CW 886 FBF -Salvatore Buschemi– Rent-To-Value Ratio's With Jason's Mom & Crowdfunding For Real Estate Investments

This show is produced by the Hartman Media Company. For more information and links to all our great podcasts, visit hartmanmedia.com welcome to this week's edition of Flashback Friday. Your opportunity to get some good review by listening to episodes from the past that Jason has hand picked to help you today in the present and propel you into the future. Enjoy.

Welcome to the Creating wealth show with Jason Hartman. You're about to learn a new slant on investing, some exciting techniques and fresh new approaches to the world's most historically proven asset class that will enable you to create more wealth and freedom than you ever thought possible. Jason is a genuine, self made multimillionaire who's actually been there and done it. He's a successful investor, lender, developer and entrepreneur who's owned properties in 11 states, had hundreds of tenants, and been involved in thousands of real estate transactions. This program will help you follow in Jason's footsteps on the road to your Financial Independence Day. You really can do it. And now, here's your host, Jason Hartman with the complete solution for real estate investors.

Today. Our guest will be Salvatore Buscemi, who is going to talk about making the yield, about fund scams, hard money lending uncovered. Just some interesting stuff that I think you'll enjoy. For the intro portion of the show today, we have got my mom on the phone. My mom is back. Mom, welcome. I think this is maybe the fourth time you've been on the show. Maybe the fifth even. I don't know. How are you?

Hi. I'm fine. Jason, I don't want to get overexposed here on your shows.

Yes, yes. You got to keep up your mystery, right? Your mystique. Hey, you know, as we were talking about what to talk about during this intro for a few minutes before, first of all, the big announcement is that you are coming. You are joining us for the Memphis property tour and you're going to join us for dinner at Graceland at Elvis Presley's Graceland. Right.

Definitely. I can't wait to do that. I mean, I really did like Elvis when I was a teenager.

Elvis changed everything. Now I'm curious, did you like the Beatles when you were. Well, let me see, you were a teenager. Yeah. You would have been a teenager around Beatles time. Well, you know, the Beatles are forever. But did you like the Beatles too? Really? Just Elvis?

I liked Elvis much better. Yeah.

How come?

I guess you like the things that occur to you when you're a teenager better than when you get into your 20s. And I was maybe 21 or 22 when the Beatles came to America. So I just liked Elvis a lot better.

Interesting. Interesting that you'd have to even qualify that statement and say when the Beatles came to America, because nowadays if a musician publishes something, it's worldwide instantly, you know.

Oh, but that was a. That was a terrifically big deal when they came. They were on the Ed Sullivan show. And I mean, it was an amazing thing.

Oh, really. Interesting, interesting, interesting. Well, anyway, so I'm glad you're joining us for the Memphis property tour. And folks, if you have not yet registered, it's only a couple of weeks away. Go to Jason Hartman dot com. And by the way, one of the things our venture alliance members, you know, my new mastermind group. Mom, I haven't really talked to you much about this. We. If at all, maybe. But my new mastermind group, the Venture alliance, the tagline for it is your financial friends. It's possibly the only mastermind group dedicated to doing real estate deals together to avoid the pitfalls and the scams that come with investing in funds. I want to basically help people form a bunch of friendships where they can do deals together. And that's the primary focus of the Venture Alliance.

That would be fantastic.

Yeah, yeah, no, it's going to be great. I'm super excited about it. And venture alliance members don't even know. This is one of their perks. They get to come to all of our property tours and our creating wealth seminars and our annual meet the masters events for free. So, you know, Neil, Elizabeth, Chris.

Well, they can meet a lot more potential partners.

That's true. They. They can do that. But you know, the forum won't be where they really like talking about it during those events as much. But anyway, those are free for them. So Venture alliance members, of course, just let us know if you want to come. We will get you free tickets for those events. But gosh, what. What did we want to talk about today? So you've been reading some interesting books. Mom, you finished Harry Dent's book recently, the demographic Cliff James Rickards, you've been reading. I don't know which one of his. Gosh, I.

The death of money.

Yeah, I loved that book. James Rickards is really interesting and I want to get him on the show. Of course, Harry Dent's been on the show four times and the president of his company was also on the show, Rodney Johnson. And he was just as interesting really as Harry because, I don't know, just a different take on Harry's philosophy.

I think Harry Dent is just off in the years. You know, he doesn't his, his predictions aren't following what is happening. You know, he thinks that there, there should be a big crash in. It should have been a big crash in 2014 or in early 2015. Well, it hasn't happened.

Well, crash, wait, you gotta define crash though. Is he talking about real estate or stock market?

A crash in the stock market and.

Everywhere Harry Dent has been like famously wrong and famously right about a few things. But he might be off in the years for sure. You know, I started studying his stuff back in 1995 and I remember he predicted that, you know, the stock market was really going to start to have problems in like 2009-2012 as the retiring baby boomers would pull their money out. He predicted the same thing for the real estate market and in the demographic cliff book. He's not bullish on real estate by any means either, is he?

No, not at all. But it seems like in California real estate is really doing very, very well.

Well, doing well needs to be properly.

Well, the prices are going up. I have realtors that send me, you know what's happening in real estate in West LA where I have properties. It just seems as though houses that I can recognize, you know, just on the one street over from Kelton Avenue, I mean one of them that was ugly. It was ugly as sin. Just sold for a million and a half dollars.

Here's the problem, mom. And this is the debate that we have for eternity. I think that million dollar house only rents for about 4,000, maybe $4,200 a month and that doesn't work.

Well, I agree.

You wait listeners. Did you just hear that? My mother agreed with me on the air.

I'm so glad I got that.

Well, that's a no. That's a no brainer.

I'm so glad I got that on tape.

This is awesome. Oh my gosh. So you know, here's the funny thing about it is that like look it, if these cyclical markets, like pretty much the whole state of California, just every expensive market in the US is a cyclical market, okay? And every expensive market really on planet earth, so far as I can, you know, so far as I can see, I mean it's a pretty big world. So I may have missed some in there. But you know, all the major sort of world class cities that are really expensive, all of those markets, if you can time them right, you're going to make a fortune, okay? Because you, you don't need to invest for cash flow. If you're investing in these cyclical markets and you can accurately predict appreciation and depreciation. Problem is, I just don't know anybody. I've never met anybody, heard of any expert that can really do that in any reliable way.

But don't.

But don't you remember when you had. I can't remember what the meeting was, but I think the guy's name was Joel and he really had it just knocked about where the housing prices were going to go in Los Angeles.

That was one of my very first seminars. And that was, I believe, and it was my first seminar in general, but was my first seminar with my current philosophy. I'll say, okay. And that was about 11 years ago. In fact, I remember. I'm pretty sure it was right around possibly I should look up, see if it was a Saturday, because I know it was a Saturday, March 12th of 2004, I'm gonna guess. Or it was.

Well, I remember we were all having lunch and he had these statistics with him and we all should have listened to him.

Well, we did. I listened to him.

Well, I didn't. I kept my property.

So here's the thing I want the listeners to understand on that, first of all, is that the over time, the cyclical markets actually underperform the linear markets, which is almost counterintuitive because the linear, inexpensive markets, if you look at it over the course, and of course you can pick whatever time frames you want and make the statistics kind of look the way you want, I completely understand that. That's what everybody does. So you have to just look over longer periods and adjust for crashes and booms and stuff like that. Okay? But generally speaking, the linear markets will slightly outperform the cyclical markets, which is amazing. No one would think that. And the reason no one would think that is because, you know, in the linear market, where prices are going up at maybe 5% annually, you know, that's nothing to write home about. It's nothing that exciting. And the cyclical market, where you might have a year where they'll go up 20, 30% or, you know, 15% or. Or maybe even in a crazy bubble like we saw in Phoenix in 2004, 2005, where we saw 50, literally 50% appreciation in a year, I mean, that's just really. Oh, yeah, that's just insanity. And I reported on that, on the show when it was happening and at my seminars, depending on which time frame you looked in Phoenix back then, during the absolute crazy boom, it was either a 49% increase or a 55% increase. And what I mean by that, let me just Clarify is if you looked at a calendar year or if you looked at a trailing 12 months, and based on which quarter, you know you trailed those 12 months for that number, it was psychotic. No wonder it crashed, obviously. So the point I want listeners to take home is that in the cyclical market that has the big peaks and the wonderful peaks and then the awful terrible lows where the market just crashes, you give so much back in the crash. It's that concept that you've got to remember, listeners, is that it's easier to take in a stock metaphor and compare it to a stock, because if you have a Stock that is $100 and it loses half its value and goes to 50, you lost 50% of your value. But in order to get back the money you lost, you have to gain 100%, right?

Right.

Yeah. So you have to gain so much more on a percentage basis to make up for losses in those cyclical markets, those roller coaster ride markets, all those expensive markets, South Florida, California, you know, the Pacific Northwest, the Northeast, all the expensive places that over time you do better in the linear markets. And that most people won't believe because they will think, well, I never hear anything about Memphis on the news. You know, nothing impressive happens there. But here's the reality, it's the tortoise and the hare. So number one, you don't have to make up those big losses. But number two, all along in the linear market like Memphis, you're getting such good cash flow. And I'll just give you a great example. One of our clients, a very wonderful lady, her name is Joan. Okay. She emailed me just yesterday. We were trading emails and she said that she inherited a house in Riverside. The value of the Property was about 600, $125,000. And she asked, you know, Jason, do you know a property manager there now? She lives in Southern California. Okay, so she's already probably got that Southern California mindset. Well, apparently so. I mean, you be the judge with what I'm going to tell you. And she says, do you know a property manager? And before I answered the question, I wrote back to her in the email and I said, how much is the property worth? And she wrote back and she said, well, it looks like it's worth about 625. And I said, okay, so I bet that property will rent for somewhere between 28 and $3,300 a month. And I don't even have to know the address. I don't have to know anything about the property. I just know it because that Ratio is always true. It just holds true. Okay, now, maybe, you know, I'll be off a little bit, but that's somewhere in that range is what it's going to rent for. And so I basically went through the explanation and a few emails back and forth in saying, look, you know, if you were to sell that property and you could earn about $6,000 per month. So you're basically, if you rent that house, you're going to make it very hard to sell if you rent it. So really consider this decision carefully. You're going to be losing about 2,36,000 per year.

And she says, what do you mean? How am I gonna lose $36,000 a year? The property is free and clear. There's no mortgage. And I said. And I thought, now I feel like I'm talking to my mother again.

Right? Oh, my gosh, this is. This must be my punishment for something that I have to keep. Keep repeating and having the same conversation over and over again, right?

What do you think, Mom?

Well, the thing of it is, is that, you know, you have to deal with a lot more tenants, and it just is so much nicer to have a $4,000 check deposited into your bank account.

Well, first of all, it's not.

Thanks.

Hang on, hang on, hang on, you completely illogical mother here.

Listeners. Don't you like it? You tune into my show and you just get to listen to my mother and I laughing.

All right, Jason, I'm waiting for your explanation.

Okay. All right, all right. Well, thank you for humoring me here. But, yeah, that's not a $4,000 check on that $625,000 house. It's going to be about.

No, no, I was thinking of one of my.

You were thinking about your $850,000 property on Kelton Avenue in West LA. Okay. Which listeners just notice that the ratio happens to be about the same, right? You get 4,000 for an $850,000 house, or you get 3,300, maybe as low as 2,800 for a $625,000 house. Because it's all about the ratio. It's the ratio. Ratio holds around the world. It is amazing to me. 74 countries I visited, and the ratio just holds up everywhere you go. It seems like it's an amazing thing. Remember, you're listening to Flashback Friday. Our new episodes are published every Monday and Wednesday. So, you know, it's going to be a $39,000 of less revenue. And, yes, you don't have as many managers or tenants or properties to deal with. I do agree with you, but when one of the six $100,000 properties goes vacant, you only lose $1,000 per month. Whereas when you're one $600,000 property goes vacant, you lose, lose all $3,000 per month. It's a, you're, you have a hundred percent vacancy rate. Right. So you're not diversified and you can diversify geographically, too. So with $600,000 buying six properties, I would buy those in two or three different cities and I think you'll be much better off. So anyway, that will be the continuing discussion that we can have in Memphis as well. Mom. How do you like that?

Well, at least I'll get to look at some a lot less expensive houses in Memphis.

That's for sure. That's for sure. So. And you've come around a little bit. I gotta say, I appreciate that because, you know, you've purchased some properties outside of the Socialist Republic of California in the last several years. So that's good, good news. Hey, you know what we didn't, what we should have talked about is my recent trip to Necker island and meeting Sir Richard Branson again for the second time. Hanging out with him. Got some good pictures of the whole affair. It was really fun. But we don't have time, mom, so you now, now you have to come back on the show so we can talk about that. Talk about currency wars.

You know, I told you when I was, when you were there, I read in Fortune magazine a very good article about Richard Branson and his, you know, taking, you know, flights into space. And Paul Allen, you know, one of the founders of Microsoft, anyway, he funded some of that and I think it was like $28 million or something like.

That to Virgin Virgin Galactic. Yeah.

And he, someone asked him if he was going to go into space and he said, no, I've learned to be afraid.

Yeah, well, I think that's probably wise. I wouldn't, I don't want to go on the first flight.

I will wait till it gets cheaper, safer and longer because, you know, those space flights, like, my friend bought a ticket and he paid $250,000 for that ticket. And, you know, the plan is that it's only going to go up into space for just a few, couple of quick minutes. Yeah, you're just gonna get to float around for a couple minutes and come down for a quarter million dollars. And, you know, I mean, if I'm gonna go into space, I want to do at least one full orbit around the Earth. I mean, that would be Just awesome to go completely around.

You know, to me, it, I mean, I hope that we get to be able to fly in space and everything. And I really approve of all of the technology, technology and all of the research and all of the people trying to develop that. But I'm staying on the ground for I think, Mom, I would not want to go.

Don't worry, I'm not trying to talk you into it. I'm not even talking myself into it.

Good. I'm glad to hear that, Jason.

Well, good. Well, hey, let's get to our interview. We've got a good guest. You're going to enjoy this interview. You're going to hear about how the insiders in these various funds and stuff buy their shares at lower prices. And it's such a, such a scam. We've been selling a lot of, you know what we noticed that happens. We're going to call this the tour effect. Every time we announce a property tour, it's like all our clients run over there and buy in that market before the tour. So our local market specialists have to save properties for the people who attend the tour and they always do that for us. But do check out the properties@jasonhartman.com in the properties section, register for the upcoming tour. You'll get to meet my wonderful mom and hear about her investments and so forth. And it's just going to be a great tour and dinner at Graceland, a private dinner just for our group at the world famous Graceland in Memphis. So it's going to be a lot of fun. You can register@jasonhartman.com Venture alliance members. If you want to come, just email me directly and we will get you your free ticket and we'll look forward to seeing you there. Mom, thanks for coming on and doing the intro portion of the show with me and I look forward to seeing you soon. And let's get to today's guest. Here we go. It's my pleasure to welcome Salvatore Buscemi to the show. He is managing director of Dandru Partners and co founder and CFO of Oasis Fractionalized Real Estate Equity. He's author of Making the Real Estate Hard Money Lending Uncovered. Sal, welcome. How are you?

Thank you very much for having me. I'm very happy to be here. Thank you.

Give our listeners a sense of geography.

Where are you located right now? I'm in New York City.

And is that where you're based?

Yeah, we're based in New York. We also have the Oasis Fund and it's based actually out in Las Vegas.

So hard money lending Uncovered, it sounds like, Is there a scandal there? Hard money Lending Uncovered it is.

You know, and.

You know, back during the past, you know, housing boom that we had, there were a lot of people who were getting involved into deals or they were pooling money to invest in what we call private loans. And what happened was, is that a lot of these people did not know who they were dealing with. And as a result, they wound up losing a lot of money because essentially they were lending money to people who they didn't know, who didn't have an alignment of interest with them. And also lastly, they didn't really know if the person who was borrowing the money, the operator, actually had any experience. And so we're starting to see this happen again in certain other parts of the industry. You and I spoke about crowdfunding. People have a strong interest right now. People are very, they're desperate for yields.

It's sort of a hot new thing. You know, I'm sure there will be many problems in the world of crowdfunding, many lawsuits, many frauds. Get ready, they're coming.

I'd love to discuss this. And really what's happening is that you can't take $1,000, $2,000 from someone and really place that capital meaningfully before we.

Go into the crowdfunding thing. And I really do want to dive into that. Let's just finish on the hard money lending issue. So you talked about the last housing boom and bust. Were you talking about people who, who were making direct loans or pooling money into a fund that was making hard money? Well, which one? That's different.

These are people who are making direct loans so they would have a brother in law who was a mortgage broker. If you're in Southern California or, you know, in the Southwest. And the reason why we have the Oasis fund out there, everybody was a mortgage broker. And then people are saying, hey, you know what, I have a few bucks, why don't I give you $100,000? And it's asymmetric. So the broker is going to be great. I'm going to take my five points off the top and if anything goes wrong with the loan, it's not my problem. So, you know, a lot of these people were brokers who thought that they were becoming money managers. There is a lot of interest in this because yields are low, right? Rates of return are very low. So this is attractive where people were getting a quote guaranteed coupon each month of 12 to 15%. The problem is that that only works if you're lending to a qualified operator or borrower.

Right, an operator meaning. Now usually this borrower was who they were someone who was flipping houses.

In the best case scenario, yes. At worst, they were owner occupants facing foreclosure, which opened a whole new other set of, you know, a whole other Pandora's box of problems.

Okay, so, so these mortgage brokers were out there saying to people, hey, look, you know, I've got all these borrowers that I can't get a conventional Fannie Mae, Freddie Mac type agency loan for, but you know, would you be interested in loaning the money? And they would just say that to a regular person. Right. Just a, just an individual that they knew, a friend or a family member maybe, or a client. And then they would loan someone in pre foreclosure hard money to get out of foreclosure on a. What are these usually? Those were usually second trustee or even.

Third position mortgages, which is even scarier. But yes, you're dead on with that. That is correct.

So what kind of rates were they promising?

They were promising 15. They were, they were as high as 15. They would go as high as the law would allow them to. You know, usury laws.

But so a lot of these deal, I mean, they were just lending at the peak of the market. They were, you know, not enough equity. What was the problem here? Or the, the, if they were a home flipper, when you say operator, that's probably what you meant. And they were a home flipper and they got, you know, caught with her pants down, so to speak. Right.

Here's what happened when subprime, when the subprime loan machine stopped issuing loans, that's where the house of cards fell because there was no exit strategy for these investors or private lenders to get out. And that's what caused the problems. Phoenix, Las Vegas, those very hot markets, people who are marginal buyers were getting 125% loan to value using a sub, subprime loan. However, when those loans dried up, guess what? People were holding the bag. And that's what caused prices to drop. You can't give someone 125% loan to value in a hot market and not expect something bad to happen. And that's what happened to a lot of these hard money lenders is that oftentimes the appraisals were inflated so that it would justify more money, meaning more fees and into the pocket of the mortgage broker. Does that make sense?

Yeah. Yeah. Okay. Okay. So certainly, you know, many people have been burned, but these were direct loans. They weren't funds. Right.

They were. It's interesting you bring that up. The reason why we have the. The Oasis fund out in Las Vegas is because that was a triage fund that we set up to buy out hard money funds facing receivership, fraud, all sorts of other issues.

Okay, so these are, these are funds. So you set up a fund to buy other funds.

Yes. Facing distress. That's correct. And this is the mess that we saw. And it is terrible. You know, there are people where, you know, you as the private lender, some of them were direct loans, Some of them were through a fund, through a fund structure, a typical LLP or LLC structure. And what happened was, is that sometimes you would be told that they're lending on a single family home, but now they're doing development deals. And, you know, the person doesn't really have the experience to be doing a development deal. And these loans would be made outside of the core broker's area of expertise, what he specializes in, in the sub asset category for real estate.

Right, right. Yeah. Okay. All right. So that's what happened. You know, I'm just not a fan of funds. Because.

These fund managers, they can just do whatever they want. Like, you know, they're. One day they say they're gonna do, you know, lending on single family homes, then they're suddenly doing a development deal as you described.

It's terrible, it's fair. And that's the novice. I mean, institutionally in New York and people who I grew up with on Wall street or Goldman Sachs, they're very good fund managers. But you have to be careful of the people who tell you that they'll do anything and give them what we call 100% discretion when you're giving them a blank check. And they, they can do anything they want. That's where the problems come in. And a lot of these fund managers have come in and they were promising all sorts of returns and fees, but they just didn't have the dexterity or the experience to do that. And so you wind up. These guys feel as though that they can take the risk. They want to be the next Donald Trump. Swinging for the fences. And that's where all the problems happen.

It's easy to swing for the fences when you have someone else's money with which to do it. And we're worse yet worse than everything you mentioned is a lot of times the fund managers are just crooks. They're just greedy crooks. They're just basically ripping people off.

It is true. But even worse than that, and I'm sorry To go back to the crowdfunding, but you're starting to see this happen, is that real estate's allure is a wealth creation tool. Relies on the fact that it's very inefficient. It's inefficient because it has a human element to it. If that human element cannot perform, that asset is going to not perform correctly. And so now you're starting to see people who want to get into real estate. They see that there's a lot of money out there. People don't trust the stock market, they don't understand it, but they also need coupons, they need monthly cash flow coming in. And so they're going to real estate fund managers who really have no experience whatsoever in this space. Just because someone worked for 10 years at PepsiCo doesn't necessarily mean that they're a real estate entrepreneur. You know, they've always had top cover from the parent. They probably have no real estate experience. They've never had to manage a P and L, and worse yet, they've never had to lay in a pool of their own sweat. And so that's why it's so important that when you do qualify these fund managers, and there's many of them that are very, very adept and very sophisticated, you have to look at their track record. Have they done this before? Or are they a computer software engineer who says, hey, this, this is a great time to get into buying apartments right now.

Yeah, right.

Believable.

Yeah, I know that's what you're talking about, though. They're not just crook. They're not, all of them are crooks. They're inexperienced and they prey upon their friends like, hey, he's a good guy. He's a, I've known him for a while. He's, he's great. I, I go to church with him or I'm in the Kiwanis club with him or something. But that doesn't, you know, people are investing in a person, they're not investing in the deal because the investors know anything about how to value a deal or what it looks like. And a lot of times these syndicators would go out there and they would just bid up because they were making fees, but they would just bid up the asset. And that's where a lot of them came into problems because they were overpaying for stuff that they didn't know what they were doing. I'll give you a quick example. In our fund, we had to bail out a team of. You're not going to believe this. Plastic surgeons. From Southern California who bought an apartment complex in Texas. And they bought it at a 1 cap. They overpaid for it because the broker told them that pretty soon, you know, Texas, you know, apartments are going fast and they're going to be priced the same as in. They are in California. Of course, location, location to location is really what dictates, you know, the supply, demand and pricing of this housing stock. And they wound up overpaying because they got hoodwinked by someone who did not have an alignment of interest with them. Someone who was going to make a fee on the sale, not necessarily be there and be a good manager. And that's what happens is that people just don't understand what they're buying and then they mismanage it and then.

They fire the management company. So now the Indians are in charge of the reservation. There's no chiefs around. And that's really where you see the distress comes down to the human component to it. Which is why I love real estate. Because somebody's always screwing up.

Yeah, right. And that is what's great about real estate and why I love it too. It's an imperfect market and that imperfection is what breeds opportunity. And. Yeah, no question about it. So, you know, one of the things I say is that I have this Ten commandments of successful investing. And commandment number three is thou shalt maintain control. Because when you're not a direct investor, when you don't maintain control, you leave yourself susceptible to three major problems. Number one, you might be investing with a crook. Number two, you might be investing with an idiot. And number three, assuming they're honest and competent, they take a huge management fee off the top for managing the deal. So you made the comparison, which was a good one, about the people on Wall street who could be good fund managers, the Goldman, Sachs, etc. And you know, they may be good, but they take such huge management fees off the top of the deal. You know, it's. Is there any way to win here with these funds?

You know, it's. You have to read the docs, you know, you have to know.

But even if you read the docs, they don't have to follow the docs, right?

Well, they do. When things go problematic, they all go back. I mean, the operating agreement is really a prenup nuptial agreement. That's really what it is.

It's a good way to put it. I like that.

Yeah, nobody reads it until the divorce happens or something blows up. But not everybody in these funds pay what I call rack rate. There's a lot of people in these limited partnerships, for example, and they are, but their allure is that they're able to get you into deals and invest alongside qualified people and other sophisticated investors who you would never be able to invest with anyway.

Well, wait, explain the rat Ray rack rate thing. You didn't, you didn't really explain what you meant there.

So, you know, think about it. You're flying from Phoenix to New York. The guy next to you bought his ticket on Orbitz for 280 bucks. You paid 580 bucks, and the person you know in the aisle in front of you paid 900 bucks. He bought it yesterday. All these investors sometimes don't pay. They don't pay the same fees, and their incentives are different. And that's the secret that nobody really knows in these management and these funds is that not just because the docs or the terms or what they're offering isn't necessarily what is going to happen. And that's negotiable.

So in other words, just I want to make sure you really. People really get what you're saying there. So if a fund comes to you and says, hey, you know, I've got this LLC we've set up and, you know, we're taking on investors to do this deal, whatever the deal is, okay? You know, they do that and they say the minimum to invest is $25,000 or $50,000, and that'll buy you one share, okay? But, you know, and then they pull out a list or they drop the name. You know, hey, I've got so and so and so and so has also invested. And suddenly, you know, there's that social proof element. So you think, oh, well, if so and so is in, this must be a good deal. Here's my money.

Right?

But what you don't hear is that so and so that name that they just dropped on you, that person maybe got a free share or they just got their share for half price.

Because what they did is that, you know, that wealthy guy in town that everybody knows, you know, they just wanted to get his name on board. That's basically like a celebrity endorsement, if you will. You know, maybe, maybe it's a small local celebrity, but it's someone you know and respect, right?

Well, let's put it, let's put it a different way. If Warren Buffett, if Warren Buffett invested in your fund, but you weren't going to make any money off of his investment as a fund manager, would you take his money?

Yeah, because that would be great for my Brand, right?

Absolutely. Because you'd be screaming down the street that Warren Buffett's in your fund and now everybody's going to dogpile into it. So you're absolutely correct there. Absolutely.

Okay, so. So that's the RAC rate issue. Any, anything more you want to elaborate on that? That's very interesting.

I'd like to hit on the experience and I'm very scared today. What I'm seeing with crowdfunding is that people have, you know, embellished resumes or something. The guy who's doing knocking tin, putting together houses does not have experience to manage an asset, a multi family asset overseas. The operator should always be local to the asset. Always. Or unless it's some sufficient, sophisticated, huge management team like a Goldman Sachs or something like that. But you know, if you're dealing with these mom and pop retail, you know, the rehabbers, the retail investors, the retail guys, we call them non institutional. I would be very scared if they say, I got a great apartment complex, it's 90% occupied and it's in Columbus, Ohio, but we're in Phoenix, Arizona. Say that's a problem because that's a very difficult problem to manage. That's very important.

Right, Yeah, I agree, I agree. And especially when they're doing, you know, intricate rehab. I mean almost every apartment deal, every multifamily deal includes rehabbing the units, increasing rents as the, as the units turn. I just did one myself. I just closed on an apartment complex that I went in on with a client of ours. You know, 125 units, owned it for like three and a half years, rehabbed. But see there we had a general manager and my partner and I now say, you know, we never want to do a deal with a general manager again like that because they were just double, you know, at least we thought, of course we had arguments about it, but we just felt they were like double dipping everywhere you looked, you know?

Yeah, they were. But here's the other thing too, is that do they know what they're doing, you know, when you're. And you bring a great point on?

They didn't then. They learned a lot on our dime, so we gave them an education.

You became the research and development team.

Exactly. We were the rd. Yeah, right. Yeah.

So this is funny. So, you know, we see these deals all the time and I'll ask them, you know, what are the sources and uses for? And they'll say, sources, Danju, uses by apartment. Okay, but what kind of repairs are you going to be doing? There's real value Added repairs, and then there's repairs that don't add any value. Everybody who moves in an apartment automatically assumes that they're going to have a light bulb and a toilet seat. Right. That's not value added. That is maintenance. That general maintenance. But what they don't expect is maybe to have like a part time concierge in the lobby or a newly paved parking lot or two and a half horsepower whirlpool tubs in the bathrooms. That's real value added, that's attractive to the tenant. So when you talk to these guys, they're too busy dealing with like the muck. They don't know where to start first. And sometimes, you know, a lot of these value added deals would blow up because they didn't know what they were doing. They were doing things that were more maintenance rather than value added. And by the time they get to the value added stuff, they were already out of their slush fund.

Right? Absolutely. Okay, what else?

I'd be very worried of crowdfunding if we can talk about this now.

Okay, okay. So now make the distinction though. We started with the hard money lending and then we sort of went into like, we talked a little bit about direct hard money lending. Then we went into funds and how you rescued funds and also, you know, funds to just buy deals or LLCs. You know, I don't know, it's sort of all one in the same, really. You know, it's kind of like. Yeah, I mean, make the distinction for the listener, if you would, as to what if there's any difference there. And then why is crowdfunding different? You know, it's basically the same kind of legal vehicle. You know, the structure is not different.

It is. But the problem is that the crowdfunding today in real estate is, you know, what we were talking about with these funds were minimum investment $50,000. You have to be accredited. Okay, whatever that means. Accredited today. You know, that definition changes. Got a little tougher after Bernie Madoff. But you know, now all of a sudden, because of the JOBS act, people now can get in who maybe aren't accredited. And so you don't know if they are dealing with their last thousand dollars or not. So they don't have the sophistication. So now you're dealing with investors for as little as $1,000 can get into this multifamily deal. If you've done any sort of partnership whatsoever, you know that just to pay for the deal and do the accounting costs about $1,000 an investor to do that. So how is that money actually going to be used to provide value for you if an investment that's number one. Number two is anyone with that kind of small money generally is not sophisticated. And that means that these fund managers who are now trying to crowd source or crowdfund a lot of these.

Real estate deals to buy are dealing with a less sophisticated investor who doesn't understand it and probably thinks that they can just redeem their shares, you know, their thousand dollar investment for face value at that, at any given whim. And so that's going to put a, that's going to challenge the entire partnership. Because now this fund manager is getting calls from this guy's ambulance chasing attorney saying I want my $1,000 back. And he's not doing what he should be doing, which is operating the asset, managing the investment. That's where I see a lot of problems come in. People with short money always have, you know, they don't bring any value to the deal. They actually take value from the deal. Does that make sense?

Just a reminder, you're listening to Flashback Friday. Our new episodes are published every Monday and every Wednesday. People with short money, you said?

Yes, it's a term. People who don't have a lot of money. People. Small balance investors like this, micro balance investors. Those are the people who you do not want to be partners with in an investment.

Okay. Like if you're the bigger investor or if you're any investor, you know, maybe you're a crowdfunding investor that put in $1,000 also. I mean, I can't imagine though it cost $1,000 per investor. Like say someone's raising $300,000 to invest in a deal. Can they take on 300 investors at 1,000 bucks each?

Do you, I mean, that's way too many.

Yeah, well, no, no, no, no. I know that's a lot to manage an investors relation problem. Investor relations problem, which is what I want to ask you about. But I don't even know if that's legal under the crowdfunding laws to have that many, you know, they just changed again and now I haven't, I'm not totally up to date on the new. The new change. Because now you can do non accredited investors.

Correct. And that makes it even worse now. So you know, when you're. For me, when I've done this, when we've had at one time in any one deal we've had 32 LPs, limited partners or investors. Yeah. To do the K1s and everything it would take, you know, it costs money.

To do that, yeah, there's a lot of accounting and compliance, I agree.

Oh, absolutely. But that, that is, you know, at the smaller investment increments, it doesn't make sense to do that.

So you don't want to be partners with the small investors, you're saying. And what do you consider small? I mean, if, you know, a lot of these crowdfunding sites will say, well, you got to put in $5,000 per person.

That's still too small. I would say 50,000. If you're investing alongside other people who don't have the same financial strength as you, that's a problem. That's going to be a problem. And one of the things that our investors, who again, are a little more sophisticated will say for one of our latest offerings, is that we don't want anyone coming in for less than $250,000. Otherwise I'm in violation of the operating agreement and I can get sued for that. So the smart money knows how to pull the strings because they don't want me having the burden with dealing with so many investors. It could become a nightmare. Like you said before. And that's the problem when you're dealing with sophisticated investors. They know that it's real estate, you can't sell it. And they're also not buying a lottery ticket too, which I think unfortunately a lot of these crowd investors do, is that they just go out there and they start dreaming that it's more like a shark tank episode, that they're going to hit the lottery and it's not a steady Eddy coupon clipping type of investment.

Yeah, and I agree with you. I think some of these funds and some of the people taking advantage of all of these crowdfunding laws, they're basically like a version of the modern casino, you know, where they're just going to take money. They're just going to be ripping off small investors, you know, people, it's, it's so desperate. You go to these casinos and I mean, I can't believe this crap is legal. They're just destroying people's lives. It's so sad, you know, all these poor people sitting there at slot machines, a lot of them elderly, you know, I mean, I just, you know, this is just disgusting what these companies are allowed to do, you know, it really is.

Well, I mean, you can thank the Fed Reserve for this because they've actually had the zero rate interest rate policy, zirp, nirp, negative interest rate policy. Banks in Australia now are going to be charging you money to hold for the privilege.

Germany and Germany it happened in Germany already negative interest rates.

So people are desperate. People are desperate. And that's the drive, you know, the Fed is desperate to have people take risks.

I'm glad you said that and recognized it and let me just elaborate on that and you can, you can finish my thought here for the listeners. But what, what he's saying, listeners is that because of this environment, because we have these, you know, greedy, disgusting central banking scams, okay. What they've done is they've created this no yield environment. And older people specifically, you know, they get burned the most because they're the people who did the right thing. They saved money all their life. They were prudent. They didn't, you know, they delayed gratification and then they retire. They've got a few bucks and they think they can just live off their money by putting it in a really conservative bond or you know, a savings account or a CD and they can ladder those CDs and you know, they can live decently. Now granted that's not a very good investment plan obviously, but you know, this is what a lot of the world planned on. And because there's no yield out there to get from these really safe things, all these people have been pushed into the risk arena and they shouldn't be taking risk, you know. So is that what you meant to say?

Absolutely, 100%. You hit the nail on the head. Yes. No, you did. And you know what? I, being a money manager, being the cynical guy that I am, I think.

You'Re an honest guy. I like what you say.

No, but I look at everything cynically and that's how you, that as an investor you can't, you know, look at everything through rose colored glasses. You have to see what the risk is and structured away. But this money managers view is that rates will not increase anytime soon. Probably not in your lifestyle lifetime. Jason. Right?

Yeah. Wow. Wow. So you think we are just in a low rate environment first for the duration, huh?

Exactly. Because there's no catalyst for race to drive, for race to go up.

Well, come on, you kidding? With all the, with all this debt we have, you don't think inflation is gonna come? You know, you know, wow, I could be wrong.

But it's not just my view, but a lot of people. And if you see how these bonds trade and everything, they have the same view too as well. The problem is that people are keep buying treasuries and as long as they, because there's an implied safety with the United States States and you have all this money just Going into Treasuries because there's no real place for it to go. America is still a great place for rich people to invest, politically stable, all of that. But when you start seeing the yields, I mean the 2 year drop below.

2 handle at 1 point, I mean, this is just really ridiculous. And so that is what's happening. And I think the market mechanism as you knew it doesn't exist anymore for price discovery. Everything is manipulated and everything is really a function of someone governing the markets, not the markets governing themselves, if that makes sense.

Right. And see, that's what happened during the last crisis. We, we couldn't have, and we, I would argue that we still don't have price discovery because everything, you know, when you've got all this, everybody's trying to make predictions, but you can't make predictions in an era of massive intervention by governments and central banks. They completely screw up the market. And it's just very hard to predict anything. You know, I don't think the economy itself is really, you know, like incredibly hard to predict the business cycle, things like that. But when you get all this intervention, you can't predict a thing.

No, you can't. And that's the problem. And you know, and now, you know, different capital sources have different needs. You know, my apartment in, my apartment was sold. We sold my condo in New York. I wanted to buy a new one. The guy who bought it was someone from Brazil, didn't speak a lick of English. He just showed up with a briefcase literally full of cash. And he offered over asking price because for him, he's using real estate as a wealth protection vehicle. He doesn't care. He doesn't care if he overpays or not. He's hiding money. And that's a whole other conversation we can have.

I'm glad that's happening though, because that does show you that much of the world, as messed up as America is, still looks at America as what's called the Brinks truck. You know, it's the safe place to put your money because, you know, we do to some extent have rule of law. You know, except when it comes to government lobbyists and central banks, they don't have to obey the law. And Wall street doesn't obey the lie either because they basically own the government. See, I'm pretty cynical too. Yeah.

And that's, that's the mindset you need to have today to be a successful investor. And that's what people don't understand.

Okay, so what else about crowdfunding? Other thoughts on that?

I Think, I think it's, I think we'll see what happens with it. But I think when people, you know, you got to check the bios of these people. What, you know, the first thing I always ask if somebody's looking for money from me. We're discretionary, right? We're not a bank, so we don't make people if we don't care about their credit, we care about the asset. That's what a discretionary capital provider does. You want to buy a retail center, you have experience and you can show a bio and a deal sheet of stuff you've done. It's almost certain that you're going to get a loan from us. But if you don't have any experience, you're not going to get a loan from us because we are not in the business of teaching you and becoming the research and development for you to learn how to piece together a retail deal or a value added multifamily deal. So I would look if any. There are some, I'm sure there's some good crowdfunding things that are working. But the two things I would check is what's the minimum investment, how many of those investors are in on that floor, that threshold? You know, the smaller money, that's what you want to move away from because that means that the operator is desperate and, you know, because the smart money is turning them down. But the stupid money, which is always a unfortunately unsophisticated money with the less dollars, the shorter money that we talked about before, he's opening the floodgates for the masses to come in. And that's where the problem is.

But the smart money will be glad to be in on that deal as long as they don't pay the rack rate that the stupid money is paying. So again, like you said, and that was so well put, that they're using this smart money as a. It's a head fake, you know, because it makes you think that, oh, well, this deal's been vetted. All the smart people are in it. So I'm going to go into, I mean, look at Bernie Madoff did that for decades. He made a career out of that. And you know what blows my mind, though, is, hey, look, and I gotta, I'm gonna call you out for a second here. You know, feel free to debate me. But you're saying check the guy's resumes, right? You gotta be kidding me, though, because look at the resumes. Bernie Madoff. Bernie Madoff was president of nasdaq. I mean, he was networked in every country club in all the highest level circles. But wait, there's more. Look at John Corzine. He was frickin governor of New Jersey. Okay.

He's also my ex boss too.

Oh, was he really? Okay, yeah. And he ripped a bunch of people off and nothing's gonna happen to him probably, right?

Yeah, they're invisible. Well, you're right, but I think that when you're talking about John Corzine, you're talking about like these bond trading funds, these hedge, real hedge funds. I know that word is abused today. And what he did was he took a lot of risk with other people's money that was supposed to be segregated. You're right. With the experience. You're absolutely right. But I think you're going to see a lot of fraud because people are just so desperate. Pensioners and savers need to put money, they need a return, they're desperate for yield. That's why I named the book Making the Yield. It's for someone who wants to get into this business and learn to make direct loans. This is your, you know, your gateway drug to do that and to do that efficiently. And it's basically off of all my years experience seeing everything that's gone bad. But you know, there are some people and that's just the way the money management industry is. But the SEC though is not in a hurry to prosecute. A lot of these people.

I think they're underfunded. I don't think they have the sophistication, you know, they're just not going to be chasing after a lot of people. I think, I think they choose their fights and they choose, you know, the lowest hanging fruit. When you see the more sophisticated frauds, it's sort of like the John Corzine, you know, he's still free, he's still out there. You know, he got a hand slap maybe. But you know, nothing really is going to happen to that guy because, well, he's very politically correct connected too, which is something that, you know, we forgot to mention.

Oh yeah, no, of course. I mean, you know, it's, it's all political. I mean all of this stuff gets political and that's the problem. The little guy doesn't have any political power. So he's going to get nailed. Well, the big guy, it's, it's like too big to fail. You know, if you rip a lot of people off and you do it on a really big scale or if you have connections in some way, you're probably, you know, there's a good chance you're going to get a pass. Okay. So you can go out and commit your frauds with impunity, you know, or your indiscretions. And another thing that just blows my mind is the way that like these funds, they're all set up in Delaware, you know, in Delaware, you know, for its share. I mean, it has good business practices and it's business friendly. That's why all the businesses are there. Right. And there are other business havens too. But one of the things, things in Delaware that you can do is you can contract away your fiduciary obligation. So you can just say, hey, you know, I don't owe you anything as an investor, you know, I mean, that doesn't seem right to me.

Yeah, I mean, you're more sophisticated than the rest of the guys, but you're hitting the nail on the head. Exactly. And that's usually what happens.

I learned that because there's this company in Phoenix called Caliber and you know, they got a bunch of funds out there now and, and we've done some deals with them, didn't have very good experiences at all. The first thing he says is, oh, well, you know, we put them in Delaware because then, you know, we don't have to be liable like, oh, wonderful, you know, I'm really going to rush to invest with you guys again.

I mean, that's not blazingly honest.

They brag about this stuff. It blows my mind.

You know, I think really what we're reaching, I think right now the golden age for if people really do want to pool money to invest in real estate, this is the time to do it. This is the golden age for that.

Well, I kind of thought you were just saying it wasn't. Isn't that the crux of this conversation? Okay.

No, it is the golden age. No, it is if you do it correctly. If you do it correctly, if you're pulling thousand $500 chunks from smaller investors, that's not going to work. But as far as people like you, the more sophisticated guys and you have a good track record and you have good ethics, you're going to be very successful. And we're seeing that happen right now. People are buying apartment complexes. These little REITs are popping up all over the place and they're just people who, they don't have to go to the bank anymore. They'd rather go to the guy down the street who has a self directed IRA with 500,000 to fund his deals. That's where you're starting to see it right now. It's taking on More. And really what people want and the alert of this is that people want more intimate money management. People who invest with, you know, you, they have your cell phone number, they see the asset, they can kick it, they can touch it, feel it, spit on it. But conversely, and you got to put yourself in the mind of the investor now, the saver, the pensioner, who's a loser. Not morally or ethically, but they're just losing money. We haven't even talked about inflation with that. But they're just losing money money by having it sit in the bank. They're like, well, I'm going to invest with this guy rather than put it into Martha Stewart on the media. If I buy 200 shares of Martha Stewart, guess what happens if she does something stupid again? Insider trading goes to jail. That stock will drop probably 50%. But they have no control over the investment. And that's what people really want today is that they want control over the investment. Good luck calling Martha on her cell phone and asking her why your 200 shares dropped 50%. There's not a chance in hell you're gonna get her on the phone. But what people's main attraction to is, I want something that I can see, touch, feel and understand. I don't understand the stock market for my part.

And listen, I agree with you and that is good that it's more intimate and it's getting closer to the investor and the man. They, they can really talk to the management and that's, that's good, that's an improvement for sure. But for my part, you know, I say for most people, just buy some single family homes and rent them out and you'll, you'll make money. And you know, that's your retirement. I mean, you know, that may be really your big wealth creator. You know, you can move up, you can move up and buy your own apartment building or buy it with a partner rather than, you know, having some fund manager that's given the profits off the top of the deal.

Oh, no, absolutely. But there, you know, there are people who think that there's an allure and I'm one of them. And I hit, you know, I know, you know, and I don't want to cut my nose off, despite my face. But, you know, I'm wearing two hats here. And you know, the point is, is I've seen some funds that are very well managed. I've seen some that are not. There was a company in Phoenix, I can't remember, but they, they blew up because they overpaid for everything. And Then the banks called the loans due, you know, so see, that's the.

Thing, you know, when it's. What I'd like to see is the fund manager having a lot of their own money in the deal, that you.

Always have to do that if you always have to ask. And that's what comes down to the alignment of interest. And in the institutional world it goes like this, well, if I get hurt, I want to make sure you get hurt too. And that's really what it is. And so, you know, I've been in some tenuous conversations with some institutions here in New York, with, you know, people who I know, they said, okay, what are you putting in? You know, I'm putting in a fresh one, you know, fresh million or something, you know. And where's that money coming from? Is it coming from you or is it coming from your brother in law or from people who you don't know? And not all equity is the same. And you know, people sometimes will say, oh well, it's my money. Is it really your money or is it your mother in law's money? That could be considered your money because you never want to lose your mother in law's money. But if it's being pulled from people who you have no idea who they are, you have absolutely no alignment of interest with your investors and that makes it so that you, you can walk away. That's the hard questions that you have to ask, and that's what investors don't ask, is that they never ask the hard questions. But you're absolutely right, you got to have the proverbial skin in the game because they want to know that you have your feet to the fire and that's how grown up deals are done. Now it's not bad to raise money and syndicate money for bigger deals like that, but again, putting on my investor hat, this is what I would want to see is okay, I'm going to invest in this guy Sal. What's he got into it and where's it coming from?

But, but here's the thing. I just want to point this out because Sal, you brought this up before when you talked about the rack rate issue, right? A lot of these guys, they're in the deal and what, what the investors, it's so hard to sort through and really understand the capital structure on these deals and the alignments of interest because you know, they're in the deal but you know, they don't pay.

The racial, oh, I mean, that's a whole other story. I mean, the indication sometimes, you know, that Blew up. And this is what we, you know, we would fund these, you know, we would provide to triage financing for. This is not all, not all equity is the same. So somebody, I remember one time some guy came to me and he had a deal. I'm like, so where are you in the capital structure? Where are you in the cap stack? Well, I'm common, but I'm treated like preferred. I said, no, no, no, no, that's not how it works. That's not how it works. There's remedies for different parts of the capital structure. And you know, this guy saying, well, you know, but they, you know, they treat me like preferred, but I'm common. I said, no, that's like the girlfriend saying at her rich boyfriend's funeral when they're reading the will that she deserves to get the millions of dollars and not the wife sitting next to her. Because he called me his wife here. Something. It's totally different. And that's why people, you know, we. I actually wrote a book on this that I'm finishing up. But it's important to know where you are in the capital structure. What are your rights and remedies? And people don't ask that question. They don't. Sometimes they don't even know what they're getting. Sometimes there's a. They have what, you know, I've seen investors offer what's called a cash flow certificate. I don't. That means nothing to me because there's no recourse and no remedies. But you hit the nail on the head right there.

Yeah, yeah. Good stuff, Sal. This is really informative. And you know, in this world in which you operate every day and you see all this stuff, I want to just thank you for sharing this with our listeners. Because there are just so many scams and you know, they, some of them don't rise to the level of being a true scam. They're just, you know, people who have their hand in the cookie jar.

They're acid aggregators and they make money by sitting on assets. That's what they do. They make money on sitting on assets. That's what they do.

And they make money because, you know, they got the management deal over here and they got the rehabber, you know, the contractor company over here and you know, they're like triple dipping and all of these, you know, they're referring the business to themselves. It's self referential, you know, so once they get control of that money and control of that deal, they say, hey, well, you know, my contracting company Will just rehab the apartment building, and then my management company. Company will manage it. But all the investors got to pay for management on site, too. That's what we found this caliber company doing. When confronted with it, they just made kind of excuses, you know, sort of says, that's the way it is. Tough, you know.

Yeah. And that, you know, but to the uneducated investor, they're like, oh, cool, he's fully integrated. You know, oh, this is great. He's. He can take care of everything. Not so fast. Not so fast. You're absolutely right. Always read the fee agreements to. If anybody's thinking about getting into these things. What are the fee agreements? There should be a 1% flat rate in most real estate deals. That's acceptable. That's fine. And the reason for that is because the investors want to make sure that you're keeping the lights on. They don't want you to have to go outside of investing and managing their money to make money to keep the lights on. Anything more? I've seen them as high as 5%, 10%. Why? I. And that just shouts inexperienced to me. You know, they show their $2.

Yeah.

Wow.

Just 5 and 10% versus 1%. That's, you know, realize that that's not a 4 or a 9% increase. That's a 500 or 1,000% increase. It's a multiple of five or 10 times. That's insanity.

But people pay it because they're desperate. They're desperate.

They're desperate and they're busy and they don't have the skills or the ability to evaluate all these things, you know, so it's a sad story. It goes back to that casino analogy. And I agree with pretty much everything you've shared with us today. Sal, give out your website.

Yeah. For people who are listening on this, we're giving away. We have 20 books that we're going to give away for free. Print copies of the book, and they can go to making the yield. There's a little video there, and I talk a little bit, but you can go to makingtheyield.com and if you're one of the first 20, we'll ship you a book out. All we ask is a couple bucks for shipping and handling. I think it's like three bucks or four bucks or something like that. But there's also a lot of other cool stuff on there, too, like infographics and how these funds should work and all sorts of other things that will really open your eyes as to whether or not, you know, whether or not you're being played or not. You know, it's sort of like that old adage that the if you're playing poker and you can't tell who the fool is at the table, it's probably you.

It's you. Yeah.

It'S to get people smart. We call it intellectual capital. And, you know, that's the sexy term in the industry. On Wall street, they'll say, you know, this has got to have the intellectual capital to do to pull this deal off. That's really what it comes down to. But if you go to makingtheyield.com first20 get a copy of the book.

Okay? So get a free book@makingtheyield.com and Salvador, thank you so much for joining us today. This was very, very enlightening.

Sal, my pleasure. Anytime. I really enjoyed this. Thank you.

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