Real Estate Investment Opportunities Series - Wellings Capital

Foreign welcome to this White Coat Investor real estate webinar. I'm here with Paul Moore, the managing partner of Wellings Capital. Paul invests some of my money and the money of a number of White coat investors as well. But today we're going to learn more about his unique approach not just to real estate investing, but also to due diligence. And it's important in selecting your real estate investments. Like most of these webinars we do, we're going to start with Paul doing a presentation and then we'll move into Q and A afterward. Paul, welcome to the webinar and why don't you take it away?

All right. It's great to be here, Jim. Thanks everybody. Today we're going to talk about building a hands off portfolio to grow your wealth and decrease your stress. This is a little stressful though. This disclaimer is a little long. You can look at these later. Basically this is for accredited investors, $50,000 minimum. And some of the returns we're going to be talking about are at the property level, not necessarily the individual investor level. So I got an engineering degree and an mba, worked at Ford Motor Company and their headquarters for about five years. Then I started my own company. After about five years, Wall street caught the eye of the type of business we had and we sold our company to a public firm in 97. I started investing in real estate a few years later. I've written three books on real estate investing. I blog regularly on a national platform called BiggerPockets. I'm co founder of Wellings Capital, of course, and most importantly, I've been married for 37 years and we've got four adult kids now. Jim When I sold my company in 1997, I thought I'm a full time investor now. But I wasn't. I think I was closer to a full time speculator. I should have known the difference, but I didn't apparently know the difference. I lost a lot of money doing that. Now I made some money doing that as well. But as I got older, my wife and I did not appreciate the rollercoaster of speculating. And so now I see investing as when your assets are generally protected and you've got a chance to make a profit. Speculating is when your principal is not at all safe and you've got a chance to make a profit. So in 2011, after investing in real estate for about 12 years, my partner and I both built and operated a successful multifamily project in North Dakota during the Bakken oil boom. And I went on to start a multifamily syndication firm. And Jim, I even wrote a humbly titled book called the Perfect Investment, and that was about multifamily syndication. Wellings Capital was born. During this time, we went down the syndication row, but there was a problem. The deals were being bid up. As everybody knows, multifamily has become so popular over the last decade that it seemed to us that it felt like speculating again, something I tried to quit years ago. I know that some syndicators out there have been able to do this without speculating, but for us, I just wasn't willing to put my family and our investors at that risk. And I think some of these other operators had better deal finders or they had something that we didn't have. But we pulled back and we just reevaluated things. And we basically. I went on dozens of podcasts, wrote dozens of blogs warning people not to speculate in multifamily. And I also said that the perfect investment is not perfect if you have to overpay over leverage, use risky floating rate debt, and believe that trees, AKA rents, will grow to the sky. So we had to decide what we wanted to do next. Now, as investors, my partner and I, we asked ourselves what we wanted, what we needed. And we concluded two things. Number one, we needed operators with extreme focus and extreme experience. But we also needed broad diversification, and it was impossible for us as one company to do both. We needed specialization because that results in better profits. We needed diversification because it results in safety. And so we tried to figure out how to pull that off. Now, you know the 8020 rule, the Pareto principle. This curve represents that now if you invest with the average operator in the average deal, you'll get average results. And in the last decade, average results have been incredible because the rising tide lifted all boats. But like Warren Buffett said, eventually that tide will go out and we'll see who's skinny dipping. And so we knew that that tide would eventually go out. So we thought it was critical to be in this top 20% of deals and operators and asset managers, and even in the top 20% of the top 20%. Here's an analogy. If you're a doctor and you want to cover all your bases, you may want to become a neurologist and a podiatrist and an oncologist and a dentist. But the question is, could you be the best at any one of these and have a life too? Obviously, probably not. The individual doctor excels because of deep focus and long experience. Now, as a Patient, my family and I might need all these disciplines over time and a hospital system could be the answer. It could provide that with a whole bunch of specialists. And so in a similar way we saw a need for again specialization diversification. And we realized that a fund was the only way to get there. That's why we launched our first fund years ago. And now we are on fund number six. And our goal is to provide at least four distinctives. Number one, diversification. We really believe it reduces risk and we're going to talk about that more in a minute. Also, what Jim mentioned, due diligence. Our goal is to locate and partner with the best of the best operators who are who produce superior results over many years or even decades. We also provide access to deals that you've probably never heard about, deals with a very large minimum and preferred equity deals that no one but us can access. And in many cases we also have better terms than individuals could get on their own. So let's look at these four. First of all, diversification. Our goal is to provide diversification across multiple asset types, recession resistant assets, best in class operators, geographies, et cetera. So right now we're in 10% self storage, 15% manufactured housing communities, 8% RV parks, 5% light industrial, 6% debt, 39% specialized multifamily. We'll get back to that. 7% open air shopping centers and 10% pref equity preferred equity for a single family rental portfolio. Honestly, we have yet to find any private real estate opportunity in the US that gives investors instant access for $50,000 to 12 carefully vetted operators, seven different asset types and hundreds of properties across 20 states. We also, as you mentioned Jim, have a lot of due diligence. We evaluated 515 different operators opportunities last year. We passed on 504 and we already knew seven of the 11 we invested with. So I'd ask this as a busy professional or even if you're retired, could you possibly sift through over 500 deals in a year and choose what at least what we believe are 11 of the best? I'd say it's be pretty impossible for any individual investor. We also provide access. 41% of our deals are currently in the preferred equity space. And every one of these was designed by us and our attorneys. It's not a second layer, there's no extra layer fees because we are the only investor in these pref equity deals. I also mentioned better terms. Now it's possible you could invest in some of these assets if you could find these operators in Some cases you could. But if you invested with our largest operator, you would get 7% preferred return, 60, 40 split, no extra fees. Because of our size and our relationship, we get a 9% preferred return 80, 20 split and we get a substantial due diligence fee. And all that goes back in the pot to investors. Now, almost 50% of our capital raised in 2023 was from current investors. And you know, Jim, this was in a year when, and I'm not talking about white coat partners, but out in the world in general, if you've been reading the headlines, a lot of investors are pretty angry with their syndicators, pretty upset. Some people saying, I'm just going to go back to Wall street. And I get it, because they lost money when that tide went out, when the interest rates went up and when floating rates, debt was, you know, in the, was, was used by some of these syndicators. We had, you know, again, almost 50% of our money came from current investors. 141 of them referred their friends. A lot of these were white coat professionals. One reason is because we didn't rely on floating rate debt. 93% of the assets in the current fund are either all cash or they're fixed rate debt. And even the floating rate debt was already underwritten at high levels. But this is great, but I think the outcomes we've been producing are the main reason people keep reinvesting. So these are the full cycle results. This is all the assets that sold in previous funds. If you look at this, we have an average of 57% at the asset level, median internal rate of return. Now these were fairly short hold times. You can see by that last column about two years. But I want to point out something. If you would have invested in asset number five here, you probably would have been pretty unhappy. That was something completely unforeseen. This was in St. Paul, Minnesota during the George Floyd tragedy. And our operating partner didn't believe they could get their staff and their tenants in and out of there safely. So they sold it pretty quickly for a 9% loss. But because it's a fund, that 2.1 plus million was reinvested into other cash flowing assets. And this asset was also sold around the same time as number four with a 347% IRR. That's kind of an anomaly. And the one below it, number six with a 60% IRR. So our investors didn't feel any impact at all. Now these are the full cycle results. Here are, here's what's going on under the hood for Our current investors in these earlier funds, these assets are gaining in value. Let's just look at number two. Now these are all the assets that have been refinanced in earlier funds. Number two, for example, was a $4.3 million acquisition in Grand Junction, Colorado. We were the largest investor. It was acquired from a neurotic mom and pop operator. She had 80% occupancy, but 80% delinquency. Imagine that in 2018 our operating partner cleaned it up. They actually added a website. Imagine that. Signage, exterior storage. And three and a half years later it was refinanced at a value of over double what was paid for it. Now I want to point out that even though this is 104% increase in value, the equity value is much. The equity value increases over 200% because they were using leverage. And that $5.2 million that came out of that was not just given to investors, it was reinvested in other assets. And so this is why we're pretty bullish on what's going on behind the scenes. Because while the assets themselves are, these earlier funds are throwing off an 8% return every year and they've been consistently doing that for a while, what's going on behind the scenes for a future exit date is in my mind even more impressive. So while we call this an income fund, it's really a growth and income fund. The Wellings Real Estate Income fund is for investors who need a low to mid teens tax shielded yield and are unwilling to tolerate the high risk of speculating with newbies and in some cases the uncertainty of investing in individual stocks. We provide diversification across asset types, properties, operators, geographies and strategies. We perform rigorous due diligence on operators and properties. We provide access to preferred equity deals that investors couldn't access on their own. We invest in historically recession resistant asset types. We provide tax benefits, cash flow and appreciation. We offer full transparency audits and planned monthly distributions. We're targeting 5 to 8% net cash yield and 12 to 15% net total annual return. Now you might think, wait a minute, I thought you had a 57% median IRR. Well, we do not want to promise and we do not believe that we can continue at that rate. We feel like in a way those were sort of anomalies because they were two year holds and we have a 10 year fund. But in another way, if you look at the refinanced assets, you can see, well, a lot of those are still growing in value now and maybe we'll hit higher than these Targets and we would love that if we did. But we don't want to over promise and under deliver. We'd like to do the opposite. So I'm gonna switch gears right now and talk about some of these asset types we invest in and I'll tell you some fun stories along the way. One of the books I wrote is on self storage and it was published by BiggerPockets in 2021. Now we really love self storage for a lot of reasons. There are about 55,000 self storage assets in the US and over 2/3 are owned by small time operators. These mom and pops don't have the knowledge or the desire or the resources to upgrade the facilities, increase the income and maximize investor roi. And the tenants are sticky. Now think about it Jim. If I'm leasing a $1,500 apartment from you and you raise my rent by 10%, I might leave rather than pay you the extra $150 a month and lock myself into $1,800 more in the next year. But if you're renting a self storage unit to me for 150 bucks and you raise the rent by 10%, well, I probably won't get a U haul, get my friends together and waste a weekend to move my junk, excuse me, my treasures down the street just to save 15 bucks a month. Especially when you've given me a month to month lease. And the new facility could raise their rent next month too. And besides, you know how it is. We all think that we're going to get down there the next free day we have and we're going to clean that unit out and stop renting it, right? Well, a friend of mine who leases self storage, he was talking to a doctor about this and the doctor started laughing and he said he was going to invest right on the spot. And my friend said why? He said, because I just remembered I have a self storage unit that's been hitting my credit card for like six, seven years and I've basically forgotten about it. And that's the situation for a lot of people in self storage. There's also lots of value adds. I mean our operators sell retail items like locks, boxes, tape and scissors. They rent U Hauls, they can add a cell tower in the back and they can put a billboard in the front. They can add a propane filling station, ATMs, they can use spare land to rent, you know, RV and boat storage and so much more. So self storage just has so much upside for a professional operator. This is a 33 year look in the green line, we see the occupancy of self storage versus the see sawing GDP in the red. So this is one of the assets we invested in. I was here in Colorado Springs at this asset several years ago. It was acquired for $10.9 million. The operator was completely hands off. He had a guy running it that wasn't doing a good job. It was acquired for $10.9 million. And listen to this. Not only did it have about 100,000 square feet of self storage inside, it had a lot of unused, poorly organized parking space outside. And it had about 90,000 square feet of unused warehouse space inside that was in decent shape. So our partner rented the warehouse out to three tenants. He raised the self storage rates to market. He organized the outdoors and rented that for boats and RVs. He sold off the retail, and in about four years total, he was able to get a 40% IRR on this property. And like I said, we were the largest investor in our earlier funds. This was another asset in the booming metropolis of Beeville, Texas. By the way, you might think self storage is overbuilt. It can be overbuilt, but it's not typically overbuilt. And there's typically not the big competition in these smaller cities, places like Beeville, Texas, Ishpeming, Michigan, Grand Junction, Colorado. This one was acquired from five feuding siblings. Unfortunately, the parents had passed away and the kids were running this into the ground. They were asking 5 million bucks for this asset through a residential realtor. When my partner, our operating partner, acquired this for $2.4 million cash. Now he did upgrades, he kicked out delinquent tenants, he added marketing and again, even a website brought it into the 90s. And it was appraised at $4.6 million just four months later. And he actually sold it for that price about a year after that. We were the largest investor in this in our earlier funds as well. You see, one of the secrets to this business is having full time people trying to contact these mom and pop operators. This operating partner I'm mentioning has eight full time people working 40 hours a week, making over 100 calls, texts, emails each per day to mom and pop operators trying to find these types of properties. Lots of people want to do that, but very few people pull it off. Now, in our current fund, they just recently acquired this property in Las Vegas. The builder in 1982 was still operating it for 42 years. They had handwritten records, no marketing, free units to friends. They were renting it illegally to homeless people. And the rates were only 40% of the market, if you can imagine that. So these rates could be raised from like, you know, average $60 a month up to $148 a month, and, and stay competitive. So these are the types of deals that are, you know, again, not only throwing off income, but also providing refinance proceeds to buy other assets and eventually, hopefully have a very strong exit. So we love investing in self storage, but we also love investing in manufactured housing communities, also known as mobile home parks. This is a Wyoming asset that's we invested in in an earlier fund. Now, mobile home parks are the only asset type we know of. With increasing demand and decreasing or sometimes steady supply every year. Now there really is an affordable housing crisis. 10,000Americans turn 65 today, but statistics say that 6 in 10 don't have $10,000 saved for retirement. Now many of them do have a pension or 401k proceeds or home equity they're willing to trade in to buy a manufactured home that gives them a yard, a porch, parking, a community, and no shared walls with a neighbor. A friend of mine was actually a prominent doctor in Southern California. And when he retired, he moved to Palm Springs and he bought a very nice mobile home and he traveled a lot. And so this is a choice many people make, in some cases workforce, housing wise. It's a choice that people just, you know, it's the best option for them to raise a family. So many of these manufactured housing communities are mom and pops and like I said, they don't have the desire or the knowledge or the resources to beautify the park and increase income. I also mentioned that there's very limited supply while the demand for these go up every year. You can see here that Green street says that the manufactured housing supply through next year is practically non existent while storage, student housing, senior housing, et cetera, is being built at normal levels. So this is a mobile home park we invested in in earlier funds. Ben, my partner and I were on the ground at this park in Louisville right before COVID It was acquired from a lady three states away. And as far as we know, she had never been to the property. She hadn't been there in at least five years. Our operating partner's goal was to improve the community and to get from a $7.1 million acquisition price to a $13 million value in three years. Well, he was able to make a lot of the changes he wanted to make, even during COVID And he surprisingly got an offer from a large operator of $15 million and he sold it only 10 months later, this is a manufactured housing community in our current fund. Now this one's in Bay City, Michigan for you Michiganders, it's up here in the Thumb. Our operating partner had acquired a mobile home park from a northern Detroit operator and made a lot of improvements to the park, upgraded the value a lot. And you can kind of guess that a lot of these operators, you know, wouldn't stay in touch with the seller for lots of reason. But that's not the case here. He stayed in touch with the seller. He sent them gift baskets during holidays. He stopped in to see them for coffee or a meal for when he went to Detroit. And in 2024, just actually December 2023, when they decided to sell their second asset, they didn't call a broker, they didn't put it out on the market. He didn't have to bid against a bunch of people. They just sold it to our operating partner. Now this is pretty significant because this was a year where statistics say that transaction volume in mobile home parks manufactured housing communities was way down over previous years. This asset, I mean, was a classic mom and pop manufactured housing community had 137 lots. It was acquired for only 36,500 a lot, which is way below replacement cost if you could get a permit to do it in the first place. Let's look at bullet point 2, 3 and 4 here. Rents were way below market, so they were raised partially toward market rents. It was based, the price was based on 127 rented lots. Four were filled before closing and four more are in process. And then he also recaptured utility expenses. All three of these combines add almost $4 million to the value of this park within the first year at a 6% cap rate. Now, I want to point out that we invest with operating partners who want to provide a nicer community for their tenants. These are not our operating partners. And us as investors, we don't view these as metal boxes that spit out cash, as some people say. This is someone's childhood home and we want to make it a great experience and a great memory for them. But we also want to maximize value for investors. Now I've mentioned mom and pop operators several times and I want to show you visually why it's so important to acquire from them when possible. So in multifamily, you can see that 93% of assets according to the study are owned by multi apartment owners. These are corporations who have typically already bled out the value. But look over here on the left, self storage, 76% of the owners are independent operators. And about half of all the operators own only one asset. They obviously don't have the resources to upgrade these assets and they typically don't care. They're typically making a great profit. Mobile home parks is even more extreme. 80 to 90% of mobile home parks and there's about 40 to 45,000 out there are owned by mom and pops. And so acquiring these, making improvements, making a better experience for the tenants and maximizing value for investors is a real possibility with mobile home parks and with self storage and with RV parks. We love investing in RV parks. They remind us of where self storage was in the mid-1990s. They've had a very high demand since the pandemic, which accelerated an already long term trend. They're highly fragmented. There's about 8,700 privately held RV parks in North America and over 90% are owned by small time operators. The COVID crisis really accelerated the RV boom. About five times as many RV campers started in 2020 as opposed to previous years. And a lot of people, in fact millions of people say they want to buy an RV in this decade. What's made it even better is there are websites that actually allow you to rent an rv, RV share outdoorsy. Other websites like that allow people to rent an RV for a weekend or a week. They'll even set it up for you. What this means is there's a lot more pressure on the limited number of RV parks. Now we've chosen to invest in destination RV parks. These parks have water parks. I mean, these parks have, you know, water parks, they have swimming lakes, they have, you know, dog, they have facilities for pets. They have limited food service, glamping units. And Jim, they even have whippets. Do you know what whippets are, Jim?

I have no idea what those are.

That's the bottom here. This is a floating obstacle course. You can see that this is a part my wife and I visited in Texas, has a floating obstacle course, has a beach, and they rent this for like $17 an hour to kids and adults and they can rent these as a value add to the park for up to $1,000 an hour in the summer. So now you know what wib. So the parks we invest in make these type of upgrades. They're really trying to be a destination park. I love this park. This is in Leesburg, Alabama, which most people haven't heard of. It's about an hour and a half from Chattanooga, Birmingham, two hours from Atlanta, which is the perfect driving distance for most RV parks. This park was Dramatically expanded in a couple different directions, including that forested area over on the right. They've added pools and the water park and they've added all kinds of stuff. They've got boat rental at the lake there. This park has as of now has 24 or so million dollars all in. And it's anticipated to have a value of $40 million upon stabilization. This is one in Branson. Branson is located 3 1/2 hours from Kansas City, Tulsa and Little Rock. And of course, it's a destination itself. This park's being upgraded in a similar way to the other one and we expect similar results. Now earlier I made fun of that guy who wrote a book called the Perfect Investment. And I did write this book, but I avoided multifamily investing for years like I already said. But we discovered two game changers that for us make multifamily much more palatable. In fact, we think it's a great time to invest in multifamily. The first one is investing in tax abated properties. Now I'm going to show you one in Texas that we invested in. This one has a 10 year interest only Fannie Mae debt. And the equity on this $80 million deal at closing was $26 million. But the next day the appraisal came in at not 80 million the purchase price, but $113 million. So there was a $33 million increase in equity at closing. And the reason is it had 100% property tax abatement for 99 years. The rents were 27% below the comparable units at closing. And basically this asset, what we love about it, Jim, is not only the future exit at a potentially high margin, but the margin of safety this creates. And then if rents don't go up as much as planned or if insurance costs skyrocket as they have in lots of multifamily, this property has more than enough margin of safety to absorb that. So this is one of the two properties in this two pack in League City, Texas. This is the other one. Now I mentioned two ways that we love to invest in multifamily. The first I mentioned was tax abated like this one. The second is related to Mr. Warren Buffett. Now Buffett acquired $5 billion of Goldman Sachs stock when most people wouldn't touch Goldman Sachs with a 39 and a half foot pole. But Buffett didn't take the same risk other investors took. Instead, he dramatically lowered his risk by buying shares of preferred equity in the fall of 2008. And we really believe that investors should try to Access preferred equity if they can. Right now, this is a picture of preferred equity. Imagine senior debt in the bottom. Imagine this is a $10 million deal. So imagine $6 million of senior debt, and then you would expect $4 million of common equity. But at this point, there's only $2.5 million, which is leaving a $1.5 million gap. Preferred equity or mezzanine debt would fill a gap like this. So we're pursuing preferred equity investments that provide cash flow of 8 or 9 to 10% and total returns of 15 or 16 up to 19%. Now, these are also providing lower risk because they've got that buffer of common equity on top, which means that if that common equity, if the value of the property is lower at the exit, then the common equity will be the first one to take a hit. In fact, in this example, if the property dropped in value of, let's say, 20%, that would take 80% of the common equity out, but it wouldn't touch the preferred equity at all. So we love investing in preferred equity because it's got some of the advantages of debt and some of equity. We think it's got a better risk to reward ratio. Right now. We feel like it. We feel like it has limited upside, it's very hard to source, and there is a limited time period. And it's especially profitable for small check sizes. And when I say small, I mean one or two to five million dollars. Now, a lot of people, when they hear preferred equity, they tune out because they think we're talking about rescue capital, but we don't do that at all. There's four types of preferred equity right now that we've been able to identify. One is for acquisitions, and we do that. Secondly, for recapitalization of an existing property. We do that as well. Third is ground up development. We think that's a great idea, but it's not in our risk profile. That's riskier than we want to be. And fourth, for rescue capital, which we have no intention of ever doing, though there certainly is a place for it. This is an example of an investment we made in the current fund in Atlanta. It was about $4 million. We have 30 million, excuse me, 30% common equity. And first loss position shielding us. This one has 9% current pay cash flow, 8% accruing upside. About 3 of the $4 million is still in our accounts earnings, 5% along the way. So this one is projecting a total IRR of 19.4%, which is pretty good, considering it's contractual. Doesn't Mean, it'll happen that way. Things could go wrong. But it's contractual, and the operator plans to take us out in about three years. And if they do, we will likely reallocate the proceeds into other assets and pay some of it out as profit. Now, the terms on this are pretty nice. Our current pay, our full return of capital and the compounded upside are all senior to the common equity. We get for sale rights. We get the power of the purse. We get depreciation, just like common equity, which we pass through to our investors. And this is only accessible through our current Wellings real estate income fund. This is the asset in Atlanta. We actually got some news about this that sounded pretty negative. Last week. Our operating partner told us that within the first quarter of ownership, they found that the tenants were a lot worse than they thought they were. In fact, 28 of the tenants out of 96 were evicted quickly, which means that these units were upgraded not a year or two down the road, but in the first quarter. And they plan to get $200 rent bumps from these upgraded units. But based on supply and demand in the Atlanta area, they're actually getting $450 rent bumps, which puts them way ahead of schedule, which is great for us and is especially good for the common equity investors who are in first loss position. Now, we've got a lot of investors, including white coat investors, who have said a lot of nice things about us. Samuel Strogans is an oral surgeon in Roanoke, Virginia. He said, oops, I jumped ahead here. He said, I like this as a way to get passive income for the long term, to grow my capital and be able to diversify my investments away from the stock market. Dr. Alan Solane says they truly, Wellings Capital truly wants what's best for you. And their model's a great model. With Today's financial situation, Dr. John Griffin says they're the most professional, timely and communicative. In addition, it's clear that their stringent due diligence helps my investment dollars work hard for me and put my mind. Puts my mind at ease. Evan Wilson is a retired orthodontist. He had some really nice things to say about us as well. And he says the funds have performed as expected and provided cash flow to me while the stock market has declined. Now, a lot of white coat investors and other investors love us, but you might not. In fact, there is quite a few reasons not to invest with Wellings Capital. And if that's the case, you know, we don't want you to invest. We want you to know what you're getting into. So let's look at some of the reasons not to invest with us. Number one, you might need a liquid investment. If that's you, you definitely don't want to invest in real estate or at least our fund because we're not liquid. Second, if you want a short hold time, you won't want us because we have eight or eight and a half years left as I record this in a ten year fund. If you love control, you should not invest in syndications or funds. If you like to file your tax return early, you probably should not invest in syndications or funds for the most part. If you're concerned about filing in multiple states, you should probably reach out to us if that's your only concern. Because though that is an issue, it's not an issue for most of our investors. And I'll tell you why, if Jim asked me about that later. If you're investing with an ira, you need to know that you'll be subject to ubit. Because though we don't have any debt at Wellings Capital at all, these assets, as I've already mentioned, have debt at the asset level. This is a quick overview. You might want to screenshot this if you're interested in our fund and take a look at it later. We're targeting 12 to 15% total annual returns, 5 to 8% cash flow along the way. There's a drip option so you can reinvest for a while at least. The way it works is if we ever exceed 10% cash flow from operations, which again I expect it to be 5 to 8, then there's an 8020 split and then there's an 8020 split on capital gains. At the end there's a $50,000 minimum. And again, it's for accredited investors. Investors can invest through Cash Trust LLC, self directed IRAs, et cetera. We have a 1.25% asset management fee. Jim, I don't want to leave today without telling investors about something near and dear to our hearts. Now, in the last 10 years, everybody's heard about human trafficking. But what you might not know is that if you took the record profits, not the average, the record profits from Nike, Starbucks, General Motors and Exxon Mobil, you added together those record profits and added about 20% more. That is the projected annual profits from human trafficking, according to the U.S. state Department. And so it is a tragedy. And Wellings Capital is concerned about this. The issue is huge. But like many of you, we didn't know what to do at first. The problem is if you want to get involved, what do you do? Do you go and do a commando raid like that guy in Sound of Freedom? Well, maybe. Do you send money off to somebody you've never met and hope they do the right thing? I don't think I want to do that. We decided to do the same thing we do with commercial real estate. We decide to vet operators. We found two we really like. One we've been investing heavily with that is aim. Aimfree.org is their website. You can go there yourself. We've influenced, raise and donated over $600,000 in the past two and a half years to AIM. And if you want to get involved, you don't have to go through us. You can go straight to aimfree.org or you can join our Giving Tuesday campaign in November where we raise money to again fight trafficking, put the bad guys behind bars, rescue children, give them a home, give them job skills, clothing, income, separation from the scene of the crime and a chance for a happy life. If you want to get hold of us, you can go to that bottom link there, wellingscapital.com investor you can email us investellingscapital.com you can actually get resources, including special reports on RV parks, self storage, mobile home park investing@wellingscapital.com resources or you can set up an investment call. If you'd like to do that. You can screenshot that top link. So with that, Jim, I'm going to take a drink and see if you have any questions.

Also, if people are having trouble Remembering all those URLs, all you got to remember is whitecoatinvestor.com Wellings and we'll get you connected with them even if you're not ready to invest with them right now. Paul does a lot of writing and it's, you know, almost all of us educational. And so it's a great email list to be on just to learn more about real estate investing. And you can obviously sign up for that with them. Also going through whitecoatinvestor.com Wellings all right, one of the things your fund has decided, your company has decided is to value diversification over simplification. Now, diversification sounds awesome, right? You get investments across 20 different states, bunch of different asset classes, bunch of different investments and operators. There are some downsides to diversification, though, one of which you alluded to earlier, which is that it often results in a more complex tax situation. So if somebody comes to the real estate income fund and decides I want to invest in it, how many states should they Expect they'll be filing a tax return in.

Well, Jim, it's hard to say where we'll end up. I can tell you that for 2022, Ben and I, as two of the first investors in this fund, filed in about six states. But there's a reason it's only that many. First of all, a lot of states don't ever need a tax filing. So if you're out of state in states like Washington, New Hampshire, South Dakota, Texas, Tennessee, Florida, you don't need to file a tax return because there's no state tax. Places like Michigan don't even require out of state filings. But a bigger reason is because of depreciation, because real estate has this thing called accelerated depreciation, which passes through losses, paper losses to investors in early years. And so if there's one asset in this fund in, let's just say South Carolina, I'm just making this up as an example. And your tax return has a $38 loss in South Carolina. Well, you may not go out of your way to file to pick up that loss this year. Some people do, most people don't. But there's going to be a day when those paper losses turn into real profits. And when that happens, you will have filing requirements in more states. Now, I will say, Jim, that I've had hundreds of prospective investors be really concerned about this. Some haven't invested. I can say that in six years we've had about three or four ever complain after the fact. And usually it's because their CPA was overcharging them to file. Most CPAs we see now charge 50 to $100 per state or sometimes $250 flat to cover all the different states. If that is your only concern, ask us. We can tell you A list of CPAs who probably charge less if your CPA is complaining about this.

Now, in states that will allow for the filing of a consolidated return, do you file that for the fund?

We don't. And the reason is there's a number of reasons. We respect the people who do that. But our CPAs have told us repeatedly that it's not necessarily best for investors when there's a lot of states like this and a lot of different investors. One reason is we have understood from CPAs that it can result in you paying the highest tax rate for that state. There's also other administrative headaches that can happen with consolidated returns. So we've decided not to go down that route. And if you decide that that is a hang up for you, it's probably not the best place for you to invest.

You mentioned your preferred return and the promote. I believe it was a 10% preferred return and then a promote above that. Is there a catch up on that promote?

There's not. So it's a 10% hurdle rate. We originally were looking at an 8% preferred with a catch up. And because we're a publicly registered company, our attorneys recommended that we didn't do the catch up. It was best practice in the SEC's eyes for some reason not to have the catch up. So we elevated that preferred from 8 to 10%. We did the math and concluded that it was about the same as an 8% with a catch up. So here's what I mean. The 10% hurdle basically means that investors are going to get all the distributable cash flow from operations for what we believe to be about an eight year, eight and a half years left on the fund, ten year total fund life. And then when there's a capital gain, let's back up actually. So they'll get all the cash flow from operations and then when there's a refinance, the investors get all that. We don't get a fee or a piece of that. And then when there's the sale of an asset, the investor gets their pro rata share of the principal and then there's an 8020 split on the capital gain. So we're really waiting till the last five or so years of the fund to get a profit split. And we think that's how it should be. We think investors should get rewarded first.

Now, a fair amount of the fund is preferred equity. And the value proposition you're making for the most part part with the fund is that you're doing the due diligence, finding the best people to invest with, and in exchange, the investors are paying you an additional layer of fees in addition to what the operators are getting. That's not the case for what was a 41% of the fund that's in preferred equity. There is no additional layer of fees there because that investment is just in the fund, correct?

Right? That's right. So there's a 1.25% asset management fee on that. And then the investors are getting other than expenses that is going into the return we're paying to investors.

Can you talk a little bit about the tax advantages of preferred equity over debt? I think as far as common equity goes, people understand the depreciation and that sort of stuff. But can you talk about the advantages of preferred equity over debt as far as Taxes go.

Yeah, a lot of folks think that the depreciation only applies to common equity, but that's not the case. We can actually negotiate that. And we're negotiating the pass through depreciation, the accelerated depreciation that you get on common equity, we're negotiating that on behalf of our investors for preferred equity as well. So the cash flow that is going into the mix we pay investors actually has the same paper losses on it that you would get with common equity, which is much different from debt, which is taxed as ordinary income. Typically.

Yeah. Now, the Real Estate Income fund is not an evergreen fund. It's going to close at some point. When do you anticipate it'll be closed to new investments? And do you expect to open another fund after that?

Yeah, we believe we will be closing by the end of 2024. And we are planning, though we haven't got details yet, we plan to open another fund after that for investors.

And so the funds, I think it's 10 years total. It's gone a year and a half so far. When do you expect to start returning equity to investors? Does that start after seven years or not start until 10 years or when do you expect that to happen and how much variability can there be in that?

Yeah, so we expect that these preferred equity investments will probably start cashing out. And like I said, in the first five years of the fund, from 2023, 2 to 2027 or so, we would tend to reinvest the principal and the profits in general to leverage future returns even more. However, from 2027 to 2020, 2032, the last five years of the fund life, we expect to be returning principal and profits to investors. So we expect that at the 10 year mark, there won't be a sudden big payday, but it'll be the last payday of many paydays for the return principal and profits from the sale of these assets along the way.

Okay, and of all the asset classes that the fund invests in, which one are you most excited about this year?

You know, it's funny, Jim, I told somebody the other day, if I was investing for 100 years and I couldn't touch the money, I think I'd choose multifamily. I think the multifamily that's built today will still be around in 100 years. But if I was to pick one for the next five years, I think it would be manufactured housing communities. Because there really is a serious issue with workforce and affordable housing. And manufactured housing meets that in ways that most other asset types really don't. So we really like investing in mobile home parks.

And the minimum investment for the fund is $50,000. How large is the fund now and how large do you expect it to be when you close it?

Yeah, we're at about $55 million right now and we expect to be trending close to $100 million by the time the fund closes, about nine months from the time we record this. Now, I can't promise Jim, and I might regret saying this, but if you like what we're doing, if you really like preferred equity, but you don't want to be part of a 10 year fund, reach out to us. We'll put you on a waiting list because we're going to have some sidecar preferred equity opportunities. These will probably be about a two to five year hold and they would be directly investing in singular preferred equity deals that we're structuring. So in addition to the size of the fund being hopefully approaching $100 million, we'll have some sidecar opportunities where the fund and individual investors invest together in these opportunities.

All right, well, thank you so much for your time today, Paul. For those who want to learn more about the Wellings Real Estate Income Fund or more about the company or more about Paul, go to whitecoatinvestor.com Wellings and you can get all of that information there. Thanks again for being with us today.

Thanks, Jim. The hosts of the White Coat Investor are not licensed accountants, attorneys or financial advisors. This podcast is for your entertainment and information only. It should not be considered professional or personalized financial advice. You should consult the appropriate professional for specific advice relating to your situation.