How Private Money Works in Real Estate

You.

So, Heather, thanks for being here. I'm excited to hear what you have to share with this audience. They're very engaged. So, yeah, let's take it away. Thank you for being here.

Well, good morning. First, thank you for the opportunity. You know, my feelings are the same as yours. I always enjoy co hosting and attending each other's webinars. And you have been a great asset for quite a few of our clients that have been able to deploy capital through different offerings that you offer that we don't offer. And so I think we complement each other very well. So thank you for the opportunity to be here. And it looks like you have a great audience. Everybody seems very engaged. I have to fly out this afternoon, but I was hoping I could stay on as long as I can and listen to some of the other speakers.

Perfect. Well, yeah, hand it over. Give you the stage and go ahead and share.

Absolutely. Yeah. Well, I didn't put together a PowerPoint or anything. I thought I would just spend this time telling a little bit about who Secured Investment Corp. Is, what we offer. And then, you know, I always like to engage the audience. So if you guys have questions as we go along, I encourage everybody to put those into the chat section and I'll do my best to address those. And then there'll be some opportunity to schedule some time with me to talk, you know, after the event if they want additional questions answered or more information. But a little bit about myself. I've been with Secured Investment Corp. For over 11 years now. It's hard to believe that, but actually been in this industry for 18, so that's kind of dating me a little bit, but kind of fell into it by chance. I had a friend that was in the private money industry and quite honestly did not know a thing about private money. I just assumed that when you wanted to buy real estate, you went to your banker and when you wanted to invest money, you called your financial advisor. And that was really just what I had been taught by my parents, which isn't necessarily wrong, but my eyes were opened to this industry. You know, there was this aha moment where I realized, you know, that if people had the right deal, and, you know, we focus around real estate and specifically residential real estate assets, so it's a nice compliment to what Sugo does. But, you know, I was taken back by the fact that if you had the right deal, you didn't necessarily have to go to your bank and go through the ringer to get funding for that. That there were passive investors that were looking to deploy Capital outside of more of your traditional resources. And it was this perfect, you know, relationship that people were marrying, right, passive investors, which quite honestly a lot of passive investors were also active real estate investors. You know, they, and I love buckets and your spreadsheets of, you know, looking at where all of your assets are because I don't think people do that enough. You know, I think people just start investing and buying real estate and they don't really look at the percentages of where they have capital deployed. So I love that I'm going to use that. And so anyways, long story short, I was introduced to this industry probably almost 19 years ago and it was fascinating. You know, since then I've had the ability to become an active real estate investor. My husband and I own rentals, we fund notes, we have investments in and the funds. And you know, I've told my kids and I have young adult children that it's great to have your day to day job and it's important, but you also have to have multiple streams of income to create wealth and really legacy wealth. You know, I don't want myself or my kids to get to the end of their working years and have to start to deplete all of their savings that they've saved up their whole lives to live off of. Why not put your money to work for you? And so that's really the joy that I find is being helpful to help our clients do that. I have a lot of clients that I've worked with for 18 years and they live the kind of lifestyle that they had when they worked and now they're letting their money work for them and they're traveling and they're spending time with their grandkids. And so that's what fills my bucket. Right. Like I love being able to help clients do that. So a little bit about our company. I love that all of these operators kind of have their lanes right. You know, some of us are really great at multifamily, some of us are great at self storage. Where we fit our niche is in the residential real estate space and really specifically affordable housing. So for us it's important to be able to provide affordable housing for people to live in and then also be able to provide affordable housing as a real estate investment asset class. And we decided a long time ago, when I came on board 11 years ago, we were not going to try to be the operator that did everything for everybody. And that's where I think Sarah and her team has been such a great addition to what we can offer Is we don't do multifamily, we don't do self storage. It's not our expertise. And we would rather align ourselves with people like Sugo, that's the expert at that. So our expertise is really the residential real estate market and specifically affordable housing. And what I mean by that is the houses that we invest in and buy and then the houses we also lend against are affordable houses and they're under that FHA cap. And I just want to speak a little bit about that because a lot of people ask, well, why, you know, why would you do that? I mean, they will look at some of the houses that we buy and say, ooh, I wouldn't live there, you know. But we want, when we're investing in real estate to have multiple exit strategies. We all know that the market is a moving target. It shifts constantly. And if we were so siloed to think that the only way that we could make money was maybe to fix and flip, we would not be a good operator, in my opinion. And so we like that affordable housing market space specifically under the FHA cap. That way, if markets start to shift and maybe we bought a house 12 months ago and it was our intention to potentially fix and flip it, and we see values declining. And like right now, with interest rates rising, houses aren't selling as quickly. When we're under that FHA cap, we usually can at least keep cash flowing those types of properties and turn them into rentals and. And vice versa, you know, as interest rates start to cool off, let's say, I don't think they're necessarily going back to what they were 12 months ago, but the housing market will pick up and values are going to start to increase. And then we would potentially take those types of assets that maybe we rented this year and start to sell them. And so we want to have the ability as an operator to pivot quickly. We have a very good pulse on what is going on with our portfolio. We meet multiple times a week with our teams, and so we want to be able to make quick decisions. And I think that's a big benefit to deploying capital in a real estate fund, especially a privately managed real estate fund. We don't answer to board members. We make decisions effectively and quickly and internally between the three of us, fund managers and obviously our teams that support us. And we can make decisions quick as markets change quickly. So residential real estate is really our niche. We currently actually are managing three real estate funds. And this is something I'm pretty proud of. And I think you Showed this on your spreadsheet of the different investments. You have quite a few of these types of investments only allow accredited investors to invest. And we do have a fund for accredited investors, but we actually also also have a real estate fund that is open to everybody and that is not very common in this industry. It's extremely hard to get approved for. It is a lot of internal management and reporting to the securities and Exchange. But we felt pretty passionate about it. We wanted the ability to help people that maybe were close to being accredited or just getting started, the opportunity to start to create wealth for themselves. So we actually have an accredited investor fund, which we call Fund two. We have a circle of Wealth Fund three, which is open to everybody with a very small minimum of $1,000. And both of these, excuse me, both of these funds functioned as what I would consider a debt fund and an acquisition fund. Excuse me, debt fund, meaning that we make money for the partners in the fund by lending that money out, we lend money to other real estate investors. So for example, Sarah potentially could find a great deal on a residential property that she's going to rehab, increase the value, throw a tenant in, and then she's going to rent it out and hold it long term. Where we would fit into that equation is we would step in, we could potentially provide Sarah funding to buy the property and rehab the property. We're going to put a lien against the property. That's how we protect our fund and its members. And Sarah's going to pay us interest payments every month. And when Sarah gets done rehabbing that property and the value has now increased, Sarah's going to either refinance us or pay us off. We get our capital back and we go and originate another note. So that's what, that's what a debt fund does. It essentially is making money by receiving interest payments and origination points and it's protecting the fund and its assets by filing a lien against the property. We're stepping in as the bank. These are all short term loans, 12 months on average. We like short term debt because when markets start to shift, we don't have as much concern with values declining 30% in a 12 month period. We're not going to lend more than 65% of the value. And for just our really experienced people will maybe go up to 70, but no more than 70%. So that is the debt component to our fund, both funds. The other part of our funds is what I would consider acquisition. So we will acquire properties. Now, the debt component to our fund, we are Doing this nationwide. We lend all over the United States. The acquisition part of our funds is only local to our market. So we're actually located in a town called Coeur d', Alene, Idaho. The picture behind me is actually a view from our office. So we feel very spoiled that we live in a beautiful part of this country. But we only acquire properties in basically Coeur d', Alene, Idaho, up through Spokane, Washington. And we're very clear about that because it's the only way that you can control that. You have to have boots on the ground. We believe in being where you're investing in as far as acquisitions go. And we have a contracting crew on staff, we have a property management crew on staff. We have a servicing company on staff. So we keep everything very internal. We have a staff of about 120 people. And so that's the acquisition side of our funds. We will buy properties. Sometimes we sell them, sometimes we rent them. We run a return on investment calculation and whichever is greater and we feel like is a better risk for the fund with a higher return. That's what we're going to do with the acquisition. So that is essentially how our funds make money for our fund members. A lot of feedback I get from our fund members is that we have the ability to. And I love that you asked people if they were trying to invest for long term or cash flow. That's something that we have conversations with our clients about from the very beginning. Because if somebody's coming to us saying, hey, I need a 1031 exchange opportunity, that's an not going to be something we can do. That's going to be something that Sugo Capital can help with. We just are very clear about the fact that that's not what we do. But where we fit in those boxes is our funds can create cash flow. So they pay out on a quarterly basis. The other really neat thing about our funds is I think I was looking at our investor database. We have about 70% of our members that invest with self directed IRAs of some kind of. And it's just a great wealth building tool. It's a tax deferment opportunity, especially if you're using a Roth. They're just so powerful. And I was excited to see that you have someone speaking about that today. So I want to listen. But the opportunity that I think is really big with those types of self directed accounts. One of the challenges I hear from people is, hey, I'm invested in oil and this and that. And it's great because I get monthly payments. But I invested with my IRA and now those earnings are sitting in my, my IRA and I don't have enough because so and so's minimum investment is a hundred thousand dollars and I got to save up capital to be able to deploy it. So essentially what happens sometimes is that capital sits there undeployed. Our funds have the ability to reinvest their earnings so they can set it up from the very beginning and they can say, hey, right now I don't need the cash flow, just set that to reinvest every quarter. They know this is how much my earnings were and we will reinvest it. For those of you that have self directed accounts, you know, they like to have all their forms filled out. They love forms. We actually help our clients with that. So there's something called a fair market valuation form. So your IRA custodian is going to want to know what your account value is at the end of the year. We actually do that for our clients and it's really a big deal. Especially when you're reinvesting your earnings because those dollars aren't flowing back and forth to your ira. So you can set it up for growth mode. You can set it up for cash flow. People that are trying to replace income and live off their earnings. The funds are a nice opportunity for that. There is a little bit of tax benefit because we are holding some rentals. Always will that depreciation or any of those kind of tax benefits flow through to the members of the fund. It's not going to be as exciting and sexy as Sugo offers and energy and full disclosure. But there will always be that tax benefit flow through to the members. So they, they will have the ability to take advantage of that. But yeah, I mean we get a lot of feedback that, you know, people like the fact. And I think Sarah, you mentioned this, this is a way for people to invest in real estate with physical assets backing that investment. But they're not getting a call in the middle of the night from a tenant saying that they're toilet plugged and they're not getting a call from a contractor saying, oh, I can't show up and paint it. We handle all of that and we have a massive team that does that. It's a great way to get, you know, high returns on your capital with very, very little headache. And the other thing I would want to just mention is our funds have a pretty short tie up period in relation to most real estate funds. Ours is a 12 month tie up period, which is pretty unheard of, you know, and it really is, you know, just simple. We aren't, it's not a long term play for us. Our goal isn't to sell all these in the end of five years like a multifamily or a self storage. So we have the ability to exit people out of the fund quicker than most. So they do have just a short 12 month tie up period, which is a lot different than like most syndications. I think most syndications are three to five years typically.

Yeah, three to five. And, and I want to jump in here because this is a really, these are some really good distinctions that you're making. So audience, you know that chart that had 15 different kinds of investments and I had a bunch of categories where I compared side by side. So those were some examples of ways you could compare. But you, those columns, how you're comparing your investments should be based on what's important to you. So some of the things that Heather's saying I don't have in that comparison chart, but add them. So like if liquidity is important to you, like you need access. So I did mention, look at the hold period. But if you need to have some flexibility, like I don't know, maybe I need this money in one year or three years, then don't go into a syndication or a fund that has a lockup period of seven years. Go into something liquid like secured investment, corpse investments, you know, they're much more liquid. If you want to break down your portfolio, you know, the minimum investments, that's very, very attractive, your minimum investments in your different funds because you can become more diversified like you said in your ira, you can either jump in with some of the cash, you don't need to build it up to 100k to make one investment. So you know, the liquidity, cash flow, like make sure you understand what's important to you and, and put those in a side by side spreadsheet. So when you hear everything that Heather just said, if you didn't catch it all, listen to the replay and write them all down. Because those could be things that are really important to you. And so you want to make sure you get into an investment that aligns with what's important to you and your goals.

Yeah, good points. And I mean we take calls all the time and we'll start to talk to people and, and after peeling back the layers of the onion, we realize that what they're looking for, either we don't offer or they don't even really understand what they're looking for. You know, it's like, and I try to tell people, like, try to determine what you're trying to accomplish. Like you said, liquidity is a big one. We actually have one fund that has a 90 day liquidity call. So that is something that we just recently opened. We, we heard our clients, they said, we like your fund, but I need access to my capital quicker than 12 months. And you know, so we do now have a fund that has a 90 day call. So, you know, again, I think to your point, Sarah, it's really important to know even before you start vetting operators, like sit down with your spouse or your partner or your business partner and determine what you're trying to accomplish, what kind of dollars you're trying to deploy. That's another big one. You know, if you are, if you are deploying IRA funds, it's probably not as important to be getting monthly and quarterly cash flow. It might be more important to get, you know, the ability to reinvest your earnings unless you're at an age where you have to take your required minimum distribution. So like Sarah said, I think it's really important to just have an idea of what you're trying to accomplish first and then start to back into these deals. And it makes it easy. Otherwise you get analysis paralysis. You're going to start calling every operator out there, you know, and it's just. And I, I talk to these people and it's like. And they don't, you know, they don't even have a clear understanding of what they're looking for. The last thing I would add about our funds, and I'm going to ask, answer a couple questions because I know we're kind of running short on time. Our funds are fully audited by an outside auditing firm. That is a big deal these days in the fund management world.

So many people are sending me links. Did you see this Ponzi scheme?

I know. I get them every day. Every day. Yeah. And I think that's something that I would encourage people to ask. It doesn't mean that it's required or it's a bad thing that they don't do it. But if they don't have their funds audited by an outside auditing firm, not internally, I would start to ask more questions and I would start to ask for more information. Ours are audited by an outside auditing firm. And our funds are not REITs. They are privately managed real estate funds. They're similar in structure. There are some differences between our funds and a reit, but again, they are privately managed real estate funds. We have an 11 year track record. We've always had positive returns. The other thing I would say is if you are in a position where you don't need cash flow right now, but maybe in 12 months you're planning on retiring and that's your whole goal, is to start getting cash flow and have your money working for you. Just because you set up your account to reinvest to begin with doesn't mean it's set in stone. You could turn around in 30 days and say, hey, we decided we want the cash flow. You could even call me and say, hey, I want you to reinvest 50% of my earnings and I want to have the other 50% of my earnings paid out. So just know that it's not set in stone. We just have to have enough time to let my accounting team know. So our fund two is our accredited investor fund. The minimum investment in that is $50,000. And then you can invest any dollars thereon. After we have people that literally call me and say, oh, I just got paid by so and so, I got twelve hundred dollars, I want to put it in your fund and we can do that. So 50,000 on the accredited investor fund. Target return on that is 10%. Our circle of wealth fund three for our unaccredited investors is a $1,000 minimum. Now that has to be in $1,000 increments and that has historically been hitting above 7%. So that's still a great return on that. And we have historical data that I can provide anybody that's interested. And then our new fund, which we call our fixed income fund 5, that is a guaranteed 5% with a 90 day call, you could invest today and call me next week and say, hey, I need access to my capital and within 90 days you'll have it. And we really created that, you know, for the people that maybe had capital that was waiting for another, maybe waiting for a deal with Sugo to come along that wasn't quite ready, they could at least keep their capital working for them. 5% still isn't anything to turn your nose up at. But then you can access it quick. If you needed access to it to invest in something else or an emergency.

I think it's great too, if you're looking to buy a home. So we have a lot of investors who are like, I, you know, I have my down payment, it's not working, but I need it to, I know, you know, I need it when I need it. I don't know if I need it in a year or in, you know.

I'VE heard that a lot lately.

Yeah. And so I say don't invest it with me because I can't get it back to you in time.

Yeah. So 5% and the minimum in that is $5,000. So we wanted it low so that, you know, there was a low barrier of entry. And like I said, once you do your capital call within 90 days and it could be much quicker, but we give the fun 90 days and then we can exit you out of it. Cool. Perfect.

Well, I'm looking at the chat because I know you won't be here for the Q A later. So I want to make sure we hit any questions.

Andrew had a good question that I saw he asked about. I think Andrew, what you're. He's asking about the debt component in our fund and the default. And I think that's a really good question and probably is worth just spending a minute on. So what Andrew's asking is how many in your portfolio as a percentage are what is your default rate of notes that don't pay? And you know, that is a moving target. I would say on average it can be anywhere from 5 to 8%. But what you have to keep in mind, we consider default 30 days late. And what tends to happen is people, if they are having payment problems, they'll get to almost 30 days. Because the challenge with 30 day lates is we won't lend to them again. So a lot of them are very motivated if they start to have problems. And also just to kind of touch on these clients are people we talk to almost daily. They're asking for draws. We're holding their rehab funds back. So we have this open line of communication with them. More often than not, if they're having a challenge, they're on the phone with us and we're like, hey, what's going on? Maybe their contractor took off on them. We have the ability to find them another contractor. I mean, we service 500 notes. I mean, this isn't like we have 100 notes that we're servicing. We have a massive database of contractors and borrowers and brokers. So most of the time, if they are open and they're talking to us, we can help them. So I would say 5 to 8%. And that's probably on the high side. But to be honest, right now we're seeing some defaults. I mean, people are getting to the end of their term. You know, houses aren't selling as quick as they thought they would. And so default could also be that they matured. They might still be making their payments. But technically, if they've matured past their 12 months, we want them to put an extension in place. If they don't, then we classify it as default. What I look closer at is foreclosure rates. You know, how many houses do we actually foreclose on and take back? That's under 2%. It's very low. The thing with the deals that we originate, they have at least 30% equity in them. They don't typically just walk away from them. A lot of times they have their time, effort, and money into them. You know, they have their down payments, they've been paying contractors. So a lot of times it's a matter of, hey, just get it on the market. If you can't finish it, let's get it sold. So I look at more of the foreclosure rate, like, how many do we actually take back? It is very few, a lot of times. But to that point, if they get 45 days late and they're not calling us, we throw them in foreclosure. We have to start that foreclosure process because we have to protect the fund. And typically, what happens, it can be six months, it could be 12 months to foreclose. A lot of times they'll cure the debt, pay it off, bring it current before we actually foreclose. So hopefully that answered that question pretty thorough.

I think a good last question is for fund two, Are the returns taxable as interest, dividend, or return of capital?

So that's a really good question. So they do get a K1, and it is reported as earnings. It is not a return of capital. So it's a little bit different than the syndications.

Perfect. All right, thank you so much for being here.

Absolutely.

Always great to have you. And, you know, the way that our investors can diversify their portfolios is really awesome because they're. They're complementary.

They're.

They're our investments for different purposes, different goals, different situations in life.

So it's always great. Absolutely. Thank you for having me. And I'm going to put my direct link to my personal calendar in the chat, so if anybody wants to connect. And this goes right to my calendar. So I'm not available the rest of the week because I'm going to an event, but there we go. I encourage anybody if you have questions or just want to learn a little bit more about us. I'm always open to a phone conversation and would love to share a little bit more. But thank you again, Sarah, for having me. It's always a pleasure yeah.

Thank you for being here, Heather.

Yeah.