CW 317: Crowd Funding for Real Estate Investors with Chase Insogna Managing Partner of Insonga & Stewart

Welcome to Creating wealth with Jason Hartman. During this program, Jason is going to tell you some really exciting things that you probably haven't thought of before. And a new slant on investing fresh new approaches to America's best investment that will enable you to create more wealth and happiness than you ever thought possible. Jason is a genuine, self made multimillionaire who not only talks the talk, but walks the walk. He's been a successful investor for 20 years and currently owns properties in 11 states and South 17 cities. This program will help you follow in Jason's footsteps on the road to financial freedom. You really can do it. And now here's your host, Jason Hartman with the complete solution for real estate investors.

Hey, welcome to the Creating wealth show. This is your host, Jason Hartman. This is episode number 317. Thanks for joining us today. As we are going to finally talk about finally, finally. I've been wanting to do a show on this. We're going to finally talk about the concept of crowdfunding. Yes, you may have heard about this. You've heard about websites certainly like Kickstarter and Indiegogo, and then you've also heard about sites like Kiva. And these sites are really changing the world in many, many ways, whether it be micro lending or crowdfunding. But there's also a crowdfunding aspect where you can crowdfund a real estate deal. Just so you know, I don't think this day has arrived yet in any real practical way. But being on the cutting edge of things as we are here at the Creating wealth show, we wanted to talk about it. I've been very interested in it for a long time. I just, I don't think we're quite ready for prime time on this. But it's something to keep in the back of your minds. And we will be talking about it and exploring it more as it develops and as the laws mature. I do think that out of a lot of these things there's going to be a lot of litigation. So watch out. They always have a new thing come into play and then the lawyers follow and the litigation follows as fraud appears and people get burnt on deals and stuff happens. But generally speaking, this stuff kind of sorts itself out. You may know that in the early days of franchising and there's still a lot of litigation that comes out of the world of franchising, of course. But you know, nowadays after decades and decades of franchising, the legal system has matured, the parties in that business have matured, and everybody's just gotten better at understanding what it's all about. And the regulators have gotten better at understanding what it's about. And, you know, I think that's the way it will go with crowdfunding, too. So I'm not saying we're ready to do this yet, but I'm saying it's an interesting thing that as real estate investors, we want to keep our eye on for the future. And so we've got a couple of guest experts who are going to talk about that here as part of our guest segment today. But before we do that, Steve and I have some very important things to talk to you about. And one of them is some massive change in the housing market and what you should be doing with that. And we're going to talk about an article from a prior guest that I had on not too long ago, and that was Dr. Steve Sugarud. And you can go back and find that episode. Of course, it wasn't too long ago, maybe 20 or 30 episodes ago. But we want to talk about one of his articles that appeared today. And Steve, how are you doing?

I'm doing well. I'm just thinking about a couple of really important things, which is what prize are we going to give to the person who can spell Sugar rude successfully?

Well, yeah, that's. That's a good question because, you know, I'm always recommending that our listeners go to Jason hartman.com or if they listen to our other shows, any of our websites. And we always have this very handy dandy Google search bar that we actually pay for. So it's not full of advertising and it's in the upper right, the page. And they can type in Steve Sugarud and find that episode if they can spell it. But you know what? I'm gonna circumvent that contest and I'm just gonna spell it here for them. It's S J U G G E R U D. That's a. That's a tough one. But Steve's a great guy and really, really smart, really insightful. And you can find that. That episode that I recorded with him couple dozen episodes ago, it was a good one. But Steve, talk to us about this article.

Well, it's an interesting article. We were kind of going over it together, and I think one of the things that stands out the most to me is that Dr. Sugarud here has a graph that shows home prices since 1973 and kind of where the median home price has been in the United States and what is really a mind. You know, I'll just read it. It's only three or Four sentences.

Okay, but before you, before you do that, I got to just cite the source. This is a Bloomb graph. It's from Bloomberg, so it's credible source. And folks, if this doesn't convince you to beg, borrow and steal to be buying high quality properties with long term fixed rate investment grade debt following my exact plan, you're out of your frickin mind. I just got to say this so strongly and I really don't talk like that, but I mean folks, this is going to blow your mind, this graph and what it tells you because the opportunity is nothing short of phenomenal. I mean, Steve, it's hard to overplay this because it's just so true. It's just the facts of what's going on right now.

It is, it is so true. And we really ought to link the article on the blog or something because he nails your philosophy here.

He nails it. Yeah.

Yeah. We're not alone anymore.

We are definitely not alone.

Yeah, he just hits it out of the park because I'll read what he says here. House prices today are at about the same levels they were in 1979 and 1980. Adjusted.

Adjusted for inflation.

Adjusted for inflation.

Yeah. And so you know folks, if you felt that you missed the boat, that you, you wish you could turn back the hands of time, don't we all have those regrets at times in our lives? Every time I look in the mirror and then I hear on the news there's not a recession, but my forehead seems to be getting bigger. I'm talking about the recession in my hairline. And you just in so many ways. We want to turn back the hands of time. We want to take a mulligan. If you're a golfer, you want to take a do over and start again. This is the chance. I mean, look at this. This is the chance. I mean, do I sound too giddy? It's just phenomenal. Steve, what did you say? You said house prices today are back at the same levels as they were in 1979 and 1980, adjusted for inflation. And the amazing thing about that sentence is those are adjusted, I'm sure, because whenever anybody says that they're never adjusting for real inflation, they're adjusting for the official or the quoted inflation rate. So when you think of this, it's actually better than what he's pointing out. Because of that.

Yeah. We don't know if he's purposely being conservative there, but.

Okay, well, you know, because. Because to adjust for real inflation, you'd have to decide what the real inflation rate is. Okay. And everybody, whenever they do that, some liability or potential damage to their credibility is going to come. I say real inflation now is 9 or 10%. Most people in the know agree with me on that. But if you just go with the government statistics, no one will criticize you too badly for that.

Just go with those knowing it's actually higher than that.

Right.

So back then, and I'm quoting again here, back then, mortgage rates were 15%. At that rate, you'd pay $620,000 in interest over the life of that loan. And that's, that's taking, you know, what the median home price was back then. And then, he says, by comparison, at today's mortgage rates of 3.5%, you'd only pay $106,000 over the life of the loan. So what if you could go back in time now, not quoting anymore, to 1979, and buy houses at 3.5%?

It's better than it was then. I mean, think about the significance of this, folks. Now, one note, it's not quite as good as it seems in this sense, because an investor probably isn't going to get a 3.6% mortgage rate.

Yeah, not gonna happen.

The investor rates are higher. Maybe you'll get 4.5% just as an example. And you know, that fluctuates a little bit depending on the size of the loan, your credit score, the points you pay, the location in which you buy. So that's a slight moving target.

It's okay. It's still 10% lower.

It's phenomenal. Okay, it's phenomenal either way. Okay. But it's not quite this good. But in this example of buying one's own home as an owner occupant, you're paying 1/6, almost 1/6 of the interest. In a time when we have this massive, unpayable, unrepayable debt, that is a sign of significant, if not hyper inflation coming your way. That is going to totally enrich you and wipe this debt out. Those people didn't have this in 1979. We were coming off of the big inflation problem as Reagan got things back in decent stead. I'm not saying he was perfect by any means. He was just better than everybody else. Reagan had his downfalls, too. But when he got things back under control, that was good for the overall economy and it was more sensible. And it was really, you know, I can't even credit Reagan. You got to credit Paul Volcker, who was the only Fed chairman who had the guts to do the right thing. And break the back of inflation with those high interest rates. But I know many people who were in the real estate business in 1980 and in the 70s and still are in the business now or recently retired from it. And this is true. I mean, this is an accurate portrayal of things. So you've got basically the same median home price nationwide. Median home price. And then you've got interest rates that have you the equivalent of paying not quite as good, but almost one sixth of the interest over the life of the loan. And you've got massive inflation knocking on the door here. I mean, I know.

I know we have those. We have that opportunity, and it really has cut a fine line, Jason, because we have that opportunity because the money is cheap. What the Fed has done, what the government has done, if you don't take advantage of it, you're going to get clobbered by it.

I got to almost make a strong statement here because I just get so frustrated. Look, folks, when I sold my last company, I could have just retired. This is like my mission. I love this stuff. I want to really see the middle class and the upper middle class live on in this country, and they are totally under attack. But if you've been listening to this show and you have the wherewithal, and I understand some of our listeners don't, they. They've been listening because they've been wanting to get educated and they. They're not ready and they don't have the capital to make the move to do this. Okay. And they're accumulating it. But if you have the wherewithal and you don't take advantage of this time, you're just wasting your time. I mean, I don't know why you're listening to the show. You know, I gotta say, because the opportunity is so phenomenal right now. It's just sad to see people miss the opportunity.

It really is. And I'll kind of, if you don't mind Jason segue a little bit here, because there's something I want to read from the story and we can circle back if we need to. But you and I were talking about the quote from Wayne Gretzky, the famous hockey player.

That's a great quote.

Yeah, you miss 100% of the shots you don't take. And I actually, I don't even think you know this, but I played hockey for four years in high school, so that hits home with me. It's a very much a game of opportunity. And a lot of times, hockey coaches will measure success by how many shots on goal, the team had. If you didn't have a lot of them, your odds of winning go down. And that's how this is. And I have, you know, a few clients and I know lots of people do who are just stuck in paralysis by analysis right now. They're, they're chasing returns from six months ago where they're looking for reasons to not make a decision and they're getting left behind. But even if you're new to this and you're just jumping in now, it's still a fantastic opportunity. Then that leads me to what I want to read you from the story. And we can comment on this if you want to hang on one second here. But Dr. Sugarud says what most people don't realize is that market price today is still a fantastic deal. Most people don't understand compound interest and fair value. So most people today will back down. They won't pay full price or more because they don't really understand where we are now in housing. And I'll put quote, unquote, historically there at the end of that, because what he's talking about with where we are, where it adjusted for inflation, we're back in 1980 right. Now back to his quote. He says, in the grand scheme of things, full price today is still cheap. It takes a long time for house prices to reach fair value. They can't jump overnight like stock prices. Housing is still incredibly affordable thanks to low mortgage rates. And coupled with no supply and tons of demand, we have a recipe for much higher housing prices in the next couple years. Yeah, it's much, much harder to get a good property dramatically below asking price. But buying at market price is still a bargain today. I am confident that you will look back on today's prices in two years and wonder why the heck you didn't act.

Yeah. Yeah. The beginning of the reluctant investors lament, written back in 1977. He says, I hesitate to make a list of all the countless deals I've missed. Bonanzas that were in my grip. I watched them through my fingers slip and goes on and on. And I just want to read the whole thing, but I don't want to bore the listeners. I've done it before. I might do it again. I just have to warn you. But this is the time. And folks, if you're out there and you have half of the capital necessary to do a deal, I will partner with you personally. I'll put my own money into the other half of the deal. I can't imagine I would turn down any deal offered through our network so if you want to buy something and you've got half the cash and you need me to put in the other half of the cash, talk to your investment counselor at my company. If you're not engaged with an investment counselor, just go to jasonartman.com and click the contact section of the website and contact us through there and say, I'm interested in partnering with Jason. How's it work? And they'll help explain it to you. And, you know, we'll see if we can do a deal. I've partnered with many of our investors, and I've got capital, and one of my biggest problems is trying to deploy the capital because the inventory is so scarce. And if you need a partner and you want the guy on the show here to put his money where his mouth is, you just let me know and I'll put up some of the cash in your deal for you. Okay? And we will split the equity, we'll split the tax benefits, we'll split the cash flow and go from there. Those are pretty easy partnerships to do. I've done many, many of them over the.

Challenge issued.

Yeah, challenge issued. There's your deal.

Okay, well, yeah, I think you and I are going to do what here? But I want to say something here because some people are stuck in this mentality of 2009 and 2010. If you were doing real estate deals in 2009 and 2010, most people would have said that you're absolutely insane.

And you know what else? You had a lot of guts to be doing them back then.

You certainly did.

We had clients. I mean, I'll just tell you, in my businesses and my financial life, 2009 was not a good year. I mean, there was the financing just dried up, but we still had clients that had the guts to do it, and they were contrarian thinkers. Buy when everybody's selling, sell when everybody's buying. Right now, it may seem frothy to you, but we're early in the froth, folks. It's going to get a lot frothier than this. And still on net overall, the mentality out there is for mainstream is that things are still tough. I don't know if I should do anything. You hear a different thing on our show, of course, but you look at the mainstream world and there's a lot of people with paralysis of analysis out there that are still scared to make the leap. And when we're talking about this, by the way, Steve, I have to qualify it because most people that contact us are willing to do things. It's not like they're not buying. I guess what I'm saying is they're not buying enough.

Yeah.

Because I know that they have a lot more wherewithal and a lot more capital. And you know, they're buying five, six properties, 10 properties. But when you look at their entire portfolio, because, you know, they come to us and tell us about many times their whole entire financial life, what I've got in my IRA, what I've got in my 401k, what I've got in the bank, what I've got in equity and other properties and all of that stuff. And I qualify this with saying, as long as you're in the right deals in the right markets and you're structuring them correctly, this is the time to go in. Kind of heavy. Okay? I don't want to say go all in. I don't want to say that because that's just too much liability for me to say that. Okay. But this is the time to really, really push yourself to be doing a lot of stuff. And when you only put 20% or 1/5 of the money in the deal, your risk is relatively low, folks. The bank is taking the biggest risk.

It really is. And it's not that time anymore. Some people want to buy. You talked about this on the last podcast. I believe they want instant equity. And that can happen. That can be somewhat relative. But like Dr. Sugar was talking about, when you're looking at this historically and understanding what's really happening in the broader market, market price is a good deal today. It's not like in 2009 when you could go buy land or something from a builder who was losing his shirt or from a bank who was going to get shut down by the FDIC.

Tomorrow if they didn't unload some of their REO real estate owners.

Exactly. Or like we like to say, when there was blood in the streets and when only the crazy people were doing real estate, well, that ship has sailed. The crazy people, they did it. They're going to make the highest return because they took the biggest risk during that time. And we're in a good equilibrium right now where it's pretty apparent that this is a historical market. But you don't have to be one of the crazy people with all the risk you're taking. Less now, but you've still got that window to get a very good return historically, the herd has not arrived yet. We don't have NINJA loans yet. We don't have these low down no DOC loans.

Yeah. But we'll probably get them. It looks like they're coming and that'll be here and that'll really sell and that'll really make the market frothy. And that's when things will get really crazy. When that happens, and you'll think that this time was no big deal. Yeah. Folks, just do not miss the opportunity.

And financing is holding it back. That's why it's so great right now, because when financing comes back, you bought when it made sense. The deal made sense today. So you want to hold it forever. You can, you want to liquidate it. You can, because you did the right thing, you made the right decision, and you've got staying power.

Yeah, right, right. And that's commandment number five. Thou shalt not gamble. Only invest in properties that make sense the day you buy them and don't expect anything great to happen. Although from the looks of it, something great probably will happen, but maybe it won't diversify geographically, follow my ten commandments, and that's going to be your insurance policy and it's going to offer you a lot of protection in different areas. You're going to be buying sensible properties. You're going to have control of your investments. You're educated, you're diversified, you're area agnostic. You've got the most tax favored asset in America. You're using as much leverage as possible. It's fixed rate, prudent, conservative leverage. You're not buying in markets where you're buying high land values. You're following my risk evaluator formula to lessen your risk and almost eliminate it. And those are all the principles under which a prudent investor does business. And I just, I tell you, if you're not going in heavy right now, you're just going to miss the boat. And I hate to talk like this because I feel like a cheesy salesman saying it.

Yeah, I know what you mean.

But sometimes it's actually accurate. Okay. You know, and that's the thing. So anyway. Okay, well, hey, let's look at an actual property, Steve.

Yeah, I'm looking at one here in Lehigh Acres, Florida, down in southwest Florida. A lot of building happened back there during the boom.

Oh, yeah, that was one of the blood, bloodshed areas. I mean, it was just what happened in some of these areas of Florida was just ridiculous. I mean, where promoters would basically, they would get, they would sell people a lot a piece of land and then they'd say, hey, get this contractor to build the house for you. And these ramshackle houses were going up very Little zoning restriction at all. And they were just building things everywhere. They didn't have proper planning where there wasn't any shopping nearby. And there was like no employment base whatsoever in some of these areas. And, you know, it was just ridiculous. They just totally overbuilt these areas. But what happened was even worse than that, than those things is the builders, they'd start your project, start building your house, and they would quit in the middle of the job because they got another job that paid them more. That's how crazy the market is. Can you imagine buying a lot and having a half finished house that you can't get anyone to finish for you? Because there were just no workers. They would just leave a job in the middle of the job and then go build another house because it would pay them so much more.

Wow, those were the crazy times.

I mean, there were some bad things going on. So. Yeah, yeah, there are many overbuilt areas in Florida. But now the pendulum is swinging back because almost nothing has been built in the past few years. And the demand has increased. And it's not all investor driven and it's not all subprime borrower driven. Silly demand. The demand is much more sturdy and realistic now.

Yep, it's realistic organic demand. People like to jokingly refer to Lehigh Acres as ground zero.

And that's close to ground. That's one of the ground zeros. There's several of them, but that's one of them.

It's one of them. But, you know, you can buy. You know, we're looking at this property that was built in 1987, and it's almost 1300 square feet. You're buying it for $49 a square foot.

So this. Okay. It's funny because you look at the age. So it's built in 1987. So this property has lived through a couple cycles.

Yes, it has.

Absolutely. Okay.

And that is well below the cost of construction in Florida.

49 bucks a foot. Yeah.

Oh, yeah. And so that for Florida, that's great. So what's even better, too, the cash on cash return ON this is 12%. Your total return is 41. This isn't a growth market where you're buying well below the cost of construction. I like this deal.

Yeah. And I gotta say, these are all pro forma returns. This is part of the projection. But our projections, we feel, are pretty darn conservative. We've got the vacancy rate in there. We've got the management fees in there. We've got the maintenance percentage in there. This is not the pie in the sky stuff that some of our competitors in quotes do.

It's very conservative. Part of my responsibility at the company here is to verify data and I checked with a couple of property managers just to verify, hey, or how we looking on our rents, you know, in Lehigh Acres and Cape Coral and this particular property, we have it on the Pro Forma at 700amonth. Both the property managers I talked to came in higher than that.

Yeah. And Steve, I gotta ask before we totally finish with this property, what are some of the other markets that you like right now? If someone's listening to this and they say, hey, I'm just not a big Florida fan or I already own four or five properties in Florida and I want to be diversified. What are some of your favorites right now that we're doing business in?

Well, I can answer that quickly. It does depend on what your goal is. If you want to go minimal cash out of pocket. If you're the person that likes really cheap properties, maybe you like Section 8 and the guaranteed income that that brings. I don't think you can beat Birmingham, Alabama right now. What they get for rent there is very high. I think it's probably our highest rent to value ratios if you want new construction and you just like the stability that that brings. I am crazy about Houston right now, the growth that is happening in the Houston metro area. I was talking to our local market specialist actually the other day, and the manager there has actually got some calls from some of the big oil companies who want to sign executive leases on these new build properties, which that's a great tenant to have. That is fantastic. I love Houston. I love southwest Florida. And for your bread and butter, steady cash flow. Boring but steady. I always like Indy.

Yeah, good old Indianapolis. You used to live there and that's where I actually met you, so. Well, I didn't meet you there. I met you in Phoenix. But the first time we went and looked at properties together was in Indianapolis.

Yeah, we were in Indy.

That's good. Yeah, good. Well, yeah, we have lots of different markets for you to choose from, but just getting back to this property. So we got a projection of cash on cash return of 12% annually. So if the property goes to zero in value the day after you buy it, just maintain your income and expenses. You'll get 12% annually and overall return on investment when you factor everything in is projected at 41% annually. Wow. So again, as I always say, if it only goes half as well, you're going to make 20.5% annually. If it Only goes half as well as expected. So there you go.

That's a pretty good way to look at it. And it's a conservative pro forma. We've got the taxes, insurance, vacancy maintenance, leasing fees. This is all built into the pro forma. Make sure you pay attention to that stuff. If you're looking at property in other places, because that's usually not included, people want to doll up the numbers. This is a realistic figure. These are real costs of what it takes to operate an income property. And even after all of them, you're getting the numbers that Jason just said.

Good. Good stuff. Well, Steve, any other closing thoughts that you want to mention before we get to our guest?

Well, I want to hear the guest. I'm curious to see how the SEC is going to throw cold water on this crowdfunding thing.

Yeah, they probably are. And there's going to be a lot of litigation. And we're early talking about this, folks. Okay. But we just wanted to bring it to you and share some of the ideas. And Chase, who's on the. He's one of the guests, is a client of ours, and he bought. I recorded this a couple of weeks ago, but he bought. I believe he's purchased nine properties from our group so far. And right on the call. I think I asked him when we were talking. I think I said, well, how's it going? And I did not talk to him before. I don't know what he was gonna say. I just took the risk and, you know, what's he gonna say? And I think he said, eight of them are going great, and one of them is a problem. So, hey. And he'll eventually write the problem. You know, maybe. I can't remember why it was a problem. I think he's got a bad tenant in one of them. But look at the odds of that. I mean, you've got eight properties that are performing well, and I would assume that those properties are probably paying him somewhere in the mid 20% annual rate of return. So like 25%, something like that. And one of them is going poorly, and he's probably breaking even on it with zero return. So that's not bad at all, huh? You got eight properties paying you maybe 25% annually and one paying you zero percent annually. And eventually, within the next probably couple of months, that one is going to be. That ship will be righted and it'll start paying well again. So this stuff is great. I love real estate. Actually, I don't love real estate. I love income property. Let's be more specific about that. If you want to know what I mean by that, listen to some of the past shows folks. I've explained it before. Anyway, Steve, thanks for joining us today. We will be back to talk about the early advanced pioneer stages of crowdfunding here in just less than 60 seconds. And I leave you with one thought because it relates to this. Steve, I don't know if you know the answer to this little riddle, but how can you recognize who the pioneers are?

I'll tell you, if you don't see any of them around you, then you're it, right?

No, no, no, no, no. They're the ones with the arrows in their back.

There you go.

So don't be too early. But this is something to keep aware of. I really am looking at this crowdfunding thing and we'll see as it develops how it turns out. So we'll be back to talk about that in just a moment. Thanks, Steve.

Talk to you later.

Now you can get Jason's Creating wealth in Today's Economy home study course. All the knowledge and education revealed in a nine hour day of the Creating wealth bootcamp created in a home study course for you to dive into at your convenience. For more details go to jasonhartman.com.

Hey.

I'd like to talk to you about something that I have been following for a while now and that is the concept of crowdfunding. I've mentioned it before on the show and Obama signed a bill about this I'm remembering about a year, year and a half ago. But my guests will confirm the dates and get me all the proper information here in just a moment for you. And this is a really interesting thing that has changed some of the SEC rules and allows small investors to raise funds in different ways. And we'll talk about that today. So I have on the line with me coming, both guests are coming from Texas. One of them is our client Chase. Chase, how are you?

Good, thank you.

Good. Now you are a CPA and you became one of our clients, what, a few years ago, right?

That's correct. 2008, I think was my first one.

Okay, fantastic. And you own nine properties that you've purchased through our network.

That's right. I've got four in Georgia, four in Missouri and one in Texas.

And as you said to me before we started recording for the show, eight of them are great and one's a problem. Right.

And like you said, it's pretty good odds. So I'm doing well.

It is pretty good odds and we like to make this a realistic thing it's not perfect by any means, but I just say it's kind of like that story of the bear chasing the hikers. It doesn't have to be perfect. It just has to be better than everything else.

And you know, the moral of that little story, if you haven't heard it, listeners, is one of the hikers, as they see the bear coming, stops to put on his tennis shoes. And the other hiker says, hey, man, forget about your tennis shoes. You can't outrun a bear. And he says, I don't have to. I just have to outrun you.

And that's really all you have to do with your investments, is just outrun everything else. So. And Nathan is with us. Nathan works with Chase in the crowdfunding arena, and he is a lawyer who has come to specialize in this field a little bit and is also building an interesting portal for crowdfunding as well. Nathan, how are you?

Very good, thanks.

Good, good. Give us a little background on what you're doing, because I don't think your introduction for me was very complete.

Well, thanks for the opportunity. I am a former real estate attorney, and I now focus on an area of practice which can be loosely described as startup law, which are all those things that small companies and businesses encounter on their life cycle in the beginning part of their life. And one of the major issues behind that is funding. There's been a lot of interesting ways of funding companies in the past, and I think now we're at a point where with the passage of the JOBS act and some of the changes to crowdfunding, it only gets more interesting. We're also a partner in a company that's building a crowdfunding intermediary, which is an online portal under that JOBS act that lets people engage in crowdfunding of their ventures online. It's called Greenhouse, and we help grow companies. It's@fundgreenhouse.com and you can check that out and we'll have a lot more information on the JOBS act and crowdfunding as we go along available through there.

So as part of the JOBS Act. Now, when was that? Was that about a year and a half ago? Am I remembering that correctly?

Yeah, yeah. It was proposed to Congress in September of 2011 and then was passed in April of 2012.

Okay, so it was a year ago then? Almost exactly, yeah. Proposed about a year and a half ago. So I guess I was kind of right on both, maybe. So what is that? I mean, the JOBS act, of course, contained a bunch of things, but as it relates to our subject matter today, crowdfunding. What happened there? What changed there? And Nathan, that's probably a question for you. I guess. I don't know.

Well, sure, I'll take a stab at it. And I'm sure Chase can jump in here as well. In the past, for most companies and for various different reasons, if you wanted to get investment dollars usually had to come from accredited investors. And the definition of an accredited investor has traditionally been someone who has more than a million dollars in assets, excluding their primary residence or $200,000 a year for the past couple of years and a reasonable expectation that that income will continue, or someone that runs essentially a professional investment company or investment fund. Because of the SEC regulations on securities and securities offerings, companies needed to go to accredited investors and they had a lot of hoops to jump through, through the various SEC exemptions if they wanted to offer to anyone other than accredited investors. And unfortunately, some of those hoops to jump through wound up being prohibitive to the extent that people really couldn't raise money from retail investors.

Well, just to give you my take on that, this is one of those things where most people think the government was protecting them. Right? But in a way, it's kind of counterintuitive to look at it this way, but in a way what they were really doing potentially, I mean, this is subject to opinion, but it's mine, is that they were really protecting the big Wall street firms because they were keeping small business from growing by making the regulations so stringent that nobody in the small to medium sized market could play the game. And that really eliminated competition for the larger companies and the larger firm. You know, investment firms as well on Wall street where they just, if you wanted to raise money for your smaller business, you just, it was very tough to do. But of course that was always under the guise of protecting the small investor, which those results are questionable as well. But this is a bit of philosophical. I just wanted to point that out. Your thoughts?

I think that's accurate for the most part. And what Nathan was touching on was two parts came out of the Jobs act last April 5, 2012 when it passed. One was title two, which is the accredited investor piece, which is what Nathan just touched on. And then what you're touching on is referred to as Title three, which is basically allowing all individuals to invest in any type of startup in the US and with certain criteria. I think the government did a good job writing the bill and allowing Only up to 10% of your income up to certain dollar amounts. I think the highest you can go up to and Nathan could confirm is $10,000 you're risking. So from an investment perspective, losing 10 grand is not a lot of money in the grand scheme of things versus, you know, the stock market. You can say, you know, put $100,000 in there and who knows what's happening with it. So, you know, I'll let Nathan Talk to Title 3 and those specifics and what is required for investors to invest in a type of business for Title three.

Right. And what. Folks, just before you start thinking, why are we even talking about this? Most of our listeners are interested in investing in real estate is because this applies to real estate deals where you could crowdfund a real estate deal potentially. And I don't know that we're really here yet, but it's getting closer and things are changing. So that's what we're going to dive into today. So please continue to pay attention as we kind of drill down on this. But you know, you know what's interesting about that, Chase, you know, you're a CPA and it's a $10,000 maximum investment. Do these companies though have to have any sort of audited financial statements? I mean, the big companies that are in the public markets, of course they have all kinds of audits with questionable reliability. Just a la Arthur Anderson and Enron and a zillion others, frankly. But they do have quote unquote standards. What about these real estate ventures and business and startup businesses?

There are some fluid regulations still floating around. Nothing's really set in stone yet, but I believe it's over 500,000. It's going to need a small audit, which can be very costly. I mean, audits normally run at least a minimum of five grand. So, you know, 5% is not too bad. But you know, from a, from an investment perspective, that's kind of where we're trying to position ourselves is kind of be the CPA stamp, so to speak, on a business submitting their financials to a portal and saying, look, we're working with a cpa. You give us your money. You know, we're not just taking it from you and running for the hills. We have professionals behind us. And I think those are the businesses that are going to succeed on the portals. The small startups is those who have a professional network working for them that they can show on their business plan that, you know, these professionals are looking out for their investor monies. But for startups, you know, and how I kind of got into it, I mean, most CPAs that I know of have Never even heard of crowdfunding or very little about it. You know, for me, I've always been in entrepreneurship and I've always followed the industry. And I really believe with the passage of this, and once the SEC finally passes its rulings and it comes to fruition, this is going to basically vet every single business idea that's ever been created. And I know everybody on the phone, you know, has some type of business idea that they've thought of. That said, man, that would be a great idea if only I could get some little funding. And what this is going to do in title three is basically put your business plan up on a website, have people come to it, you know, read it and give you money to, as an equity investor in your, in your startup business. So it's just going to explode the entrepreneurship world because unlike today, where, you know, you normally have a great idea and you just don't even know where to start or, you know, you got to know someone that has a lot of money or borrow from your family or, you know, reach an angel investor or a venture capitalist. When you go to those type of people, even on people that watch Shark Tank on abc, they're always looking for proven businesses, proven sales, and that's just not something that the small entrepreneurs have. And so this is going to allow the entrepreneurship world to basically vet their own business and then allow it to grow and get proven. And then the angel investor and the venture capitalist will then step in as investor number two and take that viable business and run with it.

Okay, so, but why do you say, though, Chase, that it's going to be vetted? I mean, you're assuming that all of these little investors that invest less, less than $10,000 will vet it. I mean, is that what you're saying?

Well, I'm saying, you know, as far as the business idea and the business concept, it will allow a person to get a little startup capital and, you know, see if the business is viable enough to bring to market or to get additional equity investment to then take it to the next level.

Well, one thing I just want to jump in and point out is it's very easy for us to focus on startups and new businesses. I think there's a lot of energy there and a lot of excitement. But this also applies to traditional businesses who are preexisting, but maybe need to go out and raise capital for additional equipment or to grow their business and expand their business. So you can certainly use this. If you've got a construction company, you need to buy some more High end equipment and you're having trouble getting the lending terms that you want out of, out of your traditional lenders.

Take it to the next level. Yeah, right, I got it. Take the business to the next level. Raise some funding there. I mean, the point of this though is if this really works, this could really stimulate the economy. I mean, this might be as much as. I really think Obama is frankly an awful president. Not that the guy before him was much better, but this is a pretty good, I mean, this has pretty good potential, I think, to do some real good.

Well, you know, some of the example numbers from the Kaufman foundation on entrepreneurship and some others. Small businesses and startups in this country create 65% of the net new jobs looking back over the past 17 years. So if we're able to get those small businesses and startups and regional companies and accelerate their growth. But that makes a huge difference for our national employment picture as well.

Yeah, Chase, Yeah, it's really going to.

Help all sides of business. Just like Nathan pointed out very well, because as we all know, everyone goes to a bank and all my clients, you know, try to go to a bank for a loan and it's pretty much impossible. I mean, even $25,000 equipment loan with a perfect credit score isn't even guaranteed these days. So as Nathan pointed out, you know, you can easily put this up on a crowdfunding site and, you know, get the terms you want and easily get 25 grand. And I think it's going to be, I think the banks are going to find themselves being highly competed against with this crowdfunding space when it opens up.

So let's talk about real estate, you guys. I mean, we can circle back to business a little more if we haven't really covered that very well. But on a real estate deal, I mean, how would this look? Someone goes to Jason Hartman.com, which is the only place they should be shopping for real estate, and they find an investment property they want to. Could they crowdfund it?

It's very likely that they could. You'd have a choice as to how you crowdfund it. Right now, if you wanted to do something right away, you most likely fall under Title two, which is the accredited investor category. As part of some of the changes, the solicitation rules have been amended and we expect additional developments I think in that arena as well. But it makes it a little easier now for small businesses and real estate investors too, to come in and find participation that they couldn't get before. And that's from that accredited base but you could also create something like limited liability company or a corporation. A lot of people are probably already familiar with using single asset partnerships and things like that to hold their real estate investments. You could create a very similar structure where you create a company to hold a piece of real estate or a series of real estate investments and offer equity stake in that under the rules under the Title 3 section, if they develop the way that we believe that they will this summer and this fall.

More, though, I don't know that we've really answered the question about the real estate thing. You got to drill down a little more, I think.

Yeah, I think it's kind of fluid with the rules still coming out. We're just not really sure. I mean, you know, this conversation kind of started. I seen an article, I forget the source, but over the weekend relating to a group of investors, you pulled some money together in a crowdfund way and bought some properties. But from a tax perspective, and that's where I kind of come with, for the tax perspective with real estate, because I have my own properties, I didn't really think that was the best option for crowdfund investors to put their money in because there really was no tax benefits from that deal that they put together. Whereas, you know, you could. I think it would just be better to go put yourself in a reit, put that same money in a REIT on the stock exchange, and you get the same benefit. But I'm wondering if, you know, crowdfunding will allow. You know, let's say I want to buy three properties in Dallas. Can I throw it up on a crowdfund site and get some equity investors and we all kind of Form 1 LLC and go into it together. It's still kind of up in the air. Maybe Nathan could touch on a little bit more, in his opinion.

Yeah, and that's kind of what I was. I think I was maybe not very artfully saying a moment ago is that you can. We think you will be able to fund any kind of company through title III and already in places through title ii. And that company doesn't have to be an Internet startup. It can be a company that holds real estate. So that company could purchase real estate, and then you could divide up those membership interests if it's an llc, or divide up those shares if it's a corporation and offer those shares or membership interests through crowdfunding.

So when you crowdfund, I mean, how do you do it? Do you just go to the people you know, or do you go to the web? I mean, There are crowdfunding platforms out there now. I know you're developing one as well, but, I mean, there are some others out there too, already in existence. Right? Sure aren't.

An example that I think everyone can relate to is the Kickstarter approach to things. They were one of the early.

Kickstarter, though, is different, though, because it's a donation.

When we're talking about crowdfunding, we're talking about making an investment where you get a return, right?

Yeah, right. But I think some of the attributes that make for a successful Kickstarter campaign are the same attributes that would make for a successful crowdfunding campaign. So one of the things I deal with oftentimes, and you mentioned it earlier, is, hey, I have this great idea. Can I crowdfund this idea? Well, you could take an idea and put it on a crowdfunding site, but the chance of your success with that would be pretty limited. And I would say the same would apply to real estate. You could say, hey, I want to create an LLC that holds some real estate. Come invest in my LLC through crowdfunding. But that alone probably isn't going to get you a very strong response, because people are going to look for the same things in crowdfunding that they would look for in any other investment. They want to know that where they are putting their money is reliable. They want to know that the people behind it have some experience or at least have a plan for how that money is going to be spent. The companies that have done really kind of gangbusters on Kickstarter have put a lot of effort into marketing their campaigns outside of whatever crowdfunding platform that they are using. It is very much about being able to tap your network and tap the people that believe in you and believe in what you are doing to be able to make that raise effective and to make that campaign successful. The difference is, in the past, maybe you had to convince a bank or a handful of accredited investors. Now you just have to find people in your community and people that you know through your extended network who believe in you and who believe in your.

Success and your site and the other sites that are out there. If you know already, what do they do? Do they just take a percentage of the money raised?

That's something that's kind of open that we're not sure how the rules are going to sort out on that right now. The uk, for example, Britain, is about a year ahead of us. They came out with crowdfunding a year ago. And the way theirs works is that those funding portals Take a percentage of the raise, and they also charge a transaction fee for legal and things like that. It's my belief, and this is just my personal opinion, no legal opinion or anything else like that. But the way these rules are going to sort out is that you can fund through one of these portals, and the portals will operate much like Kickstarter where they take a percentage. It's unlikely that there will be a significant amount of legal fees or transactional fees outside of that.

I would assume that as good as all of this sounds, there is going to be just a ton of fraud and litigation and problems like this. Now, it's interesting how the Internet has. Of course, there's tons of fraud on the Internet. No one would deny that. In fact, I just sent like $100,000 to someone in Nigeria. They promised me, I hope it's going to work. Joking, of course, but I mean, no one wanted to deny there's a ton of fraud and problems with the Internet, but on balance, it is amazingly effective. Like, you look at something like ebay and you look at how a seller is kept honest with ratings and reviews, and of course, they're not all accurate or true, but it's pretty good, amazingly. The problem with the crowdfunding, though, is that no one sells, starts a business or funds a business that often. Whereas if you're a seller on ebay, you want to sell stuff many times a day, probably depending on what you're selling, especially if it's not a high ticket item. So that rating really matters to you. So I don't know if you can keep people who are raising money honest with ratings. How are we going to prevent just the massive possibility of fraud and litigation? Wow. I mean, there's enough of it in private placement memorandums, and people that go raise money for something and take off to another country, or they just start the business and do it kind of in vain and. And then they siphon all the money off. I mean, this is certainly done on Wall street, too. Just ask Dennis Kozlowski or any one of a zillion other sleazy operators. But the thing about the crowdfunding that makes it in a way worse is the fact the maximum is $10,000. It doesn't make it worth it to go hire a lawyer and sue them and track them down because it's not enough to offset the cost of litigation.

It's a very good question. And this is what's being brought up, especially in the media. You know, with fraud, it's definitely an issue, but like, you said, you know, fraud happens everywhere. I think in my personal opinion what's going to happen is there's two parts. One, those businesses, like Nathan said, that are already established and just seeking additional investment to continue to take it to the next level, those are the ones that are going to be successful on crowdfunding because they can look up their business and they're already established. But those that are starting up, that are new, I think it's going to come down to the portal itself and there's still regulations on how people are going to be vetted and interviewed and stuff. But I think the ones, the portals that are going to be successful are the ones that heavily interview the candidates that are coming onto their site, you know, with an application and a background Check, Financial Review, etc. Etc. Before they even get their campaign online. There's a ton of back end work that will happen at the portal level as far as credit checks and things like that to hopefully self police their own industry. And when I was at south by Southwest, the founder of Indiegogo, the co founder, spoke for Startup America session a couple weeks ago and he said, you know, we have potential fraud every day. You just don't hear about it because it generally never comes to fruition. So on the back end, you know, they're constantly and they send, I think he said, millions or tens of millions of dollars around the world every day through Indiegogo. And he said there's potential fraud all over. However, they're dealing with it on the back end and they're policing themselves so that issues like a huge fraud case doesn't come to fruition on the front end with the media and things like that.

Right.

Chase and I think each portal is likely to tackle that differently and how they handle it. Everyone is going to be doing work on the back end to identify those cases of fraud. But it's worth distinguishing the difference between fraud and poor return on an investment. You can get poor return on an investment lots of different places. Oh, absolutely, that's true. And so one of the things that I would caution people that are looking at crowdfunding and looking at going and investing money that way is to treat this the same way you would treat any other investment. And you want to look at what metrics are available, you want to look and see what kind of information you can get about those companies. Some portals will leave the due diligence process to the investor, others will be more proactive about it. And there's actually companies out there like Crowdcheck, that are entirely focused on the due diligence process of these investments. And a lot of the times it's going to be your domain knowledge or your subject matter expertise that helps you to evaluate it. So there's definitely a place for real estate specific investment advice and ways to determine how you're making a good investment and how you're not. On the startup side of things, there's a lot of discussion in the startup community about traction and how does a small company that's getting started demonstrate traction to their investors and show that they actually are going where they say they're going? And there's incubators and accelerators, companies like techstars that has a program here in San Antonio that vets these companies and runs them through an accelerator process and provides them with a lot of mentoring. So those are all kinds of things that you might look at when you're evaluating these investments. On the fraud side of things, we really haven't seen that much in the uk. We haven't seen that much through places like Chase said, like Indiegogo and the existing crowdfunding platforms. It's also not a particularly efficient way for fraudsters to work because they still do have to go through so many different checks. And this is something that ACC is going to have very strong leadership on, we believe. I think FINRA will also have some strong leadership on this in terms of what the industry, what kind of criteria does the industry place on issuers, which are the people offering the equity, and on investors to make sure that both sides are getting the disclosures that they need to make an accurate decision.

Okay, good. Wrap it up. Anything I missed that you want people to know?

Well, I think it's a really interesting. Yeah, we've covered a lot of ground and there's a lot of ground left to cover, but it's the sort of thing that we're going to see a lot of developments on this as the year, the calendar year wears along. I think ultimately people can start planning now and deciding what do they need to do if they do have a business or a real estate investment or an existing company, anything that might benefit from this funding, how would I go about presenting this to an investor? And if you come up with good answers to that question, then those are going to be good answers on a crowdfunding platform or in the traditional investment method.

Chase?

Yeah, I think for my existing clients, I can speak on behalf of them. I know they're, I've been educating them about it and they're getting super excited because like I mentioned before, the Banks are just so tight these days with their own lending that it's really going to help them open up getting that extra funding to take their business to the next level and use their social network and their customer network to plug into and say, hey, go on this crowdfunding site and help us out with our business so we can grow with you.

Good. Good stuff. Well, Nathan, I think you gave out your website already. Did you already give that out at the beginning?

I believe I did. It's fundgreenhouse.com and we'll have quite a bit of information there for investors to consider as crowdfunding goes along. And I'd encourage you to come back and check out Fund Greenhouse often, because as that information comes down from the SEC and from the other regulatory agencies, we'll definitely be very proactive in trying to help explain that and help people understand where we are in the funding process.

And Chase, give out your website, if you would.

Yeah, it's Insania and Stewart CPAs. It's is CPAPC.com and my specialty is tax. We do accounting and tax only. And, you know, not just crowdfunding, but real estate investment taxes for those that are on the call. I have all my properties through Hartman, so I'm highly familiar with the industry and everything that goes along with making sure you capture all your tax deductions.

Good. Yeah, that's great. And Chase, since you mentioned it, just maybe just a moment on your investments and things like that and what your thoughts are. I mean, what attracted you to real estate? You probably found my podcast, I assume, and started listening. And then I know you came to at least one event. Have you been to a couple of our events in California?

No, I came to Juan. I think it was maybe spring of 09.

Yeah. At the Marriott.

I remember.

Yeah. Right, right. And that was a master's event, I think it was.

And. But, but again, I kind of got started with the podcast. I just started listening a bunch of podcasts. Found you, you know, really liked your message. You didn't charge any money like some of those other guys out there do. And what I found at Atlanta, when I went out there to interview everyone before I bought my first one out there, was that you do your own vetting process with those that you're recommending properties from. And which was very encouraging to know that in my future deals that, you know, you're looking out for the people that are investing in the properties that you're recommending. But my properties individually, they, like I said, a good ones, you know, one Pretty nightmare. But, you know, it's. It's getting better. So it's, it's been some tenant issues, nothing major, just, you know, some cash flow problems. But, but all my properties I'm super happy with. I think I got in at a good time in 2008 through 10, before all the equity money started flooding into the market like it is today. They're all doing at least 15 to 20% cash rate. So I'm extremely happy with all the ones that I've found from your group and working with Ari.

And so that's 15 to 20% cash on cash return.

That's correct.

That's phenomenal. I mean, except for the problem child. So about, I guess that would make it about 11% of your portfolio has been problematic. The one property out of, of the nine, you know, out of the nine. But boy, I tell you, if you lose money on that other one and make money on the other eight, it 15 to 20% cash on cash. If you average that, I don't know, you know, what the average of your portfolio is, if you even keep track of that. But it's got to be 17%, I would assume that's. That's phenomenal.

Yeah, it is very phenomenal. And, you know, being a tax guy, I mean, the tax benefits are just amazing. It's the most tax favorite asset class, as you've always pointed out on your show. And then, you know, getting in and, you know, with housing, basically nothing being built. And during that period, you know, now we're getting into, you know, increased rents as you've been bringing up, and eventually appreciation because there's just so less inventory out there to choose from.

Well, good stuff. Keep up the good work with the crowdfunding and investing. And Chase and Nathan, thank you so much for joining us today and telling us about this. I appreciate it.

Thank you.

Thank you for having us on.

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