3 Ways the Wealthiest do Deals and Investments with Tom Burns | Capability Amplifier #111

That was a long period. If you start back then and you go fast forward 30 years, I started just like everybody else. I had no financial training. I had no network. I had no money, actually, when I started. And I just started learning, bought a few things, made some mistakes here, learned some lessons.

Hey, hey, hey. Welcome. This is Capability Amplifier. My name is Mike Koenigs. I have a very special guest with me today. His name is Tom Burns. Tom, say hi.

Hey, folks.

All right, so I'm going to give you an official intro today because I want to set this up. I originally met Tom Burns through a deal. I got involved in a fund I invested in that I think is one of the smartest deals I've ever gotten involved with. So I thought I'd give you a little bit of a warm up here before I bring Tom back. And that is this. What's the number one secret the wealthiest and richest people all know? That's not obvious, but enables you to create infinite leverage with the least amount of risk. What it is and what we're talking about today is it's to do your own deals. And that means to become a principal and a sponsor for private equity. And I know that may sound completely overwhelming. It did to me, too, until I learned more about it. And what it is and what it means is you're putting together people, deals, money structure, and rules. So Tom has very quickly become not only a friend, but a mentor and a collaborator. We just spent almost three days together, and he's got a brand. It's Rich Life and the Rich Life Club. And this is an unusual combination of people, deals and adventures, which is what Tom is really all about. So it's also a simple system to create unlimited leverage and live a life of abundance, purpose, and passion. So what he's going to do with us today is he's going to show his Rich Life leverage Matrix. I know that sounds like a mouthful of words, but it's really cool. But it enables you to think about deals and define them and the investment opportunities. And he's also going to deconstruct five of his best deals, including something called the Lotus Fund, which, as I said, is one of the smartest deals I've ever gotten involved in. So with all that, Mr. Tom Burns. How are you doing, my friend?

I'm awesome. I'm in Southern California. We got to hang out for a few days. We're not working and we're just having fun.

Yep, more adventures, more adventures. So I thought the way to dig into this, we'll get into Your backstory in a moment. But I really want to tear into this whole rich life leverage matrix. I think that'll expand everyone's minds about what we're going to be talking about next. We'll talk about why you, what your background is, because that's interesting too. And then we'll tear into some case studies. I've been looking forward to these. So why don't you begin and tell us a little bit about the, the leverage matrix.

Yeah. And the reason it's called leverage matrix. If you really think about it, to grow real we, you need some sort of leverage. Sometimes it's financial, sometimes it's otherwise. So I sort of look back over 30 years and realize kind of where that leverage took me and where my greatest benefit was. And it was at the end of the leverage leverage matrix. So you really, if you look at it, sometimes people start, start at one end of the continuum and go to the other. And so the, the beginning of this continuum is no deals, no investments. That's no leverage. My friend Robert Kiyosaki says savers are losers. Those are the folks that are taking their money, sticking it under the mattress, because maybe they're too scared or maybe they're not educated. There's no leverage there. Maybe the next step in the matrix, the next step is you do want to invest some. Invest in somebody else's deal. You got $100 in your pocket, you give that person $100, that's about a one to one leverage. You'll get some return on that. You might get 8, 10, 20% on a good deal. Not bad. Better than sticking it under the mattress. As you move forward, you think, well, if that guy could do it, maybe I could. You can buy your own deals. A little bit more leverage than that. You know, you can put 20% of your money instead of 100% of it into the deal.

And that's basically like real estate.

Absolutely. Let's say in real estate, say you buy a deal, you buy a house, you're going to rent to somebody, you put 20% of your money down, the bank will be happy to give you the other 80% as long as you pay it back. Not bad. You can increase that. You can increase your return. You're not, you're only using a fifth of the money you did for the other one. Now you can use it, get greater returns. You may get up to 100, 300, 500% just depending on your deal. But the ultimate, and what I found is ultimate infinite leverage. So if you put your own deals Together, typically you'll put some of your money in it, but over time, I've found that there are times that I, I've just been unable to put my own money into it because all my investors want the whole deal. If you can, you can put deals together where you put none of your own money, you bring other people's money, other banks money, you create a good deal that pays the bank back its money, pays your investors well, everybody's happy. It's win, win. That is what we call an infinite return. Because if you have no money in the deal and you get paid back, no way to calculate that.

Right. And what I've again getting back to, I'm going to do the Tarantino part of the show here because I know we're going to tear into a couple deals in a moment, but.

The deal I invested in with you, you're a general partner, you've got limited partners, meaning I'm one of the limited partners. And I know you put a bunch of your own money into this, but you wouldn't have had to and you'd still own a big chunk of that. So that's kind of the quick and dirty part of where we're going to be heading to. So why don't you talk a little bit about. I know you look at this through the lens of five basic steps, but let's hit that and then let's start the deconstruction process. But yes, let's do that. And then actually we got to tell the why should we listen to you story in the bio? Okay.

So, you know, if you, if you, over time, if you look at deals, it's really, I've broken it down to about five components. There's people, people in every deal. There's the deal itself, there's the structure deal, there's the rules for the deal, and then there's the money that it takes to do it. Each of those has their part in, has their part in the process. And they're different for every kind of deal, but they're all important.

And I'll make a lot more sense when you start tearing into what they all are again. I've spent past couple days with you. I've really gotten an access to kind of like the 30 year download, which leads us to the why you? Why should we trust you? Why should we believe you? What's your core story? Where did you come from and how did you find your way along this path?

Yeah, I was born in a log cabin in Illinois. Now I was, you know, I was Born to a great middle class family. My dad was a federal cop, he was a secret service agent, taking care of presidents, mother was a nurse, took care of, worked in the VA hospital, great upbringing, played sports. Found out that I probably wasn't going to make my money playing sports. So you know, after that light bulb went off, I decided to be a doctor. So I started my life as a physician and my goal was to be a sports doc. So I was, I was an orthopedic surgeon, a sports doctor, take care of the US Ski team. I did that. But during my training, so early on, during my training, I realized I watched the people that I was supposed to emulate, the doctors that were teaching us, right. And at one point I saw their life. They were sometimes on their second or third marriage, they were complaining about lack of control. They were in the hospital at 10 o', clock, 10 or 11 o' clock at night. I realized.

I didn't want their money if I had to have their life. I wanted to, to paraphrase things, I wanted a rich life. And so I thought I needed to find something that was outside of medicine. So I looked and looked and didn't immediately land on real estate, but eventually landed on real estate. It fit my schedule, fit the schedule of a busy doctor. And I did both at the same time. I sort of burned the candle at both ends for a while. And that was a long period. If you start back then and you go fast forward 30 years, I started just like everybody else. I had no financial training, I had no network, I had no money actually when I started. And I just started learning, bought a few things, made some mistakes here, learned some lessons, bought something else. Over time those things grew, the deals grew, partners came, more deals were brought to me. As you get in the market, things come to you. And you know, today I run a private equity company. We've got a half a billion dollars under management and we do a lot of other things besides that.

And one thing that again, in all the time that we've been spending together, first of all, you know, my question for you throughout our process has been how do you shortcut that? How do you, like what's the shortest period of time you could reach? Both your level of personal wealth, but also the components, the riches and the wealth that go along with that. You know, it's sort of like your five things, your people, your deals, the money, the structure, the rules, having the know how, really the courage and the confidence to go find and source a deal, figure out and do the due diligence like, what do you need to know? And then how do you create a structure that's attractive to investors, has a high probability of return or a huge rate of return? It's de risked. And then of course, as you evolve to gain that infinite leverage, as you would say, where you literally don't have to put any of your own money in the deal, but you have a chunk of ownership plus significant upside, which can happen in terms of the multiple. And when I heard the deconstruction of how the fund that I invested in was organized, I'm like, holy cow. It's so interesting and unique. I was in and I didn't have any resistance from my wife, who's usually the saver. You know, she's super conservative with her money. She'd rather everything sits in cash all the time. And that's always been a source of consternation and conflict between us. Now the truth is I would have burned through most of my cash a long time ago investing in stupid startups instead of smart people with well structured deals. You know, I wish I would have had a Tom Burns in my life, you know, 15 years ago when I started actually running into real money. So with that, any comments before we move forward about the mindsets and then we'll get into the ripping apart some deals?

Oh, yeah. You know, it really is mindset. I wish I'd had a Tom Burns or somebody better than a Tom Burns back then because it really helps to have mentors help somebody that's been there, you know, it. What's the best mistake to make is somebody else's right. Never waste a good mistake. Always take a lesson from it. So I spent 30 years making those mistakes and finally reached the point where I can do these deals. It would have been nice to have somebody who had maybe done that before and could kind of give me some of those shortcuts.

Yeah, maybe, Maybe save. Save 27 years to get to where.

You are or for you.

Yeah, yeah. All right, so let's tear into. I know you got started with real estate and that's been a great source of your wealth. And it's also where a huge part of your specialty or specialization is. But it's also, you know, you got outside of traditional residential, you're getting multifamily. Multifamily or it's apartments, basically. So can you tear apart one of your deals and show us the people deals, money structure, rules?

Sure. You want a real estate deal?

Yeah, let's do it.

We'll talk. You know, you can go small Deal. Big deal. We'll go. Big deal. Biggest deal. There's a deal outside of, outside of my town of Austin, small, small town that had not had an apartment complex built in 10 years. We had a trusted partner that we work with. Our company will either develop or co develop. And quite honestly, our business plan now is to co develop with others. So we had a developer friend who we trusted. We knew we had vetted, we had spent some time already with him, had a piece of land. We bought a piece of land 20 minutes outside of Austin and we put together enough land to where we could have put 200 units in. We decided to build 140 for the small size of the town. Didn't want to overbuild. We built that place in about 10 months. Very good developer. We did that quickly. Sometimes it's 10 to 12 months to build it, sometimes 14. We built it and leased it up in seven months. That's very fast. We were pleased, we were thrilled. We were 100% in seven months. And so we put a shovel in the ground In June of one year and exactly 36 months later, we had an offer at a crazy price to sell. Now to backfill that, we built this for a long term hold. We used FHA HUD debt, which is 40 year fixed rate debt. And that's important. The three things that you worry about in real estate is your interest rate, your taxes and the market. Well, we eliminated the interest rate variability by taking a 40 year fixed rate debt. So we planned on holding it. Right. Well, lo and behold, this is, you know, this is a nice town on the southeast side of Austin. There's a big road, that big toll road that goes next to it. Little did we know that a gentleman was going to build a factory. A gentleman named Elon Musk was going to build a factory 20 minutes north. And the little town that we built the thing in just went crazy. And so we got crazy offers. The buyers are going to put more than 200 units on there because they found a nice little way to be creative, which is great. They win, we win, our investors win. Our investors easily doubled their money in three years. So it was a home run deal for all of us. We sold it and even paid a big penalty for it. And net of the penalty, we just killed it.

Okay. And so if we were going to break it down.

In this case, the people you had, you had your developer, your contractor, management, the buyer and your wild card, which you can never depend on, which is the Elon Musk.

Exactly.

Okay. And the Deal itself was you had the, the land, the units, that one you constructed super fast. It was leased quickly. What were, what were the returns for your investors?

That 2x in three years. Okay.

Which is pretty awesome.

Yeah, it's great.

In this particular case, you put money down. You said you got a 40 year fixed rate mortgage, so you can do that for commercial.

Absolutely.

Okay. And then you had interest only.

Right.

Okay. Which is awesome. And then let's see, I don't know if there's anything else. How about the structure of the deal and the money? Like how much did you raise? How much was your own? How is that structured?

So we, and we always try to put some of our money in every deal. Nice to have your sponsor have skin in the game. And to be real honest with you, now our deals are so popular that often our investors will want to take out our position. So that's how we end up sometimes not putting money in. So our development partner put in money. We did put in some money. We raised about $6 million.

The rest of the money came from debt. And it's not often that you get up. We get upwards of 83% leverage on this, which is high. But that's HUD debt, very debt. Now the co. The converse to that is it takes a long time to get a HUD loan. It might take six to nine to 12 months to get this loan. A lot of trouble to get it. You got to really sort of be in the club. And my partner and I've been in the club since 2009. So we did that, we collected the money. So the money came from hud. It came from HUD and from our investors and from us. Structure. The deal was we paid our investors a preferred return, which is how much?

Like what's a deal on something like that.

On this one they got an 8% preferred return. So simple terms, you give me $100,000, the end of the year, I owe you $108,000. And of course it's development, so there's no money that comes out of it the first two years, but that accrues. So the first thing we do with our investors is we pay that preferred return back. Then once that's caught up, we pay them all their money back. Once all the money was paid back, the next dollar that comes back. 80% of that, $0.80 goes to the investors, $0.20 goes to the general partners. And that's the structure of the deal.

And those are that. That's a pretty typical structure.

Real common. Yeah, we always try to take Care of the investors first.

Okay. So if you look back at again, this is a sweetheart deal. We're going to get into some bad deals in a moment. Yeah. But for you, like, what were some of the big rules? If you look back at like, what are the things you learned that are really important? So if you're going to save me, you know, 2, 5, 10, 20 years of hard knocks, what were some of the big takeaways? Lessons.

So, you know, we always like to play, you know, there's that blue ocean, red ocean, thought we don't want to play in the shark infested red ocean. And so we stick with development. You look in the multifamily world for people that are investing most of what they think of as value add, multifamily, great way to make money. It's a great, great investment. But so many people do it, they're scared of development. And you know, it's not the, it's not the investment type that's risky. It's, it's the investor. If you're not educated. So our education is in development. So that's one rule is try to get educated with whatever you're doing. Get educated or get with somebody that can help educate you.

Right, right.

And if you talk about value add, we're doing the same thing. Instead of taking a rundown piece of property and spicing it up and putting in cabinets, floors and countertops, we're taking a raw piece of land, spicing it up by putting a nice shiny new building on top of it. That's our value add. So we know that our yield to cost is going to be, is going to be good when we finish. And this is not particular to this one. But always take care of your investors first. That's the most important thing. That's why we've. Our company has been built over a period of 15 to 20 years, sometimes together, sometimes separate. But we have investors that have been with us almost 20 years in order to do that, obviously have to take care of them. Yeah.

And I think you know a young person looking into this, even I do. Like we just did our first real estate deal other than buying our home. And I'm 55 and I'll just say my wife is a different age. But like I look at it and I avoided real estate because a, I didn't understand it. I thought it was really risky. And my mentality was I'm gonna have to take out a loan. I don't want anyone to ever call me and complain about toilets. I don't Want to.

Have the risk of all that debt. And then I was looking at the lens of, well, I live in San Diego. There's no good deals here. And every single one of those are just stupid.

It's not stupid. Yeah, but it's common. It's common because we're all ignorant. Ignorant's not a bad word. It's not a mean word. It's just. We're ignorant. I might be ignorant of how to play the piano versus somebody that knows how to play the piano. Not a bad thing. It means I don't have the education. So all those things are really common. And somebody could say the same thing about the tech world or that oil and gas world. So it just takes some education and some confidence that somebody's maybe been there before. You have.

Yeah, I think. You know, and I just didn't understand leverage like I do now. And debt is good, inflation is good when you understand how to take advantage of it. So. Any other comments before we tear into a bad one on your car crashes?

I have so many. Let's talk about the bad one. So which one do you want?

Well, I think.

I. Let's talk about. Because people are the most important thing. And I know in spending time with you that getting screwed by unscrupulous people happens in all sorts of forms. And there's two that pop up out of the conversations and the stories you've told me. Let's talk about wrong partners versus people who outright try to steal from you.

Right on. Okay, one comes to mind. We talk about, we did a deal outside of our state. So somebody that I met, I met and I. And I take full responsibility for all this. So just so everybody knows, this is my mistake. Not necessarily our mistake, but I met somebody who was a broker. He asked what I did. I said, we do apartments. He said, I've got a deal. And it was in a market that we knew was probably a pretty good linear and growing market. So I said, all right, I'll go take a look. So I hopped a plane, went out there, found the place, liked it.

And, you know, in fact, let me break this one down. As far as people, I'm going to break it down with each section. So as far as the people goes, I had the broker, he took me out, showed me the deal.

He introduced me to the selling brokers, which were bright folks. Then my partner and I, we came back out later, we had to sit down with the owners. It's not common in the apartment world. We had to sit down with the owners because them and their father had built that apartment complex. It was their baby. They wanted to make sure that the next foster parent was going to take care of their baby. So we had to go out there, show our faces and win the deal.

Yeah. Which is actually a good sign when you think about it, where if you have the ability to say, I don't know if I like you enough to sell you my stuff. What Dan always says is always be the buyer and flip that around. So why should I sell to you anyway? I don't even know if I like you. Exactly. So smart.

And we got along well with them so that. So everything worked out well. We bought that. We bought it at a good price per unit. We knew that we could upgrade the units and probably one day cash flow. Well, we knew we would be able to cash flow one day, maybe sell it. So.

I guess since we're talking people, I might as well cut to the chase of the good part of the deal. So our broker friend also told us that, hey, I'm a contractor. I've got a contractor's license. You'll probably get a bad deal or a dishonest deal from anybody else in this town. I've been here my whole life. Life. I'll take care of your contracting work for the apartments. We said, okay. And so things got started. And this is where I made my mistakes. We didn't have checks and balances for the money. So it turned out that our contractor slash broker was in cahoots with the general manager of the management company. The management company itself was above board, but they had somebody in their ranks that was working with this broker. So he would go to her and ask for a big check. She would just give it to him. No invoices, no. No accountability. And that. And basically the big mistake there was we did not have checks and balances in place. We should have had. We should have been able to see those invoices before any money was dispersed that was fixed at, at that time. So that cost us probably that cost us over six figures. He touched 19 of the units and it would take this whole podcast to describe how bad his work was. And just to give you an idea, we found out that he basically wasn't using skilled workers. He was taking the people that were panhandling for money on the corners of the street in that town and using them to do the work. And we went and took him to one of our units, which he had, by the way, double billed us. He'd build us twice and the manager paid both of those and we went into the unit, nothing was touched, and he was with me. And I said, so and so nothing's been done here. And you billed us twice. He said, well, I didn't know. And I said, didn't you notice on your walkthrough as the contractor? He goes, I never walked through the unit. So, you know, just, just not a great guy. We, we ended up getting, we ended up getting a, a severance payment, so to speak, from the management company. They knew things were bad and we couldn't do anything with him because he was entrenched in that town and it wasn't the most honest town in the world. We knew it would just be good money after bad. We got rid of him, paid the extra and fixed it. Lesson here though is that one of my employees, good, honest employees, said maybe we don't need to let the investors know we're going through this trouble. Let's get it all fixed up first. I said, no, we need to let them know. I personally called each investor, told him that not only did we make a mistake, but I was the one that made that decision. For that mistake, all but one of them said, hey, stuff happens. Appreciate you calling me. And that one said, okay, I'm going to watch you guys and see how things turn out. So that's the people in the deal. That's a lot, but it's important. People is really important.

Yeah, right on. Well, let's talk about, let's kind of get into the deal in the money side of things in terms of how you put it together, where'd the money come from and then how was it structured?

You bet. And this one was structured pretty, pretty straightforward. So it was not a big project. This was a small project, 12 and a half million dollars total money. The price for the project itself was probably 10 and a half and we added an extra couple million dollars for capital expenditures. So it was 122 units. We put in roughly 20%. Got most of our rehab budget.

Lent to us by the bank, not all of it. And the bank was Fannie Mae, government agency. We call that agency debt. Fannie Mae, Freddie Mac, Fannie Mae, great debt. It's, it's 30 year amortization. This was fixed for 10 years, not fixed for 40, like the HUD debt, but also a lot easier to get. You can get it in 60 days as opposed to, you know, nine months to a year for HUD. So everything has its trade off, right? It's always a scale. So we got good debt and the first four years was interest Only interest only is great. It doesn't pay down your debt, but it, it helps with your cash flow and it's wonderful. So we got 80%, almost 80% of our money from Fannie Mae. We got the rest from investors. My partner and I put in quite a bit. I think we were, we were 20% of the money ourselves. Between our, between us and our company, we put in about a half a million. We only raised probably two and a half million dollars. Really small deal. We started. We ran things. We had an escrow account to pay for these rehabs. Much of it went, some of it went to our friend that we just talked about. But eventually we brought in a good contractor.

We fixed up the units, and at some point we ended up with a sale. So money wise.

We put in two and a half million. We bought it for 12 and a half million. I forget the number it was that we sold. But to go back to the person that said, I'm going to watch you guys, I will tell you, this is the worst deal we've ever done. And our investors got a nine and a half percent annualized return over three years. So the guy who said, I'm going to watch you guys, he said, if that's your worst deal, I'm in on the next one. Just count me in. So when you're honest with people, you got to tell them the good and the bad.

Right on. Well, I think it's great, great story. And I think once we move forward into whatever the next deal is here, some of the more sophisticated stuff's going to show up. So I know you had a bad deal with bureaucrats.

Oh, yeah.

And when you told me about this, I'm like, oof, talk about bad partners. So why don't you talk about the deal you did with a big city that shall remain unnamed here because the, there's an ongoing conversation. But this is enough to make your, your hackles stand on the back of your neck. So let's set it up.

Oh, this is great. So my, I give a lot of, I get a lot of the structured credit to my partner. Brilliant guy. And so we had some land in the south part of this unknown city. And this was about 2008. So we had this land. We thought it might be a nice place to put apartments. And so that was great. We put it together. We started talking to a debt partner. We talked to GE Capital, which was a common debt partner at the time, but remember I said 2008. So this is one rule is that, you know, they things happened in 2008, stock market had a little bit of a problem. There was a bit of a, bit of a great recession, right? So GE Capital decided they were going to leave. So this was a big project. This was 250 units. And our debt partner left. So somebody said, why don't you go check out hud? Remember we talked about HUD before? We knew nothing about HUD back then. This was 2008, 2009. We went, we talked to the HUD people. We essentially learned how to get HUD debt in the face of the recession because we lost our debt. So we got that, we got the debt. We were full on developers. We hired a contractor, we got the money from hud, we built the apartments. Now.

If you go backwards, the structure of this deal was such that, you know, we had 25 acres. We were going to build 250 units. That was great.

We had our ideas of what we were going to do. We were going to have to raise 5 or 6 million dollars. We heard about some government bond money, went and talked to the city. They would give you a million dollars if you were a for profit agency. They'd give you $2 million if you were not for profit. We went to them and said, give us $2.9 million and we'll start making you money. We'll make you profit. And so these were loans you weren't supposed to have to pay back. We said, we'll pay back the loan and we'll make you an owner. We'll make you profit. A little hard to get the city to understand profit and things like that, but we got it to them. Our legal bill was a half a million dollars over budget.

But we put.

It together, by the way, that was a sign. That was a sign from God.

Absolutely, absolutely. When you do an investment, you have a thing called a private placement memorandum, ppm. It might be a long one, might be 40, 50, 60 pages long. Our P was 444 pages long because we had the city involved. But the deal was they were going to give us this grant money so we had to raise half the money. And let me tell you, in 2000, as I tell everybody, I still got scars on my knees from trying to beg for money. Back in 2009, people's wallets were locked up behind lock and key and nobody was giving up their money. Today, everybody wants to invest. So a lesson to everybody out there listening, life is waves and there are cycles. There'll be a time when it's not so easy to raise money. Anyway, back to the present time. So we told the city, we'll give you some affordable units. And we did. We gave them 56 affordable units, low affordable. I mean, you could get a $800 apartment for $300 based with our plan. What we got in return. So number one, we had fixed debt from hud. We eliminated one variable. What we got in return from the city by making them part of the deal was 100% tax abatement. We don't pay property taxes and property taxes in this particular in my home state are pretty high. So took out another variable. All we had to do is worry about the market.

Yeah. What do you think that saved you annually?

At the time, it was hundreds of thousands, probably the property taxes on the order of $350,000 that first year. And it's gone up since then. Price 6, 7.

And how long did he end up holding the deal all in?

So 13 years to date.

So theoretically, you saved yourself 350 at an increasing rate. 13 years, you've saved yourself millions, Millions of dollars.

Absolutely. And so, and so as we talk about the money, we got our debt from HUD, probably 80, somewhere between 80 and 83% leverage. We built this project. We did the 250 units. My partner and I, you got to realize this was 2008, 2009, 2010 was when we came out of the ground. This was the national.

FHA HUD deal of the month. In March of 2010, we were the number one deal in the country. Everybody looked at it because we came up with a structure that didn't exist. Right. That structure has since been used by others. They call it the Little Texas model. And the street our complex is built on is Little Texas. So again, a lot of credit to my partner who did lion's share of the work.

So let's get to the scumbaggery part.

We gotta get there. Absolutely. So we ran that. And just to set up the scumbaggery part, we did almost nothing else for the next two or three years. We wanted to make sure this project was gonna work. And so we put everything we had into it and the old credit cards and everything. So it worked, got better, got better and got better. We refinanced it. Our investors did very well. They doubled their money and six years and still own 100% of their, their interest. So take it Forward to about 10, 11 years. From the time we built it, it had grown enough equity that we thought we would refinance, cash out, use a good portion of that money to, to rehab the place to bring it back up. It's 10 years old now. We were going to work on some countertops and some things and we initially told our city partner that we were going to do that. They said, great. Then there was a turnover in staff and we started getting notices that we don't like the deal. And to just cut to the chase, a mid level staff member said, we don't think this was a good deal for the city so we want you to change it. And we said, well this was signed off by city attorneys, et cetera, et cetera. You can imagine all the people. He said, I don't care, we don't like it. You make too much money as developers. We said, well, we made it. We didn't make our money. My partner and I didn't get a dime for seven years. So bottom line is that I will tell you on a call that was not recorded, he told us that whether you're crooked or not, we're going to tell the world that you're crooked developers. We're the city, they're going to believe us. So you either sign over, you give us your ownership, they didn't say we'll buy it, you give us your ownership, we're not moving. Extortion. Yeah. If you don't, if you don't, we will use all methods available to get what we think is right. So that's, you know, take that for what it's worth.

So yeah, this goes to show, record all calls and expose scumbaggery. I mean this is the kind of thing where you want to fight fire.

With fire, but holy crap, it is extortion. It is absolute extortion. Yeah.

Well, let's talk a little bit about looking back. Well, what you finish up so at this point hasn't been sold, but your investors got double their money in six years plus the tax advantages. I'm just curious for everyone who wants to hear this, like what were the tax advantages, the savings or write offs they could realize throughout this, in addition to getting money back?

Oh, absolutely. You know, we didn't use bonus depreciation back then, which is sort of another discussion. That's where you can take lots of tax benefits on the first year and you buy something. But we use depreciation, It's a, it's a real estate term that the government knows that things wear out. This building we're sitting in now, it's going to wear out over time. So the government allows you to deduct what a certain percentage of that building every year. So most of Our investors, any of the money they got, the majority of it was sheltered and they did not pay tax on it and they haven't paid tax on it yet. They may at some point, but they haven't paid tax. Right. So they. Not only did they double their money up to six and a half years, they've still been getting distribution since. So we're probably closing in on 3X now. They maintained 100% of their ownership. So a lot of tax benefits with real estate, you know, you can, you can kick that tax can down the road till the day you die if you do it right.

So the net nat is based on the current value of the property. And again, so if this thing went up, basically 2010, it's been 12 years now. So from the time they put money in, they've probably seen, let's call it 3X plus, not having had to pay tax on that money for all practical purposes. And there may be some other advantages along the way. What do you think the additional dip's gonna be or the payout once this thing sells based upon market value?

Right now, yeah, I wish I had calculated it yet, but it's going to be another big hit because good news to. There's always, there's always a silver line into every story, every obstacle's got is just a stepping stone to something better. Because of this problem we had with the city, we had an offer of. We had a good offer and because they, they basically blocked the offer. Well, because that happened in the, in the ensuing five or six months since we had that offer, the property's risen at least 5 million, potentially 9 million in value. So our investors are going to potentially, potentially add another X to what they got. So they may end up with a 3-4x return on this property because there's a lot of equity remaining. It's going to be a great deal. So distasteful for the way, as you know, as, as you've told me before, you know, the, the three rules that the city broke was thou shalt not covet. They wanted our. They wanted what we had. They shall not steal, which they did, they extorted and stole from us, and shall not bear false witness. I love those rules because they said they'll do it. So despite all that, our investors are going to do great.

It's great. It's a great story. It's a great story. So let's jump into the big lesson, which is creating your own deals. And I want to set this up because I brought you to my San Diego Mastermind yesterday and you got to witness what was going on in the room. And then I just said, hey, pitch your deal, right? And for the first part of the meeting, your draw was dropped while you stalled the brainiacs that work in there. And for the second.

Part, you know some pretty well known people in the marketing field. I'll say without, I won't mention their names, but one of them raised his hands, he says, I'm in. And then another, another guy said, we want to put together a syndicate here.

And he's got a massive network. So it did not take long for them to raise their hands and say, I want this deal. But also there were a lot of nods about the brilliance of the structure of this deal. So I really want to. So why don't you set it up, pitch it, let's deconstruct it and then I'll tell you why I found it so intriguing. And through my hat in the ring, it's, you know, you know a big, it's for its six figure investment for us and I plan on doubling my investment. I told you that last night. So pitches.

Awesome, awesome. We like that you're doubling. So yeah. And I've got a lot of my money in this deal as well. Okay, this is a, this is a, this deal is not in the real estate world. This is in the enterprise software world. It's software, it's a tech deal. But if you start and I'll kind of use my filter of people, deals, money.

The reason I'm in the deal is because of the people. I know I'm in the general partner, but the actual operating partners are good friends of mine. Great track records, great.

Quality of character.

Before you get into the components, just pitch the deal itself. What is it and how's it work?

That's the genius behind this. It uses some, some strategies I had never heard of until this time. And it's, it's very non obvious. Huge potential windfall. And you're already in the third round of the fund. The fourth one's coming around soon, so. So it's got a track record, but I think the new structure is actually twice as good as the old one.

Yeah, it's there.

That's the setup.

I love it. So, so this is a, this is a fund that, that, that basically purchases, purchases lower middle market enterprise software companies at a low price.

Okay. So for example, what's a typical deal?

Typical deal is something that's got a revenue of somewhere between 5, 2 to 10 million. So 1, 1 company had a revenue of 7 million. We buy those companies for two times revenue. We buy controlling interest always. So, so, so if it was 7 million, we'd pay $14 million for that company. Right. So two times revenue. The deal is these are companies that are run by entrepreneurs that have great products and entrepreneurs can really create some really cool widgets and they can run a company and get it to a point where it becomes somewhat maybe of a lifestyle business. And you've got an entrepreneur that's really good at creating a widget, but not maybe so good at scaling a company. So we buy the company at low multiples because there's no investment bankers. These are all sort of hip pocket deals. Nobody else taking a bite of this app.

Yeah, it's kind of like a pocket listing. If you're out doing real estate, like.

An off market thing and we have people helping us do that, big companies helping us find these people. So what we do is, and we buy with cash. So that's why the fund, the fund brings in cash. We buy this company for cash, give a little bit to the entrepreneur, move him or her from CEO to cto. That way he or she can play in the sandbox. They're most comfortable, they don't have to worry about running the company. We bring in an experienced CEO that knows how to scale a company. Another use of that cash, we eliminate the debt, pay off the debt and we create growth capital. So now you've got no debt to service, you've got pocket full of money to use to go bolt on new companies to make it more viable. Add sales, add marketing. It's a wonderful system. These companies, they're too big for angel investors which want to catch those startups and take them to their thousand baggers. These are all post revenue companies. They're all companies that have money, but they're too small for private equity. So it's a niche that nobody really sees. And the operating partners of this fund have built their own companies in this exact same niche. So they know that.

So they've had eight and nine figure exits, that kind of a track record. And I think the smarts here is, you know, if you imagine an engineer, a technical person who starts a business like I did software. So that's why, that's one of the reasons I got into this because like I understand the problem and there's nothing worse than a technical person who's forced into being a CEO. They hate their lives dealing with HR and legal and all that garbage. It's like I just want to go back to my Art, Right. So you give them the chance to go back to their art without worrying about the debt they've been dragging around potentially for years. And they give them a, you give them a little liquidation opportunity. So they got cash in the bank, a little bit of ching. Takes the heat off, probably if they're married. Finally the spouse is like, finally, just like, we can go on a vacation for the first time in five years. Oh, and then you guys provide the, let's call it the. A brand new chassis, a sports car engine. And here's what I love best. You guys go out to your previous customers and sell to the Fortune 500. So the story I have in my head is it's sort of like you guys find the next slack and then take the slack to the next. Do a bunch of these. So talk a little bit about the fact that you guys go to them and bring in revenue.

Yeah, there's actually, there's, there's, there's actually a technical advisory committee built of very large companies that tend to absorb and buy these companies. They say, we need this, we need this, we need this. So they're the ones bringing us the deals often. And they also become the buyers. So it's wonderful. They're, they're out there sourcing deals for us.

So everyone's clear on this. You've got, you are. If you, you don't even have to bird dog the deals because you got relationships with companies that say, we'll buy them, but they have to get past the hump. The niche is.

They'Re too, too late for angels, too early for private equity. You cut those clowns out altogether. No one likes dealing with private equity investment bankers in any way in general, because they're going to, you know, you get screwed. You know, they got to make their margin somewhere. And the screw parts where the big margins at. Do you guys do ethical things with companies that could become the next thing? Or they'd say stuck. Those founders would stay stuck because they don't know how to scale.

Right? And they get their chance. They get their chance to second buy to the Apple. They bring in an experienced CEO that knows how to scale. We bring it up, and maybe it does get bought by private equity. But if you buy it at a 2 multiple, we sell it a 5 to 8 multiple. So if you start with 7 million of revenue and you, and you boost it to 10 million of revenue, but sell at a 5 multiple, that's, you know, 14 million versus 50 million. That's a nice, that's a nice payday.

So yep, that's man could start a bad habit on that money.

Absolutely.

All right, now let's get to the way the multiple liquidation strategy because this my friends, is the genius.

So this fund, it's already been beta tested. This is fund three. So fund one and fund two use this, used this strategy and refined it. There's a 300 page sort of operations manual that is used so everybody knows what they're doing. The managing partner had a nine figure exit of his own and started from a garage and went to sales. So we've. These are not, these are not Wall street money guys. These are operators running this fund. So the add on to this. So everything, everything I told you is already good and has produced in the past very nice returns and we hope it'll do so again in the future.

Low, sell high to the buyer, get the multiple. But it's a exit. Yep.

Okay, very nice. So now the new thing is that we are going public. So we'll take these companies, get them to the right point, float maybe 20% of the company on the Toronto Stock Exchange. What we just did in late December, our first company we, we took public. So when you take a come, when you take a company public on the stock exchange, first of all, if you, if things go well on the TSX for a good 12 months or so, you do well enough, then you can move over to the nasdaq and that really changes your world. Yeah, but, yep, but to just, just being on the TSX, it takes that multiple from a sale of a 5 to 8 multiple just because of the amount of due diligence and the number of people that look at this deal and the number of people that vet it, it takes that multiple anywhere from 12 to 15, maybe even higher. So now we're supercharging the results on this. Yeah.

And as an investor, where does the money go from that liquidation event? The number one, the first liquidation event, the second liquidation event and what can turn into the third liquidation event?

Absolutely. Show me the money is the best part. So again, we're taking care of our investors first. Right. So this is a fund structure. It's a 2 and 20 model. 2 means 2% of the assets of our asset management fee. 20% means that's the profit for the general partners. But you break that down, the money goes to the investors first. The Investor gets an 8% preferred return which will pay out beginning in August or so as a corporate dividend. Although we're not tax experts, hopefully that gets taxed at long term capital gains and not ordinary income. Always think about taxes. There's another tax thing remind me to talk about. So money wise, what happens? Well, when we have a liquidation, we don't recycle the capital. Meaning if we get a windfall of money, we don't use it to buy the next company, we give it to the investors. So this past company had its partial liquidation eventually, throughout this first quarter. So those investors that get into the fund, believe it or not, between now and the end of March are going to be able to take part in the profit that was, that was realized from the IPO in December.

It's insane. It's insane. Well, that's full disclosure. That's why I'm putting in my next round of money. Because it's like, all right, I got in right before, but then this one's a no brainer. And then there's going to be multiple. Because this is a fund that's buying multiple companies. Now, you can't guarantee that everyone's gonna go public, but my attraction to this is, first of all, I love the fact that investors get their money out first and you still have ownership in the fund. So I get an 8% dividend, an annual dividend on my money. While this stuff's spinning around.

The IPO happens. And if you're only floating 20%, you're only selling 20% of the company. Right. That goes, that sells on Toronto Stock Exchange. Exchange. If everyone behaves for a year and a day, then you can do a second event on NASDAQ.

Correct.

Okay. But you could still hold 60% of the company. So that means a big publicly traded company that's got its eye on this company that fed you the deal in the first place might come in and say, hey, we're going to buy the majority of what's left at a certain discount off of whatever the stock exchange is. And what the world will know is as soon as they acquire the deal, the their value of their stock on both sides goes up.

Absolutely.

I mean, this is, this is a quintuple win as far as I'm concerned. And it was, when I heard it, I was like, holy crap, that's probably one of the smartest things I've ever heard. And until we were talking right now, I didn't even think about the fact that you're just, well, I didn't know only 20% went out initially. You're still controlling. You still have the controlling interest.

Absolutely.

This is purely a mechanism for testing out the market's appetite. And it can be an amazing publicity Play. As long as you keep the news up and there's good stuff to report on, blah, blah, blah. I mean, there's variables, but, you know, at 20% of the company, I'll take the risk.

Absolutely.

Great. All right, well, what am I missing here?

Well, yeah, exactly.

What's wrong with this?

And here's another catch. Always think taxes. Right. Because the less tax.

Oh, yeah, you said there's a second tax deal.

Less tax you pay, the more money you keep in your pocket. That's the thing we think about in real estate all the time. There's a thing called qsbs for this fund, which is called Qualified Small Business Stock. It's not. Not unique to this fund. It's been around a long time. It's just a. It's. It's in the tax code and it's designed for small businesses to grow. The government wants to incentivize you to grow small business and buy real estate. Drill oil. So usbs essentially means that if you buy the. Buy the. Buy certain companies a certain way, which the fund knows how to do, the managing partner knows how to do. You hold that company for five years and don't liquidate it until after five years, the capital gain, whatever profits you make, the capital gains you don't pay tax on. So can't guarantee that all the companies will be sold after five years, but certainly those that are, if it's still intact and still there, there may be some tax savings too. So everything just keeps adding on.

Yeah. In the meantime, you're getting your eight points. You could buy your. Buy your spouse some flowers or.

Illegal illicit drugs. Whatever you want.

Yeah, whatever you want. Well, we want to pay you. We want to pay the investors back as much as possible.

That's what I'm saying. That's what I'm going to do with my money. I was just making a joke. That just did not land. Did not land. All right, so this is the next part. I mean, what you've done now is taken this whole structure and the strategy.

Why don't you talk a little bit about your syndicate and the Rich life club?

Yeah, you bet. So I've been at it so long. Had no real. I mean, I had lots of good mentors and guidance. Nothing that was really squashed together and packaged together for me. And so those things we talked about a lot, the people, the structure, the deals, the money, the rules, they're all very important. It's nice to learn where to make the mistakes, where not to make the mistakes, how to avoid them again. Try to learn from, from somebody else's mistakes. We have now kind of put all that together in a nice group, a nice package, so we can all learn that together. And added on and layered over that is the fact that we've put together a syndicate, for lack of a better word of investors, with the money that you need, which is part of a deal. Deals, which is what you need. If you've got money, that's the best marriage in the world. You've got a deal, you got money. Those two come together and produces profit. So a lot of times what people have difficulty with is they might have a deal, but they just don't know where to go to get the money. And so we help with that. Other times people don't. People have money, they want to invest. They're not ready to do their own deals yet, but they're learning, but they need to find some deals. So we do that. And there's a lot, there's so much that comes through my network of people that I've invested with over the last 20 years or deals that I'm putting together or people that I know are quality folks. We're making those available to this syndicate. So you put it all together, it's like a, you know, it's like a little engine that, that stops the, the hit and miss that I went through for 30 years.

And there's one other little thing that we didn't. So the bottom line is you got really cool people, people in your network, people outside. You got great deals that you vetted more than often. You put skin in the game yourself. So you're bringing deals that you've already vetted, you've done the due diligence, you've thrown some money in. And these are deals that aren't going to show up in anyone's radar. They're the equivalent of pocket listings.

Right, Right.

And you guys also structure them in really unique ways to maximize the return, minimize taxes, minimize the risk. And then.

If you're a deal maker, you can go to the group with deals, get some money, you got money, do some deals, and then also learn how to structure your own deals once you get rolling. There's one other thing that we didn't talk about, though. It's the adventure part. We didn't even talk about that. I realized just now you haven't been talking about your adventuresome lifestyle. You're a big traveling guy and you wanted to combine that with rich life. That's really what it's all about. So once you tell everyone about Rich life, adventure.

Yeah, you bet you. So, you know, what we want is we want people to have access to deals. We want them to eventually do their own deals because that's where the freedom comes. And you know, rich life. And freedom comes with. When you've got purpose and you've got the time and you're not having to worry where your money's coming from and you can start experiencing the world. And me, I'm a big adventure person. I love to travel. And so part of what I've put together is we're, we're going to learn, we're going to get deals. You know, you do deals with people you know, like and trust. Right. But sometimes it's even more fun to do deals with people you know, like and trust when you're in some really cool places in the world. So we're going to go to the British Virgin Islands and we're going to go to Croatia. We're going to go to wherever is. We're going to experience a part of the world. While we're out there making money, while we're out there making longtime, lifelong friends, we're going to stay healthy. Part of what we do is we bring in people that talk. You know, one of my friends is one of the, one of the foremost authorities on how to live longer and live healthy. That's not in, that's not in any real estate books, but by golly, why have money if you can't live long?

And I don't know if you can name drop or not. I know who he is. He's definitely one of the world's foremost longevity experts. That's really cool.

I'd give him a plug. His name's David Sinclair and his book is called Lifespan. He's a wonderful person and he has been studying aging for 20 years. So I intend to live till I'm 100 and something years old. So I want everybody to come with me. Yeah.

And I happen to know a guy who's raised and invested well over nine figures in David's latest ventures. So he's the real deal. He really is the real deal. And you've got an amazing network. You know, you're friends with Kiyosaki, yet plenty of other folks. So you bring.

A long list of good people. And I've met other people. I know other people who are in the fund, folks that we know in common. They're just good folks that you want to play with.

Yeah.

You want some great adventures. Okay, so where do people go to learn more?

Ah, you bet. You can just go to Rich Live. You can contact me there. I get all the emails that come through there. I'll answer personally. But some other things you get there. You can get some of the free goodies we've got which includes a video that's going to help go through some of the things that I talked talked about today. So I'd love to hear from you.

All right, great. Well, I'll wrap this up. I don't know about you, but I learned a lot from this. And I've had the good fortune of spending days with Tom now learning how he thinks, who his network is. I couldn't believe how many people we had in common once we started working together. But he is the real deal. He's got, I think, a brilliant way of thinking about deals and anything he doesn't know. He's an amazing student so he asked great questions and I'm going to continue to be involved in lots of deals that they have going forward as well as continuing to participate in the Lotus Fund, which I'm blown away with. It's such a smart deal and I love hanging out with smart people, know how to do smart deal. So, Tom, once again, thanks for being here.

Appreciate it, Mike. It's been a bless. Been a blessing to be here.

Absolutely. Well, let's say goodbye to everyone. So long. Thanks for watching. Make sure you leave some comments. I watch. Read them all and give us a rating and a review on Apple itunes as well. See ya.