On this episode of the Note Closers Show, Scott discusses the process of a JV Partner. He also talks about what you should be asking of your potential funding partners to ensure that they are a good fit for you.
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JV Partner Discussions
Today’s topic is something that a lot of investors ask me about, a lot of new people ask me; a lot of people that come from corporate world that have retirement accounts. Have somebody asked me because they’re a little concerned about having the money questions with potential funding partners. Today’s show is all about what do you ask, how those conversations go, what were anything that we should do to do our own due diligence on our funding partners. I thought I’d start with a very basic aspect of things as you’re out networking, as you’re out talking to people. You’ve all heard me talk about the fact that it’s good to have something like deal samples. It’s good to have something tangible for your potential funding partners or people you’re networking with to take a look at. Having something on a piece of paper, a photo of the property, having the deals in hand help tremendously when you’re having that conversation because you’ve got something that you can look back to versus just talking theory.
JV Partner: It’s not about the money, it’s more about the deals.
I think a lot of people miss the boat when it comes to that facet of the business. It’s not about the money, it’s more about the deals. You have to make the focus of your conversation on the deals you’re working on, the deals that you close or the deals that you’re going through due diligence on. Having something tangible is much better than not having something at all. Also, good deals find money. It’s not always the case now. You should be around raising capital until you’re making offer on a deal. You’re never going to have something tangible and investors want to get something tangible. They want to get something they’re actually working on or a case study versus something, “This is what we do.”
One of the biggest, easiest ways I’m a big believer in doing is you’ve got to build rapport first. Going up and asking somebody if they’ve got money to invest right off the bat is like going and asking the girl at the bar if she wants to go home with you, or a guy if you’re a lady, “You want to go home?” You don’t do that. You have to build rapport. You have to have a conversation. You have to get to know that person a little bit. Sometimes, it takes time. Good relationships are built over time. It’s like dating. Maybe some of you went home with your spouse on the first date and worked fine. For many of you, it’s a process of dating. It’s a process of getting to know that individual. It’s a process of building that rapport and getting to like and trust on both sides of the relationship. It’s not just one side, it’s both sides. There are times, all the people that come to me that were ready to fund the deal. I won’t do their deal. I won’t let them fund the deal because I just don’t like them. I like them as an individual, don’t get me wrong. They’re fine but I just don’t like their business. I’m fine, I’m having a conversation with them, friends with them but I think they would just be a nightmare when it comes to being a funding partner. I’ll share a little bit on how we decipher that as we get rock and rolling through some stuff.
If you need help with ice breaking or talking to people, you can use the four method. You just think of FORM. Some people, they do FROM but that’s okay. It starts out with F, “Where are you from?” Very simple, “Where are you from?” The second thing is, “What do you do? What kind of investing are you doing? Are you proficient of a real estate club or a networking event? Are you in the real estate? What do you do in real estate? Are you a realtor, mortgage broker, investor? O of FORM is the occupation, “What do you do?” Third thing, the R aspect of that is recreation, “What did you do for fun this weekend? Did you watch the game? Did you go somewhere? Did you go to the festival? Did you go to an event? What did you do for fun?” The key thing is if you ask those three questions and they don’t come back and ask you the same things, they’re rude. The last big thing is M, your message. You want your message to be short and sweet. You don’t want to throw up on them and have diarrhea of the mouth on them and they’re like, “I got to go.” You don’t want that. You want your message to be relatively short and sweet.
One of the best messages I’ve ever heard was when Steven Lloyd talked about this, I think it was in the Distress Mortgage Expo in New Jersey. He talked about, “I raise capital for real estate projects.” “Tell me more about that.” It’s a leading response. “I buy distressed notes. I’m a mortgage investor. We buy distressed mortgages from banks and hedge funds and then we work to try to keep the borrowers in house as we possibly can.” Whatever your little ten-second, ten-word message about what you do, it’s got to be clear and concise and it’s got to be focused.
One of the biggest things that always drives me bonkers is when somebody hands me a business card when I meet with him the first time. I flip it over and there are twelve things, “I’m a notary, I’m a realtor, I’m a mortgage broker, I’m also a legal aid.” It does look bad. It looks like you don’t know what the hell you’re doing. Trust me, you don’t want the guy doing your oil on your car to do your taxes and mow your lawn or be your interior designer. You want somebody who’s focused, who’s an expert on what they do. I get that unfortunately a lot of people have gone to real estate seminars and workshops and they’ve been sold a bag of goodies, “Here’s how you market. Here’s that other stuff.” I have tools. Whatever type of deal comes my way, I can do the deal because I’ve got the tool to fix it. If I have a plumbing issue, I’d call a plumber. If I’ve got a pest issue, I’ll call a pest. If I need my lawn mowed, I’m calling a lawn mower. I’m not calling somebody who is too generic in nature. It might do a cheaper job, but you often get what you pay for.
That’s the thing you got to keep in mind. If somebody is doing a multitude of different things, they’re not an expert in any one of those. They’re probably looking for deals and they’re going to be all over the place. Don’t be that individual because an investors is going to look at that and think, “You’re all over the place. Give me a phone call if you’ve got a deal,” but they’re not going to look at you versus, “This is what I do. This is the one type of thing I do.” I want to be known so that when they have a deal in Austin or they know me as the Note Guy. That’s what I focus on. The whole idea of the Note Guy came originally from me just doing videos years ago, and then I actually went to Florida for real estate investment clubs. I was travelling the country in a week period. People are like, “You’re that Note Guy who does the videos. You’re the Note Guy.” They get to know me as the Note Guy. It wasn’t the fix and flip guy. It wasn’t the wholesale guy. I was the Note Guy. That stuck and I was like, “I got it. Hit that nail in the head, we’ll keep that shot.”
As you’re communicating in your network, as you’re talking to your tribe, everybody’s got a tribe. Everybody’s got a group of people that are around them that they network with, that they are in their geography, their hemisphere. You’re going to communicate with those people, whether they’re friends, families, people you go in network clubs, stuff like that. You want people to start to recognize you as that person. Not that guy with the stinky bad BO or the Jack of all trades, but somebody who’s consistent in what they do. Sometimes it can take time, especially if you’re just going once a month to a real club, it could take you four or five or six months to get to one of those to build enough consistency to show up. If you network in other areas and people are connecting, it won’t take as long. It’s still about getting a word about what you’re doing.
What does that have to do with funding? If you’re going to use that in a consistent basis, like many of the guys are that are successfully raising money, you’re going to have people that come to you. They talk to me, “We’d like to talk about funds and deals with you.” Great, that’s a much easier conversation to talk about them wanting to fund my deals versus me, “Let me pitch you on a deal.” Don’t get me wrong, I still don’t mind sharing what the deal is and making sure the deal makes sense for people. You want to make sure that the deal makes sense. It’s all about investor questionnaire at that point. Let’s say they want to do deals with you, they want to fund your deals, one of the first things that we ask them to do is, “How much are you looking to invest? What number are we talking about?” You want to find that number out relatively quickly because the last thing you want to do is spend an hour talking with somebody about a deal and they only got $5,000 or $10,000.
I’m not bashing anybody who’s got starting off at $5,000 or $10,000, but those people need to think more so about raising capital themselves. Instead of funding a deal, they need to look at doing some marketing themselves and go and find deals that are growing in that aspect. You can’t really do much with anything below $20,000 for the most part. You can, it’s just not the most effective way. A lot of times, when you’re using somebody’s last $5,000 or $10,000, there are going to be a lot of problems, headaches, reaching out to you. They’re going to give you migraine. They’re going to do some stupid shit. We’ve seen it. It’s a start off somewhere but it’s best for you to keep your business streamline and have a basic thing. We used to start around $25,000. Then we’d bump up to $50,000 and then we really prefer $100,000 or more.
The investor questionnaire that I literally will then send, “How much are you looking for? I think we need to do a sample of that.” It’s an excellent investor questionnaire. Especially when we talk to them on the phone, I probably have already asked them to tell me what are they’re investing in or to tell me what they are looking for and I ask them, “What kind of projects have you got? Tell me a little bit about your past or your real estate stuff.” They go, “I’ve done fix and flips. I’ve done wholesaling. I’ve done this, I’ve done that. I work too much, I don’t have time but I’ve got this money as sidelines for an old 401(k) that I need to roll in to something.” That’s the time I’ll say, “Let me send you out an investor questionnaire to you.” It’s a one-page questionnaire, simple questions. The first chunk of it is their information: names, emails, where do you work at, how many years have you been doing that and what have you invested in before. Then I ask what their adjusted gross income is for the last two years. We’re getting close to 2017 being over, so 2016-2017.
JV Partner: I just ask them to tell me what their adjusted gross income is.
I’m not asking for tax returns or W2s or anything like that. I just ask them to tell me what their adjusted gross income is. It’s important because you wanted to fill it out. It helps also to determine if they’re a credit investor or not. If they’re not a credit investor, that doesn’t mean you can’t do individual deals with them. It’s just you’ve got to be a little bit more careful with them. “Have you invested in real estate prior to this, yes or no?” If yes, “What types of real estate investments?” Then I ask, “Where is the investment coming from: a credit card, an IRA, cash, 401(k), CBs or equity line?” There are a couple of things on this that will be a big red flag. If they say credit card, that’s a red flag. I appreciate, but you’ve got to realize my joint venture deals are going to be twelve to eighteen months. They’re not going to be six months. You’ve got a teaser rate of 0% for six months, but what’s your payment going to be after six months? Can you afford to make those payments in case this deal drags on to twelve months?
The other thing on here that is important is if they say cash, I want to make sure it’s not a big suitcase full of $1 or $20 or $100 bills. If they say equity line, I want to make sure the same thing with the credit card. Are you going to be able to make the payments? Is this going to hurt you if it drags on for six to twelve months especially if it’s a non-performing note?
We have a question, “Do we need to worry about the source of funds? Should we be concerned about they’re funding a deal on a credit card?”
If they’re funding a credit card, not good. This is based on experience. I had a lady who funded a deal and six months go by, it was running at the front-end. It was a Florida deal. We knew it would take twelve to eighteen months of foreclose. Lo and behold, after six months, she started getting Nancy. I’m like, “Why are you getting Nancy?” She’s like, “The money I get was from a credit card. The interest rate is now 19.9% and I can’t afford it and I’m losing my house.” I was like, “It’s not my fault you made a stupid decision to have your money go that way but let me see what I can do.” I ended up having to refinance her out, and that was a pain in the ass, and go from there.
After, “Where is the money coming from?” “If you are to invest, would you be comfortable tying the investment up for twelve months? Yes or no?” If they say no, I’m probably not going to work with them on a JV deal. Most of our deals will take over six months. It’s not going to be a 90-day thing. I get people ask, “I have somebody who wants to get their money flipped in 90 days to six months.” I’m like, “How often are they doing it right now?” If they’re not doing it right now, it doesn’t hurt to tie their money for twelve months, if they’re going to make a better return on their money versus I’m trying to do one deal on 90 days and then it sits vacant for nine months.
“Are you investing money out of a self-directed IRA? Yes or no? If yes, who is your custodian?” This is important. You want to find out who the custodian is. If it’s with a self-directed IRA company like Quest IRA, then great. If it’s with a company like Equity Trust then no. I always say this because Equity Trust is the slowest in the industry. They are not the easiest to deal with. They’re the largest custodian but honestly, I will not fund deals that go from an Equity Trust account most of the time. They can take up to two weeks to get them to fund something in a timely fashion and two weeks is not timely. It’s also important to realize where their money is at, if it’s Schwab or Chase or Scottrade. That adds time to your schedule. If you move money from a Scottrade account over to a Quest account, it can take at least three business days for Scottrade to move the money from funds into cash and then either send a wire, or god forbid, they have to send a check. You want to make sure and ask, “Who’s your custodian?” to find that out. If they say it’s not Quest or somebody that you know, you need to bring that to their attention, “You need to go and start the process of moving this over.”
For interest payments, “How are you with payments? Quarterly, semiannually, annually or one lump sum of my investment? “I don’t offer up monthly payments. It’s just as too big as pain in the ass paperwork-wise. Do it quarterly, it also saves them money and funds and wires or us on wire fees. Then I ask the questions, “What would you say your net worth is including real estate? What would you say your net worth is without real estate?” It’s important to ask those questions. “Are you currently involved in a bankruptcy or a lawsuit of any kind? Yes or no? If yes, please explain.” This is a filter. If somebody says they’re in a lawsuit, they’re suing people for things, probably don’t want to do business with them, “I’m suing this speaker. I’m spinning this person for their coaching, trying to get my money back.” That’s usually not somebody you want to do business with. If somebody has been through a bankruptcy before, that’s not a negative thing. You just got to be careful of how they’re using their money and make sure it’s all closure.
The last question I always ask is, “What type of real estate education classes have you purchased or attended in the past?” I want a full list. I’ve gone Eddie Speeds. I’ve gone to Scott Carson. I’ve gone to Ron LeGrand. I’ve gone to Bill Gatten, Rich Dad training or whatever it is, FortuneBuilders. I want them to fill that out so I know what their experience is. The more seasoned, the more experienced they are as education, usually less questions they’ll ask in the long run, plus the more knowledgeable they are when it comes to things. This is more of CYA, cover your ass questionnaire.
Another question is, “What about foreign funds?”
I always say you need to have that investor speak to their attorney about getting funds in. It can take a little bit of while to get funds into the States, depending on where it’s coming from. Whether it’s internationally overseas and they’ve got some restrictions with that. That’s when you need to say, “You need to speak to your bank or account to talk to this person,” or I’ll refer him to somebody that’s very knowledgeable and works with different companies. If they need to set up an entity in the United States to do that, to make it legal, to make it easier with the Patriot Act and things like that, that’s when I refer them over to Laughlin Associates and let the staff from Laughlin help that out. They’ll let me know once the money is stateside, then we’ll talk about it. What I don’t do is I don’t deal with international investors as a fast funding party because it’s not. Oftentimes, I see investors do that, “I’m dealing with international money and it takes forever to get done.” It can take forever. That’s not saying it doesn’t work. Our buddy, Garrison works with a lot of international investors but he’s already got that system set up. He needs to fund something, the wire comes in relatively quickly or it’s already sitting here in escrow waiting for him to take things to the next level or him to purchase the asset.
I require every spot of this to be filled out. If an investor does not fill this out in total, I send it back to him. If they give me crap about answering some of the questions, “I don’t want to disclose that to you.” I tell them that, “I’m not going to do business with you.” I want to make sure who I’m dealing with here. I want to make sure they’re good. One thing too, do not get caught up in this scam that is happening where you see hard money lenders say you’re going to get personal loans all day long. We’re going to do personal loan. We’ll give it to you in 5% interest. I just need a $5,000 fee in the frontend. I have had friends get scammed because they thought it was so good, “$4 million, the guy is going to fund me on deals on a 5% interest rate. I just got to pay $2,500 as a fee.”
If you’ve never met the person in person or talked to him on the phone, it doesn’t work well. I ask my buddies, “How did you meet this person?” “It was all through via email.” I’m like, “That’s a scam.” It’s like the Nigerian Prince. It reminds of the American Hustle movie. They were doing commercial loans and taking $5,000 to $10,000 in fees on the frontend not delivering anything. Don’t get caught up into that. This is why you’re still going to raise most of your private money from around people that are around you in your local area. This is why it’s important to have that.
One of the things that I ask people to send when they send the investor questionnaire back is I also ask them to send a pledge letter. Pledge letter is very simple, not anything difficult. It’s basically an email that says, “It’s Scott. I enjoyed visiting with you. Attached is our investor questionnaire, fill it out along with proof of funds from our IRA account or my Schwab account,” whatever it is. “We’ve talked about putting $50,000 to $100,000 to work with you.” That’s all a pledge letter is. It doesn’t have to be fancy. Just send an email over to me, “This proof of fund is good for six months,” or something like that.
We have a question, “What if the person does not qualify as an accredited investor? Can we still work with them? Is there any precautions we need to do?”
JV Partner: You want to make sure it’s not their last $50,000 or $25,000.
Yes, but this is why you want them to fill this out. Talk to them about what’s going on, what are they doing? There are a lot of people that aren’t a credit investor because they don’t make the money they need to make it annual or a year but they still do a lot of deals. Those are the kind of people you still do one-off partnerships with those people. You still talk to them about what’s going on, share with them the information. Have them double-check your information. This is why you want them to fill this out. You want to make sure it’s not their last $50,000 or $25,000. If somebody comes to you and say, “I want to put $200,000 to work with you,” I always take that number in half initially, “Let’s start off with $50,000 and make sure that we get along together. Let’s start off with $50,000 and we’ll go from there.” That’s always a good thing. If their first deal they come in, “I got a $1 million.” “Let’s start off with $100,000 and figure out just to make sure this works for you.”
Trust your gut. If somebody is going to ask, somebody is just rude, don’t do business with them because they’re going to end up being rude to you. Even though how desperate you may be initially to raise capital because you’ve never done it before, just take a deep breath and relax. It’s okay. If a deal that you had an investor interested falls through whether the due diligence turns out bad or somebody else bought it faster than you did, just share that, “Somebody else closed on this a little bit faster than we did. They offered more than what we wanted to go to.” Share that information. “The deal didn’t turn out as good as I thought it was going to be, so I scrapped it because I didn’t want to put your money at risk.” Share that. People love to hear that when you mean it because that’s the truth that you’re watching out for this person’s best interest if possible.
We are excited we have Jillian Sidoti coming on Note CAMP to talk about the business with John Hyre, the IRA investor who fought the IRA twice and won twice. That’s going to be a good session. He broke the law and won. Raising capital and talking with the investment partners is all about just talking and asking questions and listening. If you want a good chore in listening or talking with the investors, go to your local bank and then ask to speak to their financial adviser. Or go to Schwab or Ameriprise or American Express Financial or something like that and sit down and start talking to them. They will pull out a profile sheet and start asking you questions. How do I know this? That’s what we used to do at Chase Bank, that’s what we used to do at Smith Barney, Citi Bank. Those are the things that we used to do is going through and asking those questions. It’s a good chore, it’s a good must-have to do. It’s got to be something that you do on a regular basis. It’s not that hard, “Great to talk to you. I’m going to send you over an investor questionnaire, please take the time to fill it out and get back to me. You need to fill it out 100%complete.”
I’ve had some people that didn’t want to fill it out completely because they didn’t want to send it back to me filled out. They want to get on the phone and have me filling the rest of the information, which is okay. I don’t ask for their last four of their Social Security number, their mother’s maiden name, their date of birth, their favorite pet or their high school mascot. I don’t ask those things. What’s on here is important. Then that goes into their file folder. We have a JV file folder that’s electronic or it’s actually a hard file folder you could keep or you keep deals in there and you keep it in there. When you have deals, eventually what’s going to happen is that you get deals in. Those are the people you reach out to, “I got a deal now. I have some funds available.” If you don’t put people’s money to work, oftentimes, especially if you’re savvy enough, they’ll start putting to work in other places.
A big thing to keep in mind, if somebody tells you they’re going to invest with you and you’re working through a JV partner agreement and they fill this out and you share with them a deal. Then they pull the rug out from you the day of funding because they decided to go somewhere else or they get cold feet, don’t ever do business with them again. I’ve had several cases where we did everything right on our end. We got a deal. We’re going back and forth on a few points on the JV partner agreement and get around the funding day. I’m like, “Are you ready to fund this Friday?” Somebody goes, “I found a deal I could not refuse.” I’m like, “Really? You refused me even though we’ve been working with you for a couple of weeks. We’ve been talking and you’re going to go somewhere else. You knew we were going to close the deal but now you pulled your funds.” I will never do business with somebody who pulls funds like that, if they get cold feet.
The thing to keep in mind is you get yeses along the way. If you don’t make them fill this out, you don’t ask them for a pledge letter, they’re just going to get cold feet pretty much anyway. This is why it’s important to get those virtual yeses along the way. You’d get a yes when they want to get more information. You’d get another yes when you get on the phone with them. You’d get another yes when you send this to them and they send it back. You’d get another yes when they send in a pledge letter. Those are all four or five yeses and then it all comes down to funding. If they need to open a self-directed IRA account, they open an account request. That’s another yes. If they get cold feet or they over-analyzed the deal and run, just don’t waste your time with them anymore.
There are some things that will pop up that are like having a hurricane or a medical emergency. Those things I totally respect that. Not a problem at all. What I do not like and what I put up with is somebody who just pulls their money for something else when they know we’ve been working through things. I’m working on two deals, either your deal or this other person’s deal whichever gets fund fast, I will respect that but not to go blind on me, go dark on me and never respond. I’ve had people do that. They will never get another deal. I will alert everybody I know that they will do that.
Another thing to keep in mind, sometimes people will overthink assets and go through everything. If you’ve done your due diligence, which you should all be doing on a deal, stick to it. Feel free to share that information, “This is the reason why.” “That makes sense.” That’s okay if your investors have questions about your deals. I had a conversation with one of our funding partners, “Have you seen the crime map around this asset?” I had forgotten to pull it on an asset. Even though it was a great asset where the borrower was going to make payments, they’re begging us, just doing a loan mod. I’m like, “You’re right. I don’t want to put your money into that one. Let’s put you in a different one. I’ll go fund that deal separately and get my money involved on it.” Treat your partner’s money like it’s your money or better one if it’s your mother’s money. Hopefully, you all love your mother.
We have another question, “Do your investors have input on exit strategy or they’re just along for the ride?”
It depends. Yes and no. We have an idea of where the asset is going to go on exit strategy. It was going to get re-performing and then after twelve months, we could sell it off. That’s what the JV partner agreement is all about. It’s just discussing that with your funding partners on what happens next. If it becomes a re-performing note, do we want to keep it and hold it for cashflow or do we want to sell it off? The biggest thing is I’m still controlling that. I’m not going to let them dictate where it’s going on the frontend. If it’s going to be a re-performer, it’s going to go re-perform. I’m not going to say, “No, we’re not going to accept that. We’re going to foreclose.” That’s not necessarily the case. I want to make a good sense along the way with the assets. If they want to buy me out after twelve months and keep the asset, they can. If I want to buy them out, let’s discuss with a partner agreement. It’s just a conversation.
One big thing we also do is if it starts running beyond twelve months. Assets will do that is offer up the opportunity for somebody, “After twelve months, if you want to get your money back, we’ll give your money back to you plus the 12% return because I’ll go out and find somebody to go and refinance that.” Another thing to keep in mind too, if it’s before twelve months, say six months, you can bet your ass I’m not going to give that investor any money back as far as interest. They’re going to get a penalty also because if they have a CD or annuity with another firm and they decided to break that, there’s a penalty involved. I charge a 25% penalty. Now, I’ve got to do something that’s different in my time frame and now I’ve got to go and find a new investor and I’ve got to take that new investor’s money away from a new deal and put in this old one. That’s the thing to keep in mind. If someone wants to get out of the deal before twelve months, it better be something good. If it’s just, “I want to do something else,” “You signed an agreement with me here. You agreed to this. There’s a penalty for you to do that.” If they get upset about it, I’m like, “You signed on it. We’re doing business here. I don’t run a charity. We’re in business here. If you expect me to do the things I sign up to, I’m going to hold you to what I expect you to do.”
JV Partner: We share that information so they see what’s going on.
That doesn’t mean you can’t have somebody involved with more knowledgeable notes and wants to see servicing issues or see the collateral, that’s completely fine. That’s completely fair. I will even share what’s going on in a regular basis, “We’ve got the sellers dragging on getting the collateral. I’ve got 45 days down. We’re reaching out to him. I’ll copy you on my emails.” They see what’s going on with the attorneys. They see what’s going on with the servicing, the taxes. We share that information so they see what’s going on. If somebody’s dragging on, I’d be like, “This is dragging on longer than expected to help solve those issues.”
We have another question, “Do you include that penalty clause in your partner’s contract?”
Yes, I do. It’s good to do. For the first-time investors, yeah, I will do that a lot with. If I’ve done business with a lot of them before, I won’t include that in there. If somebody is brand new and they never fund a deal before, you bet your butt, I include that in there. It’s just a good business. You may want to have an initial right next to the partner group, “You should be aware of this. The reason I’m putting this in there is if I’m going to do the work and you’re involved with this deal if it gets beyond twelve months, then we have the right to get out. Before we do, I’m just going to penalize you 25%. You’re not going to get any interest. You still have $100,000 with me. I will only give you $75,000 if you do it before twelve months.” There’s a cost in violating contracts.
The same thing if somebody’s within the 90-day period, ten months or getting close to twelve and they ask for a refund back, that’s fine. You’ve got to give me 90 days to get your refund back. That’s an important thing to keep in your JV, “If you need to refinance out, it’s going to take 90 days. You’ve got to give me 90 days to do that.” This doesn’t usually take 90 days. Sometimes it drags on a little bit, but I communicate. In some case we’ve had it, we’re like, “What do you need that money for? Is it for a different deal? Is it for something else?” I’ll do a partial refund, “Let me split this refund up in payments as we close in other deals to get stuff done.” As long as you have a solution for your investors, they’re going to be happy.
We have another question, “Is it best to go with 50/50 on JV out versus a percentage?”
That’s up to you. You have to look at the deal. Equity split versus a flat return, you have to ask what are they looking for. That all comes down to what the person is looking for. If it’s going to be a re-performing note that’s yielding a 25% or 40% return, you may want to go 50/50 so that you’re either seeing a 20% return on the cashflow and you’re getting the other half, or you may want to go just a flat 10%, 12% interest rate. Some people are different with their model. If they’re coming from a CD or annuity where they’re getting a flat interest rate, a flat interest rate may be something that they enjoy more. I do a lot of real estate investors who don’t want a flat return obviously. They’re looking for more of the equity split being 50/50. If you can get fine, cheap money at 6%, 10%, 12% and that’s all they want and they’re happy with that, by all means, give it to them. That’s a question that only you can answer for the conversations you’re having with your potential funding partners.
We usually try to have our funding partners fund extra. If the deal we’re funding for $25,000 is what the purchase price is, we try and fund $30,000. That gives us a little extra cushion for expenses and other things along the way. If we close out the deal faster and we refund them back the $30,000 and I didn’t use that flag rate difference, it’s now profit. Something goes into our slush fund for other things. There are going to be other operating costs or other expenses along the way.
The more often you have these questions and questionnaires and the more you’re talking to people, the more selective you can be in your funding. You can pick people that you just want to work with. You don’t have to be desperate just to get your deal done. You’ve got to have these questions. You’ve got to have these money questions and that’s difficult. If they were to go get a bank account or get an annuity or invest with a 401(k) or something like that, they’re going to ask these questions to figure out the risks.
We have another question, “If you need additional funds and the investor can’t come up with them, do you reduce their percentage in the profit?”
If we have a funding say $50,000 a deal and then we need $5,000 or $10,000 later on for expenses, do I reduce the principal? No, I don’t do that. What we do is it is set up basically this way. If you’re going to do an equity split, this is one of the things that you want to do. There’s going to be expenses that happen during or while you’re working through the deal. If you’re going to fund $50,000 and you find out the property is to be rehabbed, so you’re going to put $10,000 into the rehab but your funding partner doesn’t have that money in their IRA and you’ve got to fund that. You fund it. Treat it as expense. When you sell that asset off, you pay back the $50,000, goes back first to your investor. They get their investment back first. Then you cover any expenses, second. If you paid $10,000 in your own pocket, you pay the $10,000. You might even want to charge yourself some interest on that $10,000. If it’s just short-term mezzanine loan, $10,000 for six months and you’ve got to pay 12% interest on that, you’re adding $600 to that as an expense that’s getting paid second. Then the profit is going to be split 50/50. They’re funding most of the projects, $50,000 in the frontend before we get to that, I’m not going to sit here nickel-and-dimed. I’ll still split the expense up 50/50 in the backend. It’s just good business. The investment gets paid back first, any expenses come second. The cost of money, if you’ve taken out a hard money loan or a private loan on that money, the clock is ticking and they’ve got to be paid back.
It’s all about just having a conversation. It’s all about talking to people, getting to know them, getting to see what they are doing. It’s also good to talk to other people, “Who else have you done deals with?” “I’ve done Wayne a deal. I funded Gaile.” I will call Wayne and Gaile and ask, “How is this person? Were they a pain in the ass?” I will tell them, “They want to do some deals with us. Are they a pain in the ass to deal with?” “No, they’re good to deal with.” “Awesome.” I ask for references. If someone has never done a JV partner deal, that’s fine, but they have to do a deal with who you work with, “How is that working out for you?” When you ask what they’ve invested in before, what kinds of returns are they getting with that? If their money is sitting in a CD account and are probably making 1% of their money if that, so it’s important to keep that in mind. You may be able to have that conversation, “I see you’re only making 1% on your investments. What if I could show you 6%? Will that be something you’ll be excited about?” “Yeah.” You’re going to have those conversations with people that are less savvy in real estate or haven’t done much. That will be cheaper money for the most part. There’s going to be hand-holding as you answer more questions with them.
This is a conversation we could spend all day talking about this. The important thing to keep in mind is create your own investor profile questionnaire. Create your sample deals. At the different workshops we’ve done, we’ve given sample deals or investor questionnaires. I’m always amazed somebody sends those sample forms out and release my logo and my information on them, every class. What happens is I get a phone call from somebody, “I came across your sample deals. I came across your investor profile.” “What’s up to you?” “I’m not going to tell you because I don’t want to fund with them, I want to fund with you.” I’m like, “Awesome, thank you.” Somebody just did all the work for me. I wish I could send them a steak dinner.
Go out as you’re networking people, talk with people. Don’t be like a brand new puppy. Take it simple, relax, breathe and make it a multi-step approach, “Where are you from?” Inform them, talk with them, meet them for coffee, get on the phone with them, email out the investor questionnaire, ask them for the pledge letter, have a deal for them to put their money into. It’s not hard to do. It’s easy to do to make things happen.
That’s all that I have for this episode. Hopefully, this has been helpful for you; a lot of questions from people. If you like this feel free to share this. If you are listening on iTunes or Stitcher make sure to leave a review. We love reviews. We love to hear how we’re doing. If you’ve enjoyed the show, share it. We like to know what you like, what you dislike and what we can do better to make this show a better experience for everybody involved.
Have a great day. Go make some stuff happen. We look forward to seeing you all at the top.