Relationships are key in making syndication investing work. In this episode of the Note Closers Show, Scott talks with real estate investor Jim Pfeifer about finding quality investments through syndications. Jim also shares his biggest failures and why he chose to be a passive investor instead of an active investor. Jim Pfeifer is one of the founders of Left Field Investors, a group dedicated to educating and assisting like-minded investors negotiate the nuances of the passive investing landscape and world of syndications. Jim believes the most important factor in a successful syndication is finding a sponsor that he knows, likes and trusts. Join in and learn how to make syndication investing work with Jim and Scott!
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EP 684 – How To Make Syndication Investing Work: Success Tips With Jim Pfeifer
This is Jim from Left Field Investors. In this episode, Scott and I talk about passive investing, syndications and the value of community.
I’ve got a very special guest joining us on here out of Left Field. You’ll understand that here in a second, but he’s an amazing guy. He’s a former financial advisor. You’ll read me pick his brain about that. Before being a financial advisor, he became frustrated with the path that most financial advisors take and the one path fits all approach to the standard financial services industry.
He now concentrates on investing in real estate assets that produce cashflow and is committed to sharing his knowledge with others who are interested in learning a different way to grow wealth. We’re honored to have our buddy, Jim Pfeifer, joining us on the show. As an ex-financial advisor, I always find it interesting talking to other financial advisors or past financial advisors, how they, I hate to say this, got rid of the brainwashing that happens in a lot of banks, institutions and saw the lights. Did somebody show up with two pills? I take the red one.
I’ve been a stock market mutual fund guy, stocks and all that for many years. When I got into financial advising, it was my third career. I learned a lot about money that I thought I understood before, but I didn’t. At the same time, I’d become an accidental landlord. We had built a house and couldn’t sell our old one. It was in 2008. We ended up renting it out. The combination of getting educated at my financial advising job, they did a great job of training and they’re teaching us about how money works. I was doing this real estate on the side and it all clicked.
I thought, “I understand what you’re teaching me about financial products and finance, but it’s all pointing away from the products we’re selling.” I had a little bit of a conflict there because I always prided myself and I was not going to put someone in a financial product that I wasn’t investing in myself. I started investing in all the things that I was putting my clients in. As I got more and more involved in real estate, I found that I couldn’t do that because 1) I wasn’t licensed, so I couldn’t offer that advice. 2) I wasn’t paid for it, but if I was putting my money in real estate, that’s what I wanted to recommend.
That facilitated my exit from the financial advising industry, but it opened my eyes to what’s out there and it’s funny because that’s the way the name of my group Left Field Investors, came about is because all my old colleagues in the financial advising world look at me like I’m in left field because I’m investing in these alternative assets. The alternative asset is where you live, go to work and shop. It’s real estate. It’s not an alternative, but that’s how they look at it, so they look at me as I’m in left field.
My background in finance and the financial advisor and license were great. It helped me get to where I’m at. When you start looking at how banking and the finance history, in a lot of cases, it’s a rate gain for the companies to succeed, but not necessarily the investors.
You don’t realize that, but it depends on where you work and what firm you’re with. They’re going to educate you on the products that they sell. You’re going to become an advocate for those products because you’re learning and they’re telling you, “These are great products,” and they teach you about them. They look great, and sometimes they are. If you put them in the right place and right person, there are great financial products out there, but the bottom line is Wall Street constantly inventing new products to get people into and shocker, they’re not always appropriate for everybody and there are better ways to do things. What I’ve found is one of the biggest obstacles to wealth building is taxes.
Almost none of the financial products that financial advisors put out there, almost none of them are tax-efficient and the tax code is written for us to pay no taxes in real estate. There are some disconnects there in the financial industry. I don’t want to go down the hole of everybody who’s a financial advisor is trying to teach out of your money because they are not. There are some great people doing it. Some of them don’t know what they don’t know and the others they’re taught what they’re supposed to sell, they do what they’re taught. I don’t blame them, but it did take something else for me to get out of it, which is being in the real estate on the side and then that became all that I was doing. That’s when I had to leave financial advising.
The question I like getting that too is that you said that you were trying to sell your house there in Columbus. I heard somewhere in a previous podcast you are originally from Alaska, bounced around, and finally settled in the Buckeye State? You got into real estate forcefully. You couldn’t sell your house. Do you look back at that being such a pivotal moment in, “I had to learn how to become a landlord or how to learn to rent my property and solve that aspect?”
Absolutely. I did it for five years and I hated it. It’s the classic story. Christmas Eve, the bathtub breaks or something and the guy’s calling me, “Can you come over to the house and fix it?” I don’t know how to fix a bathtub. I’m Googling it, looking on YouTube, trying to fix it, all my family’s waiting for me. As soon as the market turned, I went to my realtor and said, “Sell this thing for me.” He said, “I also manage rentals. Why don’t I manage the rental for you?” He knew that I had the house paid off and he said, “How about this? Get a loan on it. We’ll get you two more rentals.”
I went from one asset that was the return on equity in your home. If it’s paid off is zero. You don’t get any return on that. He got me into two more. Now I have three cashflowing assets all with the same cash. That’s when light bulbs started going off and rockets flying. I’m like, “This is awesome.” I had three single-family homes. My immediate thought was, “A single-family home makes a lot of money. Now I need to get multifamily homes.” I went down that path and started buying multifamilies and got a little bit carried away. I got the bug right then.
There are two things here. One about the leverage of the equity. Many people, “Let’s pay off our house.” I was dealing with an investor and he’s like, “I’ve got seven properties completely paid off and I don’t have any money to invest.” I’m like, “You’ve got all this equity. They’re saving you 3% or 4% of you were to get a mortgage these days when you could go out and make double that at least in some sort of passive investment?”
That guy is not saving 3%. He’s losing. Every time you have the equity in your home, it returns zero because think about it. If you have a house worth $100,000 and it appreciates to $150,000, it doesn’t matter if you had 0% or 75% loan on it. You still increase the value by 50% or $50,000. All of it goes in your pocket. If you had leverage on it, now you can take $75,000 out of there and go invest somewhere else and you’re making me pay 3% or 4% in your mortgage, but you’re making 8% on your investment.
It’s just dead money sitting there in a house. Once I realized that everything opened up because you don’t want to be deep into debt, but if your debt is covered by other investments or real estate, it’s a no-brainer to take a mortgage out or, better yet, get a HELOC if your house is fully paid off and invest that money it will just multiply. If you use leverage in the stock market, it’s dangerous because you can get out of your SKUs and have serious problems, but if you use safe leverage in real estate, it amplifies all of your returns.
You mentioned you got a little haywire, went a little crazy with the real estate bug, and went on the multifamily side. Tell us about that journey.
I did a couple of things at once. I’ve heard flipping is the way to make money. I went and did a flip. We made hundreds of dollars on that flip, which is not good. Nine months, $100,000? I learned something. It was an expensive education and I’m not flipping. That’s not my strength. At the same time, I looked at one unit and thought of making money, “Let’s go to multifamily.” I met a guy or a property manager/realtor. I was looking for a four-unit, he took me to a 22-unit and I ended up going down the path where he said, “Put an offer in. You can back out of it.”
They have curb offers I learned some stuff. He said, “If you don’t like the color of the paint, you can get out of the contract.” I kept going down the line and eventually, I bought a 22-unit. I didn’t know what I was doing. I did not manage it properly. The property manager didn’t do a good job. I didn’t do a good job. It was horrible. After three years, the market had increased so much that it didn’t matter. The market saved me. I more than doubled my equity on that deal, mismanaging it. This is another way that I think real estate is the place to be.
A good buddy of mine ran a business that flipped homes. He was starting to get into multifamily. He looked at the deal and he wanted to buy it from me. I doubled my equity in three years. He bought it from me because I understood now how to manage this property properly. I had to restart, but I didn’t have the energy and people to do it. I sold it to him and he doubled the value in the next year and a half. I was completely happy for him. I made my money, he made his money and it was a win-win for everybody. That’s what I like about real estate is I can mess up and still make money, sell it to another guy who does it right, then he makes a killing and we’re all happy.
It was at that point that I started to think I didn’t like active investing because I was trying to be passive and active at the same time. I ended up managing the property manager and my multifamily homes. I also had some single-family turnkeys that I was getting into in multiple markets. The original houses I bought in Ohio, that property manager is awesome. For all the rest of my property managers, I had to replace them. It was a struggle. I was managing the manager and then I stumbled into passive investing through syndications.
At first, I thought, “I want to be a syndicator,” and then when I got more into it, I was like, “No. I want to be passive.” That’s where I am now. That’s where I’ve landed. That’s what I love doing. That’s where I’m making money. I don’t have to manage managers anymore because I wasn’t good at it and to be honest, the people I was dealing with weren’t good at property managing either.
What have you developed as a checklist and identifying a good syndicator? My email is filled full on a monthly or weekly basis. A lot of other people got anybody is dated, “We’ve got this.” What have you done to develop your house? “Let’s see if they pass muster the inspection?”
When I started out, I went to a seminar with a pocket full of cash on a self-directed IRA. As soon as I met someone, I wrote him a check and that’s the way not to do it. I did not know what I was doing, but I was so excited. I had this use it later money because it’s not the money I need now. It’s the money I need when I retire. I thought, “I can experiment with this.” Bad way to do it. Since then, I have learned a lot and there are some pretty good syndicators and good podcasters out there. There are also some podcasters who are good marketers but aren’t good syndicators and there are some that are both. You have to sift through it all. Where do you find them?
After a few years of doing this, I’ve settled on, “I am not interested in general and investing with a sponsor unless they come to me, referred by someone that I know, like and trust who is already invested with them.” There are exceptions, but that’s my general rule because that’s a great first step. There are several things I do to test the sponsor and make sure they’re a fit for me, which is communication.
That is the key because these are long-term illiquid investments. I can’t get out of it once I’ve invested. I have no idea how it’s going to go for five years. These are long-term investments. What I do is I communicate, send them a couple of emails and see if they are going to respond in a timely fashion. They’re going to give me a quality response.
For example, when they send me a deal to look at, at Left Field investors, we have a deal analyzer, so we throw some metrics in an Excel spreadsheet. Pops up red if it’s bad, green if it’s good. I take all the red boxes. It doesn’t mean to don’t invest. It means to ask a question. I come up with an email, write it up and send it to the syndicator. This is a test. I need to respond either quickly or with a reason why and then I want a quality response. I don’t want someone that says, “We did the webinar. Go check that out. I want you to answer my questions.”
I’m a pain in the butt for syndicators because I have a lot of questions. Almost every time when they respond with those answers, even if I don’t have another question, I’m going to fire off another question because I want to see. Are they going to say, “This guy,” and no answer? I had one syndicator, he emailed me and said, “Can we get on a phone call? I’d love to talk about this some more.” He dove into it and that’s the type of person I want to invest with.
All along the way, you’re giving them tests to make sure because the only investments that I’m not satisfied with are the early ones I made with people that do not respond to me. I don’t know how my investments are doing. If you communicate with me, even if the investment is going poorly like I had a guy communicate with me, the investment isn’t going very well, but he was explaining himself. He was saying, “What happened?” That’s fine. I might invest with that guy again if it all works out and he figures things out because he is trying to let me know, “Here’s how it’s going.”
There’s another one that they haven’t communicated or paid anything to me in two years. I’m not investing with those guys ever again, even though they say that they’re going to give me double-digit returns. I don’t care because I’m stressing about it the whole way through and it’s not worth it. For me, the sponsor is the most important part of this process. The deal matters and obviously, the market matters. If you don’t have a good operator, then you’re just back to where I was managing poor property managers, “I am not interested in that. I want to deal with some of those qualities.”
There are exceptions to this as well. The other thing I look for is I want someone who has some experience. I prefer someone who’s been through a cycle or two, like before 2008, but those are hard to find. There are plenty of people that haven’t had that experience that I invest with. You got to have at least a few exits. I don’t want you to experiment on me. I want to deal with you after that, but I’m also open to people that are new as long as they’re going about it the right way. I may take a few shots with someone new.
I get people all the time, “I want to raise $5 million and do big.” “Go do some deals first. Go do those $50,000 or $100,000 deals. Get your systems in place and get your communication in place. Build that experience before you try to eat an elephant in one sitting.”
Experiment with your friends and family. Once you’ve proven it with them, then take another baby step and get some investors, then you have some history to share or partner with somebody who has the experience. Even that, we’ve been getting a lot of these deals that we’ve seen that have 7 or 8 GPs. I have all kinds of questions about that. I don’t want to be somebody’s training ground, but also you want to give a new person a chance, but I’m not interested in something that has eight different GPs that all have different roles. I don’t know who’s in charge. I don’t know who to talk to. There’s a balance there. I think.
I just want to clarify for our readers out there, GP stands for General Partner on where you have a variety of different partners. It’s almost come to the point where you have too many chiefs, not enough Indians. You had enough too many chefs and not enough cooks taking care of things. Whenever you’re looking at syndication, there should be a clearly defined breakdown of who’s handling what. The more diluted it is, it can be verified, but you also don’t want to have where it’s just one person trying to do everything as well. It works both ways.
We had one of our community’s favorite syndicators and it was just him. He struggled with communication and some other things. We had conversations with them because we’ve invested quite a bit with them. We said, “You need some more people.” He was on it. He’s like, “You’re right. I do.” Since then, he expanded his staff. He’s got more people and he’s still one general partner, but he has a staff of people. He has an investment relations person. He has a CPA. He’s got all those functions filled.
You have to look at the team. If you don’t understand the structure of the team, they can’t or won’t explain it to you, move on. There are so many syndicators out there. There’s a ton of quality syndicators. You got to find the ones that are right for you. If you’re feeling a little bit uncomfortable, there’s no reason to move forward. You move to the next one or get or find a way to get comfortable.
One of my favorites and you’ve had her on your podcast in the past. She’s our friend, Kathy Fettke. She’s just a phenomenal real estate mind as well in a variety of all of the things out there.
She knows her stuff.
It’s a good one to model after for anybody looking to do stuff. Kathy is one of the most giving of people when it comes to information and building a community. You’ve done something cool. This was one thing that I loved about it. I want to bring it up maybe because I think not enough people did this. Talk about when you left and everything, and you started a community. You started building, “Let’s bring people together locally and roll in the same direction bring like-minded people.” Talk about that and how a monkey wrench got thrown into your plans?
When I was an active investor, I started a community where we’d meet and have dinner. That group was pretty big, but once I decided I was going passive, I didn’t have a use for that anymore. I passed that off and decided, “I need people to talk to who is doing the same thing as me.” I started a group and it was going to be twelve people in Columbus, Ohio. We’re going to go once a month out to dinner and it was going to be twelve because that’s the only private room I could find that was free in Columbus.
Our first meeting was going to be on March 18th, 2020, depending on where you are. Most of us in Ohio that was, that was shutdown time. The pandemic shut us down and we decided to have our first meeting on Zoom. We still haven’t gotten together as a group. We’d be done all our meetings on Zoom and what it did was it allowed more people to join us because I had former financial advising colleagues or clients, friends, people out of town that were interested in this. It slowly grew.
We purposely kept it small because we wanted it to be like a Mastermind thing, but then we realized if we’re doing it on Zoom and we have twenty people, syndicators, other industry people will come to our meetings because they don’t have to fly anywhere. We started having meetings and the group started to grow. We had people who were super into it and people that were watching the meetings.
We started developing investing tools, sponsor evaluation tools and all this stuff. It just grew where then we needed a website and membership because we were spending all this money on a website and tools and we didn’t have any revenue. We do have we charged for our membership group. It’s just covering our costs. We’re not looking to get rich here. We’re looking to build wealth through investing, not from our members, but it grew into this community. It’s crazy how big it’s grown. The best and craziest part to me is the quality of people that we have in our group. We have people that aren’t in their first deal yet, and they’re trying to get into it.
We have people that are in 80 deals that have been doing it for a long time. They all share and interact. We have a forum that people talk about or talk in. All the topics are open in there and then we have meetings and all that. We have monthly meetings in our non-paid group or just the Left Field Investors. To be successful in this type of thing, the community is key. It doesn’t have to be Left Field Investors. Any community that helps you, you can talk about because I remember distinctly Steve Suh is one of the founders of Left Field Investors with me.
The first time I talked to him, we were talking about syndications. He said, “I’m in a couple of deals.” I said, “Who’s the syndicator?” He told me and I’m like, “I’m in that one too.” He told me the deal and I said, “I’m in that one.” The sense of relief, I finally found somebody. A smart guy and a doctor, he’s not only the same syndicator as me but the same deal. It made me think, “I’m not crazy. I just wired someone $25,000. It didn’t go into the abyss. This is going to work.” It gives you confidence.
The more people that you join up with and you find they’re doing the same thing, but maybe they have a twist on it or have a better idea. Someone said to me, “I don’t invest in a second deal with a sponsor until it’s gone one full year.” I thought, “That’s brilliant because what I’ve done is as soon as I need a sponsor, I’m all in. I’m in five deals but wait a year. Be patient. It’s not a get-rich-quick scheme. It’s a get-rich-slowly scheme.”
Be patient. After a year, I reassess and might invest more. That’s the thing I learned from my community. I also learned that from the community where I’m not going to invest in somebody unless they’re referred to me. Now, I make exceptions to that, but that’s what I try to stick by. I learned that through my community. I started this community thinking, “I’m going to share my knowledge with everybody and I’m the winner. I’ve learned more than anybody in my group.” Now we’re trying to be a better network and have everybody learn from each other.
The master has become the student in a lot of groups. That’s needed these days and I don’t think enough people take advantage of it. COVID with Zoom and other things out there, Facebook groups are the only thing valuable Facebook anymore these days with the craziness of the community. We’ve been locked down and we don’t have that breaking bread, a cup of coffee, having a cocktail, a lot of times in different areas. It started to open back up. Hopefully, it stays open up in every state and cities are a little bit different.
It’s such a great way to learn and network. I love the dinner aspect but if you can’t do that and do those, and we’ve been doing a webinar every Monday night for many years now as our community is getting together and sharing a topic. It’s such a valuable come together, especially for those that are dealing with stress and are still working a full-time job. It’s a great way to tap into and make sure you’re investing passively doing something versus nothing.
This is accessible to everyone, but the problem is people don’t know about it. How do you get that message out? Everyone knows about the stock market mutual funds because Wall Street pushes it and you hear about it on the news, but no one hears about syndications because it’s not exciting. I can’t tell you the value of the syndication that I invested in two years ago because it’s impossible to value.
There’s no discussion you can have on the news like, “Jim’s got great syndication. It’s valued the same as it was two years ago. It’s not, but I don’t know how to value it.” What we’re trying to do at Left Field Investors is get the word out, spread the word like, “You can do this.” We also get brand new people who maybe don’t have $25,000 to invest in the syndication, but we do group investing through a company called Tribevest that allows ten people to get together. Instead of putting $25,000 into one deal, you put $2,500 each.
Now you’re a real estate investor. These are people who might not have been invested in any real estate outside of their own home and now they’re in a deal. They can learn, grow and watch how it works. Maybe they start another group of their own, or maybe they go in on their own and invest because plenty of people are putting $2,000 a month into a 401(k). That ends up being about $25,000 a year. When you say, “You need $25,000 to get in one deal,” people are like, “I don’t have $25,000.” You do. You just don’t know where it is. That’s part of it. I’m pretty passionate about spreading the word and getting more people into this because it works. It works better than just throwing your money in a 401(k).
You usually get great returns from syndications if the person who sponsors is doing a great job with it and knows what they’re doing. You’ve been down that road of doing stuff yourself. They read somewhere where you’re still doing some hard money lending and helping some people with investing some funds via hard money?
I do private lending only with a very few selected people that I know because I don’t know active investing anymore. Someone will send me, “I have this deal.” I know Columbus, but let’s say it’s in Columbus they say, “Here’s the price.” I’m like, “I don’t do that anymore. I have no idea how to evaluate it.” The people that I used to go to evaluate these deals are now the people that I’m lending to. I have confidence in those deals because they’re bringing them to me and they’re deals that I would have them evaluate them. I trust them and I get personal guarantees on the loans and it’s just easy. I recycle it through. Most of the time. As soon as the deal closes, they say, “Can I pay you the interest and roll the capital into the next deal?” “Sure.” My capital never stops working and it’s great.
That’s a beautiful thing there, the velocity of capital. You mentioned somewhere about how you’re looking for that cashflow. That’s one of the most important things out there versus appreciation. California investors were often betting on the appreciation on the cashflow. People would slice their grandmother’s float for the free cap. That free cap does not excite me at all. Let’s talk about that philosophy and why you had that philosophy of, “I need cashflow. I don’t need appreciation.”
I’m a full-time passive investor. If I don’t have cashflow, the family doesn’t eat. It’s not that severe, but we need cashflow. Most of these assets are going to appreciate. Most of these assets are forcing appreciation, meaning the syndicators going in there, making improvements and increasing rent, so the appreciation is going to be there. I look at it as a bonus. I want an asset that produces cash now and the cash is going to increase the asset continues to improve. The cash that I get now is 8% to 10%. It’s tax-free if you do it right, which is better than what you’re getting in the stock market.That’s good enough for me. After 3, 5 or 7 years, you’re going to get this bonus kicker of another 50% to 100% increase in the value of your asset. That’s in the back of my mind, but I need to invest for cashflow now because that’s what propels my lifestyle and everything else. It keeps growing. It’s a snowball. Once you get into these, they just snowball because as soon as you go through one deal and it goes full cycle, you do the next one, now you have twice as much, so your cashflow doubles. Everything keeps accumulating and it grows.
Do you miss any of the operations of doing these deals yourself versus jumping in the syndications?
I don’t. There’s some of that where it’s exciting because you’re in there doing the work or directing someone to do the work and then you get to see the results. So much of that me was out of my comfort zone. I didn’t know what I was doing. I was managing a manager and it wasn’t for me. This passive stuff is for me. Someone used the analogy, “You pick a jockey rather than the horse.” Now I’m just picking jockeys and they manage the property manager. They are professional asset managers. That is their job. I hire them to manage my part of the asset. I expect them to pay a return and they’re professionals. I was not a professional asset manager. I was a guy trying to tell a property manager what to do.
The property manager would agree or disagree and they would just end up doing what they wanted anyway. I don’t miss it. Where I get the excitement is on the side, I do some speculation stuff, Bitcoin pre-IPOs. That’s the fun stuff. Real estate is exciting because that’s where you make money. It’s a get-rich-slow scheme. The speculation and the other stuff is where you get a little bit of the excitement and you cross your fingers and hope.
Speculation stuff is exactly the speculation. Investing in those things with money that you, if you lose it, you’re okay losing it because it is speculated. You don’t want to lose it obviously, but if you do, it’s not going to affect the bottom line for the most part. Whereas the true investment and stuff, you should never invest anything you can’t lose or live without in a lot of cases because the deal doesn’t go plan A, there’s often plan B, C and D. That’s a people thing about real estate.
I’ve finally figured out after all these years that there’s investing and speculation. In my mind, if it’s not paying you to own that asset, it’s speculation. That’s the stock market because, as I’ve said before, if Apple is having the best year they’ve ever had, but the stock market tanks, Apple stocks going down, not up. If you’re in multifamily syndication, that asset performs great the market tanks, you’re probably still going to be okay because your asset is doing fine. It’s not affected as much by the market. You got to figure out where you are investing and where you are speculating. Once I figured that out, it opened up a whole lot for me because 90% of what I do is invest in assets that produce money for them and produce cash.
In the stock market, you buy something, waiting and hoping you can sell it to somebody else for more before it tanks, where if you’re in real estate, you’re buying an asset, you’re managing somebody or the manager’s making improvements to that asset that is going to increase the value while you’re getting cashflow they’re increasing the value and then they’re going to sell it, but they’ve increased the value. It doesn’t matter as much what the market is doing because you’ve already increased the value. It makes sense to me now.
Real estate is a longer-term play. It’s a 3 to 5-year process per asset, especially syndications, and for some real estate, it’s longer than that process. You don’t mind if there’s a dip because it’s going to come back. If it goes up, you can’t always plan on it. You try to sell it at the peak, but if it does it, “Let’s hold onto it for a while as long as its cashflow and loans are covering what I got to pay each month, that there is a payment you’re still sitting there.” Many investors get stuck on one tactic or tool then when things go awry, they flip out and end up losing money because they aren’t reactive versus saying, “Let’s step back and look at the backup plans.”
That is a crucial point that you made, is that there are multiple strategies. When I invest in syndication, they say, “We hope to refinance and give you some of your capital back within three years. We also hope that we’re going to sell the asset in five years.” I ask them, “What if the market changes? What happens if you can’t?” They have a plan, “We’re going to cashflow for ten years until we can sell.” That’s great, but if you’re investing and I compare everything to the stock market, there’s no other strategy.
You’re hoping that the market continues to go up and you hoping yourself the right time, but there’s no backup plan. If the market tanks, you tanked. That’s what I like about real estate is even though I’m passive and it’s not under my control, it is under the control of the person I selected to manage my asset. They’re controlling it. I put my faith and trust in them and they can change plans. We can’t refinance because the market won’t have it? Fine, let’s cashflow for another 3 or 4 years. You’re going to keep paying me 8% or 10%. That’s fine. I can live with that. That’s what I got here for. It saves me from having to go find a new investment because you gave me my capital back.
It’s sitting in an account and I’m making anything until you change it into something fast.
There are multiple exits and that’s what I like.
As an ex-financial advisor, especially in your group and for new investment, how much are you recommending people to use a self-directed IRA or self-directed accounts? Is that a priority for a lot of folks in your group?
It is sometimes. With the IRAs, I recommend that people do notes or any of those estate-related, but non-tax advantaged things. You’re not paying taxes in those accounts. I have a self-directed 401(k), and I do my private lending out of that. I invest in a few note funds out of that, that’s where I try to do that. We do talk about that a lot. If I didn’t have any other money and I wanted to invest in syndication, I might invest out of my 401(k), but I’d much rather go to a note fund that’s paying 8% or 9% because it’s easier and I don’t lose out on those tax advantages. We do have a lot of people that are in self-directed IRAs. We do encourage them, “Look at the note space and private lending or things like that because I think that’s a lot more effective use of the Tax Code.”
Who knows what the tax code is going to be?
It’s always changing, but there’s always going to be advantages that they put in there for real estate investors because most of the congress own real estate. They call it loopholes, but it’s just instructions on where the government wants you to invest. It seems like they like real estate, so that’s where I am.
Follow the code. They’ll give you all the answers. It’s a small fire where you can’t find sometimes, but that’s the most important thing about surrounding yourself with like-minded individuals, professionals, attorneys, accountants, people that know what they’re doing and people that are in multiple deals or have experience because we will learn about things that most people don’t even know about, word of mouth advertising in a lot of cases.
As a financial advisor, we talked all the time about the biggest eroder of your wealth is taxes. You need to master the taxes, but not once did we say, “Real estate is a great place to do that.” It was always these crazy schemes and ideas. A lot of times, people go into this super complicated Delaware statutory trust, 1031s and all this crazy stuff to avoid taxes. When I went to my accountant after I was selling all the multifamily properties and said, “I got some big capital gains. What am I going to do? Should I do 1031? Should I do new qualified opportunities on?”
He said two things. The first thing he said is, “Sometimes when you make a bunch of money, you’re just going to have to pay taxes, but if you don’t want to pay taxes, you could do a lazy 1031.” The lazy 1031 basically is I invested in syndications and the paper losses I got from cost segregation, bonus depreciation wiped out, deferred or offset all of the capital gains I had from my other investments. There are ways to do it. You just have to know how it’s done.
Talk with professionals. Most people don’t ever talk to professionals. They just go the cheap route where it ends up becoming very expensive in a lot of cases.
I finally realized that it’s worth paying my accountant $250 to talk to him for an hour about strategy. It’s worth it to pay my attorney $200 an hour to talk to him about strategy or $600 to do a set of documents, so I’m not using something that some guy drew up on a napkin. It’s worth it. They are professionals and you pay them. It hurts when you pay them, but a couple of hundred bucks don’t matter if you’re making thousands. If you don’t spend that and you lose thousands, you’re going to wish you could pay that a couple of hundred bucks. I believe in paying those professionals. It still hurts. I still try to negotiate with them, but you got to use them because they’re going to protect you.
Let’s go back to 2008. We were seeing a lot of opportunities coming down the board. We were having conversations with banks and have seen default in distressed debt. How are you approaching the next market phase differently than what you’ve done the last many years? Besides syndications, are you doing anything else to take advantage of different opportunities?
I am trying to communicate with as many people as I can and learn what they know. I’m keeping my ears out. I have capital. I am not going to sit on the sidelines and watch the road to inflation. I am still going to invest in cashflowing assets because I believe that even if whatever market you’re talking about drops, if your assets are cashflowing, they might cashflow less, but they’re going to still cashflow. A real asset is a place to be. I know there are going to be some opportunities once the moratoriums are in and there can be more foreclosure.
I’m certainly looking into that space. That’s not my expertise, but that’s why I’m talking to people like you, so that I’ll be ready when that happens to call you up and say, “Do you got any deals? Let me get in some.” That’s how you prepare is you keep your pulse in the markets, but also talk to the experts in different things. I don’t know that I’m an expert in anything except my community, maybe, but I’m talking to a lot of different people who know a lot of stuff and I’m hitching my wagon to their train.
This is a Left Field question. Thinking back to being a financial advisor to where you’re at now, what’s the thing that stands out the most as far as quality of life? Let’s not talk about real estate. We know real estate help finance it, but let’s talk about the difference in your day-to-day or your family. How has that been a big impact?
It’s night and day. As a financial advisor, I was in charge and managing my own business. If I wanted to take two weeks off, I could take two weeks off. It’s the same now. The difference is I’m not trying to convince anybody of anything. I would meet with clients all the time and I knew I could help them. Even though I’m talking bad about the market and stuff, I knew there were solutions that I could give them that would help them. I had to convince them because they didn’t believe me, didn’t trust me or I didn’t explain it good enough or whatever it was.
Now I don’t do that at all. I present things to people. I try to help people, but if they’re not interested, it doesn’t matter. I don’t care because I know that I’m still making money on the investments I’m doing. I’ve been an educator my whole career and my whole life. I was even a teacher for a while, but now I’m still educating people, but if you’re not willing to learn or you don’t want to learn, then I’m not talking to you because you’re not joining my community.
It’s not that I wouldn’t try to help somebody, but I don’t have to try to convince people now. That’s such a huge difference that I got frustrated as a financial advisor, knowing that I could help people, but I wasn’t able to because either I wasn’t doing something right, I wasn’t convincing them or I wasn’t educating them. Now I have a lot more confidence because I feel better about what I’m doing because all of the stuff is going to help people. Also, I’m to the point where if you want help, I’ll give you a time. If you don’t, I’m going to move on. I’m not trying to convince anybody of anything. That’s a huge difference. It’s a lot less stress.
That right there is one of the most important things. You’re not trying to bang your head against a wall, trying to get somebody to understand that you’re trying to help them. People are coming to you versus you trying to go to people in a lot of cases. The big difference. Being your own boss is great and stuff like that, but also the whole aspect of that mentality adds a lot of being able to sleep at night, but also being able to do a lot more fun, not being stressed out around the family and doing some other things.
I felt a lot of pressure to help people back then and pressure to produce and earn a living. Now the only pressure I feel is I want to make sure I’m giving our community the best information, best network and best help they can get. I feel pressure there, but it’s all people that want to come together and learn. It was the same thing when I was a high school teacher for a while and teaching finance. I loved helping those kids.
It was in Columbus City Schools. The kids needed help and I loved helping them. A lot of them weren’t interested and I don’t blame them. They’re high school kids. I love teaching people who are thirsty for knowledge. I struggle when I have to convince someone that they need to be educated. It doesn’t work. You have to want it. I think I finally found my niche where I’m happy to share my knowledge, but you’ve got to bring something and some desire in order to get it. It’s a big change.
The desire to learn, and the desire to better one’s self is important. One of the great things about this country is we have the opportunities to do that no matter where you’re at and what you were born with or what you were born without in a lot of cases. Jim, what’s the best way for folks to find out more about you, connect with you, find more about Left Field Investors and your group?
There are two ways. You can go to www.LeftFieldInvestors.com. If you want to subscribe to our newsletter, there’s a button up there. You can do that or if you just want to contact me directly, you can email me at Jim@LeftFieldInvestors.com. I spend a lot of time just talking to people. I’m happy to talk, explain our group, and see if it’s a fit for you. If you’re interested in passive investing, I highly recommend finding a community that fits you. Left Field Investors is not a fit for everybody, but we’re a fit for some people. If we’re not a fit for you, go somewhere else and find a community because I guarantee you, it will take your investing and success to a whole new level.
It has been an honor to have you on the show and share your story and journey. It’s great to see some mutual thoughts out there with everything going on there. You don’t have to be the expert at everything. Go find the experts and invest in those people. I love that out there as well. Thanks for coming to the show.
Thank you. It’s been fun.
- Left Field Investors
- Kathy Fettke – Previous episode on Passive Investing From Left Field Podcast
About Jim Pfeifer
Jim Pfeifer is one of the founders of Left Field Investors, a group dedicated to educating and assisting like-minded investors negotiate the nuances of the passive investing landscape and world of syndications. Jim is a former financial advisor who became frustrated with the one-path-fits-all approach of the standard financial services industry. Jim now concentrates on investing in real assets that produce cash flow and is committed to sharing his knowledge with others who are interested in learning a different way to grow wealth.
Jim not only advises and helps people get started in passive real estate syndications, he also invests alongside of them in small groups to allow for diversification among multiple investments and syndication sponsors. Jim believes the most important factor in a successful syndication is finding a sponsor that he knows, likes and trusts. Jim is constantly looking for new investment ideas that match his philosophy of real assets producing cash flow as well as looking for new sponsors with whom he can build quality, long-term relationships.