S4 E19 - De-risky Business

Is it possible to own the equity piece of a real estate deal with $0 of your own money? Well, we're going to answer that, and we're going to provide you an incredible list of questions that will protect you in your investing career. In this episode of Broke to look.

Crushing the real estate tips. This is amazing. One of the things you alluded to in the last episode was just about the whole capital piece.

Yes.

You got to have capital to invest.

Yep.

At some point, some type of capital doesn't mean money capital.

Ooh.

There can be other types of capital, but you definitely need. Someone needs money somewhere to buy these things.

Got to be somebody's money.

Someone's. And I've actually raised a decent amount of capital in my life.

Oh, have you now? Yes. Tell me more about that.

Yeah. So I think this is a very underestimated part of wealth that people might not know exists. So I'm going to blow some brains, if that's okay.

Do it.

One of my favorite ways to get wealth and to own assets is with none of my own money.

What?

So what I'm going to do is I'm going to paint a picture on how someone can do this. And let me do that by telling a story. Let's say your name is Robert, and you're married to someone named Gina, and you live in Texas, and you have $500,000 in your IRA and you want to build a lot of wealth with none of your own money. How could you do it? Well, let's say Robert's an engineer. Doesn't matter where works makes $120,000 a year. So, Robert, my question to you is, how many people do you know that work in your area and also have money in their IRAs or 401s? And let's say Robert, I don't know, purchases a ticket to an event. And let's just. Let's say the event's called Abundance.

Oh, you know.

You know, and it's a private island.

And 47 acre, always surrounded by amazing people.

Y.

Great minds.

Let's just say this is the case. And he spends a very small, very small amount of money to get to that event and connects with five people. And one of those people is raising a million dollars, Brittany. For an apartment complex. Now a million dollars in this apartment complex. He's done the numbers. There's going to be a really good return. But Robert's like, wait a minute. I want in on this apartment complex. Now he has $500,000. He could bring some money to the table. But what he decides to do is have a conversation with some of his friends. And his conversation goes like this. Hey, friend, maybe they're playing golf, poker, maybe they're at the bar, whatever. Hey, buddy, how's your retirement going? Now, when you ask the person how their retirement's going, they're either going to say, oh, I don't have a retirement. What are you talking about? All right, well, that person's not going to be good to do this with. But if they're like, well, you know, oh, man, the president, the election, the interest rates, whatever, it's all over the place, it's all up and down. But, you know, I'm doing okay. Great. Once you find out, does the person have a retirement, that they have some money stashed away. Now Robert can start figuring out questions to ask that would help him determine how much, how long you've been working there, how long you've been contributing to it, how much is in there, what type of swings, what percent has been growing over the last few years. Ask him qualification questions. Robert determines his buddy Tim also has $500,000 Tim saved in his IRA. And he says to Tim, hey, Tim, I'm raising capital for an amazing project. Million dollars is the total raise for an apartment complex in Nashville, Tennessee that one of my buddies that I just met is building out. And the returns are this, and the expectation is this. And here's all the information. Well, Robert talks to Tim. Tim puts $200,000 of his money from his IRA or his retirement through what's called a self directed IRA, does it through a custodial. And with this custodial, he can invest. Tim can invest into this apartment complex. Penalty free, tax free, right. There's no penalty for taking this money out as long as it's through a custodial. So we have Tim. Tim has gone from $500,000 of his IRA money. He's taken out $200,000. He's still got plenty left, right? He's got some money, he's doing great. Now Robert finds five other people, five other temps. 2002-002002-00200. How much is that? A million. What our boy Robert just did is created a money chain for whoever was raising the million dollar apartment complex. Now, for bringing a million dollars to the table, how much do you think Robert should ask for of that million dollar deal?

Everything's negotiable.

Precisely, everything's negotiable. So Robert could say it's the person who's raising a million dollars. Because a million Dollars is buying $5 million worth of real estate.

Right.

Keep that in mind. So this $5 million of real estate has tenants. This, we're talking whatever 80 unit apartment complex, $5 million total. Now we're talking some serious money. Robert tells the guy who's raising the million dollars to buy $5 million worth of real estate, give me 5% ownership of the entire deal. He starts negotiating. The guy says, sure, let's do it. Robert now owns 5% of a 80 unit in this hypothetical example apartment complex with none of his own money.

Right.

And all he had to do was have conversations with his friends and a.

Good deal to offer them.

Sure.

Obviously, you never want to be hustling a bad deal and hoping it works. So he knew his numbers, he knew this person who's the actual person bringing the project to life. He understands all that before he goes and dangles it out there.

Precisely.

And then now he's part of something without his own money. That's genius. Love that.

So I've been Robert.

Yeah.

A lot. I've been Robert's situation many, many, many times. And it's about going out, finding these great deals, talking to the right people, understanding what it is. But there's a lot of individuals who are listening that can do this right now, especially if you are, if you're employed. Fantastic. Amazing. Incredible. You have a job. Awesome.

Yeah.

Reach out to the, your people that you work with. Reach out to the people that are sitting next to you and I don't know, your boss, your boss's boss. Talk to them, talk to them about their retirements, Talk to them about their 401ks, their IRAs. These are good conversations to have. And that's how I even learned about the whole self directed IRA. The loans that you can do from your 401k, what your loans are in, what your investments are in the 2040 retirement funds. I've done all that research, I've studied all that and that's why I started when I was 19.

Nice.

So when I worked in nationwide insurance, they gave you 401ks, which was awesome. Right. Health insurance, all kinds of cool stuff. So these 401ks, it was brand new to me, so I studied it. Right. I wanted to learn about the stock market, I wanted to learn about investing. I want to learn all about how money works. I went to the University of Florida, as you know, to get that degree. And in college they did not teach me anything really.

Dang. I always thought I was missing out, not going to college. They must teach you all these Things that make life not so hard. Hard.

No.

Investing isn't so hard if you went to college, right?

That's right. No, I didn't teach those. So all those things I learned through just a 401k paperwork that a lot of people just don't take the time to read. I read it. All of them.

Good job.

Yeah, thanks. So I learned a lot about how you can use this money. I mean, this is. There are trillions of dollars, ladies and gentlemen, inside the US retirement systems, right? Government pensions, 401ks, IRAs. That obviously, again, as Brittany mentioned, you want to put into an extremely safe deal something where the person has done the numbers, the person's reputation is outstanding, AKA Brittany Turner. You can easily negotiate pieces of ownership, pieces of equity into other projects. Go out and talk to your friends, family members, bosses, bosses, bosses. People that you know, bring a bunch of money, and you can do this over and over and over.

And if you're Robert, I actually have a good list of questions for you before you get into a deal.

No way.

I do. I've got a written list here.

Oh, snap.

Of the questions of what to ask before investing with someone. This is for anybody, either the investor or the person being the Robert, before you want to put your name on the line, let's start asking the right questions. So number one is, have you ever lost someone's money?

Money?

Now, if they say yes, that's not a deal killer necessarily. You're just trying to understand their character because the deals will pan out to be whatever the deals end up being. But you are normally investing in that person running the project because at any point they can either screw you over or they can run off into the sunset, have some affair with somebody else and leave you hanging. And you really just want to know, like, what is their character? So have you ever lost somebody's money? And if the answer is yes, again, start asking more questions like, what happened? What was your agreement with them? Why did you let them lose money? So on and so forth. Cause a lot of these deals are structured to where the investors make a lot of money because they're willing to take the risk. And deals do lose money. So it's not the end of the world. Have you ever lost money? Big question. Cause I have lost a lot of money, but I've never lost somebody else's money because I've made sure I've eaten it before they do. Again, the contract says they could lose money, but I made sure I didn't lose theirs. Again, you're really betting on that person, not the deal. Next one is, how long have you been doing this type of asset class? So they're like, oh, it's my first apartment deal. I've done like 12 single family homes. It doesn't mean they're qualified to do this project. What year did you start? What you're looking for here is to find out if it was before or after 2008. I guess if it was before 2008, you want to be asking them how did they deal with 2008? What were the consequences? Yeah, what happened to them? What happened to their investors? How did they weather that storm? How long have you been real estate investing in general? How many deals have you done? How many deals have you done on your own? You want to see if they're pulling from somebody else's portfolio of work that they were the assistant on or if they actually know what they're doing without some big mentor around. What lien position will I be in if there is a lien? If not, how many liens will be on the house total? That's a big one. That's the fastest way I've watched people get screwed over is they don't actually file the lien on the house. This person borrowed 30 people's hundred thousand dollars on a property worth 50. So you don't want to be that. What is the insurance on your asset? What happens if you die? Do you have any partners? What's the current status of your personal relationships? Somebody's going through a divorce. You will probably be affected by that. So will the deal. Are you currently in a lawsuit?

Nice.

Now that again is not a deal killer. But you want to find out why they're in a lawsuit? How will the lawsuit affect this project?

I'm so happy I can say no to that.

Have you ever been sued before? If so, why? What documentation will you give me to protect my investment? What is the backup plan if it doesn't sell? Slash, what is the investment strategy? So if it's an apartment complex like this specific deal with Robert, how long are we going to hold it for? Okay, well, we plan to hold it for five years. Well, what happens in five years? Are we going to refinance it? Are we going to sell it? What if we can't sell it? How are you going to pay me off? What kind of rights do I have? All these are really good questions so that you're not just blindly investing with somebody who doesn't know what they're doing and they're just excited and trying to raise money. And see if the deal works.

Sure. It's a great, great list of questions. I really like the. You know what's kind of funny? This list is almost, in a way, the episodes of season one of Broke to Oak.

Yeah.

Kind of. Right. Like, have you ever lost someone's money?

Yeah.

Oh, right. I had to talk about my story.

Those are good.

I'll be answering yes to that.

Yeah.

They lost your money. Yeah.

Right, yeah. All these questions are.

Are you currently in lawsuit? No. Have you been? Yes.

Yeah, yeah.

The reason we're asking these questions, we've experienced it. And I forget who I said it to or where I said it exactly, but I'll say it again. If you haven't failed yet, what are you doing?

Right.

What are you doing? Like, why are you so scared? Get out there and fail. Do something measurable. Because what Brittany's mentioning in this list, she's not saying anything about her perfection. She hasn't lost anyone else's money, but she's lost her money.

Oh, yeah. Many times.

There's been a lot of deals haven't gone great. Right. There's been tons and tons of struggle.

It's real estate.

But there are certain priorities that you put and having these type of conversations, answering these questions, asking these questions on both sides.

Yeah.

Knowing who to talk to. So if you're in Tim's position. Right. Meaning you're the one that Robert's asking you for money. Ask these questions. If you're Robert, ask these questions. And of course, if you're a really, really good syndicator, you should be asking similar questions as well to your LPs or limited partners. So a great syndicator should be reaching out, how many deals have you done? What's your risk criteria? What's your fears?

Yeah. And don't worry, you're going to lose the deal. You'd rather lose the deal than work with somebody who won't answer those questions.

Precisely.

You want to narrow that playing field because it's just. It's too risky. Honestly. There's so many schmucks out there that just raise a bunch of money and hope the deal works. No, it didn't work. But they didn't have any money in it. You know, we want to make sure that even the person, the LP limited partner, the person who's running the day to day of the deal, you're not one out of 40 deals that they just again threw against the wall and saw which one stuck. Let's just ask the questions. Protect our butts. Because money is I'd rather not have to re earn it. If you can just ask better questions.

Sure. Three or four episodes ago, you mentioned about reaching out to contractors and looking at their BBB rating, their Better Business Bureau.

Yes.

Is there a rating or some type of system that we can look at for like syndicators by insurance?

You know, I don't know that. We could probably ask ChatGPT or we could create it. That'd be a good idea.

Yeah, that'd be nice. Right? Like just pull up some type of database and like, hey, here's all the people that do syndications or here's a long list of them and here's their rating.

Right.

That'd be sick.

Absolutely. I'm sure somebody's gotta have that, right?

Yeah, I don't know.

If not, that's a great idea.

It is a good idea.

They've got it for charities, they've got to have it for this.

What's the name of it for charities?

You know, Charity Navigator. Yeah, that's cool. Helps you navigate which charity to use and which one not to.

Yeah, that's really, really cool because this is a way, I mean, from a business standpoint. And I would love to talk about maybe in the next episode, how businesses can invest into stocks and how businesses can buy real estate. But for my business owners, if you have extra cash flow, these are things that you can invest in as well as a business. Right. Obviously, you know, buy some Airbnbs, buy some motels, hotels, take some of your money and be the lp, be the limited partner in other deals as a business.

Right.

You've already worked hard doing it. It doesn't matter what type of business. I mean, it could be a realtor, agency, it can be. You are the owner of a donut shop. Right. Five daughters, bakery, hashtag, shout out to them. Great, great layer donuts. But if you are a business, this is how you want to buy assets, right. You can be the person that only puts the money and everyone else does all the hard work. You're just the check writer. So that way you get a return.

That's everybody's goal is to get to this.

Yeah, absolutely. So at some point, like you're making 8 to 10% is relatively normal per year. And then you're going to get some of the upside whenever the exit happens. So the refinance or the selling of the actual property or asset itself. And so once that happens, if that's in 2 years, 3 years, 5 years, 10 years, 7 years or never, then you get all of your money. Back plus whatever that return is projected to be, hopefully. Obviously. So from a business standpoint, keep in mind we're going to talk about that next. While you are a business, whatever your business is, whatever LLC you own, you can do all types of assets because that makes your business ready for this, ladies and gentlemen. More profitable, your business now has more value. Your personal financial statement will increase because you now have a business and this business begins to own other assets as well. And you start making money on top of money on top of money on top of money.

Triple prizes, quadruple prizes.

Let's talk more about some stock stuff.

Yes.

What do you think?

I think we should do a whole episode on it.

Maybe the next one.

I think we should.

We'll see you there.

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