it, but not all property management groups are created equal. And a lot of people learn the hard way that it’s not just as easy as saying, “Hey, let me buy this asset, let me plug this property management group in play, and all will be done.” Some are good at that and some work out, but I’ve heard horror stories of paying property management groups that don’t know what they’re doing, or maybe, even they do know what they’re doing, but they just run into a tricky situation.
So, plenty of reasons to own it yourself. I think for most people, there’s probably plenty more reasons to get involved with a syndicator that has a great track record. And we’ll dive more into this. But I think as newbies, it’s nice to know that you’ve got competent expertise behind the property management and the asset acquisition. That kind of creates some peace of mind.
Erik van Horn: So, there’s a difference between a good syndicate, a syndicate, and a bad syndicate. Five years ago, I mean, a syndicate was probably considered a good syndicate based on return because it’s hard to lose money in that type of investment. And things have definitely taken a turn. So, what are some metrics that you could measure someone by making sure that they’re running a good syndicate?
Justin Donald: All right. Well, this is interesting because I feel like there’s this slate of easy metrics that most people go through, and I’ll touch on some of those. But the thing that I want to point out is that I’m telling you, the last 10 years, it has been really hard to lose money. So, very few people have lost money. Everyone thinks they’re a genius. Everyone thinks they’re a great investor. Syndicators all think they’re great syndicators, right?
And what we’ve seen is a lot of people will then experience get in the space as investors, but then also as syndicators. So, you have people that say, “Hey, I invested in one or two syndications. Now, I’m a pro. I made money. I’m going to start my own syndication without a track record, without experience.” And we’re going to see a lot of those fail and a lot of people are likely going to lose money over the next, I would say, two to five years, probably even as soon as the next six months, I bet we’re going to see some things shake up in the space because of interest rates, because of using the wrong type of leverage. And so, on the surface level, I mean, we can talk about what most people talk about. And I actually think it’s good that we just get into surface level.
Here’s what you’re going to hear from most syndicators, here’s what you’re going to hear from other investors who have some sophistication, but maybe not the depth of sophistication that you want to have getting involved in some of these. So, most people talk about the asset class and that’s going to be, is it multifamily, which is apartment complexes? Is it self-storage? Is it industrial where you’ve got distribution centers and warehouses? Is it single-family home rentals? Is it mobile home parks? These are all asset classes under the banner of real estate.
So, you hear people talking about that. You’ll hear people talking about ROI, return on investment, you’ll hear people talk about IRR, the internal rate of return. So, on average, what’s the return going to be on an annual basis? This is one of the things you always see in a deck, a pro forma, where the sponsors are going to show the– often called the GP, the general partner, or the sponsor. Those are kind of synonymous names, but you’ll see them right up. Hey the IRR is something crazy, 19%, 20%, 21%, 22%, 25%, which is very aggressive of numbers for most people, I think. I like seeing them a little bit more conservative, and hopefully, they exceed expectations.
You see MOIC, which is your multiple on invested capital, which is kind of like if you see a 1.5x, that means you’re making 1.5 times the dollars you invested, right? That is your multiple. And I like that as a pure number. I think not enough groups use that number. A lot of groups default to IRR instead of MOIC. I like MOIC better because it’s a little bit less subjective in my opinion. But what’s better is having both numbers. It’s knowing both of those.
Cash-on-cash return would be another one that you’ll see measured in kind of figuring out what makes sense. And that’s just the return on the actual dollars invested, not including the leverage. And then, leverage itself would be something that– it’s important to know. I actually think here, we’re getting a little deeper where people may not check these as much like what does the financing look like, what are the terms? A lot of these investments that we’re going to see, and I can expand on this a little bit more, but they haven’t used proper leverage. And so, that’s going to be really challenging for them.
Erik van Horn: Let’s get into some of that with proper leverage. And I’ve had conversations recently, meaning this month with people that are experiencing improper leverage that the GP set up and they are not getting paid today. And it could be worse than that. And Justin, one of the things that I’ve always appreciated about you when I first started to learn from you is how you de-risk deals. And so, can you talk a little bit about de-risking, how you go about de-risking deals? And you’ve always been very upfront, like there’s risk in everything. Everything that you do in investing, there’s risk, but the point is to de-risk deals as much as you can. So, how do you de-risk deals in trying to find a good syndicate?
Justin Donald: Yeah, and this is kind of where I would say, Erik, we want to dive deeper. What I covered before is kind of surface-level metrics that you’ll see people using to evaluate. All right. Once we get into leverage, I think we’re diving deeper. And there’s a number of things that I want to dive into in terms of having an audit or some due diligence around what most people don’t look at. So, leverage, what type of debt is this? Is this long-term fixed interest rate debt? I love that. I love agency debt, like Fannie or Freddie type of debt where you’re getting 30 years and you’re getting a low-interest rate, you’re getting it fixed over a period of time.
And obviously, interest rates are different today, but different groups have different buying power, different relationships. And so, there’s opportunities. And by the way, even today, you can get special discounts because you found buildings that have tax abatements, which are discounts or the absence of taxes on certain buildings.
So, there are ways that you can still get great financing today, but you’re going to see that most aren’t. And some of the concerns that I see is a lot of people use floating rates and different variable rates, where at a certain point in time, in short order, those rates that they have are going to expire. Once they expire and they reset to market rates, they’re going to have a hard time making the deal work.
The deal only worked because rates were artificially lowered so much that everything penciled. But the moment that things restore back to kind of normal or where they are right now, it doesn’t work. It doesn’t produce money. They can’t even cashflow it. So, they’re going to have to sell at a discount. So, you’ll see a lot of bridge loans where people are doing two, three, five years, and then the rate is going to reset.
So, those are the dangers that I look for, and a lot of people are going to be in trouble there. I think a lot of inexperienced investors didn’t look at doing deals with the preferred return. So, when you look at a deal, I want a preferred return straight out of the gate. A lot of these groups are doing splits that they make money no matter what. Even if the deal doesn’t work out, they make money. And based on fees, which we’ll talk more about based on basically just different types of fees, different types of splits that put them in the money from day one when investors won’t make any money. And so, I don’t like those arrangements.
Preferred return just means that the investor gets paid first. So, I want to see that every time because I want to know the investors are taken care of, and what I really like, there are different waterfalls that exist. And so, what happens after the preferred return is that there’s a split after that. Maybe it’s 70/30 to the LPs, maybe it’s 70 LP, 30 GP, maybe it’s 80/20, maybe it’s 60/40, maybe it’s 50/50. You’ll see lots of different things there. Something to pay attention to is a catch-up.
Erik van Horn: Hey, before you get to the catch-up, just go a little bit deeper into the waterfall because people that have experience in investing in syndications and whatnot, waterfall concept is very familiar to them. But think about the person that they might be getting into their first deal, this might be the first time that they’ve heard the term waterfall, which, by the way, in Justin’s book, The Lifestyle Investor, he has terms and a glossary of all these different things that are going to be new terms depending on where you’ve invested or have it invested in the past. But if you could go just a little bit deeper, third-grade level, treat me like a third-grader, Justin, what’s a waterfall?
Justin Donald: Well, the waterfall is the split that exists. So, think about if you have a preferred return, maybe you’re paid 8% first, and you’re going to be paid that preferred return until your initial investment is paid back. So, let’s say you put $100,000 into a deal, you’re making 8%, and that is often paid out, but it might accrue, meaning it’s not paid out and it just compounds until it’s paid out, until it can be paid out. And what happens is once your initial capital, that 100k, is returned, then the preferred return would stop. But that means you got money out first before the sponsors did. And I like that structure.
And then the waterfall or the splits afterwards are, what happens after that? So, the portfolio returns are then split according to some percentages where the LPs get a certain amount, they generally are going to get a larger portion, and the GPs are going to get a smaller portion, an 80/20, a 70/30, a 60/40. And every now and again, you’ll see a 50/50 from groups that maybe have more experience in the space or maybe they’ve lowered fees on the front end. And so, the waterfall is important to know kind of the pecking order.
And by the way, there are different types of waterfalls. So, for many of us living here in America, we might think, oh, an American waterfall is the best. I really like a European waterfall because a European waterfall means you get all of your money out of the deal and you get your split before the GPs make any money. So, it incentivizes these GPs and sponsors to finish the deal. They don’t get paid out early, they get paid out when the deal is done. So, they have an invested interest in the deal until the end. I really like that.
An American waterfall can create a scenario where they make money, whether the deal goes well or not, and they can make good money on a deal even if it fails when the investors kind of take the loss. So, that to me is just not as ideal of a structure. And then inside of the terms, you’ve got to look out for catch-up clauses because that’s an opportunity where the GP makes 100% of the money to catch up with a preferred return, for example. And so, that way, let’s say you made that 8% preferred return and maybe they get the next 2% or 3% or 4%, 100%, and then the waterfall split after that.
But it’s important to understand what a catch-up is because sometimes, there’s some manipulation with the numbers where a group might say, “Hey, we’re going to pay you a 9% preferred rate of return or pref.” And it looks better than an 8 pref, but they might have a larger catch-up. And so, the deal, when you measure it out with real numbers and you run it through an actual scenario where you go through the waterfall and what that looks like and you actually pro forma it out, that 9 pref might be a worse payoff than the 8 pref with a lesser catch-up or with no catch-up. So, those are just a few examples of things to look for in the legal docs, the subscription docs of what you’re signing.
Erik van Horn: What else should you be looking for to de-risk deals?
Justin Donald: Okay, so handful of other things. Number one, I want to know that a sponsor has their own money in the deal. And realistically, I would like to know that they’ve got a decent amount of cash. And the size of the syndication, the size of the dollars in play is going to impact what that looks like. But I often like to see a GP in it, 5% or somewhere around there of the total. A much larger deal is going to be different than that, and a much smaller deal might require them to be at 10%. But I just want them to have significant skin in the game where, if the deal doesn’t go well, they are going to lose. Besides making money, I want there to be incentive for them losing their own money in making the deal go well.
And then, we talked a little bit about fee structure. So, let me expand on this. In fees, this is where you see a lot of GP is making more money, is a fee for everything under the sun. And this, by the way, is where you can find the difference between a retail investment, which is high fees because your retail investor doesn’t know better, they don’t know the difference, or something that is reasonable in fees which would not be a retail type of investment. It’s something that’s more investor friendly and really more what I would say is standard. As a standard thing, the fees should be reasonable. I’m okay with people making fees because you got to pay your staff.
But there are some groups that put fees based on, for example, the asset value, but you’re not using all equity in most cases to buy an asset, you’re using leverage, you’re using some debt. So, that’s not a great way to charge fees on the total value of the asset. That to me is not reasonable. I’ve seen it based on committed capital. I don’t like that either because if it hasn’t actually gone in and you haven’t actually made those contributions, you’re being charged a fee on money that hasn’t been put in. I don’t like that either.
I like invested capital and I want to see a reasonable fee across the board for everything. And you can check deal by deal by deal and just measure up and see what that looks like. But that would be one thing I would definitely dig into because a lot of sponsors and GPs, I’ll use those terms interchangeably, they’re notorious for being high fee’d. So, that means they make money even if the deal goes bad.
I was looking at a deal not too long ago where the GP made a ton of money within days, and so, if the deal went poorly, it didn’t matter, like they were already, I think it was $3 million of fees that they made right out of the gate just based on one fee metric where they were in the money, even if the deal went bad. That is an egregious misalignment to investor-sponsor relationship there, and I don’t like that. So, that’s really important.
I would say track record is important. A lot of people have only been in business syndicating for five, six, seven, ten years so they don’t know what this new season of investing is going to look like and feel like. They haven’t tested the raging waters, the bigger waves that happen in an economic season that is not as wonderful as what we’ve experienced. So, I like seeing people have been through the 2008 financial crisis. I like seeing people that have been through the dot-com crash. Those two areas, if we can get two different times and that’s about 20 years, I like seeing that experience. I think that’s really important.
And then I also think one of the greater indicators and metrics to look at is past deals. So, what was their pro forma on their past few deals that have gone full cycle? Meaning they’ve gone all the way to the end, investors have made a return, and the asset has been sold. And for a lot of these syndicators, they’ve never even had a deal go full cycle, right? So, there is no history, there is no track record. But what I’m excited about is finding people that have gone through it and the pro forma matches up.
So, anyone could put in a pro forma like, oh yeah, we’re going to do 25% IRR. And an inexperienced investor is going to say, ooh, that sounds really good in their cash and paychecks before it actually happens. That’s not a good way to do it because what they put today, it’s irrelevant. Like I could put any number I want. It has no bearing.
What I do care about is what was your last deal’s IRR? What did you put in the pro forma? And then what was actually the result of it? And did you equal the projection, exceed the projection, or did you fall below the projection? And how many others in the past actually met and exceeded ideally the criteria that you had in the pro forma? That to me is the best indicator of being able to hit your numbers. And that’s where I can have trust in a pro forma on a current deal because I know that their history is good and they’ve had recessions in their background.
And then I think the exit strategy matters, like what is the plan? Is the plan to hold this long-term? The plan, is this a value add? The catchphrase is value add. So, everything’s been a value add. But is it a true value add? Meaning you’re buying an asset that you can instantly add value to, you can rehab it and you can bring rents up to market. And so, you’re kind of locking in a gain there after that work is being done. And then there’s a chance to refi it out where you can take some of the equity off the table and pay investors. And then maybe there’s the plan that you’re going to sell it in five years or ten years or this is a whole, forever, and understanding that. I think all of those are really, really important.
Erik van Horn: Everyone, keep these questions coming in the chat. We are compiling these questions, and so, we will get some answers to the questions that you put in the chat in addition to just having regular Q&A near the end of this. So, Justin, that was a lot. And there was so much gold in there. And you mentioned trust in the GP, the sponsor, and I would encourage everyone, that is an important piece. Don’t look at just the ROI, what they project, look at the past pro forma, see how accurate they’ve been, and that’s where trust is built.
Justin, you did a great job of explaining fee structures. Is there anything else that you want to add about fee structure? What we should be looking for as LPs? What the GP should be trying to explain in their fee structure to the LPs? Or did we hit that pretty solid?
Justin Donald: Well, I feel like we covered a lot of ground there. I mean, just to summarize, compare the fees to other deals, find fees that are consistent. I mean, what you’re going to see is there are a lot of fees that are higher percentage, maybe you’re seeing a 1%, a 2%, a 3%. And each fee is a little different. There’s an acquisition fee, there’s a management fee, I mean, just a slew of different fees. So, how many fees are there? What does that look like? What’s the total? It’s reasonable to have fees because people need to get paid to do the work.
But at the same time, the fees need to balance well with the splits, the waterfall. They need to be market, market fees, like I don’t like doing retail deals where fees are super high. They make a ton of money right out of the gates. In addition to that, the splits are kind of slanted to the GP, and in many cases, there’s not even a preferred return. It’s just a straight split right out of the gates. And don’t make argument saying why it’s better and why this is better than a preferred return. I’m just not buying it. I don’t believe it is better. And I would run for many of those deals because, to me, those are retail deals targeting a retail investor that doesn’t know any better. But do your homework and compare different decks and subdocs, and basically, you’re going to figure out that there is a cadence and there is an average to these fees that is reasonable.
Erik van Horn: Why don’t you explain a little bit what you mean by retail deals targeting retail investors? Because people that have been in your world and my world, which is the world you introduced me to, they’re not retail deals. They’re deals that just aren’t advertised out there on public websites necessarily. So, can you explain a little bit about retail deals and retail investors?
Justin Donald: Yeah, the deals that you want are the deals that are hard to come by. I mean, the deals you want to be in are the deals that are not advertised on social media. If you see someone needing to raise money via social media, I immediately question, do they have a strong investor base. I like to invest with people that their investor base is so strong, they don’t need my money and they’re kind enough to allow me into the investment. We’re able to leverage some relational capital and let me into a deal that, otherwise, the greater market is never going to know about. That’s the deal I want.
So, find the deals, and even a lot of the crowdfunded deals tend to be a lot more retail. So, just pay attention to the fees and you want access to the deals most people don’t get access to, most people don’t even know exist that have very investor-friendly terms. And the reason that these groups have such a strong investor base is because the investors know these are friendly terms to me. And the moment that a deal goes full cycle, they just reinvest those dollars back in. I mean, that’s a place that they trust those sponsors and they want back in. And when the sponsors do a good job, they get to a point where they are at max capacity, they don’t need new money, they’ve got enough. And in many cases, they only have to email a fraction of their list to raise on any deal and they can raise it in a moment’s notice.
Erik van Horn: So, retail deals, that’s like CrowdStreet, websites like that. That’s a retail deal. And I got in my first investment as an LP, it was somebody, a friend, trusted friend that’s done well, said, “Hey, I’ve been investing in this apartment syndication for years.” And I said, “Tell me more.” And it took me a little while to be able to get my foot in the door because they would. They would email it to their past investors. They would get first crack at it. They would invest until finally some room opened up for me and I told some other friends about it. Any comments on that or any other ways how a normal retail investor that hasn’t been in your world yet that wants to find off-market deals or deals that aren’t retail, how do they go about doing that?
Justin Donald: Well, I mean, it’s really a relationship-based thing. It’s finding people that have access, just spending the time getting to know people. I mean, that’s it. Joining groups and organizations that have access to them, I mean, I think that that’s really important. We’ve got in our mastermind several sponsors that they don’t need anyone else’s money. So, they’re just out of the kindness of their heart, kind of appeasing me and appeasing the Lifestyle Investor Mastermind, for example, and letting us in deals when they don’t need to do that. They’re just being kind and we’ve got a relationship.
And so, I think it’s it’s making those connections, finding those sponsors that don’t need your money, but you develop a relationship, and therefore, they want you in. They are excited. They feel like you’ll add value to their community and their network. And the better you get to know them, the deeper those ties go. So, yeah, I would say that.
Erik van Horn: Access, I love, and I’ve seen members just email the mastermind, and all of a sudden, the deal is full. They don’t even get to email their normal list. And that’s awesome. All right. Let’s talk about taxes. There’s a lot of tax advantages in some of these deals. I even saw one of the questions about opportunity zones. There’s different types of tax implications that you can have when you invest in a certain syndicate. So, can you talk about just taxes, maybe advantages, disadvantages, the good things and the bad things, wherever you want to go with taxes? But that’s such an important piece of this whole thing.
Justin Donald: Yeah. And I’m glad you bring that up. And it’s fun because this is part of the deep dive. This is one of the questions that a lot of investors don’t ask when it comes to getting into a syndication. But I think this is important and I think this is a standalone type of question or topic. So, with taxes, there’s a number of things. You’ve got your federal tax, you got your state tax. Some taxes don’t have state tax.
And so, I would pay attention to what state the investment is in and figure out because some states, it doesn’t matter where you live, it matters where the asset is, and you’re going to owe taxes to that state. So, make sure that you understand what that looks like if you are investing in funds or tons of syndications with assets all across the country. You might have tons of different state tax returns that you’re going to need to file as well. And so, it’s just kind of good to know that it might make sense to pick a region that you’re really confident in, that is very robust with work and with population growth and bringing jobs in and that sort of thing.
But I also think it’s really important to ask about depreciation when you’re doing your due diligence and when you’re figuring out like, is this deal a deal that I want to be in? Because the depreciation could be a game changer in itself, where in some cases, you can write off your whole investment. So, that $100,000 investment that you did, you might be able to deduct the entire $100,000 from your tax return, which is incredible. You might be able to in some cases, like some of the syndications that we’ve gotten access to, they allow you to deduct even up to 1.35%, so you’re at above 100%. And so, I do think that those deductions are really nice, really important.
So, I would ask about that. I would ask how those are getting passed on. And then there’s also a way to negotiate more. So, you might be in a situation where you might need more tax deductions, you might be in a situation where you don’t need any tax deductions, and so, you can negotiate for more of a return and trade off with someone else for more of the depreciation. So, these are things that the more educated you become, the more sophisticated as an investor you are, you have the opportunity to impact and influence to better your situation.
Erik van Horn: So, I only have a few more questions, and we’ll get into some Q&A, but I hope people have been enjoying this. Let me know if you guys like this type of format where it’s just Q&A with Justin and I on a particular topic, like apartment syndications or multifamily syndications. Syndications can be all kinds of different asset classes, but if you like this kind of format, webinar, Zoom meeting on a particular topic, and if you do, just put it in the chat, what other topics would you like to hear in the future if we did more of these?
All right, Justin, let’s get back into it. Let’s talk about funding. How are people funding these? Because what’s so interesting with you, and again, you opened up my eyes to a lot of different types of investments, but also how the right vehicles to invest these dollars in like– so, talk about funding deals.
Justin Donald: So, one of the things I like to look at and find groups that are flexible and creative with the way that we’re able to invest in it, so a lot of people are kind of learning today about the self-directed IRA, self-directed 401(k)s where you have the ability to take dollars that traditionally had to be tied in the stock market that your employer invested for you that you had no real say over, and in most cases, didn’t track the performance, didn’t realize how high the fees, where most people don’t realize in 401(k)s, these are some of the highest fee’d vehicles out there. And a lot of people don’t realize, like basically half the money that’s in there, you’re not going to see anyway. It’s going to go to taxes whenever you do take those dollars.
But there are ways that you can then make it more advantageous or create more utility around those funds, getting better returns where you can take self-directed dollars, you can take IRAs, you can take 401(k)s, and you can invest those into real estate, which is really cool. And if it’s your own deeded property, then there are some different rules. You can’t be the maintenance person. There needs to be a legit third party that operates that.
But from a syndication standpoint, that’s easy because it’s a hands-off investment. You’ve got an institutional– we’ll call it a management company, whether it’s in-house or outsourced to a third party, you’ve got people with expertise doing it. So, it’s really hands-off. But what I would also say is those might not be the best dollars to put into these. You might want to look for something that is an investment with ordinary income. If you are using, for example, a Roth IRA, where that thing grows tax-free, there are certain vehicles that you can grow your money tax-free. There aren’t many of them.
But why take those dollars and put that into something like real estate where you’re already getting tax advantages with the depreciation and other tax plays? It might be better to focus those dollars on ordinary income type of returns on a debt play that is maybe you’re earning interest and that’s taxed at ordinary income or taxed at short-term capital gains. Anything that has a specialty treatment, like real estate, you might want to use different dollars, not Roth IRA self-directed dollars. So, maybe it is a 401(k) self-directed or maybe it’s something else, maybe you have a cash balance plan. There are so many different things that are out there, especially for entrepreneurs, but certainly, for employees as well. So, those are a few things.
And then for me, personally, I think one of the best vehicles that people can use to fund any investment that they have is whole life insurance, the strategies around creating your own bank. And I want you to know, just like not all syndications are created equally, not all life insurance policies are created equally. And it’s important to find experts just like you want to find an expert with a track record in syndications, you want a qualified sponsor. The same thing is true with whole life insurance, but you can really create your own bank, a family bank.
And for me, I’ve done, it’s almost 20 years now that I’ve had my whole life policies. Each of my family members has one which we’ve built in a special way. And we use a specific company with a specific strategy that most agents don’t even know how to do, but we do that so we have the best return on our money. But the quick is access to those dollars and we can borrow against it, get a return inside the policy, but then also get a return outside the policy. So, that has been my favorite way to invest in deals and syndications and various other investment vehicles.
Erik van Horn: So, Ryan Casey, who always has so many good questions, you talked about depreciation. Anything else with Ryan’s comment? And I know he got started with real estate syndications as well, he’s done a lot of them. But any due diligence questions that you could ask a syndicate?
Justin Donald: Specifically, are you just talking about his question, most syndicates pass it through the investor, that one?
Erik van Horn: Yeah, yeah.
Justin Donald: Yeah, I mean, really, a syndicator should be passing through the depreciation on a pro-rata basis for what you invest and you should be getting an equal portion based on the percentage of equity that you own in that asset and you should have some sort of a deduction. And sometimes, these are structured in a way where maybe the GP or the sponsor gets a larger share and gives away a lesser share. And I don’t like that. I think it should be passed through 100% completely to the investors. And so, that’s something I look for.
But again, I had mentioned before, like if you’re in major need for depreciation, there are ways that you can potentially even negotiate larger depreciation for maybe a reduced return, maybe you reduce your preferred return, or maybe you want a larger return and you don’t need the tax depreciation. You can offer that to someone else and maybe you can trade that with the sponsor, with someone else in the fund with a side letter.
Erik van Horn: And that goes into one of the questions earlier about negotiating when you’re not in a position of investing the most dollars into a deal, different things that you can negotiate. All right. Last question for you, Justin, then we’ll get into some Q&A. We’ve had private conversations, and I’ve seen you publicly talk about it a lot inside your mastermind and our mastermind, people going too big into their first deal or a deal or investing too much into one investment or into one asset class. So, can you talk about just some cautions around that?
Justin Donald: Yeah, I think the interesting thing that I have seen in people that invest for the first time or they’re very new to investing, maybe they’ve only done a few investments, they don’t understand– what was your question again?
Erik van Horn: Something popped up on the screen, I’m like, we didn’t plan on that. Just people putting too much money, it’s over-allocating.
Justin Donald: Yeah. So, what I see is, at the beginning, people are really– they hold their money tight and it’s hard for them to actually make a decision to invest money. But then once they finally get comfortable doing it, maybe they have never done a deal, maybe they’ve done one or two deals and they’ve gone well or they think they’ve gone well or they’re trending currently in a good spot, well, then, for whatever reason, and I have seen this countless times, they over-allocate into a deal, they put way too much money. That deal goes bad. They lose a lion’s share of what they had saved. And it is really a detrimental situation because anytime you lose money, if you lose half of your money, you have to earn. So, let’s say you lose half your money, you got to earn literally twice as much, 100%, to make up for that 50%, right? I mean, that’s a big difference. And so, we want to be really careful there.
So, I think it’s important to never have, I would say, more than 10% in any specific investment, any specific– and I would actually probably say no more than 5% in any specific deal and no more than 10% in any specific asset class. That way there’s balance. Most people are trying to maximize the return. The goal shouldn’t be to maximize every dollar. The goal should be to create a well-balanced portfolio where it hedges against different assets, hedges against different economic scenarios. And so, when one performs well, maybe the other one doesn’t, but if the economic time changes and switches that you have a flip flop, but you have portions of your portfolio that perform well no matter what the economic season is.
So, I’m looking for balance, not maximization of return. I think new investors look for maximization of return and they get really overzealous and eager and over-deploy into new assets. And for me, I often put the minimum in deals and I often just spread that out across as many deals as I can, so that way, I’m kind of hedging against any single deal that goes bad. If I have a deal that goes bad now, all of a sudden, I’m only losing a portion of my money. I’m not losing all of my money. And that is really important.
Erik van Horn: I hope people caught that. Justin just said he typically puts the minimum in each deal. New investors, they FOMO into some of these deals. I’ve seen them put– they see bigger dollars going into deals and they want to do that. And it takes discipline not to do that. And so, I really implemented Justin’s strategy on that and I would rather do a lot more deals with a minimum in each deal versus going big in certain deals.
All right. We’re just about to Q&A. Justin, if people want to do a deeper dive, I mean, you’ve got a lot of different options from free to where people pay you in the mastermind. You got all kinds of things that you do. We’ve got a mastermind together. So, just give people a quick, some direction on where they can dive deeper in your world.
Justin Donald: I think for people that are just getting started, want to learn, don’t want to have a huge commitment, maybe they want to figure out should they take an online course, should they take a master class, I’ve got a bunch of different products, a couple of different master classes, one on mobile home parks, one on passive investing. The online course is kind of an extension of the Lifestyle Investor book. And so, there are a lot of different options.
So, for people that really want to take the next step, but they’re not ready to fully dive into a mastermind since that is a little bit more of a commitment, both with time and capital, I would say, go to LifestyleInvestor.com/consultation, and we can give you, our team can give you a free strategy session where you can figure out what is best for you. Is there a course that’s best? Is there a master class? Is there a program? So, that probably is the best place to start for someone who’s new, whereas someone that has a little bit more experience or they’ve done very well for themselves financially, they have capital to deploy, or they’ve got a business that kicks off a lot of cash or a profession that kicks off a lot of cash where they would need some consistent places to learn tax strategy and have more education and to really dig in on specific investment vehicles and opportunities for cash flow, they would probably just go straight to LifestyleInvestor.com/mastermind to learn about that mastermind, and really, the community of brilliant people that are part of it.
Erik van Horn: Perfect. So, K.J. had a question. Do you guys invest into syndications, in the mastermind? And do you have preferred syndicators that consistently the mastermind invests in as a group? One thing that’s important, Justin, why don’t you also dive into a little bit, it goes into trust and syndicators, it goes into why you set up the masterminds the way that you did, which is all built around trust, and you invest into every deal that is brought to the mastermind?
Justin Donald: Yeah. For this, it’s important for me to find the best of the best. I want to find world-class in whatever it is I’m investing in. And the reason why is because I have done deals that were not in world-class and they have not gone as well. They came up short on the pro forma, on the projection, or it actually lost money, or in one case, it ended up being a Ponzi scheme. These things exist, and my goal is to just find best in class. So, the answer is, yes, we do a lot of syndications. Yes, I invest personally in a lot of syndications. Erik does. I mean, I’ve invested in probably over 100 different syndications at this point. I’ve seen thousands of syndications that I have evaluated. And in one sense or another, whether it’s a shallow dive because I can rule it out quickly or a deep dive where I got closer to pulling the trigger to, where I did pull the trigger.
But my goal in the mastermind is I wanted to find a place for Lifestyle Investors to be able to have other smart people around them and have expertise around them so they can get the preferred terms, they can get into deals that retail investors can’t get into. They can get access to deals that are purchased off-market that are at a considerably less price based on the value. So, if you’re coming in with something off-market that is well below the market value or market pricing, you’re already ahead of the curve. And so, we try and do a lot of that with strategies that are aligned with fee structures and splits that are very investor friendly and with many of the syndicators that are in our group that we do trust that not only do they syndicate, but they actually want to be in the group to learn more from the other members and learn the things that they don’t know from other lifestyle investors.
Erik van Horn: So, I’m going through the questions, and as I’m going through them, I see a lot that have already been answered. So, if you have a question that you want to ask, raise your hand, and we’ll bring you up to ask the question. And as we’re waiting for that, Mitch had a question, “How do you negotiate preferred terms or de-risk a deal when you’re not in a power position? I invest in the minimum.” And you talked about that, Justin. So, if you’re investing the minimum in a deal, how do you still negotiate preferred terms?
Justin Donald: Well, often, you might not be able to, but if you’re coming in with a group, then you might have a lot more pull. So, maybe you got a bunch of people coming in at the minimum, but collectively, that dollar amount is very large. You’ve got sway. You’ve got say. So, that is one easy way to do it. And I think, over time, developing a relationship with the groups, with the sponsors is the best way to go.
Erik van Horn: Perfect. And I’ve seen you do that. I’ve done that accidentally before, and that absolutely works. All right, Ryan, come on up, man. What’s your question?
Ryan Planchon: Hey, guys. Thanks for taking my question. I got three parts. So, you asked for recommendations on future things. Justin, you mentioned. I would like to see something more on, I don’t know, deep dive or math being done on the whole life policy strategy, or just from my background and being from the education that I’ve always received, they’ve always had a negative connotation, even where other groups, they call it something else. And when you dig down to it, you’re like, oh, it’s a whole life policy. Oh, I see why you’re calling it something else because it’s a sales tactic, so on and so on. So, I would love to see something on that venue, per se, and actually math to show why the first three years of commission are worth accepting for the benefit in the end overall because that negative connotation on whole life policies, I’ve yet to really see a real good deep dive on that. But first, a basic question is when you look at…
Erik van Horn: So, first, I have a very similar experience as you, Ryan, with that. So, I think that’s a great topic for a future thing. And Justin, again, there are some nuances to some things that really changed the way that I view things today. So, I just wanted to let you know, great comment there.
Justin Donald: And I’ll even chime in on that real quick, Ryan. I mean, to get it right, it needs a full hour plus for us to dive into it. But just the Cliff Notes version of it, you’re right, 99%, probably even 99.5% to 99.9% of these policies are exactly what you’re saying. They’re not good. The math doesn’t work. You wouldn’t want to do it. There are very few people that I’ve found that can create a policy that really amplifies and compounds the returns in a quick manner that gives you access to 90% of your money within 24 hours where the numbers work.
But to answer your simple question, that actually requires a complex answer. I’m going to still do it in as simple of a form as I can. You look for that fractional reserve lending type of strategy. How can you make two returns with the same dollar? So, if you’re only comparing internal rate of return, it’s going to be easy to make the argument that maybe that’s not the best case, with the exception of the fact that you have a death benefit.
But once you can take the same dollars and earn two different returns with those dollars, well, now you’re in a scenario where it drastically shifts, especially if the commissions are low. You want the lowest commissions going out as possible, you want the most amount of access to those dollars, you want the most compounding in a short period of time. You want to put these really quick riders on that fall off right away. So, yeah, you basically want to buy the cheapest insurance that is insurance so it has the lowest cost but has the best rewards in return.
Ryan Planchon: Yeah. It’s just something I know that requires a lot of in-depth that’s not general information. It’s not usually easy to find that strategy and to find information on it without them calling it something else. I hate to say it.
Justin Donald: Yep, 100%.
Ryan Planchon: But basic question, and I’ll just give you both of them and you can answer them as talking about the equity multiplier when you see it in pro formas, is there a general assumption of time frame when it comes to the equity multiplier number? Because I’ve seen it where equity multiplier and it’s times two. Well, if it takes ten times two, I’ve seen it five years, ten years, well, then that’s not really a good number of metric to go off of, or I’ve seen it, okay, we’re planning on giving your equity, your multiplier, your money back in a few years or even over the time of the investment. It just seems that they don’t– I would assume that the equity multiplier numbers should have in this many years as far as that metric goes.
And then the second question is a general one since you just said investing in syndications inside of a self-directed IRA, maybe using other tax benefits. So, what would you recommend inside of a Roth IRA instead? Because I have a self-directed mind, I’m in syndications with both mine and my wife’s IRA. And I knew going in that I’m tax covered twice, but there still wasn’t a better return with the safety and being in the volatile market right now that I would rather be in those kind of things. So, those are my two questions. Appreciate your answer on them.
Justin Donald: Ryan, that’s a total of three outstanding questions. And thank you for asking them. So, what I will say, with the last part of it, qualified dollars, I think you want to get the best return that you can on your money. So, I really like taking Roth IRA dollars self-directed into anything that’s going to produce ordinary income or short-term capital gains. So, you’re basically paying almost twice as much in taxes. That’s what I want inside of the vehicle that is going to grow tax-free.
What I would normally outside of this vehicle pay the most in taxes on, that’s what I want in there. So, hard money lending, this could be inside of like you can do this with funds, you can do this as a one-off. I mean, I like the protection of funds for that sort of thing, even in real estate because it’s backed by strong collateral. I mean, you can look at the path of– I don’t know how much equity investing you do in companies, but that would be a good place to do it, or even in secondaries where you’re getting maybe employee shares and you’re getting them at a discount to today’s valuation. And so, when there is an exit, it ends up being very large.
So, if you think of Peter Thiel, he kind of got destroyed for his investment in a Roth, where he put very little money in, it ended up being millions upon millions of dollars. So, what are the returns that could be huge returns that you would owe a huge tax bill on? That’s what you would plug in there. And then also, it’s important if something’s cash flowing and you need the cash flow, well, you probably don’t want it in there because you can’t use those dollars, right? You can compound it. You can use it on other investments, but it’s kind of good being mindful of that. And I am now forgetting your first question. Remind me real quick.
Ryan Planchon: It was the equity multiplier question.
Justin Donald: Oh, yes.
Ryan Planchon: I would assume that it would have a time frame associated with it instead of just, hey, equity multiplier 2%. Well, 2% is in 50 years. That’s a horrible investment where it’s just always thrown out there as a general number. Why isn’t there a time frame associated with it?
Justin Donald: Yeah, and there really should be a projected time frame that goes on. So, the reason I like MOIC, the multiple on invested capital, the reason I like it is because it’s straightforward because you know this is the return on your money. So, regardless of the period of time, it could be 5 years, 10 years, 20 years, regardless of the period of time, that is the profile of what you’re going to return versus IRR can be juiced to look better than it is. IRR is measuring it on an annual basis so you have a quick return or juices at IRR, and then you can say, “Oh, on my last deal, we had a 65% IRR.” Well, that could have been a one-off deal where you flipped it in six months or something, right? And so, it distorts it a little bit more.
But the truth is what you want is you want both. You want to know the IRR. You want to know the MOIC. Both are important because that way you’re getting information that is going to be relevant on the time frame. But I just like knowing, I want as much data as I can get. I’m past deals. And then what are you projecting this time? And the MOIC to me is the clearest indicator of what my money is going to turn into and they should have a time frame on it. And most real estate deals, depending on their exit strategies, why I think it’s important to ask this, they follow a similar cadence of when they can refi and when they typically exit and how long it takes to do a value add, etc.
So, to me, it’s like if I put in $100,000 and it’s a 2x MOIC, well, I know that I should be getting $200,000, right? So, I like that it’s easy, it’s clean, it’s clear, but it’s good to know their IRR as well because that’s going to tell you inside of an annual basis what that looks like. But keep in mind, all projections in a current deal are just that, they’re just projections.
Erik van Horn: All right.
Ryan Planchon: Thank you, guys.
Erik van Horn: You got it. Next up, someone on the beach. That looks really nice. But before we– are you there? I can’t tell if you’re able to…
Erik van Horn: Okay, perfect. Go ahead.
Ashley: Okay, so I’m completely green to all of this so really grateful for the call because I feel like it’s helped me ward off making some big mistakes. But I had sent Justin a message. I’m in freight and logistics. I’m an agency owner, and my husband owns a franchise that does really well, has great royalties, amazing. So, we’re talking about what to do.
And I guess my concern and question is I am really afraid of being taken for a ride and taken advantage of and not finding the right person to invest in. So, I just don’t know, like I’m bringing in about 20 grand a month. I just don’t know if I should say that up and strapped for a warehouse myself, knowing there’s a bunch of tax abatements in a certain area that are located near the freight and logistics terminals, I just don’t know what to do. I don’t know if that would, like based on the call today, it sounds like maybe that would be putting all of my money into one basket and that might be kind of stupid.
Justin Donald: It’s interesting. It’s a great question, Ashley. I think that it’s different strokes for different folks. So, I talk about how you might spread it out over a bunch of investments. Other people might tell you, “Hey, become an expert in something and know it so well that you can go in very big on that.” But that also takes time, it takes expertise. And then there’s the question of like, how much time do you want to invest into doing it?
So, whether you own deeded or not, it’s to me more of a question of time. Are you willing to spend the time doing it or finding the people that can manage it because ultimately, the buck stops with you? Or are you willing to find the groups that have been doing this for 20-plus years that have a track record that have been through a recession that hit their pro formas consistently that they can do it and you can spread that out over a few of them?
So, it’s hard to say one is right or wrong, I think it’s what is right for you. And there’s probably several strategies ultimately that work. And it’s just figuring out what makes the most sense. Are you willing to be on the hook to buy something yourself or would you rather not? Is that one thing…
Ashley: I’d probably rather not. And I’ve talked to some investors that are experienced in it, but I don’t know them. And I’m afraid what if they take me for– I just don’t want to get screwed over if I put my money in it. We have capability to manage it. I mean, I think it’s as simple as sending out to all my clients, “Hey, I’m going to have warehouse space. Who needs it?” AI think there’s a big demand for it. I haven’t started the business plan of it yet. That’d probably be the first step. But the main thing is I just don’t want somebody to take advantage of me because I don’t know what I’m doing.
Justin Donald: I think you find an expert in that space and you ask their opinion of that specific asset and what they think, and then, what type of a lift it’s going to be. I mean, if you can get something for the right price, you can use leverage to do it. I think that that creates a great opportunity. If you can buy something below market, if you have other people in your network that can help you figure it out, I think that great things can happen there. I mean, I got my start by jumping both feet in on a mobile home park and I knew nothing about it. I mean, I went to a seminar on it, but I didn’t know what I was doing. And I just found people in that space that could coach me and guide me so that I didn’t make any foolish mistakes.
Ashley: Thank you so much. Your course helped me get so clear on what to do. I just need to find the right folks to help me.
Justin Donald: Oh, I love it.
Ashley: Working on that now. Thank you. Thank you.
Justin Donald: You’re taking great steps, Ashley. It’s awesome.
Erik van Horn: If you’re not on mute, go ahead and put yourself on mute. I’m going to call out Steven Berab and Phil Bohlander. Thank you for going back on mute. You’ve made me very jealous with all your skiing and snowboarding Facebook posts. So, not a big fan of yours right now. Ryan Casey had a comment earlier about– do we invest in franchises? And somebody else had that comment. So, do we invest in franchises in the mastermind? No, we have not done that yet.
But with that said, there are a lot of franchise people in the mastermind. They’re consultants, they’re franchisees, like Ryan. He’s an Orangetheory franchisee. We have consultants in there that help people find different franchises. And what we’ve seen is people are able to get really accurate information on franchises before they buy because they have this trusted group of friends inside the mastermind that actually owned the brands or can give inside information on these brands. Not illegal inside information, but like deep-in-the-trenches information on some of these brands so members can make really good decisions versus just out there on their own.
So, there’s a lot of franchise stuff that does happen in the Mastermind. So, I just wanted to bring that up. All right. So, we have iPhone. iPhone, why don’t you come on up and ask your question?
Miguel: I’m Miguel. Actually, my brother’s part of the mastermind. And we sold our business last year, and because of tax strategies, we had to invest, in a lot of depreciation on real estate. Listening to what we’re listening right now, I feel like we did a good job of diversifying a lot. We did a bad job of going deep on each one of the deals.
Fortunately, out of the 15 or 16 deals that we went into, two of them are having a capital call. And I’m just wondering if my money is better, just putting more money into it on the capital call or investing otherwise and just kind of cut the losses there. That’s one of the questions. And the other question would be, how do I reevaluate the deals that I already invested to see if they’re in good shape at this point?
Justin Donald: Two great questions, Miguel. And I think it is important for a lot of people to realize there are going to be a lot of capital calls. Why? Because the pro formas were not right. The pro formas, even in a worst-case scenario, didn’t anticipate a true worst-case scenario. So, a lot of people will say, “Hey, here’s my stress-tested pro forma. If everything goes wrong, here’s the pro forma.” But the funny thing is, most of these groups, most of these sponsors, they don’t have a worst case. They just have a case that is worse than their mid-case, right? So, usually, there’s like a best case, a likely case, a worst case. But the worst case is not a real indicator of what a worst-case scenario is.
And so, now, these sponsors are finding out, oop, we don’t have enough money. We have to do a capital call. We have to raise more money than we are anticipating raising because we made a mistake and didn’t underwrite this properly. So, how do you assess if that is a good deal to participate in the capital call or if you don’t participate? Well, part of that is going to be based on the terms. So, if you don’t participate, it is likely that you can lose your investment or get penalized or be bought out at a discount to what you invested in at. So, it’s all in the subscription docs. And you got to dig into the legality of what you signed up for.
So, that said, when does it make sense to do it and not? I mean, you’ve really got to run the numbers. You really have to be in good communication with the sponsors to understand what their plan is, and if this money is going to hold them over and for how long and what’s their new plan, are they going to refinance? What are the terms of the refinance looking like? I would just gather all the information because you’ve got to see their last pro forma didn’t work. What’s their new pro forma? Do you think that that’s really going to work? So, that’s what I’d say.
It’s hard to know what that looks like. But again, it goes back to the experience. How much experience do they have? How long have they been doing it? I had a capital call with one of my investments and I was disappointed that there is a capital call, but I still think their plan was good. So, I did pony up the extra capital, but I had a lot of other people that got out. They just felt like this wasn’t going to work.
In some cases, you can get out at par. Most cases, you’re going to get out at a discount. Other people could buy you out if they’re excited. So, it all depends on the legal docs. And it’s hard to say, but it for sure is worth evaluating and letting someone with expertise look at those numbers with you.
Miguel: Okay. Thank you, Justin.
Justin Donald: Yeah, my pleasure.
Miguel: And reevaluating the ones that I’m currently in just to kind of see. I’m guessing that once I talk to the sponsors a lot and I feel like the assumptions on the debt, especially being short term instead of being long term, and the turnaround on the multifamily syndications, which is at least 18 months before they can kind of turn the property around and the value at, I think those assumptions were off. Basically, they were betting that they were going to still get that interest rate at a decent level to the point where the deal will work. So, I’m guessing that that would be one of the questions to ask on the current deals that are not having capital call, correct?
Justin Donald: That’s right. I mean, I would ask them, and you can do this, you can take their pro forma, and you can tweak it. I mean, generally, they should send you a pro forma with everything already in where you can just add in the different interest rates that they would secure today or find out what it is that they’re looking at and then see if the numbers work. But even better, can you get them to update it and send it out to all the investors? They’ve got a fiduciary responsibility to do what’s best for the investors.
And so, I would look at that and I would evaluate every single deal, like, what are you looking for? Well, which ones are bridge lending? Which ones have floating rates? Which ones are long-term, are locked in for 25 or 30 years? You don’t have to worry about those. But everyone thought you could do bridge lending across the board. And it was fine. And I had for years told people this is so dangerous. We don’t know when rates are going to go up. You just can’t willy-nilly do this. In the past, you could refi out in two years. But anyone who has any sophistication and understanding in the space knows that interest rates could have changed at any time. And any time you’re locking in short-term debt, that is a risk.
Miguel: It is. Yeah. Thank you very much, Justin.
Justin Donald: Yeah, my pleasure.
Erik van Horn: All right. I don’t know who let Raymond Dunn in. I don’t even know the name Raymond Dunn. I just know Ray. Ray, what’s your question?
Raymond Dunn: Hey, Erik. Thanks a lot. Thanks, Justin, for this. This is terrific. I’ve got three questions, but I think there are very quick answers, hopefully. First of all, are you aware of any kind of publicly traded vehicles that can accomplish much of what you’re talking about?
Justin Donald: Well, with that one, I mean, if you’re wanting something in the form of cash flow and that is real estate, I mean, you’re going to look to a REIT, right? I mean, there are a lot of different types of stocks that pay dividends. I mean, there’s energy stocks. There’s an investment that we did. And by the way, this is not financial advice. I’m just simply sharing information of things that I’ve done and things I’ve invested in and seeing people invest in.
But there is a cannabis fund that we had invested in that went public. And those shares for Chicago Atlantic Group are available, and so, that’s something that could be looked up under refi. There’s all kinds of REITs that are real estate. And if you’re a REIT, then you have to pay the majority of the profits out to investors. So, there’s tons in that space.
You’ve got big-name companies that do this. So, you certainly can find it on the public side. There’s some irrationality that happens on the public side that I personally try to avoid because I think there’s advantage on the private side. But the reality is a portfolio should probably have both.
Raymond Dunn: Okay, very good. Other two questions are really just kind of definitions. And I think you touched on one a minute ago. On the MOIC return, does that typically include the ultimate sale of the property as well?
Justin Donald: Yeah. Yeah, your MOIC should kind of be like a start to finish. You’re going to make this much on this property from A to Z.
Raymond Dunn: Okay. And the part you addressed earlier, was it kind of the typical time frame that a MOIC is quoted for? I guess, if it includes the sale, they’re all sold different, maybe there’s not a standard.
Justin Donald: Yeah, there’s no time frame that’s associated with it. The MOIC is just what is the multiple on invested capital, regardless of the time frame, like this is the total return. So, If you look at past performance, you’re going to find out and you want to know how quickly did it, but the MOIC is like that’s a real number. You actually earned this much money on your investment. And so, I want that in my due diligence. I want to know. Tell me about your last 10 funds or the last five funds. And if you don’t have that many, maybe I don’t want to invest with you yet, right? But tell me what your MOIC was. Tell me what your IRR was. Give me all of the information.
Raymond Dunn: Got it. Okay, and last question, you mentioned cash-on-cash return, which in my personal portfolio, which is single-family residential, I like to keep things very, very simple. And that’s kind of the way I look at it is just cash out on closing deposit any rehab versus my net monthly income after debt service. So, is that pretty much what you mean by cash on cash?
Justin Donald: Yeah. So, when I look at cash on cash, that is the return on the money that you put into the deal. So, if you put 20% down and that 20% is $100,000 and you were able to get bank financing or seller financing for the rest, you’re looking at the return just on that $100,000. And that is before debt service.
Raymond Dunn: Oh, before debt service.
Justin Donald: Before debt service.
Raymond Dunn: Okay. All right. Thank you very much. Appreciate that.
Erik van Horn: Ray, did you ever follow up on that last point? Was that clear to you before debt service? I just want to make sure that that doesn’t…
Raymond Dunn: Well, it’s clear to me. I was asking what its definition was. But to me, as an investor, I just want to know what my net on a monthly basis after debt service. I put this much in and I’m going to get this much out every month after debt. So, to me, it’s a little simpler to look at it that way in my very simple mind.
Justin Donald: And I’m sorry I misspoke. It is calculated after debt service before tax.
Raymond Dunn: Oh, okay. Okay. Well, that makes sense. Okay, thank you.
Erik van Horn: All right, last question, Brian. This better be a killer one, man.
Brian: No pressure, then, right?
Justin Donald: No pressure.
Brian: Thank you, Erik. And thanks, Justin, I’ve got your book here. I don’t know if you can see it, but thank you for being here and spending the time today. My question is, as an investor, do you prefer or what are your thoughts or the pros and cons of going directly with a syndicator versus joining a fund, such as a friend of friend or a special purpose vehicle?
Justin Donald: All right. A few layers to this. Generally, you can compare, like syndication fund. A fund of fund is investing in a bunch of different funds. So, with a fund of fund, the negative is that you’re going to have more fees because you’re going to pay the fee of the fund, but then you’re also going to pay the fee of the fund that they’re investing in, right? So, there’s two layers of fees.
Now, a lot of these funds of funds are big and they have the ability to negotiate that down. So, you’re still paying two fees, but maybe it’s reduced in one of the instances or in both of the instances. So, you kind of want to see how that plays out. So, that’s providing a lot more risk or a lot more diversity and allocation across multiple assets. So, it’s de-risking. When you invest in a single asset, that is providing more risk.
But the thing that I look at is every deal, there’s going to be pros and cons, every type of deal, every specific deal. And you’re looking for (a) what makes the most sense in your scenario? (B) Do you have expertise in something that kind of helps to de-risk the deal? For me, I know mobile home parks better than any other type of real estate. So, when I look at those, I feel more confident in that that I can de-risk it because of my expertise. And so, that’s another thing. Number three is the track record and how good is the group.
So, it’s really like a pros/cons checklist with anything. And it’s not that one is better than the other. It’s often like what’s best for you in this moment right now? What if you have nothing else in your portfolio? Well, that might lean to one– you might invest in a fund if it’s your first one as opposed to an indication with a single asset, right?
Or what do you have a ton of investments in a certain area? Well, maybe you want a syndication in industrial since that’s been the best-performing real estate asset class for the last five years running and you have no exposure. Well, then maybe it makes sense to put some cash into that. You could do a fund or you could do a syndication.
So, I would just look at the pros and the cons. The goal is to have a diversified portfolio. The goal is to not have too much in any single asset at any given time, but then it’s to also have an investment criteria. And I think all investors should do this at some point is make a one-page list of kind of your dos and don’ts, like, I’m looking for this. This is important to me to have or to avoid and try and keep it to one page, maybe two pages tops, where you’re outlining what you want so when you start feeling an emotional pull to do something because your friend is doing it and you can check your investment criteria that you made and say, oh, actually, this doesn’t line up because I said, never have more than 10% of my allocation in a single asset class or more than 5% in a single asset. Or I’m overexposed here because I’m big in single-family home rentals or whatever the case is.
Brian: Okay. And then just one quick follow-up. When you talk about multiple asset classes, in a broader sense, real estate being one of them, but are you speaking more specifically to different asset classes within the real estate realm, such as self-storage, multifamily? You mentioned model homes, so on.
Justin Donald: At different places in life, I’ve had different strategies that have worked for me. And as my net worth has grown and as my cash flow has grown to cover my life’s needs, it has shifted the way that I’ve done things. And so, when I talk about diversification, I am talking about it across all different real estate, but I’m also talking about it across the broader market.
So, I think it makes sense to have some exposure to the stock market, some exposure to private equity, some exposure to real estate, some exposure to fixed income, some exposure to agriculture, some exposure to crypto. I mean, the list kind of goes on and on of like what do we want to make sure that we have? Do we have a hedge fund allocation? I mean, if you look at what a family office does, which family offices manage money for the wealthiest people in the world, how do they allocate?
And I want to have a portfolio that’s similar to them. And over time, it’s going to change. If you’re new, it’s going to be a little different. You may not have the luxury of having allocation to everything they do, but over time, as your net worth grows, you can add different allocations, and every year, you should probably rebalance, if not every quarter, but certainly, every year, and just figure out where you’re at.
And so, I mean, some of the things I love diving into in the Lifestyle Investor Mastermind and Tribe of Investors Mastermind, I love diving into what does the asset allocation of a healthy investor look like. When someone is a millionaire, a decamillionaire, a centimillionaire, a billionaire, how does that shift and what does that look like and who should be managing money at that point in time and what exposure should people have? Because the reality is most people are overallocated. Entrepreneurs are generally overallocated in their primary business.
If you’re an employee and you’re in corporate America, you’re generally overallocated in the stock market. I mean, the list kind of goes on and on where most of your assets are tied in one investment class. It’s just if you look at what the wealthiest people in the world do, it’s like 20% to 25% in the stock market, 20% to 25% in private equity, 20% to 25% in real estate, 20% to 25% in everything else, right? And so, that is something maybe to have a goal of like, how do I get to that type of asset allocation?
Brian: Thank you.
Justin Donald: My pleasure.
Erik van Horn: All right. Are we going to have one quick question for Russell? Russell, it better be fast, man.
Russell Solomon: Hey.
Erik van Horn: And it better be good.
Russell Solomon: Oh, okay. Well, I feel pressured now, Erik. So, just enough, I’m in Erik’s Franchise Mastermind. I have read your book and have been following you. So, I know you like mobile home parks. Have you followed the Brandon Turner’s Open Door Capital, their generational wealth fund, which is basically a mobile home syndication? Have you looked into that? That’s my first question.
Second question, do you know of any other mobile home syndications? And I’m sorry, I missed the first part of today’s calls. You may have already talked about it.
Erik van Horn: Now, you’re in big trouble. Big trouble, Justin. We’ll let this slide. But yeah, I can’t wait for Justin’s answer.
Justin Donald: Yeah, I’m a huge fan of mobile home park still. I’m good friends with Brandon Turner. In fact. I’ve got a call. My call right now at 11 o’clock is with Brandon. So, we have a weekly call with a little…
Russell Solomon: Drop my name. Drop my name with him. There you go.
Justin Donald: All right. Happy to do it. So, I think the world to him. He’s done a lot of great things. It’s my understanding that he’s pivoting away from mobile home parks and back into apartment complexes a lot more so. And Open Door has done a great job of raising capital. They’re still kind of early on in the life cycle of that fund. And so, I’m eager to continue following him. But I like Brandon. I like his character. I haven’t studied it enough to really know. So, to me, I like to look at what’s the price with which you’re buying your assets and have you been buying at market, below market, above market. That matters to me.
I think there are a lot of groups that are out there that are doing a good job. I mean, I now have learned some groups that are not doing a good job. So, I kind of have my beware of list and then I really like these groups list. And some, it’s like, hey, I really like this group because you can do a tech, you can do tenants in common. If you need to do a 1031 exchange because you had an exit, you can actually put money into a fund. Most people don’t know that you can do this with certain funds. So, you’re de-risking the deal and not tying it into a single deal.
And I like funds that can do that. I think that’s incredible. And most of the time, with a 1031, you’ve got to go into deeded property. So, they create a way that you can go into deeded property and qualify with that investment. So, I like that. There are other groups that don’t do that, but they’ve got pretty good returns. You’ve got other groups that have just been kind of like the standard in the industry for the longest time.
We just had Frank Rolfe and Dave Reynolds, Strategic MHP Fund! present to the Lifestyle Investor Mastermind, and that is, I would say, one of the best groups out there. I mean, he’s my original mentor in mobile home parks, so I trust him implicitly. And he hasn’t raised a fund in probably a decade. And so, I’m glad that he’s back to doing it. They sold a big part of their portfolio and want to add back to it. So, they’ve done very well. Their track record is great. And I don’t know anyone that’s better than them. But there are groups that are offering better splits than them because these guys are the best in the business, so they don’t have to be as generous to the investors, but they’re not egregious either.
Russell Solomon: Yeah. All right. Well, thank you.
Erik van Horn: Good question. All right, Justin. This is fun. Did you have fun?
Justin Donald: Yeah, this is great. I love doing this stuff.
Erik van Horn: We got some good suggestions on future stuff as well. So, thank you, everyone, for coming. And hopefully, you win a layer or two deeper than you’ve been before in all of this investing stuff. And that’s the goal and that’s what Justin’s brilliant at. He’ll take when most people just want to look at ROI and look at ROI across the board, like what does ROI really mean? And then how do you de-risk deals? And you just go deeper and deeper and deeper into all of this stuff. And I don’t know anybody that goes deeper than Justin. Justin, any last comments before we shut it down?
Justin Donald: Yeah, I would just say if you want to learn more, go to LifestyleInvestor.com/consultation and book a free strategy session with someone on our team to figure out maybe what is the next best step for you, specifically if you’re interested in some sort of an online course, one of the master classes on mobile home parks or passive investing. And for those of you that really want to jump in with both feet, go to LifestyleInvestor.com/mastermind. There’s a way to apply there, learn all about it, see testimonials from people that are part of the mastermind. And it’s really just a community of like-minded people that are some of the most successful people that I have ever met in my life. So, it’s a really, really cool community.
And my goal, and I say this in my podcast, and by the way, if you want just free content, I’ve got a blog at LifestyleInvestor.com and I’ve got a podcast there. And I would just say tune in because I have really amazing guests on the show. But the way I wrap up every podcast episode is I say, what’s the one step that you can take today to move towards financial freedom and move towards a life that’s by design, it’s not by default, but it’s on your terms. So kind of shifting from autopilot to intentional life by design. So, that’s what I’d say is what’s the one step you can take today to move forward in that direction?
Erik van Horn: Thanks, everyone.