The BxB crew discusses the importance of creating your real estate team and best practices for real estate networking.


(Transcript below.)


Ep. 7 - Building Your Real Estate Network - Transcript

Ben Shelley: [00:00:08] Welcome to the Brick by Brick Podcast where we take you from the ground up on all things real estate. I'm your host Ben Shelley. We are fortunate to have Ryan and John back with us today. The focus of this episode is something we do in every business: networking. However, there are many different ways to network in the real estate industry and that's what we'll be discussing today. Gentlemen, let's jump right into it. John, why don't we start with you?


John Errico: [00:00:33] Yeah. So it's perhaps a prerequisite to say that Ryan and I met through real estate networking. And something that we alluded to in a previous episode which is true about real estate investing but is also true just about entrepreneurship in general is that it can be very lonely. So real estate networking offers the opportunity to both meet like minded people and also to build out your team of people that you might use to invest in real estate. So a lot of real estate investors talk about building a team and it's certainly is it is a true thing. Your team might be a great real estate agent or acquisition person like a wholesaler. They could include an attorney it could include a home inspector an appraiser a general contractor or property manager or even like a plethora of things that might be on the table. So networking is an important facet of being I think just being a happy person. If you're a real estate, full time real estate investorm entrepreneur and also in my mind an essential thing to build out a team of people to help you accomplish your, your real estate goals.


Ryan Goldfarb: [00:01:37] One thing I would add is beyond the obvious value of having say a competent real estate attorney on your team. One thing that I think goes way undervalued is networking with other real estate investors and that's valuable for a variety of reasons one of which John alluded to earlier is the loneliness factor that you may experience as a solo entrepreneur, a real estate investor. But beyond that there's also an educational advantage that you have or that you gain by networking with and speaking with other investors in the same field. Oftentimes you'll find that another investor in your market is doing a lot of similar things on the surface but tactically speaking they may be doing things very different when you get below the surface.


John Errico: [00:02:29] Yeah real estate I think has a guru problem. A lot of industries have this but real estate has this to a huge extent. These are the people that you see maybe an ad before a YouTube video or TV late night TV or hear on the radio that are coming with you know a free conference to talk to you about whatever you know how to make all your dreams come true by buying real estate with nobody down, etc. And it's not to say that all of them are scams but I would say the vast majority of them are out there to just take your money for the fees that they're going to charge for their books and their training and their courses and whatever else.


Ryan Goldfarb: [00:03:06] The most frustrating thing about that to me is not that it's a scam or not that they don't have value it's the fact that there is so much free information available out there that I just don't believe it's genuine to try to push that upon somebody who could otherwise learn the same stuff for free or by perhaps bartering something else of value to work hands on with somebody who is doing it in the field every single day.


John Errico: [00:03:36] Yeah. So one major piece of advice that I would have about networking is not to name specific names of gurus but when you see people listening to this podcast will probably just immediately have a couple in mind when I'm talking about it when you see those those are probably not the best networking opportunities because a lot of times the people that attend those conferences or events are gonna be people that maybe are just getting started in the real estate space like you. And although there's some value to networking with those want to be your soon to be investors the much more authentic and engaging connections that are gonna make you there by building your team or by finding fellow real estate investors are through specific real estate networking events that you often don't have to pay money to attend. Or maybe for a very small fee to get in the door.


Ben Shelley: [00:04:22] So maybe something that would be helpful because you know I think a lot of people abide by a maxim we've used on the show before life being a relationship business and nowhere is that more true than the real estate business. So when you're looking and you see online or you see on television come to my seminar come do this. Maybe you get solicited calls from brokers or wholesalers maybe what are some of the strategies from a networking perspective given how experience you guys are to differentiate who's worth connecting with and maybe who's worth staying away from Ryan.


Ryan Goldfarb: [00:04:50] I would be most cautious of opportunities or of events that are proposed that have a very high entry fee or that have maybe an introductory entry fee with the promise of some type of knowledge that is going to fulfill all of your wildest dreams. The fact of the matter is learning takes time and those events appeal to the people who want to take a shortcut to get to what is often a lifelong process of learning. So I would start by rather than falling prey to the people who are trying to advertise to me and trying to reach me I would try to find the people who are the gatekeepers so to speak or find people who are in my backyard and who are doing the things that I would like to be doing and see who they associate yourself with. One of most valuable aspects of networking is the fact that once you find one or two of these linchpins you'll often find that they are connected to a quality team of respective professionals in the same space as well. So a good title company often knows a really good real estate attorney who they can refer you to or another active investor or a wholesaler who whose deals they close frequently and who may be a good resource to you as a new or aspiring real estate investor.


John Errico: [00:06:16] Absolutely. So pretty much every city neighborhood county that you may be in has a local real estate investing group club whatever you want to call it. And oftentimes those groups are advertised on places like So Meetup is a great place you can literally go open it up type in real estate and you'll find a ton of events. Some of them will be of the guru variety and those are often the ones that charge you know 50 dollars or dollars just to to attend and the others will be of the authentic real estate investor variety which are usually free or maybe charge a nominal fee because they had a reserve the space for the event or there's some drink or food minimum but that is just showing up is you know like 90 percent of the battle because I host a real estate meetup group in northern New Jersey and I think there are about a thousand people in the group and I hold events every month and I don't sell anything I don't charge any money for people to attend I'm not going there with any ulterior motive to get any obvious immediate personal benefit to me. But you know I'll have a thousand people in the group and say maybe 50 people RSVP to any one event and of the people that RSVP maybe 20 people will actually come. So you know I'm not saying that just because you're in the group you have to come to the events but that just gives you a sense of how many people are aspiring real estate investors or interested in networking but then don't actually take the step of Oh I'm actually going to walk out my door and go to a networking event.


Ryan Goldfarb: [00:07:41] And then beyond that I would say that the next step once you do that and once you've established some clout you've done a few deals. The natural progression I think is to find the events that aren't generally solicited to the public and that aren't available to just any aspiring investor. We've taken a little bit different of a path and my brother and I add is to the networking game. We more recently have hosted an event or two with various investors who we know and various people in the real estate space. And it's been a little bit more of the invite only variety not to say it's quote unquote exclusive but our end goal was to get as many active investors together as we possibly could. And what I've realized and I'm sure what John has realized is a lot of publicly advertised events often attract newer investors. And while that's great. And while I've benefited from those and I've certainly met some great people John included from events like that. The downside to it is once you've done a few deals you end up spending the vast majority of your time talking to people who haven't done a single deal yet and you are giving giving giving giving and oftentimes not getting much in return. And oftentimes talking to somebody who may never even take the first step and buy an investment property.


Ben Shelley: [00:09:00] So before we continue down the conversation of do's and don'ts I want to know from each of you given your accumulated experience what are short of your real estate network essentials. You're starting as an investor or you're a couple of properties in to building an investment portfolio. You've got a backpack on your network essentials that you're putting in with you as you continue to elevate or move forward in the business from a relationship standpoint.


John Errico: [00:09:24] So I would say for Ryan's point fellow investors are super important. I don't see investing in real estate as a zero sum game. So my success doesn't mean the detriment of somebody else. So if I get a deal that somebody else wanted. I often try to structure where maybe we can both get the deal but we can both partner in on it or we can both talk about it and even if I end up getting it maybe I'll learn a lot from that other person's perspective. The second thing though is I would say it's very important to get people that can. So when you think about a real estate transaction. Who are the people that you're going to have to need for a real estate transaction. So you may need an agent. Depends on the sort of transaction that you're going into or how you're getting out of it. You may need a property inspector and that's someone who after you go to contract on the property will inspect the property for flaws issues that you might want to negotiate with the seller. You likely need an attorney in some areas of the country that's less common but where we are it's very common to have an attorney represent you as a buyer or seller in a real estate transaction. The title company and that's something that an attorney can connect you with or that you can find on your own and then you'll probably need a contractor which is someone that will help you to repair the property or fix any issues that come up after you buy it.


Ryan Goldfarb: [00:10:41] The last thing I would add to that is you may need a or you will likely need a financing partner or a lender who will facilitate the mortgage or the loan that you're getting to purchase the property. And when it comes to qualifying these people there are a few things that I always like to keep in mind. The first of which is the character of that individual. So I don't think you know it's great to meet another investor. It's great to meet another attorney but if that person conducts himself in a way that is diametrically opposed to how you would like conduct yourself you're better off cutting ties now than getting too far down the line with that person and falling prey to their behavior. In addition to that I would also way I'd also put a little bit of an emphasis on the personal side. So do you like being around this person. There are plenty of people who I've worked with in the past who I worked with for reasons other than that. And oftentimes I came to regret it. I remember one example of that was a subcontractor I used on one of my first projects that individual was one of the least pleasant human beings I've ever been around. And though he was a subcontractor of mine and in this context I was his customer. He for whatever reason had this prevailing notion that it was my privilege to be employing him for this job. And every single interaction I had with him reflected that. And it just left a sour taste in my mouth and it took mental energy and it was just not the kind of person I wanted on my team. So pick up on that and address


John Errico: [00:12:23] it. Yeah. And I think it's important to consider first. I think it's a great point about the caliber of the person. For me it's about what are they willing to give to you without an immediate expectation of return. So something that I I really try to do that we both try to do is I think give give back our knowledge and experience to other people even if it doesn't obviously make financial sense for us. So if you encounter somebody at a networking event that has a lot of knowledge maybe it's a contractor or an attorney or something. It's a really bad sign if they are not really interested in talking to you except if you've engaged their services because as we started out saying in this episode knowledge of the real estate space is really readily available and you don't have to pay money for knowledge. So if you encounter people that don't want to give you free knowledge it's a really bad side.


Ryan Goldfarb: [00:13:15] Additionally while this may run counter to what your instincts may tell you I like to surround myself with people who are a little bit different than I am or who run in different circles than I do. When you ask anyone in your network for a referral they'll often say Oh hey I have a cousin who's an attorney or I have a brother in law who's a lender you should talk to them you know that that may be great. And if you have no other options that person if they're qualified can be a great asset to your team. But I've also found it quite beneficial to cultivate relationships with people who are otherwise outside my social sphere because that opens up other doors to other networks and you never know who that person may ultimately refer you to. And that's a referral that you would otherwise miss out on if you're talking to somebody who is


Ben Shelley: [00:14:01] in your network. Yeah. And I would even draw listeners to even hear I think the tone of Ryan's voice when you talked about your interaction with the first subcontractor and the bad taste that left in your mouth and it's a reminder to people that how you treat people matters obviously but also do you meet your commitments. Do you do what you say you're going to do are you willing to go maybe a little bit as John alluded to up and beyond just generally sharing knowledge and go the extra mile to form the basis of relationship again as John said. And has he appropriately noted this is not a zero sum game. And I think in the first it might have been in the introductory episode where you talked about you both talked about how it would be very easy in the context of this business and what you guys do in the residential market to sort of look at your deals on an individual basis and just see in the larger scope what's best for you. But that how that would not be effective towards achieving both your long term goals and to maintaining the strong relationship you have together there was. Was it the rising tide. What was that phrase you used to love.


Ben Shelley: [00:14:59] The rising tide lifts all ships raises all ships. Right.


Ben Shelley: [00:15:02] And if there's two things to take away from this episode it's how the real estate network and John Errico does not like gross not not one bit don't you. Don't you say good or don't you say you're a guru.


John Errico: [00:15:12] Well I to like pagers I like. I'm just joking around. I want to give a specific shout out to one networking tool in particular which is BiggerPockets and BiggerPockets is a if you're not familiar with it it's BiggerPockets dot com. We're not sponsored by them. So you not yet at least not yet. We're not sponsored by them but if you go to BiggerPockets you'll see a lot of resources that they have including podcasts and online resources. But what the most valuable thing for me are the forums the message boards and they have specific message boards for every real estate strategy you've ever thought of. For geographical regions and whatever and there are many Meetup groups there are many networking events that are either sponsored by them or that appear on their Web site that are really really valuable. And just reading and also contributing to it has been a huge part of my real estate growth. I've given I haven't been active that recently and BiggerPockets which I actually regret. But for a time I was posting very frequently and I met a lot of great people through that through that back and forth and learned a tremendous amount. That was probably my number one resource when I was getting into real estate was was BiggerPockets so using that as a networking tool I highly highly highly recommend. Now


Ben Shelley: [00:16:23] we've already kind of summarized I think the most important themes for each one of us when it comes to real estate networking. But maybe last thoughts from each of you.


Ryan Goldfarb: [00:16:32] Before we close the episode I'd like to expand on a point that John alluded to earlier which is about evaluating those who you may be interacting with and you may be welcoming into your network. I would look at that from the converse or inverse perspective. Flip it on its head if you will and think about how you come across to other people. I always strive to make myself a resource to those in my network and if I'm meeting somebody for the first time I like to think about how I may be able to help them. And while that may pay dividends to me on occasion it is certainly not my end goal and every time I put myself out there offering something of value to someone. The reason being if you put enough goodwill out there in the world generally finds its way back to you. And for me I want to be a giver I want to be somebody who provides value and I want to be somebody who people enjoy having in their lives. And I think there are both tangible and intangible benefits to that some of which are business related some of which are personal.


John Errico: [00:17:33] Can't really find that image because I was going to do the exact same thing. Truly I think it's a really important point this is true for one.


Ryan Goldfarb: [00:17:42] Why don't you try to say the same thing and then we'll both play we'll play both of our responses with a poll and we can ask the listeners who say it well.


John Errico: [00:17:51] I would phrase that exact same point is to give a lot more than you take. And that's the philosophy that I have in almost always everything and particularly in networking. So I think I would have foreclosed so many opportunities if I were another way to say as I've left so much money on the table right. I think we both have done that. There's there's so many ways that I could have made more money in the past doing real estate that I haven't but I would've foreclosed so many future opportunities. So networking is a two way street. And for me it's a lot more about what you give than what you take. So even if you've no experience whatsoever in real estate I am sure I'm certain you have experience in something where you have something to offer or some perspective or some ability to help somebody else. So even somebody who's done nothing in real estate has no experience in real estate. I could talk to and gain something from that experience I could I could get something from it and then I hopefully can


Ben Shelley: [00:18:44] give something to them as well. And one last thought that actually occurred to me from listening to both of you I think it was Ryan who mentioned you want to try to look for people who maybe fill your gaps who maybe have a separate skill sets. But I think the other important thing to look for even if and when they are different from you from a skill set perspective is to find people in business who share values and your principles. Because even though you may have different strengths and different weaknesses that mesh well with each other I think it's important to be unified in terms of not only a forward looking goal but how you want your operation to run how it should be perceived and how you treat people. Guys as always I appreciate your time and your expertise. Thanks so much for coming on.


Ben Shelley: [00:19:34] And thank you for listening to the brick by brick podcast where we take you from the ground up on all things real estate. We will continue to bring you the best and brightest the real estate world has to offer as we leave no stone unturned in helping you the everyday investor. Thanks for listening.


The team examines the complex topic of real estate investment funds from a high-level and in the context of their real estate investment business.


(Transcript below.)


Ep. 6 - Raising a Fund for Real Estate Investment - Transcript


Ben Shelley: [00:00:07] Welcome to the Brick x Brick Podcast where we take you from the ground up on all things real estate. I'm your host Ben Shelley. We are fortunate to have Ryan and John back with us today. The focus of this episode is about raising a fund for real estate investment. As you begin to build your real estate portfolio and gain experience in the business the opportunity can arise to rapidly expand your operation by raising money from outside investors and utilizing an increased capital base to scale up your business and generate returns. For this discussion we'll take a deep dive into how real estate funds can be structured when might be a good time for you as an investor to consider raising a fund and how the increase in capital resource can help you upscale your business. Gentlemen let's jump right into it. John, why don't we start with you.


John Errico: [00:00:55] Yeah. So I think I want to take a very high level perspective on this to start with and then we can delve into some specifics. But just as a sort of perfunctory statement I think raising a fund like we're gonna be talking about is something that is not appropriate for all real estate investors and even kind of advanced or experienced real estate investors might not ever do or might not be ever interested in doing. And I'll explain why that is as we go on. But from a very very very high level perspective raising a fund is related to a previous podcast episode where we talked about real estate financing and how to get money for deals. So the way that Ryan and I generally get money for deals is on what I would describe a deal by deal basis. So we'll see a property - you can call it an asset for for this world. You'll see an asset and you say how can I raise money? Well I'm going to go to my investor friend or my partner and get money in whatever capacity and whatever structure I want to do for that specific property. If you don't want to do that for some reason so maybe because it takes a lot of time to do that or maybe because you have a lot of deal flow or maybe because you have such a large asset that it doesn't make sense to go to one individual person it may make sense for you to raise what what we are calling in this case a real estate fund. And when you do that you're entering into the world of what I would say is private equity. So a real estate fund is the way that we're using the term is a pool of money. It could be provided by a single investor. It could be provided by a bunch of investors. But normally or frequently in the real estate world or the private equity world the way that they're structured is you pool people's money together. The people who operate the fund are called the sponsors or maybe the general partners of the fund. They're paid a fee and they control all of the investments that the fund makes. So instead of going on a deal by deal basis and raising money you sort of do it all upfront. You say, "hey friend, I'm raising five million, 10 million, hundred million, a billion dollars and I'm an investor in this type of asset class in this strategy and I want you to put in money to this fund and let me manage it for you. I'm gonna do it for you." And so you might be familiar with companies like Blackstone or maybe Brookfield or maybe any sort of company that you like could jeez I wonder what they do you know kind of in the finance banking world. A lot of them are private equity companies and a lot of them raise humungous funds. A lot of times to buy real estate. So Ryan and I are in the midst of raising money for our first fund and the details of that and how it structure we can get into right now. But that's a very high level overview of kind of what the world is. Ryan, do you want to touch maybe a little bit on the why we in particular raising a fund as opposed to deal by deal?


Ryan Goldfarb: [00:03:40] Yeah. So that was a great summary of high level what a fund is. Now you may ask yourself why you would want to do that when what you've already been doing has been working with some degree of success. For us it became a matter of scale and we were at a point where we were wasting a lot of time, or maybe not wasting, but we were occupying a lot of our time with trying to line up investors on a deal by deal basis. And at the same time we felt like we were missing out on opportunities to buy other properties because we didn't want to have to go through that whole song and dance to raise maybe 50, or 100, or 150 thousand dollars because of the amount of time required to make that a reality. So the logical next step for us was to figure out something with a little bit more scale, which in this instance turned out to be this fund. So the impetus for this, or the logic here, is let's front load all of the fundraising. Let's front load all of the work so that over the duration of this fund we have discretion over the investments that we're going to make. And the moment we see something that we would like to act upon we have the resources to make it a reality. Now there are still plenty of opportunities to get creative and to borrow money or put some type of unique capital structure in place either on a deal by deal basis or by employing some leverage with the fund itself.


Ryan Goldfarb: [00:05:15] But we are no longer beholden to finding a new investor for every single deal every time something comes across our plates.


John Errico: [00:05:23] And one aspect of our decision to raise a fund as well is the idea of diversifying returns and risk so we will have deals that come through our doors that range from extremely speculative, very high risk but hopefully are usually very high return to quite conservative, quite middle of the road, but correspondingly quite modest returns relatively, and some of those deals might be appropriate for certain types of investors. Some investors want to do really high risk. Some investors wanted to conservative stuff but if you're raising money on a deal by deal basis that investor doesn't really have the luxury of saying, oh I don't. It may be awkward to say I don't invest in this, you know, low risk, low yielding deal but I would want to deploy money more aggressively. It's hard to to say like well just wait a couple of months and then I'll have another deal for you. In the fund structure we can say look we're doing all of that together, it's diversified, right. So we're buying stuff that's really high risk and we're also buying stuff that's conservative. But the blended return to an investor is hopefully a healthy return at a risk portfolio that. Almost any real estate investor in this world would be happy to accept.


Ryan Goldfarb: [00:06:38] One other benefit to this strategy or to the fund path for our investors is, you know, in comparison to let's say an equity partner who might be on a flip with us, that flip is only going to hopefully last six months, nine months, or 12 months. So it's a shorter term play and while the investor's rate of return on that investment on that single project may be quite high by the end of it, they get their cash back plus their profits but they're left with the same problem that they faced at the beginning. What do I do with this extra cash? They now have to find another deal, another quality deal, whether it's with us or somebody else, and they need to try to recreate those same returns. So the benefit to them in this scenario is they make this investment upfront, and while they may not have access to the cash for an extended period of time as depicted by the limited partnership agreement and as outlined by the fund itself, the benefit is that theoretical high rate of return is achieved on that capital from the point of inception up through the dissolution of the fund, which in this case is going to be many years down the line.


John Errico: [00:07:59] Yeah, that's true of the the fund structure that we are putting together. It might be significant to understand that there are many many many different ways to structure funds, real estate funds, even a REIT is a type of real estate fund structure, which is unique and has unique advantages and disadvantages. I mean even putting together money for a single deal you could think of it in a way as as a fund. And frankly it is subjected to the same legal requirements as even what we're doing. We're sort of talking about a fund in the very traditional private equity world of a fund. If you went to say Blackstone and said "how do you structure your funds?" they would be similar to the way that we are discussing structuring a fund. So as Ryan alluded to the fund structure is such that we raised money at the beginning usually within a small period of time and that money is essentially illiquid meaning it cannot be withdrawn from the fund, maybe your interest in the fund can be sold to another investor. But basically if you need the cash you don't have access to it until the fund sunsets. There are funds that are "evergreen funds" which are around forever but generally the most common option in what we're doing is a fund with a set time horizon so you invest money at the beginning, the fund invests that money over a - could be 4, 5, 6, 7, 8 year period of time - and in our case for doing a six year fund - invest that money over that period of time and at the end of that period of time the fund operators liquidate those assets either by selling them to potentially another fund or by selling them to buyers or refinancing out of them or doing whatever. But at that point all the money that you've raised is returned to investors and the investors will receive obviously more than the amount of money they've initially raised. And that difference is their return on their investment. And as Ryan alluded to before the if you sort of backdate the amount that they've been returned you can get a pretty healthy IRR, a pretty healthy yearly rate of return, for the amount of capital that was initially invested.


Ben Shelley: [00:09:57] So John you took us a little bit through there...


Ben Shelley: [00:10:00] The capital structure both of funds generally and specifically the fund that you and Ryan are raising now. I do want to get also into the fund raising process itself from your guys perspective, both your experience and also maybe strategies for potential investors transitioning to creating a fund, but just out of curiosity could you maybe also talk about whether it's yours or funds generally, the corporate structure. So if I'm an investor and I own real estate under multiple LLCs and I'm ready to take that next step, is there a specific way I should go about structuring my legal ownership of my already owned properties to take that next step?


John Errico: [00:10:35] Yeah, it's a great question and it's important to understand that underpinning or overpinning all of what we're discussing is a large legal apparatus and a large legal structure. Even to the extent of raising money for a specific deal which is something we discussed in a previous episode there is a legal structure that overlays that. And as Ryan was alluding to before, that's part of the time going through it because it's important to, for example, structure your purchase in an entity like an LLC. But to answer your direct question, funds are structured in a partnership model and partnership is - frankly not entirely sure of the current legal reason why it's done this way - but historically it has been done this way. You can think of it similar to an LLC. Basically there will be a pool of people that invest who are called limited partners and limited partners have certain enumerated rights and those rights might be things like the formation of the entity, the disposition of the entity, what happens if the the other partner is gone or dies. The other partner is called the general partner and the general partner will be the entity that controls the fund. The fund itself being the partnership. So if you're raising money for a fund, limited partners will be your investors, and general partners will be you or your entity and one of the great things about the fund's structure is that that general partnership can itself be its own thing. It can survive the lifespan of the fund and because that general partnership is making management fees, which are another component of the fund and making profit on the back end carry or carried interest after the fund is over, the general partnership can become quite lucrative and quite solvent and can go on to raise itself. Other funds. So when you hear these big companies, you say well how did Blackstone, for example, which is the largest, I believe, the largest private equity firm in the country, how does Blackstone operate? How does it become what it is? Well Blackstone, maybe through its subsidiaries, is a general partner in many funds and they make money by management fees and by carried interest. So if you want to build a real estate company that that sort of has a legacy that is beyond you as a person, this is one way to do it because you're not tied to individual assets, not tied to individual investments. You're really creating a business. A company that can survive and become quite large, you know, you can approach even an asset class that maybe right and I don't even know about yet commercial industrial whatever.


Ryan Goldfarb: [00:12:56] John, correct me if I'm wrong but I believe one other ancillary benefit of the limited partnership structure is that the LPs are shielded from certain liability, right?


John Errico: [00:13:05] So similar to an LLC, the LPs are shielded from personal responsibility for the debts of the the overarching fund.


John Errico: [00:13:13] One counter to that is that when raising money from partners that are purely passive whether it be for a specific house specific asset or in a fund structure there are federal securities laws and even state securities laws that are significant. So most people that raise funds consult an attorney and frankly it's a very expensive attorney to set this up. In our specific case, I'm an attorney and my wife Shannon happens to be a private equity attorney which is a humungous advantage to us because we don't have to pay a very large New York City law firm to put together this private equity fund structure. But having said that most investors who are passive must be accredited investors which is a quite large burden for structuring deals or getting investors. We can get into some of the legal complications and aspects of it, iff you're just doing a single deal essentially raising money for a single property but in a structure where you have purely passive partners generally they're going to have to be accredited investors.


Ryan Goldfarb: [00:14:14] And speaking to your point about creating a legacy and speaking to your point about why it is that we would want to start a fund, I think you hit the nail on the head when you brought up the Blackstones, the BlackRocks, the Brookfields, all of those players are behemoths. But at one point they started off in some capacity doing what we are striving to do today. And our secret sauce may not be the same secret sauce that they have. But at the end of the day, the value that these firms bring to the table is their ability to identify deals and investment opportunities and their ability to execute on those deals and investment opportunities. And while we may be playing in a different arena - we're not, you know, we're not raising a five or ten billion dollar fund, the thesis is still the same. And the underlying goal is still the same. It's to put forth a plan to execute on that plan and to make ourselves and our investment partners happy with the end result.


John Errico: [00:15:18] It's a great point in the way that I think of it as the difference between being an operator and being something else. So I actually love being an operator of real estate like I love just getting stuff done in the real estate space. However I think that the perhaps highest and best use of our skills is to one day no longer be just an operator but to be someone who sort of sits above it and controls the financing and gets money from people that we might even hire as operators. And that's what these humungous funds and companies do. So you are out there listening as an investor you know you are an operator right. You're the person, you're your boots on the ground. You're buying assets. You're doing the work. You're renting it out you're doing all that sort of stuff. The way to make the transition from being an operator to kind of the next level is the way that we found it is to be doing this fund. I think we're gonna be operators for a very long time. Because I actually love doing it but I also love the idea of building something that's bigger than just me or just on a deal by deal basis.


Ryan Goldfarb: [00:16:17] This really hits close to home because day in and day out over the past six or so months I've seen the extent to which John really loves being an operator and I often find myself trying to prod him in the other direction and taking a step back and saying you know John you're you may love doing this and this may be very helpful in the moment but there's a bigger picture here and I think to an extent we're selling ourselves short by getting bogged down by some of these tasks.


John Errico: [00:16:48] So I think it prefigured the larger conversation you can have in this podcast about what it is to mature as a real estate investor. And I think we are I myself certainly am learning and struggling even with that transition at times.


Ryan Goldfarb: [00:17:00] I think, the the way that I've thought about it over the last few months, is that we're trying to transition from being real estate investors and owner operators as you have specified before, we are transitioning towards becoming business owners who operate in the real estate space. Right. And what that entails is putting the systems in place and putting the mechanisms in place to execute on these strategies whether it's us or those who we put in positions to do so.


John Errico: [00:17:27] Right. That's a great way to put it.


Ben Shelley: [00:17:28] So when it comes to the fund itself what I'm curious to know from you guys and they think this will be a good way to to sort of wrap this conversation up is when an investor looks at any investment opportunity they're still weighing the similar risk factors when it comes to what's going to happen to my money. And so whether they're looking at a general S&P 500 or Nasdaq stock, a REIT investment, private equity real estate fund, they tend to look at similar risk factors and trying to make their decision of whether or not they should invest. So it doesn't necessarily have to be a pitch for Liberty Hudson, although it can be, but why should a individual investor invest in a real estate fund like you guys?


John Errico: [00:18:07] Well I think if you look broadly at the returns as you laid it out there are many many ways to invest money. If you look broadly at the returns that private companies generate it's outsized. It's much higher than you can get even doing I suppose doing very speculative stock trading maybe you can do some crazy things but you're investing in like an index fund or something moderately conservative investing private companies way way way a general outperforms that. As to why you would invest in a real estate fund specifically for me it comes back to faith in the asset class of real estate and what we do specifically is residential real estate. So faith in that specific asset class. I think if you look at all real estate and all of the country over the last 200 years or whatever it is has been real estate does not appreciate very well it appreciates maybe at inflation or something akin to that. However, if you look at certain pockets of real estate over certain times with certain investment theses it performs extremely well. So my pitch as to why somebody would want to invest in a private equity real estate fund would be that it's a way to diversify your portfolio in an asset class that has proven to be very high performing and that hopefully will outperform what you might be able to do were you to deploy your money elsewhere. And if you can find operators or fund managers that you trust and have demonstrated performance in the past so much the better.


Ben Shelley: [00:19:37] Ryan?


Ryan Goldfarb: [00:19:38] The way I think about it harkens back to what I was talking about before about this being a business. The two main focuses of the business are scale and efficiency and having an investment fund and having all of these funds pooled together makes the whole greater than the sum of its parts. So that scale leads to certain advantages in terms of efficiencies is in the sense that as a fund you are able to do things that as a singular investor you may not be able to do. You are providing a service to your investors and that service is returns. That service is providing an investment vehicle that would otherwise be unreachable for you as a solo investor. So if you are a wealthy professional, if you're a doctor, or a lawyer, an entrepreneur in a field other than real estate, and you have cash sitting around, more than likely the best use of your time is not to go and plunge a toilet or paint a ceiling or clean up someone's apartment after they just moved out and trashed your place. The best use of your time is what you are good at. What most fund managers and what most investment funds are good at are real estate investments - or investments in their specialized asset class. So for us we try to focus on that each and every day and we try to build a business around that core competency. And we try to open the door to others to kind of ride the coattails of that experience and that success.


Ben Shelley: [00:21:18] I know I appreciate this I know our listeners appreciate this and guys thank you for your time and your expertise as always.


Ben Shelley: [00:21:33] And thank you for listening to the Brick x Brick Podcast where we take you from the ground up on all things real estate. We will continue to bring you the best and brightest the real estate world has to offer as we leave no stone unturned in helping you the everyday investor. Thanks for listening.


John, Ryan, and Ben explore the range of financing options available for real estate acquisitions. John and Ryan walk through a sample deal using a hard money lender.

January 8, 2019

Sourcing Real Estate Deals

John, Ryan, and Ben discuss deal sourcing basics and the range of options for finding deals. John and Ryan debate the merits and drawbacks of various deal sourcing techniques to find dynamite real estate deals in a competitive market.


(Transcript below.)


Ep. 4 - Sourcing Real Estate Deals - Transcript

Ben Shelley: [00:00:07] Welcome to the Brick x Brick Podcast where we take you from the ground up on all things real estate. I'm your host Ben Shelley. We are fortunate to have Ryan and John back with us today. The focus of this episode is another common investor question. Where do I begin to source deals for my own real estate investments? For this discussion our focus will be on different ways you can source your deals as well as strategies on where you can start your search on your way to finding diamonds in the rough. Gentlemen let's jump right into it. John why don't we start with you.


John Errico: [00:00:39] Yeah it's a great topic and it's a great question. I think from a very high level deal sourcing for real estate investing is sort of the lifeblood of investing. And I think even as we discussed in a previous podcast the really good wholesalers which are the class of people that we'll talk about that find deals will often go on to be investors because it's such an important facet of finding deals. But very broadly so when I first started getting involved in real estate investing the most obvious place to look for deals is sort of where everyone would go to turn to for buying a house which is a real estate agent. So a real estate agent will have access to something called the MLS which is the multiple listing service. There are actually many multiple listing services in any geographic area in any given house might not be listed on all of them for that area. I think in North Jersey alone there are at least three that I'm aware of possibly more.


John Errico: [00:01:33] And so the the MLS is a database that is controlled by realtors. And when someone is selling a house and use a realtor they will put that house, the realtor will put that house on to the database the MLS and then you as a buyer either as a buyer for your own living purposes or as an investor will have access to the MLS through your realtor. You'll see all the properties that are available. So the first house that I bought was off of the MLS and I think for some real estate investors using the MLS to source deals has like a bad name because they think oh it's just very overpriced or it's you know quote unquote market price because it's on the MLS. But you know four or five years ago in northern New Jersey you know we're talking like 2013esque when the real estate market was still quite poor you could literally throw a dart on the MLS and find an amazing great deal and that's how I found my first deal which is still proudly one of the best deals I've ever found. So the MLS is something that I still consult.


John Errico: [00:02:35] I still look at it for deal sourcing and finding deals but there are more and many many many more ways to find. I'll let Ryan chime in because he's perhaps much more so than me and much more creative about finding has been much more creative.


Ryan Goldfarb: [00:02:50] Yes I'll start by saying that while I try to avoid the MLS at all costs nowadays my first few deals I did procure from the MLS. Nowadays I tend to use the MLS more so as a data source than as a source of deals. More recently I have been sourcing from a variety of other channels. One of which it has been from wholesalers as John alluded to earlier. I've also I've also found some deals through SEO which is search engine optimization that is organic. SEO is the means by which a site like Google ranks websites, ranks results based on certain keyword searches. So for SEO I have targeted specific keywords to generate what should be a targeted seller profile to drive traffic to the website to ultimately lead someone to reach out to me as a potential buyer for their distressed property. Similarly there's also what is called pay-per-click which is generally abbreviated as PPC. That's what you see. Those are the page search results that you see on platforms like Google, Bing, Facebook and those are sponsored listings that investors, business owners, what have you will essentially bid up to get their name in front of you as the search, you as the seller or the target customer. So I've I've had some degree of success sourcing deals via SEO and by pay-per-click. Those are the main. Those are the main channels online. I know other people also have leveraged social media like Instagram for deal sourcing as well though I would argue that's a little bit tougher in the real estate space than it is for let's say a consumer facing business.


John Errico: [00:04:47] So I think to clarify you actually just said that people understand what SEO and pay-per-click means in this context. Ryan actually operates a Web site that is not necessarily affiliated with doesn't say like Ryan Goldfarb on it but it's a Web site that he runs. And I think you use a company right to help you run - InvestorCarrot, right?


Ryan Goldfarb: [00:05:07] So they are one of several options in the space. They have templates for... They have templates for Web sites that are tailored specifically to real estate investors. So it comes with content packs and it comes with templates that are already specifically tailored to this use. So it's somewhat of a plug and play option though it does require some degree of refinement especially in areas where you're facing a lot of competition.


Ben Shelley: [00:05:31] So before we jump in because I think the listeners would benefit a lot from hearing some specific examples from you guys on how you've used these methods to secure net positive deals in the marketplace. But I just want to clarify just sort of separating the three things that you guys just talked about. So when you talk about purchasing or finding a deal sourcing a deal via the MLS you're really talking about using a broker and their access to the MLS to secure the deal. When you're talking about a wholesale purchase you're talking about really not needing necessarily to use a broker though there are wholesale agents in order to secure a property, usually I would say at a discount to market. And then when you talk about SEO optimization you're talking about using a Web site and keying in on sort of key search terms to allow for search engines to move your listings or your site up the ladder when people are doing generic searches to click on you and bring deals to you as the investor is that generally correct?


John Errico: [00:06:27] Yeah. And I think that you bring up an important dichotomy between agents and kind of deal originators. So there is as you mentioned there's a class of real estate agents and those people normally get deals from the MLS but they could have found deals from other places. There's also a class of wholesalers which are also functionally agents, though they are not maybe regulated as that way but they also originate deals through whatever means that we're talking about. And one of the ways that they could originate deals is by their own SEO or pay-per-click both real estate agents and wholesalers take advantage of that. So there's the sort of agency class which is brokers and wholesalers and then there's like the originating class which is as Ryan said before pay-per-click, SEO optimization than other techniques that we can that maybe Ryan can allude on to.


Ryan Goldfarb: [00:07:13] And then separately from all that there are some other ancillary means of sourcing deals just off the bat leveraging your own network. If you know people who are willing to sell or are interested in selling or if you know people who know people who are looking to sell that can be a great way to find deals. We actually had a deal come through recently that came through someone who we know who noticed that their neighbor had been cleaning out the house and presumably prepping it for sale turned out it had been in an estate somebody had passed recently they were cleaning it out and getting ready to list it and we were able to swoop in and buy it before it hit the market. In addition to that there are Sheriff auctions or sheriff's sales, property auctions. They have different terms in different states based on the means of foreclosure but that those are broadly speaking classified as foreclosure auctions. We've also dabbled in the tax lien space and we've obtained property through tax lien foreclosure more recently that's a little bit more of a niche product but nonetheless that is a that is a way to procure deals. There are also valuable relationships you can cultivate with attorneys whether they are bankruptcy attorneys or foreclosure attorneys or estate attorneys all of which can...


John Errico: [00:08:33] Divorce attorneys.


Ryan Goldfarb: [00:08:34] Divorce attorneys... [banter]... All of which can be a good gateway to real estate opportunities so you can get creative with this. I mean there are plenty of options outside of what we discussed just now. But the key is finding and sourcing deals in ways that the masses probably are not.


Ben Shelley: [00:08:57] So maybe to to sort of help this come alive for listeners particularly those who are looking to become investors and are still asking themselves the fundamental questions about how they want to go about sourcing their deals. We've just given them a lot of helpful context here. But you both said that the first deal you guys closed was through the MLS. So can you talk about in context why was it that you went in that direction first based on maybe where your the amount of capital resource you had on hand at the time. And how is your network grown from there. From a deal sourcing perspective.


John Errico: [00:09:28] Yes. So the reason why I went to the MLS initially was because I didn't know any other information at the time. And I had a real estate agent that was that I still trust and is great and was very helpful had access to the MLS and she would feed us listings and say oh this is great. At the time this is I bought my first place in 2013 2014 essentially the market. There were so many foreclosures that were working their way through the system and many of them were appearing on the MLS that as I said before it was really like you could throw a dart and you could find a great deal. The second deal that I found was actually a for sale by owner deal. So that would be kind of like a like an originating process. I ultimately went through my agent but my then girlfriend now wife were walking down the street and we saw a For Sale sign in a house and we called up the number and it turned out that they were didn't have an agent at the time but were wanted to sell it. And so I went to my realtor and said hey can we set this up and I think she ultimately probably made some nice commissions from that but I did a few more deals in the MLS as well just because again it was so easy to find stuff. The numbers made so much sense and then you know I too as Ryan alluded to before I've I've bought things from sheriff's sales which are foreclosure auctions. I we both have tried this originating tactic which is talked about extensively in places like BiggerPockets which is direct mail and cold calling and you know door to door sale I've never actually done door to door or cold calling but I've certainly tried we both have tried and have had varying success with direct mail and direct mail is essentially going to a company that will print letters for you based on your search criteria and there are a bunch of them companies that provide you with data and then we'll actually do the printing on the mailing. But it's literally finding people that meet some criteria maybe they're older maybe they don't have a mortgage or have a big balance on a mortgage or live in a different state and saying hey I want to buy your house. I'm an investor. Anyone who owns a house is probably seen these. They're also the same type of people that do bandit signs which are signs that say you know I buy your house for money or for cash and a condition called this number. So I've tried that a little bit I've actually never purchased a property from I don't know if you have room I actually bought a property from that.... From your own direct mail?


Ryan Goldfarb: [00:11:49] Yeah we have actually bought, I think, it has been just one. And we were close on a second one that deal fell apart but actually our first rental property that we still have to this day that was purchased by direct mail.


Ben Shelley: [00:12:02] Well I think it's interesting too because what you realize I think a lot of people they almost think cold calling direct mail those kinds of methods are almost old news. They think oh you know maybe it worked in a bygone age but it can't possibly work for me now and you realize when you actually do it you pick up the phone and you make those calls and you send out direct mail, yeah, may be out of a thousand calls nine hundred ninety seven people tell you to go you know what yourself but that three that one two or three deals you could get out of it could be quite substantial so Ryan I'd love to hear from you sort of your origin story how you sort of went through the deal sourcing process.


Ryan Goldfarb: [00:12:35] So similar to John I bought my first two deals off the MLS and again similar to John it was mostly because I just didn't know any better. And it was the path of least resistance. Since then I have experimented with direct mail. I've cultivated relationships with wholesalers. I've attended sheriff auctions but have not purchased through their sheriff auctions. I have received referrals through my network for people who know of potential deals that have ultimately panned out. I have chased plenty of leads that did not work out. I bought a portfolio of tax liens and a number of the liens ended up being ripe for foreclosure and there didn't seem to be a redemption coming anytime soon and that seemed like the most logical course of action to protect our own interests. So we ended up I think at this point we've gotten eight properties back through tax lien foreclosure. And the online route I've now purchased a few properties through either pay-per-click or SEO marketing. And all of these, all of these have been validated enough in my own mind that I see them as a viable path towards sourcing deals in the future. But each of them come with certain drawbacks. Each of them have certain benefits one of which I one of which Ben alluded to earlier when you're sending out direct mail or your cold calling you get plenty of rejection and you get plenty of plenty of angry rejection from people who feel like you are overstepping boundaries by reaching out to them in somewhat of an unsolicited fashion. Conversely one of the things I like about marketing online is most people are seeking you out as opposed to you seeking them out. So there tends to be a little bit better of a tone to the conversation and people tend to be a little bit more amiable towards working something out because they're a little bit more motivated and if they've gotten to you they've gotten to you on their own accord and they're a little bit more cordial.


Ben Shelley: [00:14:44] So now getting a better sense of both of your individual organic paths through various deals sourcing methods what would you guys say is the best path forward for both a beginning investor, a mid-level investor, a high end investor and do you see a difference between these different methods that you guys have talked about?


Ryan Goldfarb: [00:15:05] Well I've definitely noticed a difference in the various channels towards deal sourcing. Having said that I don't think there is a way to break it down that works best for a beginning investor, a mid-level investor, and a more sophisticated investor. I think the goal of every investor should be to source deals off market and to source the best kind of deals you can find whether that's online whether its share of auction whether it's through your network. I think that should be every investor's goal and the reason for that is not that you can't find good deals on the MLS but what I've found and maybe John feels differently about this is that the good deals on the MLS are in front of so many investors that whatever margin there was or whatever price it was listed at that made it a good deal in the first place is quickly quickly vanishes because it gets bid up by the plethora of investors whose plate it comes across. So, there's an element of time associated with all of this. If if I have to look at 10 or 20 quote unquote good deals on the MLS to actually land one then that's not the best use of my time and that's not the ideal deal sourcing channel for me. So I prefer these other methods specifically online, direct mail, networking with wholesalers who I have established a relationship with and who don't function in a manner akin to the MLS with thousands of eyes on every one of their deals. And the main reason for this is I like control and I like knowing that I'm in the driver's seat. I prefer the channels where I'm not competing with investor A, investor B, and investor C where I'm not wasting my time kicking spinning the wheels and trying to find trying to make a deal work that I may not ultimately land at the end of the day anyway.


Ben Shelley: [00:17:06] And just as an example of the way they know that you leverage your people network through the increased level of deal sourcing that you've maintained over the course of your career I know you have a wholesale broker who you work with for example who himself John alluded to this as well who himself uses SEO systems to bring in deals and oftentimes funnels that to you because he knows you're an active qualified buyer and it's just an example I think of how all this can maybe be tied together as well. John your closing thoughts.


John Errico: [00:17:32] I think Ryan brings up a great point and a major observation that I have had is when I first started with real estate investing I think I felt maybe that I was almost too good to do some of the things that are involved in finding deals. So I thought of myself as well. Once I find the deal I can do all the stuff related to the deal but I want to be the guy sending out you know emails or cold calls or direct mail whatever or I don't want to deal with wholesalers because generally the class of wholesalers frankly is humungous. It is a huge variation so there are some wholesalers that are great and there a lot of wholesalers that have no idea where they're doing that will just literally find deals on the MLS and say I'm wholesaling to you for five thousand dollars more than what you could just find on the MLS. So if you're going to be a serious real estate investor particularly in the residential sector which is what we invest in it is really important to take the time to learn how to source and find deals whether it be you go to a broker class like an agent or a wholesaler or you yourself find the sorts of deals that that class identifies like Ryan said direct mail, SEO, sheriff's sales, relationships, for sale by owner whatever it is it's very important to learn those skills because those as I said I think when the very first things we were talking about is that finding deals is the lifeblood of your investment and if you want to really succeed it's important to either control that or know how it's done.


Ben Shelley: [00:19:00] Guys I know I appreciate this. I know our listeners appreciate this and thank you for your time and your expertise as always.


Ben Shelley: [00:19:16] And thank you for listening to the Brick x Brick Podcast where we take you from the ground up on all things real estate. We will continue to bring you the best and brightest the real estate world has to offer as we leave no stone unturned in helping you the everyday investor. Thanks for listening.