TGCI 10 – From 6 figures salary to $500M in Apartments!
In this episode, Pancham interviews Joe Fairless of Ashcroft Capital. Joe reveals the various Pros & Cons investing in a real estate syndication.
This show starts off with Joe sharing his background information. After starting off as a W-2 employee with a humble salary, how did Joe manage to segue to real estate investing? Listeners will learn the importance of making sound financial decisions in this segment of the show.
Next, we compare single family investing to real estate syndication. We reveal the pros & cons of each investment strategy. Folks who are thinking of investing in a syndication will find this comparison particularly interesting.
Diving further into the nuances of real estate syndication, we reveal the differences between a general partner and a limited partner. As limited partners in a syndicated deal, can you lose your entire capital? What steps can you take to avoid this?
This interesting show wraps up with our “Taking the Leap” round. Tune in now!
3 Key Points:
- Single Family investing vs Real Estate Syndication – Which is better, and why?
- General Partner vs. Limited Partner – Understanding the Difference
- How to vet a real estate syndication deal
For more details visit: http://www.TheGoldCollarInvestor.com/show10
Download free report on top 6 reasons to invest outside of wall-street:
- 01:08 Pancham introduces Joe to listeners
- 01:55 How did Joe transition to real estate investing?
- 03:09 How did Joe save up capital for his real estate business?
- 04:23 Why did Joe gravitate towards syndication from single family investing?
- 06:26 Joe explains real estate syndication in simple terms
- 07:39Who is the general sponsor, and what are their responsibilities?
- 08:36 General Partner vs. Limited Partner – Understanding the Difference
- 10:43 As a passive investor in a real estate syndication, are you exposed to any legal liabilities?
- 12:03 Can passive investors lose their entire capital in an ill-executed real estate syndication?
- 12:20 Three Main Factors to consider when evaluating a real estate syndication deal
- 13:13 What is a preferred return?
- 14:58 Is your GP investing in your real estate deal?
- 15:23 How do General Partners make money in a real estate syndication? Typically, what are the fees that they charge?
- 18:21 What does typical deal structure and profit split look like?
- 19:09 What does a typical deal look like in current market conditions?
- 20:13 Taking the Leap
- 20:13 When was the first time you invested outside of the Wall Street?
- 20:33 What fears had to overcome when you made your first investment property?
- 21:09 Can you share one investment that did not go as expected?
- 22:21 What is one piece of advice that you should give to people thinking of investing in the Wall Street?
- 23:57 Joe shares his contact information
- 24:34 Are you an accredited investor? Sign up for Pancham’s Gold Collar Investing Club
- 26:10 Got questions? Get in touch with Pancham
Get in Touch:
Welcome to The Gold Collar Investor podcast with your host, Pancham Gupta. This podcast is dedicated to helping the high paid professionals to break out of the Wall Street investments and create multiple income streams.
Here’s your host, Pancham Gupta.
Pancham: I started investing in real estate by buying single-family homes. I bought one, then the second one, then the third one, and by the fourth one, it started to become a drain on time and energy. With my full-time job, family and three hours of total commute, I started questioning myself on whether this is really scalable. Don’t get me wrong. I was making decent money doing it. But it felt like it’s going to take a long time to achieve my goals. After researching and spending the time, I finally settled on buying multifamily apartment buildings. It took me time to learn about them, but the amount of time it takes to do one $5 million deal versus one $200,000 to $500,000 single family home is more or less the same. Today my guest, Joe Fairless is no stranger to this asset class. He is the co-founder of Ashcroft capital and controls over $450 million worth of real estate in Dallas, Fort Worth and Cincinnati. He has been investing in real estate since 2008, and prior to that, he was the youngest Vice-President at an award-winning advertising agency in New York City. Joe, welcome to the show.
Joe: Hey, thanks a lot Pancham. Looking forward to our conversation.
Pancham: Are you ready to fire up my listeners break out of Wall Street investments?
Joe: Let’s rock and roll baby.
Pancham: All right. So before we begin, do you want to give a quick overview of how you got started in this business?
Joe: Yeah, sure. So I had a W-2 job in New York City and I actually moved from Texas to New York City. Lubbock, Texas to New York City when I graduated from college, and my job was making a whopping $30,000 a year and that wasn’t going too far. So, I went from making $30k, working my way up relatively quickly the corporate ladder at the advertising agency I was working at, and I ended up with a salary of $150,000. That was at my last job in advertising, and the reason that is relevant is because I didn’t have a lot starting out. I had some student loans to pay off plus I was making 30K, and I need to figure out a way to save my money and then also make my money work for me. So that I could climb out of that hole, so to speak, and so two things happen. One is I lived in the same apartment for nine out of the 10 years. I lived in New York City. So I moved to East Flatbush, Brooklyn for the first year, and then years 2 through 10, I lived in East Village at an apartment, and I had a roommate the entire time. My friends made fun of me because I looked like a college kid. I had a dorm star refrigerator. There was no living room in the apartment. It was just two bedrooms, a hallway, a bathroom, and kitchenish area. That was it, and my friends make fun of me because they move up, you know, they scale up to the studio. Live by their self in one bedroom or you know, even a two bedroom in some cases. And I kept my fixed living expenses, or my living expenses relatively fixed even though I was making significantly more money and what that allowed me to do is that allowed me to save money and put towards something. I didn’t know what that something was and what I discovered through a bunch of books that I read and speaking to people, and something that just naturally gravitated towards…One book that was really influential was Investing for Dummies and it talks about the three different ways you invest. One is stocks bonds, two is LLC and three is real estate and so I just gravitated towards that and ended up choosing real estate and I bought my first house in 2009 in Dallas where I’m from, and then I ended up buying three more after that. But…
Pancham: All in Dallas?
Joe: All in Dallas, Fort Worth, yeah. But then you realize that that wasn’t really scalable. I was actually last night looking at a document that showed what I wanted to do for my 10 to 15-year plan, and it was to buy a house a year and to have. I think it was $25,000 of income coming in and from home rentals. But what I realized is it’s just tough to scale that.
Joe: It’s really hard to scale single-family homes where every home is unique; every home has its own set of paperwork, insurance, taxes, mortgage. If you have a mortgage, if you don’t know, you still got insurance and taxes that you’ve got to address every year. Every home has its own tenant, and every home is located in a different place. Even if they’re next door then you get some economies of scale, but it was just tough to scale that plus I was becoming apathetic towards my full-time job. So I left advertising and I was like, “You know what I can’t, I can’t scale the way I want to with a single family home”. So let me buy more homes at once and partner up with people because I couldn’t get approved for a mortgage since I didn’t have a W-2 job. So I decided I needed to partner up with people and that’s where apartment syndication came into play.
Pancham: Great. That’s a pretty good introduction, and you know that goes right into the next question, which is, you already touched on this which is you know, what’s the difference between a single family home versus investing in an apartment building? You touched on most of them. So how about you, you know, you want to talk about what syndication is? For my listeners who have never heard what that is?
Joe: Sure. We’ve all participated in the syndication. Well, I’m guessing we’ve all participated in syndication because I’m guessing everyone listening has flown from one place to another, and what I mean by that is a syndication is simply a pooling of capital from multiple people to participate in some things that they wouldn’t have access to participate in, if they didn’t pool their capital. And you know, an airplane ride from, you know, you fly a Delta from point A to point B, you don’t own the airplane, but you pay an amount in order to enjoy the airplane for a period of time and it accomplishes your results. Now the slight difference here with syndication is you actually do have part-ownership in the apartment building but you don’t buy it all with your money. You have an investment in it. 100 thousand, 300 thousand, a million whatever it is …50,000 depending on what your investment is, and other people are also investing into the deal with you. And then myself, which is I’m the General Partner or the Syndicator, more the Key Principal. There are many different names for us. We are essentially the pilot. .We are the one who takes them; you know the group from point A to point B and we’re responsible for making sure that things go according to plan and we just simply do that with apartment communities.
Pancham: I see. Okay, so you basically get together and pull all these resources by these apartment buildings and in return, you give out, you know the investors who are investing in these buildings; we make a return on their money and have their money work for them.
Joe: That’s exactly right. Yep. Right.
Pancham: And you also touched on something like General partner. So what is a General partner and what is a Limited partner in this structure?
Joe: Yep. The general partner is someone like myself, who is active in the deal, putting the deal together offering it up to investors, and responsible for the operations and ultimately the preservation of capital number one, and two the growth of capital. Um, so everything that falls underneath that, which is finding the deal, underwriting the deal, making sure you have the right equity amount in order to fund the deal and the business plan, and get the right financing in place from a debt standpoint. You know finding the right lender, you know overseeing the management of it, whether it’s the property management or the asset management. In our case we manage the asset. So what that means is we’re not on the ground, doing the maintenance calls. We are managing our property management company who we have hired, and they oversee that and we manage them and ultimately the, you know, the successful execution of the business plan. So that’s the General partner highly involved, highly active.
Joe: The Limited partner is passive, and that’s where all my accredited investors are in. That’s the category they’re in. They are Limited partners. They’re passively investing in our deals. So they have an expectation of returns based on what we project. So we have what we offer our securities, it’s a 5 or 6-B as in boy offering registered with the SEC and we provide the investors an opportunity to passively invest in our deals in exchange for the returns that we’re projecting.
Pancham: I see. So like the name suggests, Limited partners, do they have any liability in terms of you know, any legal issues that come up with the deal or if there are any problems with the deal, what kind of liabilities these passive investors have?
Joe: They could lose all their money when they invest with us. Just like any other or most other investments I imagined that they would participate in. But that is what they are limited to. Now that’s a clearly, it’s a big but you don’t want to lose you all the money that you invest or any of the money that you invest, but it’s a risk. It’s a risk factor. From any other liability standpoint…for example, someone trips and falls at our property and breaks an ankle and sues us as a result of it, maybe there is a crack in a step and they tripped on a trip on the crack and so it was negligence on our partner. Well, our investors are not liable for that. That is only the General partnership. So there’s no liability, legal liability that I’m aware of, of course, you always want to double check this with your attorneys, but that I’m aware of for our limited partners. It’s simply the risk of capital that is being put into the deal.
Pancham: Okay, that’s great. So this is a nice segue into the next question, which is, what are some of the things that limited partners have to be careful about when investing in apartments? Can they lose their principal and if so, what are the chances?
Joe: Yeah, well, I’ll answer the last two questions and we’ll circle back to the first one. You can lose all of your money when you invest in syndication. I have no idea what the chances are because that depends on the particular deal and the operator. The chances would vary depending on the deal, the type of deal, the operator and the location. Those are the basically the risk factors, and so now to answer your first question, what to look at? Well, you look at those three things. You look at the deal, you look at the market, and you look at the team. Those are the three main risk categories for an investor. And when you assess those categories actually have a website page that is dedicated to this it’s besteverpassiveinvestor.com and it lists out all the questions to ask potential general partners when you’re interviewing them to see if you’re going to invest with them or not, and all roads lead back to alignment of interest. When you invest with a general partner, you want to make sure that there is a preferred return and a preferred return if we’re talking to Wall Street people or high net worth professionals on this show, it’s likely everyone knows what a preferred return is, but just quickly to explain it or reiterate it.
Joe: Let’s say there’s an 8% preferred return on the deal. That is not a guarantee of any return whatsoever, but it’s the next best thing in my opinion because what that means is, let’s say you sell the property in five years. Well, the limited partners must receive 8% a year on their money, plus all of their money back that they invested before the General partnership participates in the profits from the sale. So it’s a way to mitigate the risk as a limited partner because you’re first in line to receive the returns from the project when the property sells, and depending on how it structured, perhaps during the operations as well.
Pancham: I see, okay, that’s a pretty good explanation and we will put the website that you mentioned on the show notes. That was besteverpassiveinvestors.com.
Joe: Yeah, besteverpassiveinvestor.com. We might have bought the “s” too. Maybe its besteverpassiveinvestors.com might be both I’m not sure. What are the things you mentioned, with the alignment of interest is sure that preferred return is great and imperative in my opinion, but also how much money does the general partnership or is the general partnership investing in deal. We put, I personally put at least $100,000 and all of our deals, and my business partner puts at least $100,000 and all of our deals because we want to participate in the deals as well. I mean, there…
Joe: We are confident in the projections that we have set forth and the deal, so why not?
Pancham: Right, right. So can you quickly go over like how the General partners make money in this? Like you mentioned few of that already, but what’s a structured way of explaining that?
Joe: It depends on how the General partnership chooses to make money and the fees that they choose to charge. I can tell you some typical ones are acquisition fees, which range between 1% to 5% of the purchase price, the asset management fee, which is usually around 2% of income collected.
Pancham: And that’s the ongoing fees, right?
Joe: That’s ongoing. Yep, asset man, acquisitions up front at closing, asset management is ongoing, and I’ve seen it also charged $250 per unit per year. Which I believe is a ridiculous way to charge that fee.
Joe: Because there’s no alignment of interest, going back to always wanting an alignment of interest with your investors. If someone’s charging $250 per unit per year on asset management, well they can be running the property into the ground but still receive their 250 per unit per year costs. So you don’t want that. You want you to want a group that’s actually making a percentage of whatever income they’re collecting for the property and we actually have a clause in our contracts that have our investors or have us deferring our asset management fee if we are not paying out the preferred return, and its common sense. That’s what I believe groups should do, everyone should do. And we did not have that at the beginning in our early deals, and one of my investors like, Well, you know, what happens if you’re not returning the preferred return and you’re still got this asset management fee? And I said, well, we will not take that asset management if we’re not returning the preferred return. He’s like, well, why don’t just put that in contracts? I said, “Oh, okay”. So we did, and so now moving forward, it’s been in all of our agreements and so that’s a second fee.
Joe: There’s also the deal structure, what type of deal is 50-50 deals and 60-40 deal. 70-30 deal 70% Limited partners, 30% General partners. I mean, that matters because basically, you know, that’s profits from the deal and how they’re getting split up. I mean, ultimately, what I would look at is an alignment of interest with an investor or with the General partnership, how that works. Because you want to know what your projections are net of the General partner’s fees. Anytime we put together a deal, we will show what the projections are net of our fees that way. It’s an apple to apple comparison for what they’re looking at and what they are what they should expect to receive, assuming that we perform as we anticipate.
Pancham: Correct, correct. So the third thing that you mentioned, which is a deal structure, the split which is 50-50, or 70-30, or 60-40. So just for my listeners, so what that means is that the back-end when the deal is sold, that’s when you know, after the invest of investors have made their money back and their preferred return, you would split the profits based on that structure, which is either 50-50 or 60-40. Is that right?
Joe: That’s correct.
Pancham: Great. So my last question, as far as apartment investing is concerned is that can you give an example of a typical investment in today’s market? I know it changes based on the market. So it’s given 2018-2019 market environments. What can investors expect?
Joe: I guess it depends on the business plan and the type of projects that the operators doing. If you’re, so I’ll just speak for myself because there’s a lot of a variable in play there and I’d say, we do five to seven years projected holds… for myself sooner myself later, but that’s the project in five to seven years. And we want to have a project that projects conservatively to 16-17 maybe 18% IRR net to investors.
Pancham: Okay. Okay. And how much-preferred returns do you guys…?
Joe: We always do 8% preferred return.
Pancham: 8% and how much is the split?
Pancham: 70-30. Okay. All right. Anything you would like to add before we go to the next section of our show, which I call taking the leap around.
Joe: Oh, that sounds fun now. I’m excited to do that round. Let’s do it.
Pancham: All right, I asked these four questions to every guest on my show. My first question is when was the first time you invested outside of Wall Street?
Joe: Oh, it was 2009. I bought a house for $76,000, and I still own that house today. It’s worth 175,000.
Pancham: Wow. Good for you. So my second question, what fears did you have to overcome when you first invested outside of the Wall Street?
Joe: That if a tenant moved out, I’d still be okay. I’d figure it out. Or if we couldn’t ever find the tenant, I’d still figure it out. Because as a big deal, I had a mortgage that I’d never had before. I bought an investment property for instead of a Primary residence.
Pancham: Right, right, right. Yeah. Okay. So that was like you have number 1 fear like what happens if you’re not able to get the tenant qualified to?
Pancham: Great, great. Okay, so my third question can you share with my audience one investment that did not go as expected.
Joe: Fourth property I ever bought is a single family house bought it for $35,000 from a wholesaler thought I only needed to put $5,000 in it so all in 40. Well, all in $50-55,000 later. The rent was less than what it was before we started fixing it up, and it took about six to eight months when I thought I’d take two months. Ended up selling the house at an essentially break-even. Maybe I lost thousand dollars, but it was pretty close because I just got lucky that the market took an uptick, significant uptick. So I bought four homes or I started out, I own three of them still today and then I switched over to apartments after that.
Pancham: I see and this was in 2010, the fourth home?
Joe: The fourth one, I’m guessing it was around 2011, maybe 12.
Pancham: I see.
Pancham: Okay. Alright, so my last question is, what is one piece of advice would you give to people who are thinking of investing in the Main street that is outside of Wall Street?
Joe: Alignment of interest. When you invest with something other than Wall Street, and quite frankly, even any type of investment, I believe you, you need to see where people are making…where people have an incentive to make money and how they have how they’re incentivized. With our projects were incentivized to make the investors as much money as possible because of their equity partners with us. So when the property does well, we all do well and let’s just say you’re buying a single family house. Well, you want to make sure that the property management company is paid for the rent that’s collected, and the other fees are limited or not present. I’ve heard of some fees like a lease-up fee. Which, you know sounds, makes sense but if they have a feed that incentivizes them to continually find new tenants, then your number one expense with a single-family home is tenant turnover and vacancy. So you’re, you’re interested in the other line. Now how you resolve that is, you give them extra incentive to renew leases with your residents, and you minimize the incentive to bring in new people.
Pancham: Alright, sounds good. Thank you so much, Joe for coming on the show and taking time to speak to my listeners. How can they reach you?
Joe: You can go to…well, you know we have a bunch of apartment resources that will be helpful. It’s a guide with a bunch of websites and different places to go to research, apartment investing and if you email firstname.lastname@example.org, we’ll get you a copy of that. Just mentioned that you heard this conversation on Pancham’s podcast and then besteverpassiveinvestor.com is a great resource for learning the questions to ask a General Partner.
Pancham: Great. Thank you so much for your time.
Joe: Awesome, thanks a lot. Enjoyed it.
Pancham: If you are an accredited investor, and have been thinking about putting your money to work for you, then I have good news for you. I have created an investor club which I call The Gold Collar Investor club. I will be putting together investing opportunities exclusively for the group. These are the opportunities where I have done the due diligence for you and will be investing my own money alongside you. If you are interested, please sign up on thegoldcolorinvestor.com/club, I repeat thegoldcollarinvestor.com/club, I will reach out to schedule a 30-minute phone conversation to discuss your investing goals once you sign up. This can be a good opportunity to diversify and take some chips off the hands of Wall Street to produce some passive income, and in case you are wondering, what is an accredited investor credited investor is someone who has earned more than $200,000 as filing single or more than $300,000 filing jointly for the last two years. Another way to qualify as an accredited investor is if your total net-worth is more than $1 million dollars excluding your personal home. It includes your stocks for 1K’s, IRA’s, cars, etc. Just not the equity in your personal home. If this is you, I would highly encourage you to sign up. Thanks for listening. If you have questions email me at email@example.com that’s p as in Paul @thegoldcollarinvestor.com. This is Pancham signing off until next time, take care.
Thank you for listening to The Gold Collar Investor podcast. If you love what you’ve heard and you want more of pension Gupta visit us at www.thegoldcollarinvestor.com and follow us on Facebook at the gold color investor. The information on this podcast or opinions as always, please consult your own financial team before investing.