Investors who want to buy a big deal but they can’t often goes for a syndication. The most important thing to be aware when investing in syndications is you need to be with the right team for that deal. Kathy Fettke of Real Worth Network learned that the experience and background of these kinds of investments is key. You can find the greatest deals, but without the right team, the investment might not turn out the way you want it to. Whatever you’re investing in, if you haven’t successfully done that before, make sure you bring in a partner who has experience in that kind of deal, because management of that asset is everything.

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Investing in Syndications with Kathy Fettke from Real Wealth Network

We’re back with our first speaker. The one, the only, the woman, the legend in California. Legend all across the country who’s got a big heart for helping a ton of real estate investors. Not only through what she teaches but also through her radio show, millions of downloads on the podcast. She’s the author of Retire Rich with Rentals as well too. We are excited to have us join in from Florida, the one, the only Kathy Fettke. Thanks for joining us as, Kathy. I know you’re busy. You’re getting ready to go to on an eight-day conference as well.

It’s a real estate cruise with the real estate guys. I’m speaking with Robert Kiyosaki, Kim Kiyosaki and a lot of big names there. It’s great.

You’ve got some great stuff to share with us on how to invest in syndications like a pro. I know a lot of people are looking to take things big. We had Sharon Lechter on as our keynote and that was one of her big things, about how she’s talking about and share with everybody to play big. I love what you’re going to be sharing with us.

We’re going to talk about how to invest in syndications like a pro and to also syndicate, and it’s important to understand both sides of it. We’re going to go over what syndication is and the types of deals. The deal structure, the offering documents you need. If you want to raise money from other people or if you want to invest in other people’s deals and how to join a project and what to expect afterwards if you are offering it or investing in it. Syndication is a group investment where a lot of investors come together to buy something bigger than they could do on their own. The key that we found for this over the many years we started in 2010 to syndicate. The most important thing to be aware of when investing in a syndication is the management. The background and experience of the lead person. It should be more than one lead because there needs to be a continuity plan if anything ever happened to that person in charge who’s going to run deal because somebody’s got to manage it. The experience of the manager, the partner is the most important thing. You can get and find the greatest deal in the world but if you don’t know how to manage it or take it to fruition, it can fail.

I’ve experienced that where we found an amazing opportunity in Oakland Hills, but the operator had not been experienced enough to know how to get through some of the curve balls that were thrown at us from the City of Oakland. The project ended up taking much longer and there were losses as a result of all the holding costs. A more experienced developer would’ve been able to get through it or see it before it happened. You can find the greatest deal, but without the right team, it may not turn out the way you want. If you’re syndicating, same thing. If you’re raising money from other investors, you have to understand that there are serious laws around that and you want to do it right. Let’s say you’ve found a great deal, but you’re not an expert. If you found an incredible apartment building, commercial building, a tape of single family homes or whatever you’re investing in, but you haven’t successfully done that over and over again. Make sure you bring in a partner who has because management of that asset is everything. Diversify risk, that’s one of the things that syndications help investors do.

At least at Real Wealth Network we’ve raised over $100 million now. I have lots of entities, lots of different companies that we formed and what we found is many of our investors will invest $50,000 in each one. They might be in ten different deals that we’ve done, but it’s significantly diversified because many of our deals are all around the country. We are currently raising for a development in Costa Rica, which helps diversify even further. Costa Rica is a unique, world class health resort but also a living community. For most of our investors who want to be in that, they liked the diversification outside of the US because some of the cracks that people are seeing in the system and possible currency wars and so forth, so getting your money out is not a bad idea these days. If you invest in a syndication, you have little control, if any. You might have voting rights, you might not. You need to read the documents to find out. Your complete and total trust has to be in that management and whoever’s running the syndication because they’re calling the shots. You do lose control in syndication versus owning a property outright.

It’s regulated by the Securities and Exchange Commission, which means if you’re raising money you better make sure you’re doing it right because you will be regulated. If you do it wrong there are serious penalties for that, which I didn’t know when I first started. The types of syndications out there, entitlement deals, we do a lot of those where we acquire raw land and entitle it for a specific use, commercial or residential, and then sell to builders because builders don’t like doing that entitlement process. It’s politically based. You have to get your local planning commission on board and we work with specialists on that, and then flip the property so we don’t take builder risk in a lot of cases. We entitle and sell for a massive profit. I’ll be talking about a few deals we did that were exciting, where we tied up a piece of property for $10 million, entitled it, and resold it for $20 million. Investors were really happy with that one.

We’ve had those same investors coming back year after year. That’s what’s great if you’re a syndicator, that money recycles because when you get through a project. On that one, we only raised $2 million but as soon as that was over, people wanted to reinvest their $2 million so you can keep offering deals when those deals come through. Diversified single family rental funds, we have one of those too we offer, and I know lots of other companies are doing that because there’s still such high cap rates in single family. A lot of people don’t want to own a bunch of single family homes, but they want the high cap rate. If you invest in a fund, you can get that and then not have to manage a bunch of properties. You let someone else do that for you. Then apartments, you see that all the time, companies acquiring apartments and you can invest as a shareholder or a member of that.

Entitlement deals, the investment strategy as a type of piece of land. I’m not big on land banking. I know that’s a thing, but it’s a waste because you got land but no income from it if it’s just sitting on the land. We’ve done it once because we bought a property worth $6 million. We bought it for $500,000 at the downturn. They were giving land away five years ago, so we bought it and now it’s worth about $9 million a few years later. It’s amazing. Sometimes land banking could work, but you got to get it super cheap. I don’t think you’re going to find much land super cheap these days, but back in 2010, 2011, it was like they were handing it out. You could tie up a piece of land and work with the regulatory bodies to approve the rezoning, the city planners. If you’re in a no growth area like Portland, that’s going to be hard to do. If you’re in an area like Reno where we’re building currently there, when we bought the land there it was easy to get entitlements. It took us months.

In Costa Rica, it took us a few months even though it’s normally a much longer process, so you need to understand the mood of the planning office and understand what they want. On that Dublin deal where we tied it up for $10 million and sold it for $20 million, we already knew what the city wanted, and we gave them that. We gave them residential housing near the BART Station, which is what they wanted. Sell it to a developer. Let them take the builder risk. We just sell the land. The nice thing about that entitlement project is if you sell it in one piece, you’ve entitled land and sell the whole thing. It is considered an investment and is capital gain treatment, which is great because that tends to be lower taxes. There are serious risks on entitlements. You have to understand the market to estimate a property’s worth and you got to deal with the city and that’s never easy.

We did a purchase and sale agreement, but it was more like an option where we only had to put down a down payment of one point $1.2 million on $10 million and we had a two year close and ability to extend it because that person who owned the commercial building that had been there, he didn’t have any idea with the city’s plans were. This is a real key in any development project. If you know what cities are planning to do and how they’re growing, revitalizing and investing in themselves, you can get ahead of that because a lot of the locals haven’t gone down to the city and found out what the plans are. We knew that they were going to completely redeveloping that area to the new downtown and they wanted this commercial area to be residential, but the current owner didn’t know that. We were able to negotiate a ridiculous deal of only having to put one point $1.2 million down over a two-year close, and in that time, we rezoned it and then sold off to the double closing. I thought we were going to get $14 million, got $20 million, so we only had to raise $1.5 million for that.

If you’re going to development, then you do take on that builder risk which can involve taking on loans. In today’s environment, I would say that is the biggest risk with anything is financing. We see interest rates going up. If you’re on a short term note of any kind and then that note comes due on say an apartment or something and the interest rates are going to be higher this year, next year or the year after. That’s going to affect your NOI and that’s going to affect the value of the property, and you may have to put more money in to refi or to sell you may have to take a loss. Financing is probably the biggest risk today on anything. On our land development projects, we raise all the money from our investors to purchase the land and develop. We’ll build some homes; sell those homes to finance the next round. We’re cautious about getting into any short-term financing on our syndications and that’s important for people to understand. We’re heading into a new environment of higher interest rates and that will have an impact as definitely on short term loans. There’s the Costa Rica one. We bought 800 acres of land for $4 million, got it entitled in, and we’re building it now. It’s going to be this cool resort there. That’s all living buildings. It’s beyond that zero, it gives back to the earth. Pretty world class and then our fund.

Let’s get to deal structure and if you’re looking to raise money, how you can structure it to make it attractive to others. You can do it as an equity partnership or a private loan. Scott, I know a lot of your investors or your audience is probably interested in notes. If you were investing, if you were trying to raise money to create a note or buy a note, it’s a little different than some of the ways we raised money. I’m going to talk about the way we raise it and then see how it applies to whatever you’re trying to do. With our deal structures, here’s what we’ve found over the years. There’s two ways investors can come in and lend you money and there’s two ways you can invest. I’m sure there are many more ways. This is how we do it. You can come in as an equity partner, which means that you’re a partner in the deal or you can come in as a lender, come and be buying a portion of a note. There’s different ways that these are taxed. It’s important for the syndicator to understand that because we want super happy investors. We want investors who are not going to end up with a surprise tax bill where they thought they were going to get 36%IRR and then find out they’re getting taxed at 50% in their IRA on that. They might be upset if they didn’t know that in advance.

You want to understand how your investor is going to be taxed in your syndication deal or how you’re going to get taxed in someone else’s deal. If you come in as an equity partner, it’s the same thing. If you were going to buy a house with somebody else, you guys might say, “We’re going to split this 50/50, we both get 50%of the equity or 60/40 or whatever.” It’s the same with a big syndication. If we’re going to buy $10 million worth of land, we’ll work out a deal 50/50 with the developer. We get 50% however it is, is there’s different percentages. If you were to go in with somebody else and buy a house, if that house, you improve it, do a fix up of some kind, and then there’s value added, then you share that equity. You split the equity.

Let’s say the market turns or you find out there’s mold or things you didn’t expect, and it costs more and there is no equity. It ends up, let’s say you bought a house for $100,000, you put $20,000 in, you thought you were going to sell it for $150,000 and split the equity gain, but that didn’t happen, and you sold it for $90,000 whatever. It didn’t work. You put all his money and that’s loss. The equity partners can either gain a lot or lose it. There’s no guarantee and that’s what you have to know when you’re going into an investment or bringing in investors. How do you want to structure it? If they’re coming in as equity owners, partners with you, they need to understand the risks they face. You could hit your target and then split all the profits, or you could not, and nobody gets anything. If there are losses, the money’s gone. Whereas if you come in as a private lender, especially if you’re secured, if you are lending money, then you get paid out first no matter what.

Using the house metaphor, if two people come in together, they do a deal and they buy a house together. They buy that $100,000 house and they get $80,000 note from the bank. Let’s say the property was able to sell for $150,000 and there’s $30,000 profit split between the two. The banks still get their $80,000 loan back and the investors get their equity split. If the opposite happens and there are losses. Let’s say you bought that property for $100,000 and end up having to sell it for $90,000, the bank still gets their $80,000, no matter what. If the property sells for $70,000, then we have a problem because there’s not enough money to pay the loan off and then you’ve got to look at the deal to see what you do then. If you invest in a syndication or raise money from others and take it as a note, then they get priority over the equity investors. We structure it both ways on our deals as often as we can so that our investors have the choice. Do they want to roll the dice and be an equity investor, which means that if there are big profits they make big returns, but they don’t know what those returns are going to be? They have to look at the business plan and see if they like it, but they have to understand there could be losses. We offer pretty high returns for those equity investors because we understand the risk. We don’t like taking big risks, so our risk is still pretty low risk.

The Costa Rica deal, for example. The return is expected to be around 30%IRR. If we don’t hit that mark and it’s 15% or something, that’s still good but it could be more. In a year from now when we built the homes, what they’re going to sell for? We have an idea, but you never know until it’s done. We’re also bringing in investors who don’t want that risk at all, they want to lend to the company. That’s fine. We set up a separate entity for that and they lend and they get their money out first and it’s secured. They get their money before there’s any profit split before the developer gets paid or anything like that. We offer less for the private lenders. They get 15%. It’s still good. On the Costa Rica one, it’s plus 3%, so they get 18% interest annualized and they get paid out first, but that’s still half of what the equity. The equity investors are targeting around 30%.Private lending more secure, a little bit lower return, still good though. An equity partnership is not secured, but chance of higher returns. When we structure these, there’s another factor too, the taxes. On the equity side, that’s usually treated especially mainly when we’re building houses. That’s ordinary income tax. These investors might say, “I’m making 30% but I might have to pay 50% of that in taxes,” so then they might consider the private loan. That may be taxed differently for them.

For sure, in an IRA it’s completely taxed differently and that’s what we mostly have. If you’re raising money today, we’re looking to raise money. It’s important to understand that there’s about $23 trillion in retirement accounts and that’s a ton of money. If you want to tap into self-directed IRA investors who want to get their money out of Wall Street, has been turbulent. People want something secure. They love notes. Notes are about as passive income as you can get, then we put our self-directed IRA investors into the note side, into the private loan on our deals partly because it is secure and because you can guess what your return will be, but also because it’s taxed differently. It’s such a passive investment that it does not trigger UBIT within the IRA in most cases. Whereas a self-directed IRA investor who would come in on our equity side may get taxed within their IRA, and then taxed again when they take their money out of their IRA, it’s like a double taxation. They need to know about that. If an IRA investor came in and said, “Do I want the equity partnership or the private loan?”They would have to understand that if they’re in a certain tax bracket and they need to talk to their CPA, that 30% return might be 15% in their IRA. Whereas the private loan pays 18% and does not get taxed that UBIT, and they might choose the private loan which in this case would pay out more.

Most RW syndications are either equity partnerships with private lending. Investors become a member of that LLC and the LLC partners with the developer. Here are a few terms to know in syndications. The capital stack is basically the priority of payout. If you go to the bottom, the highest priority in the stack is a secured debt. They get paid first, like a bank. If you sell your house, the bank gets their loan paid back first and you get the remaining equity. We sometimes will take unsecured debt, corporate debt, and that comes next after the secure debt gets paid off. The preferred equity partners, you get a preferred return and that is preferred equity, so they get paid next after the debt investors, and then all other equity investors that come after that.

On our deal, that’s the developer, that’s the upper management, that’s Real Wealth Network and myself. We get paid last and we structure it that way so that the investors come first. First and foremost, when you’re raising money, you want happy investors and you need to put their needs first before yours, and they get paid out first. We get the leftovers, and this motivates us because if we have investors coming in as lenders, we’re paying interest on that money. If the project is delayed or takes longer, those investors still get their money. The people who pay the price are the management. It comes out in their profit. That helps us make sure that the managers we partner with, the developers who we partner with and the operators that they are moving quickly and sticking to the business plan. If they don’t, it comes out of their pocket and not the investors.

Sometimes there are different layers of entities and it can be confusing. You need to understand the capital structure or the entity structure of any deal that you invest in or that you create. On our Reno project where we’re building there, we have one single entity and in it there are Class A and class B investors. That’s it. One entity, it’s Bates Stringer Reno, LLC. We noticed that, I just say that A and B investors, and it would be usually the developer, manager or Real Wealth Network would be the Class A and then class B or vice versa would be the investor group and that’s how you decide the capital stack on that. In our other ones like Costa Rica, there are layers and layers of entities and you need to understand that flow to understand how the money’s coming down.

In the same way that you have to understand the capital stack. In Costa Rica, the only way that we can buy and own property in that country is to have a Costa Rican corporation. For tax purposes, we wanted to make sure that what our investors we’re investing in was a US corporation. We created a US corporation that bought all the shares of the Costa Rican corporation and then there were several investor groups who bought from that US corporation, Real Wealth Network being one of them, and then the developer put his money in and then he had family and friends who wanted to be in. Then there were three groups coming in to that one. We need to understand the flow from the Costa Rican entity to the US to ours.

For RWN investors, it says we get 40% of the profit, but what? Which entity? You need to be able to see the operating agreement of all the entities in which you’re investing and that’s complicated, but it’s important to understand because otherwise it can be confusing. Plus, when Real Wealth Network, let’s say we opened this entity that invested in the Costa Rica one, but we have fees to pay. We have attorneys and CPAs, we have our staff, and there are management fees. When this entity that we created gets 40% of profits, the investors don’t walk away with 40% of profits. Some of that’s shaved away by the management fees that we have. Know that when you’re investing or taking money from others, secure debt investor. Secured debt is the least risky. Unsecured debt is next in line.

Offering documents. If you’re raising money, you have got to have proper documents approved by an attorney that your investors read and sign. If you do not have these and you take their money, you are violating SEC law. You don’t want to do that. Plus, like any agreement, if it’s not in writing, you’re going to forget, and your investors are going to forget what the deal is. I know this sounds obvious, but I’ve seen it happen and I’m guilty of it. With one of my first deals where we made a handshake agreement but didn’t write it down, and when that property made a bunch of money, there were discussions. The other party forgot the deal basically and could have taken our portion because we didn’t write it down even though I thought we were friends and we had a handshake agreement.

I didn’t even bother to send an email to confirm it. Don’t do that. You need to have the correct offering documents that explains who’s in charge, who calls the shots, what to do if something happens to that person, when the payout is, how it’s split, who gets paid first. All of that stuff has to be ironed out in the offering documents in order to comply with the SEC. Know that anytime you are taking someone else’s money and you’re investing it, they’re not an active player and they’re not active in management, it falls under SEC. You’ve got to make sure that you are raising money properly because there’s many penalties if you don’t do it right. When you listen to a presentation or give a presentation, that’s supposed to help explain the deal, but it doesn’t matter. What matters is the document. What’s written in the document is the law.

It’s the legal agreement and you need to understand it and they’re legally worded, so it can be hard to read. That’s why Real Wealth Network put on a lot of seminars and webinars like this to help people understand how to read those documents and make sure that they’re signing up for what they truly think that they’re signing up for. We also recommend always go bring these documents to your attorney and your CPA to make sure you truly understand the risk, that you understand what you’re agreeing to and the tax consequences of that. Offering documents, legally binding paperwork that outlines the terms of the deal. Even if you have a handshake agreement, if that agreement is not in that operating agreement or legal binding document, then it doesn’t matter what your handshake agreement was. It matters what’s in writing and a wet signature is what makes it legal.

Most RWN deals at our company include a private placement memorandum and an operating agreement for the LLC, and a subscription agreement. The private placement memorandum, the PPM, is the legal document that states the objectives, risks and term of the investment. These are the most important things to have in there. It includes items such as the company’s financial statements, management bios, a detailed description of the business plan and operations and all the details. The operating agreement, this is for the company that you form or that you’re investing in. It’s the document that customizes the terms of the company according to the needs of the owners. It outlines the financial and functional decision making in a structured manner.

There’s no confusion when it’s time to disburse the funds or a memory loss. The document once signed by each member acts as a binding set of roles to adhere to and it’s a drafted to allow owners to govern the internal operation according to their rules and specifications. Subscription agreement, this is where the person investing in your deal or if you’re investing, you’d fill out the subscription agreement because you have to apply to invest in this syndication. You have to explain your ability to invest. The SEC only wants accredited investors to invest in syndications and private placements. They let the general public investment in public companies and you don’t have to be accredited. In private placements, the SEC thinks that private companies are not as solid as public ones, which is definitely not true because 75% of last year’s IPOs were in the negative.

They’ve never been a profit, so I don’t agree that public companies are safer. If anything, they’re not, but that’s the way the SEC sees it. They think, “If you’re going to do a private deal, raise money for your private company. You can only raise it from accredited investors,” but then they do give some exceptions. In some deals you can have 35 non-accredited, and that’s what will be explained in the subscription agreement. The investor talks about their financial background, their ability to invest, their understanding of this syndication, that they have the ability to truly understand what they’re doing and they’re not taking the little old lady’s money next door. You fill out that subscription agreement and then the management reviews it and makes sure that this person is eligible to be in your deal. We’ve found at Real Wealth Network that the less amount of money that someone invests, the more panic they are. If it’s like their last dollar, they’re the ones who are emailing you every day.

Are you saying that they’re a PITA, a Pain In The Ass?

I’m saying that they’re scared because if they’re putting in their last dollar, and you don’t know that, that’s a little too risky. What we suggest is only investing 10% of their net worth and that way they’ll be more comfortable. In the beginning we didn’t know to look at that and we found some people literally would invest $50,000 and that was all they had. That’s cause for concern. They would be nervous about every little thing and face it, not every project goes as planned. I don’t know if it ever hasn’t gone as planned for us. There’s always got a monkey wrench. There’s always something that you have to work around. Accredited investors who have more to lose, at least as I’m thinking of the SEC, don’t stress out as much about it. That’s also why we like to have people put a little bit of money in a lot of deals so that they’re diversified.

The difference between accredited and sophisticated. Accredited investor, at least defined by the SEC, is someone whose annual income is $200,000 for an individual for the last two years. $300,000 if they’re married for the last two years. They would need to have earned that or it’s any of these or has a net worth over $1 million excluding the primary residence. Net worth would mean liabilities versus assets. It’s not just, “I got a $1 million in the bank.” You can’t send me a bank statement showing a $1 million in the bank because what if you have $2 million in liabilities, then your net worth is not $1 million. There’s a whole process in determining if you’re an accredited investor or not. As the syndicator, as the person raising the money, you do need to have a pretty good idea of the net worth of the people investing.

At the end of the day, if you take money from somebody who doesn’t have a lot of money and they asked for their money back, even though all the operating agreement and everything says you can’t get your money back, we bought this property with it, it’s tied up, it’s a five-year investment, whatever it is. If that person put their last dollar in, there’s a good chance they can argue to get it back if they can show distress. You need to be aware of that and have a reserve fund or make sure that the people investing in your deals can afford to not have that money during the term that you’re investing in, or if things went sideways that they will be okay. That’s the definition of an accredited investor. A sophisticated investor.

Some deals you’re allowed to bring in 35 non-accredited investors, then they would be considered sophisticated. This is a gray area with the SEC. There’s not a real definition for what that means, but the typical definition or the technical is a type of investor who is deemed to have efficient investing experience and knowledge to be able to weigh the risks and marriage of an investment. Our attorney suggested these parameters. It’s totally gray. It’s up to you but they suggest an annual income of $150,000 for an individual or $200,000 for a couple, or a net worth exceeding $350,000. Here’s what will determine who you can bring into your deals or if you can invest in certain deals.

Some projects are open to accredited investors and some are open to accredited and 35 non-accredited. What’s the difference and why? Sometimes like our Costa Rica deal, we can only take accredited and some people are upset about that because they want to participate. Whereas our Reno deal, we are allowed to bring in some non-accredited. This is the simple overview of it. 506(b), these are Reg D exemptions from the SEC, which means you don’t have to file enormous amounts of paperwork and do what public companies have to do. You could file this Reg D exemption, which means you do very limited paperwork with the SEC when you file the Reg D. There are several kinds, but these are the two we’re going to look at.

Under the Reg D, there’s Rule 506(c) and there’s 506(b).A Rule 506(b) is open to mostly accredited investors, but you can also have the 35 sophisticated investors. We have such a large network at Real Wealth Network that we can use this Rule 506(b).What I mean by ‘we have a large network’ is that we can only present deals to people that we already know. I can’t talk about it on my podcast. I can’t on The Real Wealth Show or Real Estate News, in our webinars or on a forum like this. I can’t talk about specific deals. We’ve got amazing deals I’d love to tell you about, but I can’t because I don’t know some of the audience. With a 506(b), you could only tell people about these deals. You can only tell people that you already know and have a preexisting relationship. On top of that, in that preexisting relationship, you have a good idea of their financial situation. That’s what the SEC wants, that you reach out for the friends and family type thing. Friends and family and Real Wealth Network is 36,000 people. We have a huge network.

We have to prove that we know these people that we’ve talked to them, that we’ve met them, and that we’ve got a good idea of their financial situation. We’ve had them in our database. We have a pretty good idea of their net worth and the amount of money they have to spend, what they do for a living. We have a great and sophisticated database to keep all those details, but if you were ever audited, you’d have to be able to prove, “Yes, I met this person on this day. This is when they joined our network, they came to this event. This was when we called them.” You’ve got that track record to prove that you have a pre-existing relationship. That preexisting relationship couldn’t happen an hour ago. I’m at this conference right now and I met a bunch of people. I can’t now an hour later to tell them about my deal. It doesn’t work that way.

Some people say at least a few days; some people say a few weeks. There’s no real answer on this. Some people are three months or six months. Some company syndicators will say you need to show three or four touchpoints. That again, you’ve emailed, talk to, met, these different things. They filled out a questionnaire. To be super safe, we like to make sure that we have been warmed up to whoever the person is for at least a week, but it should be more like a month, maybe two months that you’ve known the person you’re presenting to and when you’ve done that. Then when they subscribe and they fill out the subscription agreement, when they apply to do your deal with you, all they have to do is fill out a form and they tell you, they write down their financial information and if they’re accredited they self-accredit. They sign it there. There doesn’t have to be a third party. That’s what makes the 506(b) easier. You have to have a fairly large network to do it. You need to be able to know a lot of people, but if you do then the paperwork is a lot easier. Plus, you get to allow those 35 non-accredited investors. At Real Wealth Network, some of our deals are juicy, they’re so amazing. I don’t mean to be bragging, but at this point we’ve got many great developers and operators coming to us with fantastic deals that are non-accredited investors get upset if we don’t file 506(b) because they want to participate.

There are some deals that we do file as a 506(c) that is a new exemption that came out in 2012, through the JOBS act. It’s the Jumpstart Our Businesses through Obama, that act of 2012 where the new crowdfunding rules came in. It’s easy to remember Rule 506(c), think crowdfunding. This is why you see all these crowdfunding portals everywhere because in 2012 the JOBS act for the first time in the history of the SEC, private companies are allowed to go public with their deal. They’re allowed to bring in money from people they don’t know, and they’re allowed to advertise it. That’s why I can talk to you about Costa Rica because we filed it as a 506(c). I wouldn’t be able to talk about it we filed it as a 506(b). You might be wondering why did we file Costa Rica as a crowdfunding deal and our others not? The thing about the Costa Rica project is it’s such an interesting project. We’re building a state of the art retreat center, a think tank community with a school on it. We’re growing organic foods, exporting it. We planted 10,000 trees. We have Jason McLennan, who did the design for living buildings, which means that everything, all the materials are living and breathing, and they give back to the earth. There are no toxins. It’s a world class property with a world class brand. It’s Rise Costa Rica, and because of that I wanted to talk about it. I had several national magazines who wanted to interview me about this project because of some of the superstar players involved in it. I wanted to be able to do those magazine articles and I wanted to talk about it on my show.

I had to go to our non-accredited investors and apologize and say, “I’m sorry you can’t be in this deal, but there’ll be other deals for you.” We filed it as a 506(c), and the rules on that are that you can talk about it, you can present it to people you don’t know, you can advertise it, but you have to prove by a third party that the investors are indeed accredited. They can’t self-accredit. They can’t fill out a form and turn it in. They have to get their CPA, their financial planner, their attorney or they can go to VerifyInvestor.com and fill out all the forms there and get a third-party verification that they are indeed accredited. Only then can they invest in your 506(c).It’s a big pain, to be honest with you. It’s pain for us as a syndicator. It’s a pain for the investor because they have to go do that unless they have a great team that’s happy to write that letter for them, which a lot of our investors who are high net worth have that legal team that is like, “We know your net worth.” They write the letter but it can be a bit of a hassle, but it is how it is. You just have to prove that you are accredited and that’s it. That’s the only difference.

How you join a project or how you get other people to join your project? You get all those operating agreements and offering documents in place. You give them to people. Make sure that if you’re doing the offering, that when people turn in their paperwork that you have it turned in a secure way. With internet fraud happening, if you are the company that didn’t have a secure way for people to get their financial information to you, there could be huge lawsuits there for you and you don’t want that. Never ever have people send their financial information through an email. No, don’t. It’s not good. We do it through a private server that people can upload their documents in like your CPA should be doing with you. Your CPA should never be emailing you any tax documentation ever.

There’s much fraud out there. Make sure that if you have offering documents and people are sending these accredited investor forums or any financial information that it is on a private server or on a private, we use box. It keeps it secure. You review all the documents, discuss it with your attorney, for the person filling it out, they have to decide how they’re holding this investment. If it’s in a personal name, is it an LLC or a trust or a self-directed IRA. There are rules around that. Some IRA companies will want to be the ones who fill out that subscription agreement while others say, “No, you have to fill it out.” It’s a strange thing, but your IRA custodian would know how they do it. Fill out the subscription agreement based on how you want to hold it, and then you submit it through that secure way.

The way we do it, it’s pretty simple. You have to send your W9, your photo ID, third party verification, signed operating agreement and you upload there on our little widget that goes up inbox. We do it all in house. If you’re the syndicator and you’re raising the money, you can hire companies like WealthForge. There’s another one that will act as a broker dealer and will take care of this paperwork for you if you want. There’s a pretty hefty fee for that. We do it in-house. This is our team. It’s so busy. We did 1,100 K-1’s last month. Whatever projects we’re in, it was completely overwhelming.

You’ve got a lot of fees, somewhere between 6% and 10%, something like that.

We found that we prefer doing it in-house. That way when our investors call and have questions, we’re not using a third party. We have our own team that understands it, but if you’re not there yet, it’s probably worth it to either use a crowdfunding portal or WealthForge or something like that initially while you’re getting it done. If you have a great project and you want funding for it, you can come to Real Wealth Network. We’ll take a look at it and see if we can fund it for you. If you’re the operator, the syndicator, then after the investment’s been raised, you’ve got to do quarterly updates. That is important.

Even more frequently, the more you communicate with your investors, the better without totally bogging them down. They don’t have to know every detail, but we post it all. We have a page for each project that we’re doing, and it’s got all the updates there and all the details. If they want to know day by day what’s happening, they can go log in. We’re not going to send them emails every day, we send them emails for the quarterly updates. If you’re offering this syndication, you get to do those K-1’s. It’s awesome. Our CPAs do all the taxes but we individually send the K-1’s out because we have the investors’ information and that was pretty overwhelming. They need to come out by the end of March and some companies new to this don’t realize that and end up with a lot of angry investors who didn’t get their K-1’s.That’s pretty much what I was going to share.

We’ve got a few questions from some people on here. Kathy, definitely great presentation, walking them through everything. We have a question, “For 506(b) deals, does there have to be a ratio of a credit to sophisticated investors? For example, would it be okay to have one accredited and 35 sophisticated investors?”

That has never come up before for us and I don’t think so, but I would definitely talk to your attorney. That is something I have not been told. What’s been surprising that we’re located in the San Francisco Bay area, so $200,000 income is the only way you can live there and survive there. Most of our investors are accredited. We haven’t had the problem we’re shocked. We thought we’d have more non-accredited, but we don’t. I would definitely ask that question to your attorney and I will certainly ask mine.

Another question, “Do Reg D exemptions apply for smaller amounts of money raised, say $25,000, or is it no matter how much money is raised?”

Attorneys are expensive and this process of filing with the SEC can be expensive if you take money from different states. We sometimes have people from ten different states and you have to file in their state. We got a bill for $10,000for filing a Blue Sky Law. To comply with Blue Sky Laws, taking investor money from different states from where the project is, it was $10,000 in fees. To raise money for a $25,000 deal, I would not syndicate because it’s expensive to get your documentation, open up the LLC and do the taxes and everything. I would probably work out a JV agreement or something, some other way of structuring it that isn’t as expensive.

Just doing a JV deal or we got Jillian Sidoti on, are you familiar with Jillian?

Yes.

Individual JV deals or something like that. That’s what I would recommend because we’ve got a 506(a) in the process of being filed. It’s expensive. I wish it was $25,000 in fees.

It’s probably closer to $50,000, right?

We’re beyond that.

I use a high-end attorney. I don’t know why he’s too expensive, but even for our regular deals. We pay $50,000 to $75,000 for our offering documents alone, but that’s for $10 million and $15 million more raises. There’s one crowdfunding thing I didn’t mention and that is title three, I think it is. You can talk to Jillian about it and that you can you could take non-accredited money and you can only raise up to a million, but it’s still expensive to put together. I would definitely have Jillian talk a little bit about how to do JV deals that don’t require so much legal.

We got her going about though that’s a good thing. We have a question, “What if someone reaches out to me, asking me to place their money into deals? The whole funding. Do these rules apply?”

They do. It’s SEC. Anytime you take somebody’s money passively. I’m guessing what Jillian’s going to say on the JV thing is let’s say, you’re raising $25,000 and a friend or family member wants to invest the $25,000 from their IRA. You bring them in as a partner. Have them do something active it looks as like it can’t be totally passive.

Have them do the due diligence. Have them look through it there with you. Share what’s going on. Get them involved in questions. That’s the kind of thing that is helpful because it’s documentable. You guys do a great job of being able to track their systems. Track when you email people, track when you talk to them, track when they came into your arena or into your system basically.

You don’t have to spend a lot of money. You can even have contact records. Contact management system that will track that. Any time when somebody joins, they come to our website, they fill out the form, it goes straight into our contact management system as this is the date they came in. When they click on a webinar it automatically goes in where they watched this and then we have a customer service person who calls them immediately as soon as they join and has a conversation to ask questions. That’s all documented and then the key is we want them to come to live events because then we can say, “Yes, we’ve met as well.”

You also probably have a pretty in-depth investor profile sheet that you have them fill out too?

When they join we ask them questions and then that goes in and that helps us to understand their net worth and so forth.

“Can someone set up a syndication and then invest in notes with the fund?” Yes, you can definitely do that. We have another question, “Some mutual funds cap the fund. You have a cap since you may not have enough deals to put the money to work. You’re saying that you cap the fund like a $25 million or $50 million.”

There’s a difference between a blind pool fund and, and what we do. You need to be super careful with the blind pool ones. Let’s say I said to you, “I’m super good at finding single family homes. We have networks across the country,” which we do. We do have now that I think about the blind pool fund. If you know me, you know that I’m an expert in single family rental property and so I might say, “I’m going to raise $10 million,” which is what we did. “We’re going to pick out the properties for you, but right now I don’t know what those properties are because I need your money first. We have to raise the money first and then we’re going to go buy those properties. I can tell you they’re going to reach these parameters. This is what we’re looking for. We’re looking for a 10% or 12% return and we want this much equity in the deal or whatever. Then that’s what we’ll go out and buy,” but you don’t know yet what we’ve bought. That’s the blind pool. That’d be a great Jillian question of what the max is, but I don’t know if there is one. If it is, it’s super high. Do you know Scott?

It varies a little bit. I don’t think I’ve done some bigger stuff. I’ve also done some smaller stuff too.

It’s probably like $50 million.

I want to say $50 million for the most part. We’ve got some buddies that have done $100 million fund that they BK Chapter 13’s with but that’s a specific asset they have at class and it’s not true blind. That’s why it comes down to the specifics of the operative agreement. You outline what you are chasing.

If you don’t know what the asset is, if it’s, “We’re raising money, we’re going to do this,” make sure it is specific that they’re not like, “We decided to buy this apartment instead of the commercial building,” and you didn’t want to be in apartments or whatever. Make sure that’s so specific. Like in ours we say, “Fully renovated rental properties and growth mortgage.” It’s so clear what people are getting and we totally hit the mark, we exceeded it. Most of our projects and syndications are not playing pools like that. They’re an asset that we know we’re buying. Like the Reno one it’s, “We’re raising $16 million. We’re buying this piece of property. We’re entitling it, building, were selling half the lots off so that we own the rest of the land that we’re developing free and clear.

It was a great deal, by the way. You’re going to be safe in here because we’re going to have a zero basis on this because we’ve sold half the lots to someone else to pay us back the $13 million that everybody invested. This is the return.” You know what you’re getting. It’s a one asset deal syndication and that’s why at Real Wealth Network we have twenty companies. Each deal that we do like that we have to set up a new company, a new LLC and it’s in this project. If we’d taken all ten projects and put them into one fund, there’s no way we could have possibly known what we were going to buy and that’s the blind pool. They’re riskier, but if I were investing in a blind pool, I would make sure I knew exactly. You want to make sure that there’s a closed date because that’s when the Ponzi scheme thing happens. The Ponzi idea is you’ve got this investor money and you bring in new investors to pay them off. You want to make sure if you’re investing and applying a blind pool, that there is an end date from when money can come in.

Most of those are usually 24, 36 months?

Something like that. Even that to me is long. It gives that operator a little too much time to Ponzi things around.

We have a question, “Are there capital calls or do you get all funds invested prior to the deal?”

It depends on the deal. I don’t like capital calls, but you need it in the documentation in the event that that’s the only way it goes. When we’ve had capital calls, we have made the developer come in with the money or we’ve had a side agreement where we can have other investors come in. Those investors, their share would come out on the developer’s side. Personally, happy investors mean you stay in business. If you have to do a capital call, they don’t like that. There are certainly lots of companies that have been. We have to have it in the documentation, but we don’t do it.

What are you speaking on at the event you’re at? You speaking on a similar topic?

It’s The Real Estate Guys, it’s all about The Future of Money. I heard Simon Black speak and Russell Gray. There are definitely some cracks in the armor of the US economy people don’t want to talk about. It’s mostly debt related and trade wars. It’s very concerning. I walked in here feeling a little depressed honestly, because we haven’t gotten to the opportunity yet. We got to the problem. I want to let you know that that’s why at Real Wealth Network we are cautious. We have one foot on the gas and one on the brake at all times because the economy could go either which way. We could be in for a massive recession if this trade war leads to out of control interest rates, which is possible.

We’re at a turning point where if you’re raising money or investing in deals, you have to be careful that either scenario we could have a boom, we could have a bust. Are you going to be okay? It doesn’t matter if you lose investor money based on things out of your control. It doesn’t matter. I know a guy who had a big fund and private notes. He was in Atlanta. His father-in-law invested $5 million in his fund. When the market collapsed in 2008 and investors lost everything, including his father-in-law, they didn’t go, “It was a messy time. Everybody lost money.” They sued him, and he lost everything, even though it was out of his control. You have to be aware. That’s why I do so much research on the global economy and the national economy because I’m responsible for over $100 million worth of investor funds that if things happen out of my control, they’re still coming after me. It’s how it is.

When we do things like our Reno deal, we bought land, entitled it, and we knew we could sell half of it for the same price that we paid for all of it. Now what we have left is land that we own free and clear that we’re developing. If all hell breaks loose, we’re okay. We don’t have debt. It’s fine. When we raise money for our next project, which we’re raising for right now, it’s all cash. We’re going to ride it through on our single-family rental fund. Those are cash flow properties that we got from very cheap and are high cash flow and growing markets and we feel that they can survive a downturn. You’ve got to be cautious. Do not jump into something you don’t totally understand or don’t think that the economy is nothing but solid. There are some serious issues that we have to deal with that could affect all of us in a serious way and it’s these trade wars. It’s terrifying.

“If one uses a self-directed IRA, needs annual valuation, what is provided to an investor by syndication aid in that process?”

For reevaluation of the value of the property?

The IRA companies have to provide an annual statement of the value of them.

You could go as far as getting a valuation and paying for that or having enough evidence of what you think it’s worth. You have to turn something in that’s legit. It could be some kind of audit, somebody official, a BPO of some kind. Some valuation has to be considered. We will look at our K-1’s and use that information but even that is not enough sometimes for IRA companies. They want something else, something more from professional, like with our Costa Rica project. All we’ve done is we bought it for $4 million and we entitled it. We got an appraisal on the land, which was $5.5 million or something. We also invested another million in this upscale glamping. With that million dollars, even though it wasn’t on the appraisal cycle, the appraisal for the land came in at $5.5 million, but we invested this million, so it’s $6.5 million or $7 million and you have to justify that and somehow officially.

“In a blind pool, how do the investors ensure that funds aren’t being used without there being told or on the side, to speak?”

It’s a huge risk. In my twenty years’ experience, this is a more shark-infested world than where I surf in Malibu, which is right by a shark breeding area. There are many people who don’t care about you or your money and they’re selfish. It’s a big risk. I am cautious of blind pools. I would be careful of them and the only way I would ever invest in one myself personally would be if it was required to have an annual audit by a third party. That’s the only way I would do it because it’s too easy.

You don’t want the guys showing up in a Lamborghini after the deal gets funded.

These two people in Orange County who were high level, well-known, well-respected real estate investment group, they got caught embezzling millions. They were friends and it’s crazy. Be careful.

The thing I always tell people is if you’re doing what you’re doing, you don’t need to have Lamborghini’s or the private jet or that stuff like. Don’t get me wrong, it’s nice we’ve done it for years. If somebody is doing that, those are expensive habits to have that have to be fed. That’s usually the first smell test if something’s going wrong.

You need to know where that money’s being spent. One of the syndications that we did earlier, we were looking at what the manager was spending money on. One time, it looked like the rental car fees were too high and this is how detailed we get on our books. It turns out he was renting a pretty fancy car when he went to visit the site and we’re like, “No, that’s investor money. You spend money doing things like that with your own dime, but not with investor money.”You’ve got to separate the two and never co-mingle. I walk into Bank of America now and they bow to me because I have many accounts. You have to have a different account for every deal, every syndication. No co-mingling, it has to all be separate.

What news sources other than the mainstream sources do you recommend to keep a pulse in the world? Economic News?

I’m looking at alternative news for the most part. I can tell you this event I’m at right now is phenomenal. Simon Black is here. Chris Martenson. These are names I would definitely look into. Robert Kiyosaki, Peter Schiff, people who aren’t buying the mainstream news. Simon Black went over our operating budget for the US and we’re negative $3 trillion is on the US website. Our operating expenses in a good market and a booming economy when everybody thinks everything’s great, or a net loss of $1 trillion every year. How is that? What happens if we go into a recession? This is during good times. You got to get your news from the right sources. Right now, people are being misled, thinking that everything’s fine. We profited in the recession. Our investors made 20% returns in the worst of the recession. You can use it to your advantage. You can make money in any market, but not if you’re blindsided and not if you’re making the wrong decisions at the wrong time.

A lot of money on the down market by buying distressed debt. Kathy, I want to say thank you again for joining us. As always, great to have you. I know you’ve got a busy schedule. Have Fun. Be safe out there and we’ll see you when we see you.

Thank you.

Thanks.

Important Links

• Retire Rich with Rentals
• Kathy Fettke
• Robert Kiyosaki
• Kim Kiyosaki
• Sharon Lechter’s Note CAMP 5.0 episode
• Real Wealth Network
• Bates Stringer
• The Real Wealth Show
• Real Estate News
• Jason McLennan
• Rise Costa Rica
• VerifyInvestor.com
• WealthForge
• Jillian Sidoti
• The Real Estate Guys
•  The Future of Money
•  Simon Black
• Russell Gray
• Chris Martenson
• Peter Schiff

• Here’s How »

• WeCloseNotes.com
• Scott Carson Facebook
• Scott Carson Twitter
• Scott Carson LinkedIn
• We Close Notes YouTube
• We Close Notes Vimeo
• Scott Carson Instagram
• We Close Notes Pinterest

About Kathy Fettke

Kathy Fettke is Co-CEO of Real Wealth Network and best selling author of Retire Rich with Rentals. She is an active real estate investor, licensed real estate agent, and former mortgage broker, specializing in helping people build multi-million dollar real estate portfolios that generate passive monthly cash flow for life.

With a passion for researching real estate market cycles, Kathy is a frequent guest expert on CNN, CNBC, Fox, Bloomberg, NPR, CBS MarketWatch and the Wall Street Journal. She was also named among the “Top 100 Most Intriguing Entrepreneurs” by Goldman Sachs two years in a row.

Kathy hosts two podcasts, The Real Wealth Show and Real Estate News for Investors — both top ten podcasts on iTunes with listeners in 27 different countries. Her company, Real Wealth Network, offers free resources and cutting edge education for beginning and experienced real estate investors. Kathy is passionate about teaching others how to create “real wealth,” which she defines as having both the time and the money to live life on your terms.