Transcript

00:01

Welcome to Episode Four of Season Six of the Growing Empires Show. This is the last of our three part segment with Dave Rowan from Rowan financial, and Jeremy Moyer, his investment partner, and we're going to finish our conversation today regarding how to capitalize on bringing in debt partners and Capital Partners into your investment deals. So stay tuned.

00:24

Welcome to growing empires hosted by real estate entrepreneur and trusted investment advisor Jennifer de Jesus. Growing Empires provides insight to building wealth through passive income producing real estate investments for those who want to build and manage a more profitable real estate portfolio.

00:43

So let's get into the difference between debt partners and Capital Partners. Who wants to explain the difference between the two and how that would kind of change your viewpoint on you know, how you're going to accelerate your personal capital as well as accelerate your efforts with maybe a partnership?

01:00

Sure. So you know, there'll become a day when, you know, you invest long enough and all your money is being utilized, right. Or you're in a bunch of deals, and you're waiting to turn a building over or refinance and you want to continue buying more. And the only way to do that is either to have joint venture partners, other partners in you know, business relationships, where they might be able to bring capital, or you you find, as you mentioned, Jen equity partners. Where all they're doing is bringing the capital into the deal. Or they have a debt partner. Obviously, there's a lot of tax and legal implications, you know, on either or. So not going to give any tax or legal advice, check with your CPAs and your real estate SEC attorneys on how to structure things appropriately. Because you structure it incorrectly, you can gain a lot of trouble legally, and from a tax standpoint. But the major difference is, you know, from a debt partner, it’s almost a second lien on the building. You know, so you it's an obligation that you have to pay. So you have to factor, you know, that debt coverage ratio that Dave was mentioning earlier, you would need to factor, is there enough income to support both obligations.? Your first lien to a bank, and then your second lien maybe to an individual or maybe to another company that that lends money out. You have to factor that in. Are you bringing enough income to support those obligations? You know, typically, there's a, again, the seesaw effect of; do you want to keep more equity, but you might be cash poor? You know, until you can, let's say, turn a building over refinance, pay both lenders back and have one larger loan with a bank, and then have all the equity? Or do you want to have a bigger cushion on cash flow, and bring on an equity partner? Where maybe you would give 50% 60% of the company to. For that one asset you're not giving everything away. You know, you would partition it into one single purpose LLC.

03:15

And just to jump in there, very briefly, from a financial services industry perspective. You know, this is why companies go public. They are sharing equity in the firm, in order to access significantly more capital and grow by means that they can't, keeping the company private. So I'm sorry, I interrupted you, Jeremy. But if this is, you know, I think it's, it's hard because, you know, you say to yourself, well, I'm doing all the work here, and I'm lining up the architect, and I'm dealing with the contractors, and I'm working with property managers. So I should keep all of this. And it, you know, Jeremy actually introduced me to this concept within this industry, and yes, all of those things are true. But you can grow so much bigger, so much faster by being willing to accept Equity Partners.

04:15

That's great comment Dave. If you think about a bonds or debt obligations, that there are many loans, right, that the these big institutions, they pay back to investors, bondholders. That's kind of like debt financing, right? And then the stock positions are more your equity, equity partnerships. So that's a that's a good segue into maybe easier to understand concepts of like a stock market with companies. But I think those are the, from a high, high level point of view, I think those are the good distinction between equity and debt. I mean, there's there's place for both, or one or the other depending on the deal. Depending on can the building carry enough debt. Maybe there's a good long term proposition for potential property where you can't have a debt partner, or you can't pay that obligation. But there's some good upside that maybe it's a good position for your equity, equity investment.

05:14

So Jeremy, I'm gonna play Jen's role here and ask you a question. So, so what do seasoned equity partners who have been doing this for a while; what do they look for to feel good about investing in you?

05:33

Sure, I think seasoned equity investors, you know, look at, you know, a multitude of things. One being, can I trust the people that I'm giving my money to execute on this business plan is probably more than so the deal. You know, I, I was on a webinar a couple a couple of weeks ago, where there's this this company that, you know, they're very successful, they, they buy apartment buildings, you know, 50 plus unit apartment buildings, they have $20-30 million under management, maybe more now. But they were in this in equity investor was actually on the call. And they were saying, we have some investors, and this guy was a dentist, we have some investors that as soon as they hear that we have a building under contract, they want to invest in that deal. And I forget the guy's name, lets say his name is John. They're like, John, you know, we didn't even show you the deck page, yet. We have no idea, like what return you're getting. And he's like, I don't care. He's like, sign me up for your next five deals, 100 grand each, just because I know you guys execute. And whatever you underwrite, I trust, you know. So in that point, like, he didn't even care what the deal looked like. Because he knew if he invested with this group, from personal track history with them, right? That they would knock it out of the park, and he'd be happy with the return whatever it was. I think, first and foremost, so you know, from an equity, you know, if you have a sophisticated equity investor, they'll look at the management team, you know. They'll look at the operators. And then they're also gonna want to see, you know, who are your vendors? You know, who's your attorney reviewing these legal documents? Who's your property management company managing these properties? You know, they want to see that you have a solid business plan and reputable partners that can execute on it.

07:31

But Jeremy, I know, when we were talking about taking down a really large building earlier last year, we actually talked about the notion of adding a fourth partner. Specifically with gaps, you know, that filled gaps in our skill sets. Because we were concerned in terms of attracting capital, that that would be a real, a real issue for us to do something at that, that scale that we haven't done yet. And so that said, you may not only consider giving away equity, you may also consider adding another partner to, you know, grow two or three levels of scale, in terms of what you can take down and building.

08:20

Absolutely, when you get to larger, larger deals. And I've I know, guys that do this, you know, they have a balance sheet that they can personally guarantee a $10 million loan, I couldn't, I couldn’t do it, right. I don't know if our other partner could do it. But these guys can, you know, they have a great balance sheet. So they, they could enter a general partnership, you know, help raise equity, get equity, and and they would have, they would earn their percentage of their GP share there, and then also signing on the loan as a guarantor. You know, they're at risk, you know, for that loan, but they're, if they liked the deal, if they like who you are, I mean, they're doing their due diligence. But to your point, Dave, you could bring on a partner who has a vast amount of experience. They're not bringing their equity, they're bringing their balance sheet. They might bring some capital, with relationships, to to the asset, to the game, to earn their equity share within the GP. But that is another avenue. Probably not for the first time investor. You definitely need to have a track record. Because that person, you know, is is trusting you to execute, you know, if they have to, I guess they could step forward and then take it over. But that's not really what they're signing up for here.

09:38

How does one find, you know, these Equity Partners or these debt partners?

09:43

You know, it's it's relationships that you build over years, you know. It could be friends and family early on, you know, and it's just a ton of networking. It's just got to tell people what you do, you know. And you can meet, it's easier to to network in person, you know, versus over the last year was very difficult with virtual networking. But you can meet them at meetups. You can meet them on Bigger Pockets. You can, you might work with them, you know. It's I think you can meet them in a vast amount of in locations and areas. I don't know, Dave, what's your?

10:15

Well, I'll talk about, you know, how to talk to them. And I think that, again, I keep bringing this outsider perspective from the financial services industry. But last year, the Fed made it very clear that they're going to be much more tolerant of inflation going forward. And as a result, much less likely to raise interest rates quickly anytime soon. Consequently, bonds as a diversifier in your portfolio are essentially a dead money boat anchor in there. And so talking to people about other ways to diversify, one of them being real estate. And again, you know, these models do not need to be overly complicated. We're going to fix up the building, and we're going to get better tenants. And you can earn far more than you can in your bond positions. And you're not subject to the whims of of the stock market. It's a pretty compelling story for people. There's a lot of people out there who are happy to what do you think Jeremy to sign up for an 8% return? Sure. Where else you're going to get that. So that that's kind of one of the stories that you can talk to these people about.

11:37

The episode will continue in just a moment.

11:41

The best investments with the highest potential for a solid return always start with the right real estate purchase. But it's not just about a flips potential margin, or how fast you can ready a property for leasing. It's about creating a future of financial stability for yourself and for your family. One that supports the lifestyle that you want. If you're an active investor, and purchase, renovate and lease your own properties, and you love the process, the chase and the returns, you're in the right place listening to the show. Especially this season. Because we're talking about a deep dive into how to purchase the best property for you. However, if you're more of a passive investor, and one who wants to diversify your stock portfolio with real estate, but you don't want to get involved in the active management of those properties, you're also in the right place. As we serve both types of investors. To gauge where your real estate investment tolerance sits and what would be the best fit to grow your income with real estate, I invite you on a call with me. To book your call, visit growingempires.com and click book a consult. That's g-r-o-w-i-n-g-e-m-p-i-r-e-s.com. and I'll help you choose the best real estate model to help you achieve your real estate investment goals.

12:45

So what would be your best advice for a brand new investor starting out? If you could give them just one tidbit of advice , you know, do this or start here, what would that advice be for a brand new investor?

13:00

I'll start mine is always, and this is true for many new things that I try, find others who have already done it, and either talk to them directly, or read things they've posted or have been posted about them.

13:17

That's, that's a good one. I’m going to give two and they're kind of combined. One would be know why you're doing this. You know, If you ask me, do you like owning real estate? Not really. The actual act of doing it? Maybe, you know. But the the dealing with all the headaches, and then you know, it just sleepless nights and hard work. I mean, it's it's a lot of work, you know. So to know why you're doing it. I like it from the fact of what it can give me and what it gives me. You know, for the now and also the future. But know your why, you know. It's I think it might sound corny, but you really do need to know it because it's a lot of work. And the second is you got to get your mind right. You know, your mindset. It's it's a long road. It's a journey. It's not a get rich quick type of scenario, you know. So there's gonna be a lot of times where, geese Dave. How many times did we put in offers in this past year that we just got beat out by two grand? I mean, frustrating, you know. Or you do something, you buy something and something didn't turn out the way you thought it was. So now you need to go to plan B or Plan C, it's just, there's a lot that could go wrong. Even if you prepare, you know, up front. So you need to know why you're doing it. And just to have a right mindset of, you know what, this, this didn't work. I'm going to continue pushing forward. You know, persistence is really important. But I think that only happens if you know why you're doing.

14:52

Good points gentlemen, I appreciate that. So now I'm going to ask the same question about the opposite side of the spectrum, the experienced investor. So what would be your tidbit for or Tip of the Day for experienced investors that really are not able to scale as quickly as they'd like to? What would be your advice?

15:11

I think, and I'll steal one of Jeremy’s so I, and we didn't really cover this but you know, changing the definition of your cash from cash that you always use in deals to cash that you're holding in reserves, so that you can be attractive to Equity Partners and other folks that you can get involved in your deals.

15:40

Mine is going to be close to that. So I have a really good investor friend, he lives here locally. He owns a bunch of real estate, multimillion, hundreds of millions of dollars. And he said recently, maybe up to just a couple years ago, he was always in a, you know, liquidity issue, you know. He's just low on cash flow, high on equity. But it could really hurt you in the short term. You know, if something swung one way or you needed a cash infusion in this project. You know, he might need to beg, borrow and steal to be able to shore up this over here. And that goes to the reserves point that Dave just mentioned. But you know, get your financial house in order. so you can scale. You know, so there's so many times that we're looking is there a way to do this no money down? Or is there a way to do this seller financing? I mean, I've done all that I've bought subject too. I mean, there's, there's ways to do it. But then you also need to have reserves in place for rainy days. You know, a mentor of mine told me he's like, I'd rather sleep at night, you know, and give away a little more equity, you know, in deals, so I keep my money in reserves than the other way around. He's like, I've done it both. And he's like, this was a lot better. Yeah. Yeah, I would say that is just to to know where money is coming and going, you know, make sure you're attractive from a borrower standpoint. Also as a partner where people would want to place equity with

17:12

Yeah, great points. Well, I can't thank you both enough for all of your time today. I mean, I feel like we could seriously talk for like 10 more hours straight. But I'm sure that nobody would listen to a 10 hour podcast. So I think we should cut it short now. But I really appreciate your wealth of knowledge. All of the tips that you shared. I will make sure that your information is in our show notes page. So that if any of our listeners would like to reach out to you both directly, they will have the ability to do so. Is there any last tip or comment that you'd like to make? Otherwise I will, you know, thank you for your time and wish you both the best day.

17:53

Thank you so much Jen. I had a great time this morning.

17:56

Absolutely. It's been a pleasure. Thanks Jen

17:58

All right. Thank you so much. Take care.

18:01

For more information about how Jennifer can help you plan, develop and manage a strong real estate investment portfolio, visit growingempires.com