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Passive, Partnership Or Solo: How To Close Your First Deal

July 20, 2022

chrisseveney

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CWS 209 | First Deal

 

When you’re trying to close your first deal, you are constantly wondering if you need to structure a partnership or just go solo. You want to make sure you’re making the right decision. In passive investing, you have to recognize the opportunities that are beneficial for you. Join your hosts, Lauren Wells and Chris Seveney, as they dive deep into building wealth in the real estate industry. They share strategies you can consider and things you should watch out for. They explain the importance of confidence, surrounding yourself with the right people, and studying the market you’re interested in.

Listen to the podcast here


Passive, Partnership Or Solo: How To Close Your First Deal

We want to talk about when you’re starting, what is the best way to kick off? Is it passive? Is it in a partnership or do you go at it alone? With that being said, Chris, why don’t you start? What are your thoughts?

To answer the question as quickly as possible, without me saying 1,000 words. I’ll try and keep it short. It depends. That’s the answer you hear from a lot of people in a lot of different things but it’s based on your experience and how comfortable you are. Somebody was starting and doing a real estate deal who had no real estate experience compared to myself.

When I started doing my true first deal, I had been in real estate for several years. I had built a $100 million apartment building. Working on rehabbing a single-family property, I had been there and done that. I’m using my money compared to somebody else. We’re going to share some of the experiences and provide some advice on what you should do.

I thought this would be a good topic because when you read a lot of real estate blogs, they’re bringing on expert interviewers and people to shed a line on their journey. It always seems to be like this huge 0 to 20 apartments in 1 year or 5 single-family homes within 5 months. It’s this big transformational story. You never heard was that their first deal? Was their 1st deal that 1st apartment building by themselves? Did they have any help with that?

When you’re consuming all these blogs, you might think, “I’ve consumed a lot of content. I have to go invest in a short-term rental or a property by myself.” You stop. You have that analysis paralysis because you’re thinking, “What business entity do I set up? Where do I put my bank account?” Instead of understanding that there’s more than you going out and doing it on your own as an option to get to where you want to be.

The three that I mentioned are passive. Investing in a real estate fund, for example, where you are investing money and getting a return. There’s a partnership. That can be structured in a few different ways, where you’re mitigating risk. It’s riskier than being passive but you’re also more involved. Going at it solo where you’re assuming all the risk and taking on everything yourself. Chris, let’s talk about passive. Why would someone want to be a passive investor?

I view passive people as the passive side who have too much going on in their life. It’s something like, “I need to put money somewhere. I want to diversify. I like real estate. It’s a place where I believe I can make decent returns, somewhat be uncorrelated to the stock market and invest in a sponsor who has a track record.”

That’s where you see a lot of people invest in the passive side. Contrary to popular belief, every aspect of real estate typically has some type of being active, whether you’re trying to find a rental property to buy, which you might have somebody manage it and still be passive. That still takes work. You still have to understand the market and trust your agent.

CWS 209 | First Deal

First Deal: Whether you’re trying to find a rental property to buy, which then you might have somebody manage it and still be passive, that still takes work, and you still have to understand the market trust that your agent has.

 

Also, myth where you could say, “I want to be a passive investor and get a whole bunch of short-term rentals.” There’s a lot of work coming from someone who has gone that route. There’s a lot of work that goes into acquiring, getting them rent-ready and managing them. Either you’re managing them yourself or giving them to a property manager. That is a good point you make about. Nothing is truly passive unless you’re investing in a fund.

The perfect example is I’ve got two rentals. I have property managers for both. I had one tenant move out. They’re getting it rent-ready but there’s a lot of correspondence back and forth of, “We need to do this and that. We found this and that.” There’s still some back and forth that doesn’t take up a ton of time but still takes up time. It adds some stress a little bit because you’re like, “I got to go spend an extra $1.000 here or there.”

On my other one is the nightmare that the tenants destroyed. I’ve got the $10,000 bill. With that one, you got to be a little more active. Once you have them acquired, there’s also the acquisition side of things of how much time you’re spending to look at acquiring them, which some will say, “I got to spend that time looking into a fund.” You should spend that time looking into it. You’d spend a lot more time trying to find a rental than you would a sponsor to invest in a fund.

The year is still putting time into investing or looking at who the sponsor is if you do decide to go fully passive and invest in a fund. I agree with you. It’s still significantly less than if you’re looking to acquire a property on your own. That’s why someone would want to do passive. Why someone wouldn’t?

It’s somebody who is a control freak, wants to be involved and has the time to be involved. If you look at how it’s structured from a risk-return standpoint, typically, if you’re going out on your own, you can make higher returns but also, there’s going to be higher risk involved. If somebody wants to be active and do it as a side gig, it still may not hurt the start being passive. You can understand or see how people operate or try and get more information on whatever it is that venture is. Eventually, that person, if they have the desire, they’ll want to be a little more active and not just invest in syndications or funds.

There are passive and low risk or least risk of the three options we brought up. I feel like a common theme that will probably pop up throughout this is to do your due diligence, whether it’s on the property or the sponsor. With the three passive partnerships, the lowest risk and the biggest factor there are how much time do you have and how much control do you want?

I’ll explain the risk on that because you’re putting money with a lot of other investors who are buying either one large asset or multiple assets. It’s more diversified versus putting you without the experience because you’re starting, going to do something on your own. That’s why I call it lower risk than the other avenues of real estate investing.

Moving into that segues perfectly into a partnership. There are a few ways to structure a partnership. You can come to the table with all the money and someone has all the expertise and you partner that way or each put in 50% of the money. When you’re in a fund, there are multiple investors, less risk and more diversification but in a partnership, there is more risk but it’s still less than if you’re going at it alone. It’s things to consider when you are going that route.

When investing in real estate and getting returns, you're mitigating risk. It's more risky than being passive, but you're also more involved. Click To Tweet

Do due diligence on your sponsor but define what you want to get out of that relationship and structure it. When I started doing notes, I did JVs where I was a sponsor and had people invest. When I was getting started, I was looking to raise money through a joint venture. What I was looking for was trying to build long-term relationships.

Most people at the time would give a 50/50 relationship or 50/50 split. I started out giving 60/40. I was giving a little bit more and banking on that long-term relationship. When you look at a $50,000 deal that was making 20%, which is $10,000, you’re looking at the delta of instead of getting $5,000 and $5,000, you’re getting $4,000 versus $6,000. I viewed that $1,000 as it continued to let me grow my experience but also build a trust and relationship with somebody who would probably continue to invest with me in the future.

It’s defining on both sides what you’re looking to get out of it. When it comes to partnerships, know what you want to get out of it. On the other end, you were speaking to the person with the experience side. I’ll speak to the person who’s new to it. If you think this would be a better route, investing in a fund or syndication, typically, you’re going to want to find someone who resonates with you and has an area of interest that you’re interested in.

When I first did JV partnerships being on the other end, newer to this, I wanted to learn as much as possible from this person. I’m willing to put up the funds to learn. You have to be careful because I don’t feel like all sponsors are created equal. Be transparent about like, “I want to get into notes. I would love to do a JV deal and this is what I’m hoping to get out of it.” You not only are learning on top of getting a return. It’s riskier than being passive but it’s a better gateway into going solo.

The challenge as the sponsor that I started to face was as I started to grow, I wanted to try and teach as much as possible to the people who are investing with me. If I had 1 investor per deal and let’s say I had 3 notes in 1 state and 2 of them were in some form of legal, I’d want to try and sometimes get that investor may be on the call. If the attorney calls me out of the blue and goes through both cases with me, that’s not something I’m like, “Hold on, let me get my partners on the call.” To try and give them live interaction was challenging in the note space.

If you’re doing it on a fix and flip where you’re giving them money but you want to learn, find somebody who’s a contractor and stuff. If you can take the time to be at the job site daily, watch what’s going on, ask for copies of the contracts, understand how the scopes are written and understand the schedule and how things work, that can be highly beneficial to get a lot of hands-on experience. Note investing is a little tougher to get that hands-on experience. In live interaction, you can still get it but you also want to make sure your sponsor is relaying information to you in the way of, “Here’s what’s going on to give you some ideas on what would you do and do it almost to create your adventure book.”

A lot of that falls on the investor. I wouldn’t expect you to pick up the phone and be like, “I have a call with an attorney. Try to get me on it.” That would be above and beyond but asking all the right questions is what’s most important to learn from any of those experiences. My best tip for people who would be looking to do some JV venture would be to find someone who isn’t selling a membership, a course, a $25,000 mastermind or whatever it might be.

They probably or maybe have a ton of experience. I feel like it’s the people who maybe have been in the industry 1 to 2 years longer or less than these other people but aren’t going that route or it’s not a route they want to go. Seek out the hidden gems which you can partner with in your area rather than trying to seek out someone who’s published a book on note investing or whatever it might be.

CWS 209 | First Deal

First Deal: You’d spend a lot more time trying to find a rental than you would a sponsor to invest in a fund.

 

The other thing possible as part of JV is if you do find a deal, bring a deal to somebody and say, “I know this note. I’ve done some due diligence on it. I’ve looked at it and gone through it. Maybe the price would be in this range. Can you take a look at it and JV on this deal where I provide some of the funding but you manage it and work out some arrangement for profit splits, which traditionally is 50/50? You can work something out a little better for you.” There’s a price for that experience and a lot of people forget that.

If you can go into a deal, partner with somebody, get an education and make a few dollars on it. If somebody went and spent $25,000 on training, that training is not going to give you real-life experience. If you took $25,000, JV it with somebody on a note. You made $1,000 on that deal but you paid somebody $25,000 in training. At the end of the day, you got $26,000 versus nothing. You’re already way ahead of that ballgame.

It sets you up better. If your goal is to eventually go solo and become the sponsor, partnerships are a great way to start that. It’s finding the right partner, knowing what you want to get out of it and setting the right expectations. If you can bring the deal to them, they’re bringing the expertise to the table. Other than the funds, what else are you going to do for them? How do you decide to leap going solo?

It’s a confidence play. It comes down for most investors. I used to work with this guy. His name’s Brian, not our attorney, Brian. He was a superintendent on job sites. He looked like Shrek. He was a former Golden Gloves boxer. We all know this type of person. They’re crazy and lunatic. They’ll go out and do whatever.

If you go out drinking with him, expect to have a rough next day. I leave it that way. The perfect story is we are building a project and the owner made a comment that we have to have this building done within two years, which was almost impossible. He looked at the owner and said, “If I get it done in two years, I want your Mercedes.” The owner looked at them and said, “If you get this done in two years, I will buy you a Mercedes.”

Did he get it done in two years?

He got it done in two years and got his Mercedes. The confidence in this guy was unbelievable. The reason I tell this story is because he had confidence so he went out and started his business. If you know a lot of people who crush it in business, they are not the smartest and most educated people. They’re the person who has the most confidence.

I share that because I still talk to him. I told him about note investing in Austin and he asked about getting in notes. He has a site work company, which is a difficult type of company to manage. I say that because what it takes to go out on your own is that confidence. I’ll ask you, how do you get that confidence?

You want to diversify. Real estate is a place where you get decent returns. Click To Tweet

It’s surrounding yourself with the right people for me with lots of experience and time. Surround yourself with the people who have confidence in you. I worked in corporate for a lot of years, to segue back to that but I feel like, for a long time, people were like, “You’re good.” When I first got my first sales job, it wasn’t because I thought I would be good at sales. It was because someone came to me and was like, “If you played sports, you’d be good at sales.” I was like, “I don’t think so.” He took the chance on me. I was told so often.

I see this with athletes that I’ve coached in the past. The ones that you tell and are hyped up like, “This girl is going to go to the Olympics. This girl is great.” If they take that on, it helps with their confidence and they do become better athletes. There’s some talent that goes into that but surround yourself with people who see what you might not see.

I feel most people are a lot harder on themselves and they probably should be. Surround yourself with the right people and investors. Do your networking if you’re looking for real estate and then practice. I’m going to use a line that I was told growing up all the time. “What is it?” Practice makes perfect. It was a lot longer than that but that little part of it.

We could talk a whole other episode on confidence. I’d also question that boss you had because I used to play sports and you don’t want me making sales.

I do believe it, though. If you ask any hiring manager in tech, it’s like athlete and sales. There’s a weird correlation.

The one component I’ll add to that because those are all great topics, putting people around you and stuff is knowing who to go to for the answer. That is a key component. You surround yourself with a great team. You don’t have to know everything. You’re going to know little when you get started but know if something comes up in notes, “Let me ask my server, attorney and the two other note investors about this.” The one thing people should do is collaborate with others in the space as well but know who to go to. Ask them and don’t be shy. That goes back to confidence. Having the confidence to ask somebody a question could potentially be a stupid question.

Not being afraid to ask what you would think would be a stupid question because it’s probably not. You and I were growing the team at 70. Everyone is a driven type-A go-getter but we all have certain strengths where we know, “Let’s go to this person for this.” Even when you’re hiring, you’re looking for people that you know you can trust to do their thing. Run with whatever is needed. What did it take for you to go out on your own and you said confidence? That was your number one.

Did you do a JV deal here for notes?

CWS 209 | First Deal

First Deal: If somebody really wants to be active and do it kind of as a side gig then it still may not hurt to start being passive so you can understand or see how people operate or try and get more information on whatever it is that venture is.

 

I did three JV deals in notes and got a ton out of it. I learned so much about notes and the acquisition process. I started working for someone for free. I was like, “How can I help? I want to learn about this industry.” It’s a smart way to go because a lot of people might not have the time. They might need the help. I feel like it was the perfect partnership.

I learned massive amounts about analyzing tapes, the due diligence that goes into it, where to go and what vendors to use. This was before I even ventured into first. This was when I was looking at seconds. I got a lot of one on one time with my sponsor. I gained the trust to put funds in and do a JV with him. I closed all three of those out. Those notes were sold.

Who was your JV?

Sherman Arnolds.

It does pay off from starting working for free for somebody and potentially growing. Lauren and I were talking about buying a private island from working for free there.

For clarification, you brought it up. I said, “No way.” That looks like it’s surrounded by shark-infested water and it’s on the Atlantic side. There are no waves there.

I know a few people like Jamie Bateman who used to host a podcast. He brings on investors who have got it started in this space. I work with him and assist him in managing his portfolio. The amount of experience they get from that gives you confidence. You’re working around somebody day in and day out. Having those conversations, you’re getting paid to do it, whereas a lot of people turn around and pay somebody to have those conversations. You’re getting paid to learn from those people. The other component to that is when you set yourself around somebody who’s an entrepreneur, you learn a lot more than real estate from them.

I feel like you were going where I was going to go next. We talked about analysis paralysis and how people get stuck on what entity it needs to be an LLC. When you work with someone, you can ask those questions and see how their business is structured. You’re learning about not only whatever investment class you’re working on but also how their business is set up specifically to serve this asset class. It’s giving you more confidence and knowing what to do to take that next step to go out solo.

When you're in a fund, there's multiple investors, less risk, more diversification. In a partnership there is more risk, but it's still less than if you're going at it alone. Click To Tweet

Those people will also share a lot of the mistakes they’ve made in regards to, “Here’s who you use for this or that. Here’s who I’ve had good luck with.” They give you a lot of those connections that are priceless. The number of software connections and things that I’ve shared with people, to me, I’ve probably spent tens of thousands of dollars on useless stuff that I’ve told people, “Don’t use that because it’s not worth it.” I’m trying to help them and do that good gesture of that good deed providing them some input. It benefits them.

Let me ask you a question. Most people that aren’t in a professional real estate career are either blue-collar, white-collar or 9:00 to 5:00 individuals. It could be somebody who works behind a desk, someone who works in a manufacturing line, wherever the case may be. They started and saved up some money. What route do you think they should go if they want to be active?

It depends on two things, time and risk tolerance. Knowing that I would probably go in partnership of some sort, even if it’s with someone else who’s new-ish to the industry. You’re both putting in fewer funds and splitting the work. I don’t know how great that would be. It’s like the blind leading the blind but I would start with some partnership if it were me. What about you?

I need to start in partnership. If you’re doing a fix and flip, I will go to local real estate groups. No matter what aspect of real estate, go to a real estate group and find people in that space who are well known. If you’re looking for a contractor, find some of the private lenders and say, “Who is the developer or contractor that you’ve worked with who has been successful and paid you back?” The private lenders will tell you who and who not to.

On the flip side, if you’re doing the lending side of things, have some conversations with the contractors about who some of the private lenders who you work with and who you like because they can share some of the stories on the private lending side and some of that experience. On the note space, note investing is a little different because, in real estate, you have the lender and the person physically doing the building.

Notes are one person. Reach out to somebody that’s in that space. Make sure if you want to do seconds, it’s somebody who’s done seconds that do performing versus non-performing. There are a lot of different aspects of note investing lending subject to Facebook, BiggerPockets and all great places. Call ten people. Maybe you might want to venture and try doing a deal with two different people so you can get the differences between and learn from both.

Do you think there’s any advantage to doing a deal with someone locally?

If you can get FaceTime with them, yes. I do. If it’s somebody who can meet for coffee or go pick their brain and get to know them, yes. Meeting somebody in person versus over Zoom is different. I’ve been speaking with you on Zoom for years. We have not met yet. Similar to Jamie and I, we had met once. We get along great but once we finally meet each other in September 2022, it will continue to strengthen that relationship.

CWS 209 | First Deal

First Deal: You can find out who are some of the real estate agents who focus on short-term rentals because like others who focus on rehabs, certain agents are for owner occupied.

 

To bring this home and wrap it up, let’s say someone is ready to take that step. They don’t want to go fully passive. They want to do either a partnership or go solo. What would be the 2 or 3 things that they need to do? Someone who’s like, “I’ve consumed all the content. I’m ready to invest. I want to do a short-term rental investment. That’s what I’ve landed on. That fits my criteria.” They’ve already figured out what their asset class is. They’re like, “A partnership might be for me. I’m debating between a partnership and going solo.” What are the next steps you would say for them to take?

Find out who the players are in the market you’re interested in. Get to network with them as we talked about building that team. Those are multiple things right there but that’s what you need to do. Line up the resources to make sure you have everything in place. Sometimes if people rush and jump into something and they don’t have a lot of their systems and everything behind them set up, it’s a big added burden and stress upon them. When you add stress, people aren’t thinking as logical and that’s where you can make some mistakes.

My number one next step would be to network as much as possible. You’ll meet the right players but you also might meet someone who knows someone who is looking for a partner like you introduced me to people for hard money deals.

The smart networking too. What I mean by that is don’t blast to 1,000 people. Find out who some of those key players are. You can find out who are some of the real estate agents who focus on short-term rentals because, like others who focus on rehabs, certain agents will go sell the $2 million owner-occupied homes. They’re not a short-term rental person or an REO person. One way to do that is Google can look it up. A lot of information is pretty much readily available between Facebook groups, BiggerPockets and Meetup groups.

For me, it comes down to smart networking. Remember, you have nothing to lose by reaching out to someone.

The worst they can say is no.

The worst they could do is not respond to you but you’d be surprised, depending on your specific, the assets you’re trying to invest in. The people are pretty receptive. They don’t do some generic email and make it personal. We could do a whole episode on networking properly. Any other thoughts?

The last thought I do have is investing is a marathon, not a sprint. Don’t rush into anything. Make sure you take the time. Most people do suffer from analysis paralysis but you also don’t want to run before you can walk. Make sure you take the time to walk through your processes and the team. Understand the comprehension of the next step and start moving forward. If you don’t, you know who to go to.

It's really a confidence play when it comes down to it for most investors. It's surrounding yourself with the right people. Find out who the players are and the market you're interested in. Click To Tweet

If I was reading this and someone told me to go network, I’d be like, “That’s great. Research, Google and stuff.” I’m going to get a little bit more specific with my advice. If I was looking into notes, I would go on BiggerPockets and Facebook groups. I would see who is commenting and adding value the most. I would direct message them.

If I was trying to do a marathon, not a sprint, I’d probably do five carefully crafted messages a day to each of those different top contributors for a few weeks until I’ve started having conversations with these people. I mean not just, “I saw that you’ve been posting on BiggerPockets. I’m interested in notes. I would love to connect.” I’m sure people get messages like that all the time. Show that you’ve seen what they’ve been posting, “I saw you commented on this post about notes. It’s interesting. I was curious about that.”

I’m laughing because I had 5 messages in BiggerPockets and 4 of them were like, “I’m interested in getting notes. Do you want to connect?” There’s no action item. One person said, “I saw your post on this and I’m in a similar situation. Is it possible that we could connect?” I’m like, “Yes. Email me at this.”

That would be my next step. BiggerPockets and Facebook. See who the contributors are in your specific asset class, thoughtfully message 3 to 5 of them a day for a couple of weeks until you start having conversations and get to know them. I feel like the rest momentum builds from there.

When you’re looking at the people and that comment, make sure it’s the people who are commenting and adding value, not just selling their product like, “I have this that you could go buy for me,” whatever the case may be.

That comes back to finding those hidden gems. It’s the people who are adding value to add value. They are truly passionate about it. Sometimes they don’t even want to mentor. Those are the best people to find, people like you. Thank you so much for joining us on this episode. If you enjoyed the show, share it with a friend, subscribe or leave us a comment. Until next time.

 

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