Joel G. Block: Raising Funding
Episode 330: Joel G. Block: Raising Funding
Raising funding can be done easily when you understand each critical step is. In this episode, Mitch Stephen chitchats with Joel Block of Bullseye Capital about syndications and starting your own funds. Joel stresses how finding the right people to work with and guide you are essential when starting any business endeavor. He also defines what an accredited investor is and illustrates how it is similar to syndication and funds. Know more about how you can start your own fund as he dives into syndication, raising a private fund for yourself, and advertising.
I have Joel Block on the show. We’re going to be talking about syndications and starting your own funds. This is all about raising money. Probably accredited investors are the other sophisticated side. We’re going to jump right in. How are you doing, Joel?
Thanks. I’m doing great.
You’re over in Los Angeles. There’s a little money floating around that city, isn’t there?
There’s money floating in every city.
That’s what we learn. Tell us a little bit about your background and how you got to this point, the bullet points. I want to jump right into the syndication and to raise a hedge fund or to build your own fund and the differences. Maybe even compared to what I do, which is one borrower, one lender, one piece of collateral.
I started out in the CPA business as a youngster right out of college. I quickly found out I wasn’t much of a soldier. I didn’t take direction very well. I didn’t follow their lead and do what I was supposed to do. I worked on some interesting accounts at Pricewaterhouse. One year, I counted ballots for the Academy Awards, which was a fun thing. The last count I worked on there was a giant real estate syndicator and my job with an army of other guys was to convert the books and records of 500 partnerships in tax returns. I hated the work, but I love reading the partnership agreements. I knew that’s what I want to do. I want to be a deal maker and go into that business. That’s what I did. I went into that business and started a syndication company. I ran that for a few years, fell into a venture capital transaction and went out and raised $10 million for a venture deal, which I eventually sold to a Fortune 500 company. I’ve been doing deals ever since. That’s it.
There are ten million ways to make money. My business partner, Raymond Braun, he’s my business partner in the hard money loan business. At one point in my career, I had so much private money that I couldn’t get it all out under the underwriting guidelines that I held for myself. Because you have a lot of money, it doesn’t mean you go out and start making bad deals. I kept my underwriting guidelines the same. I had to find a way to get this money out or else they would move on down the road to someone else. I started a hard money loan business. He was a Managing Partner for Coopers & Lybrand, which is now PricewaterhouseCoopers. Those are our cousins now. He was the managing partner for many years in Austin. He’s a perfect partner for the hard money loan business. We’ve been in business since 2005. It was a sideline gig for both of us. We have $8 million out locally to investors that I compete with every day, but they found a deal before I did. They need some money and I got some money that you can loan them in short increments until I need it.
You might as well loan it to him because if you don’t loan it to him, somebody else will. You might as well make money. If you can’t make the deal, make money on the money.Learn how the whole process works before you jump into it and start doing it. Click To Tweet
Someone says, “Why would you help your competitors?” I said, “They’ve got to be there with or without me, so I might as well make some money off of them as they pass by.” Let’s kick it off here. You’re dealing in probably pretty big projects compared to one-off houses that we’re doing in San Antonio. Talk to us a little bit about syndication and/or raising a private fund for yourself. If you’re into this investor business and you want to get some substantial funds, in which ways or maybe the best way to go or which one fits different situations?
First of all, in the money business, you’ve got to have two kinds of money. There’s equity and there’s debt. Almost every deal requires some amount of equity unless you have a special situation, lenders are generally going to require some debt. They’re going to acquire some equity components. If you go to one of those hard money lenders, they’re going to probably require that you have 30%, 40%, whatever their number is for equity before they’ll put their money in. Whatever the arrangements are and you know how that works.
Part of finding money is having a great deal to begin with. Part of being a great deal is having some equity.
There might be built-in equity, but somehow there’s got to be some equity in the deal. If you don’t bring the equity in the deal, you’ve got to bring the cash. The syndication of the fund business is the way that you bring the cash to the table. Now you can also have some debt. You can do all different kinds of things, but imagine the fund being your bank and you walk into the transaction. You negotiate with the money ready to go into the bank account at that moment. The advantage of having your money organized. Here’s the bottom line is that most people scramble around. They get private money. They get hard money. They organize whatever they can. When you’re early in your business, you’re lucky to get any money. The truth is you’re lucky to get anything. You’re dealing with hard money lenders, which are semi-professional and professional investors. You guys are professional investors. When you’re making loans, you guys are looking at properties probably more carefully than the guys that are buying them in many cases because the likelihood is that you might own those properties.
That’s probably what’s going to happen 80% of the time with those hard money transactions. Big money isn’t made that way. Big money is made the way Wall Street makes its money. At some point in time, many wake up in the morning and they say, “I’m working hard. I’m getting good at this business, but the lenders are making more money than I am. I’ve got to find a way to bring my costs of capital down. I’ve got to do it differently.” Ultimately, the way that Wall Street does it is a better way. That’s because the cost of capital is cheaper. There’s more control of the capital. It’s better money. It provides you with enormously more flexibility and more capability in terms of how you negotiate and how you move your money around.
I would like to talk about the syndication doesn’t interest me personally that much because I’m not doing an apartment complex. I like to learn how to race a fund. Where do we start?
First, let me tell you the difference between syndication and a fund to be clear. There’s not like a legal definition of this. It’s a flexible thing, but here’s how I think about this. Syndication is a project. Let’s say you’re going to buy a small apartment building, ten units, whatever it is. It’s $300,000 or $500,000. You say, “We’re going to fix it. We’re going to sell it and we’re going to give all the people that our money back, plus our profit.” That’s syndication. It’s a project. It’s the same thing. You go and you buy the building. You fixed the building. The difference is that when you sell it, you don’t give the people their capital back. You only give them back their profit. You retain the principal and you can go do more deals with it. A fund is not a project. A fund is an ongoing business. It’s going to last for a long time. People commit to putting their money in for let’s say five years.
Even with a project, they’re going to put their money in for two or three years or whatever it is. In a project-based environment, you’re constantly raising money in the fund environment, you raise your money in advance. You have the money ready to go. A fund is a little harder to raise because people have to trust you more because there’s no project that’s ready to go necessarily that they can see. These are called blind pools sometimes because people are putting their money in and they expect that they’re going to get a certain return on their money, which they will. There’s a whole rhythm to how that works. Believe it or not, wealthier people prefer this.
Smaller investors want to see what they’re doing. They want to look at the money. They want to check in like a little baby. They want to check on it all the time. Wealthier people want to set it and forget it. They want to put it in a responsible, good place and they want to get their checks every 30, 60, 90 days and know that the cash is going to be there. The principal is safe growing at a good pace. That’s it. Funds are very sophisticated. Imagine the negotiating power that you have with a fund when you walk in and you say, “I got the money ready to go here now. What do you want to do?” That gives you a lot of power.
It certainly does. When you’re building a fund or a syndicate, you have to talk to an accredited investor in both cases. Maybe you should start off by defining what an accredited investor is.
First of all, the rules are exactly the same for syndications and funds. There’s no difference. It’s basically two different golf clubs. They are tools. They are different tools inside the same golf bag. The rules are the same for both of them. You decide which one you’re going to do. First, let me tell you that you can have a fund with twenty investors and four or five investors. “Mitch, can we organize and buy that one building over there?” Let’s say the building isn’t inside the charter of whatever the fund is. We’ve set up some set of guidelines. Let’s say it’s outside that. It’s in different geography. It’s a different size and different asset class, whatever. We’re going to go do something different. A lot of guys will set up a fund. They’ll set up syndication. They’ll do another fund and two more syndications.
A lot of guys end up doing all different things. Once you understand how the tool works, it works very well. You can do all different kinds of things. The next question is an accredited investment. That’s what you’re asking about. In 2013, the government changed the rules that had been in place for many years about how this works. This business had always been a secret, which is the reason it’s a country club business. It had been a country club business where rich guys would put their money into these secret deals. These are called private securities. In other words, what you do, you set up an LLC and you sell shares of stock. Wall Street does very well better than anybody is they take assets and they slice them up like a loaf of bread and they’ll let people buy it.
A big building, the Empire State Building for example, you slice it in a lot of little pieces called shares of stock. People say, “I’ll take one share. I’ll take ten shares. I’ll take 22 shares, fourteen shares,” whatever you want. Wall Street is great at that. Everybody buys exactly what they want. They put it all together into a clump or a pool. Now everybody is happy. One guy is going to run that thing and that guy is the syndicator, the promoter, the fund manager. All synonyms for the same thing. Under the old rules, you could have a handful of non-accredited and accredited investors as somebody who either makes $200,000 or $300,000 depending if they’re married or has a net worth of $1 million or more. That’s accredited. It’s not the highest standard. It’s only 3% of the population, but that’s what it is. Either has an income of $200,000 or $300,000, $200,000 single, $300,000 married or $1 million in net worth, not including their home.
That 3% of the population is allowed to do this. They had an exception for not accredited under the old rules. You could have 35 people who are not accredited come into a single deal. Understand the government perceives these deals to be a little risky. They’re more than for example, the stock market, although maybe they’re not. The government doesn’t examine these deals. They’re exempt from registration. The government is not examining all these different deals and that’s why they would prefer for us to deal with more well-heeled people. The government prefers that we stay away from regular people and lean toward these accredited investors. There’s an exception. You can have 35 people under the old rules. You can either choose the old rules or these new rules. One of the old rules, you can have these non-accredited, 35 of them. If you have cousins, relatives, neighbors, whatever it is, you can scoop those people into your deal and put them alongside the wealthier people. There’s no problem with that. You could do that.
You’re saying 35 people total or you’re saying only 35 non-accredited investors?
Up to 35 non-accredited, you could have 1,000 people in the deal. Let’s say you took 100 people in the deal, 35 of them could be non-accredited. You want to deal with accredited mostly because that’s where the money is. There’s more money with these accredited than with non-accredited. You might from time to time, do somebody a favor, let them come into your deal or whatever the reason is. Under the new rules, you’re allowed to advertise. Under the old rules, you couldn’t advertise. You couldn’t go send out bulk emails and do all the things that people are doing now. It depends if you want to advertise or not, whether or not you’re going to take these non-accredited into your deal.
Talk to us about advertising.
In the old days, this was a secret business. That’s why I said it was a country club business is because it would be guys at the country club would all do deals together. Now you can advertise as long as the person is accredited that comes into your deal. Only accredited investors can invest in these deals if you advertise.Better money is pre-committed, always accessible, and less expensive. Click To Tweet
Explain to me this, if you know the person, you can already talk to them. How do you decide if they’re accredited or not accredited if you don’t know them? Where do you go to find accredited people you’re soliciting?
We’re going to get a little technical here but under the old rules, they self-certify. They say, “I’m accredited. Yes or no?” and you take their word for it. Under the new rules, they have to be verified. Either an accountant or an attorney or a stockbroker or a service, some of these third-party services will verify. All that means is they ping the IRS and they say, “This person does more than a couple of $100,000. Yes or no?” If it comes back, yes, they’re automatically verified.
Can you do that?
You and I can’t do that, but there are services that will do that.
You can say, “I want to solicit to 10,000 people that have a net worth over $1 million, not including their home or make over $300,000 to cover all the basics. Do they go out and they’ll give you a list of these people?
The IRS is not going to give you a list of people. The service is to verify that people are accredited. You have to do your marketing yourself. Let’s say you buy a list of wealthy people. There may be accredited, non-accredited on the list. You don’t know because they sneak in. You never know how it is. You send out an email and say, “We’ve got a deal coming up. Who’d like to be involved in this deal?” Let’s say you do that. Let me first say I’m not an attorney. You don’t have to send out emails to people randomly. You need to be supervised. This process is very complicated. We’re talking in generality here, you and me. I want people to know. You don’t take this as advice. This is not a piece of advice. If you want to do it, you got to learn how to do it. We do teach people a lot about how to do this. We have attorneys to supervise. It’s a careful thing. You go out and you find these people. Let’s say that ten people called you up and said, “I like this deal. I like to learn more about it.” At that time, you don’t know these people. Once they say that they want to come into your deal, you have to verify them.
They raised their hand and you verify them. As soon as they show up, we need to establish whether they’re accredited or not.
What the government did, and this was smart, in the old days, you were not allowed to show your paperwork to non-accredited investors. What the government realizes because of social media and everything, people see everything nowadays. What they realize now is it doesn’t matter who sees your paperwork, what matters is who invest in your deal. They said, “You can advertise. You can show anybody you want what you’re doing, but the only people you’re allowed to let into your deal are these accredited people.” They changed the rules for the much better. Let’s say for example that you’ve got some non-accredited in your life like cousins, neighbors, relatives, whatever it is. You’re allowed to use the old rules where you don’t advertise and you bring those non-accredited. Depending on your situation, there’s a little strategy and you have to figure out which way you’re going to go.
I’ve toyed with the idea of building a fund myself. Do I need someone to help me with this or do I order them rules manual?
A lot of people think that the documents are a necessary evil. I would tell you that this is the one time in your life that you get to write the rules exactly the way you want those rules to be. If you get this wrong, you’re going to be stuck with it for years. I would also tell you an attorney always writes this down. Attorneys, this is what they do. Certain securities attorneys, they write this down, but you never want to go to this attorney for business advice because they don’t know. They don’t know what the right rate of return is to pay the investors. They don’t know what the right way to pay the syndicator the fees are. They don’t necessarily know the best way to structure the transaction documents. They write documents. They don’t make deals. You want to be very careful not to confuse those two things. I know I’m very clear I don’t give legal advice, but they are not always clear that they don’t give business advice.
Where are we headed with this? I’m asking like, “How do I start out? I want to build a fund, what do I do?”
The first thing that I would tell you to do is you probably need to learn how this whole process works. You don’t jump into it and start doing it. You’ve got to figure out, “Is this for you? Is this something you can do? Is this something you want to do?” We offer a whole program that helps people. This is not a beginner program. If they’re fixing and flipping, if they’ve done ten or twenty deals, they’re very experienced. I would tell you that those people would be ripe to get better money because at some point they wake up in their money in the morning and they say, “I’m good at this. I should be making more money and these hard money lenders should be making less.” There’s only a certain amount that they’ll negotiate. At some point, you want to go out and get better money. The money we’re talking about is better money because it’s pre-committed. It’s always accessible. It’s less expensive. It’s better money for a lot of reasons. I would tell you that you need to learn how this works. If it works for you, you need to move along. The beautiful thing about this is that the fund pays for all of its whole legal expenses. It pays for its development. The fund doesn’t exist at this moment. You have to advance some money to get it going. Once it’s going, it will reimburse you for whatever it costs you to put it together.
Keep good records, keep track of what you’re spending. Where do I go? Do I go to you?
Yeah, you come to me. We probably have the most substantial company in the country that teaches people how to do syndications and funds. Our program has probably spawned 75 funds and 150 or more syndications. We have put a lot of guys in this business, a lot of guys that are making an awful lot of dough. It’s an awesome business.
This is not a course. You’re not selling a course. You’re trying to show people how to do it because that’s what you do.
That’s my business. I’ve been in this business for many years. Several years ago, an executive from Marcus & Millichap, the largest commercial real estate brokerage in the country, asked me to come out and help them to do this. It turned into this program because it was so incredibly well-received. People want to understand it. They want to learn how this works. We’d set up a program that would help them to learn. Step one is you’ve got to learn how this works. You got to take a little course on how it works. It’s not an online course. You come physically. You’re sitting with other people, 30, 40, 50 people in a room. We learn how this works. How do you pay the investors? How do you, the promoter, get paid? Let me tell you this is a beautiful business because you get paid in many different ways. Effectively, there are two big ways.You get paid for being smart. Click To Tweet
One, you get paid for being smart. All those wholesalers and all these guys, they all get paid for being smart. I found a deal that went out in price. I made a percentage. You share the money with your hard money lender. That’s being smart. What’s not smart is that you’ve spent a few months waiting for this money to come in. You’ve got out on credit cards. By the time you get your profit, you have enough to pay it on your credit cards and now you’re back in the same place where you were. The way the syndication, the Wall Street method is that you get paid for your time. Because it’s an LLC, it’s going to require a real estate broker. If you’re properly licensed in your state, you can be the broker of record. You can broker every deal. You can be the property manager, the mortgage broker, the property manager, you can be the construction manager, the general contractor. All the services that this thing requires, you can render those services if you’re properly licensed and you’re properly equipped to do that thing.
The investors are okay with that because they know you’re not taking a salary. This is not a job. It’s an opportunity for you. You’re being paid along the way. You’re building out your team. You’re running your affairs. Unlike hard money lenders, these investors are hoping that you go broke so they can steal the property from you. These people need you to run that deal. They want you to get into the long-term because you’re the manager of the money. These people take you into their family. You’re running their money. You’re providing them with an important resource here. This is an important job. It’s a responsible job. It’s an incredible business. There’s more money in this thing than you could possibly imagine.
What’s the name of your company?
Our company is Bullseye Capital.
That’s not where the symposium is.
Go to 1000houses.com/raisecapital. We can post anything we want. We can post the symposium on the 23rd of November.
This upcoming one is from October 27th to October 30th. It will be in Las Vegas. We do this typically every six months or so.
You probably have this pretty interesting room too?
It’s a very sophisticated audience. People have to qualify in. Either they’re real estate professionals, licensed in some state or they’re financial or intermediary type people, CPA, attorneys, bankers, lenders, those kinds of people or they have asset class specialization. They fixed and flipped five or ten or twenty houses. Here’s the deal. If you can’t demonstrate that you know what you’re doing, you’re not going to raise any money. You have to practice on your own. These investors do not want you practicing with their money. What I tell people is there’s a reason that doctors practice on cadavers. These are very low-value targets.
If I came and I said, “I’ve done 2,000 houses in my town. I bought 100 houses a year for many years. This is my model. I buy houses with borrowed money. I sell them. I carry the note and create 30-year mortgages.” Would I stand a decent chance?
I’d have to take a look at what you’re doing. Here’s why, because the fund business doesn’t have a cost of capital. It’s highly leveraged and there’s not a cost of capital. You do have a preferred return, but that preferred return ends up being more of an advance to the investors. The cost of capital is zero. You’ve got a cost of capital. The other thing is that the syndicator is taking different fees for things that they’re doing. When you factor all those things in, plus the ready access to the capital, and you could still refinance and do all the things that you’re doing. You don’t retain equity. My guess is you probably see that it was probably advantageous.
The devil’s in the details. I have to figure out if it’s the right fit for your business.
You have a very sophisticated operation. You are doing a lot of what you’re doing. I will tell you that most of the time, guys that are running hard money, the best way to do it is in a fund environment. Here’s the thing. The biggest restriction of all in a private money environment is it’s one investor, one house. If you start buying anything that’s a little bit bigger and you want to put two, three, four people, it gets very clumsy to put individual people, all have a lot of mortgage notes, secure them. This is all unsecured. If something goes wrong on one of your deals, they have the right to foreclose. In this, it’s unsecured. There’s no security. That’s why the Securities and Exchange Commission likes to oversee this. The government oversees because it’s unsecured and that’s why they perceive it to be a little more dangerous. That’s the name of the game that investors are putting their capital into a pool, which is unsecured. They have a percentage of all the activity.
I will tell you what’s better for the investors and that is there’s a little bit of insurance here. If they buy one house and that one house gets hit by a meteor and it’s destroyed and there’s no insurance, they’re out of luck. In a fund, it might be 1 out of 100 assets that they’re partners in. In a certain way, wealthier people prefer to be part of a distributed pool because there’s a certain amount of risk diversification for protection. What I would tell you is that you have an enormous advantage because you’ve probably got a great network. You probably have a tremendous following, but we’d have to take a look at your numbers.
Many years later, my people have been loaning me money for decades or a decade-and-a-half, at least a decade. They don’t keep loaning me money because I don’t pay him back or things are going crappy. They are the same people. It took many years to get here. Your way might be faster. If I was starting over again, I might do it differently.
I can tell you it’s certainly faster. It’s more economical. It’s less transactional. There’s a lot less friction in the transaction. Let me put it like this. Wall Street wouldn’t do it this way if it wasn’t better. Wall Street is not calling us for advice about how to do deals. This starts at $500,000. This doesn’t start at $20 billion, zillion dollars. This starts small. The guys that we deal with are generally dealing with $500,000 to $10 million. That’s the range of guys that we have. There’s a handful of guys that have got a way outside that range that is pushing $100 million and they’re doing awesome. Most of the guys are working on a much smaller level.
Maybe I’ll come to see you on October 27th in Las Vegas. Maybe I’ll come to see you because I’ve been contemplating it. I would bring my partner who was with Cooper & Lybrand. He would be more like the guy to handle it than me. I’m the guy that goes out in the streets and creates all the products for the fund to buy.
We’ve had a lot of CPAs. I’m a CPA. I don’t practice but I’m still licensed. We’ve had a lot of CPAs that have come through. They find it fascinating because you’re an accountant doesn’t mean you know anything about the hedge fund business. It’s a totally different business. Setting the thing up the right way and making money and get your formulas right, it’s an art form. It’s the one opportunity in your life to lay this thing out the way you want. It’s exactly how you want your business to run.
Go to 1000houses.com/raisecapital. You’ll get over there and have a chance to delve into this a little deeper. I’d like to thank you for taking the time to be on with us, Joel.
Thanks for doing it. Maybe we’ll be able to continue our conversation.
I’ve been talking to some venture capitalists with that money seems expensive to me, but they seem like they could raise it pretty fast and not a lot of strings attached. I’m in the middle of this conversation myself. I like to go back and maybe develop some real-life questions that I’m going through right now. That’s one way to get all your questions answered. You tell them you want to interview and you ask them all your questions.
That’s what makes for a great interview is whatever questions you have, the audience probably has too. You have the ability to attract experts onto your show, which is a lot of fun.
I’d like to thank Joel Block for taking the time to talk to us about a little bit about syndication and fundraising. This topic is huge. You’re going to be talking about that for three days on October 27th through the 30th up in Vegas. Until we meet again. I’ll see you then.
About Joel G Block
A money business insider, Joels a long-time venture capitalist and hedge fund manager (gobbledygook for a professional investor) who lives in a Shark Tank world like on TV.