Be The Bank S5 Ep4 - Travails with a Fund
On episode 4 of season 5, Justin Bogard and Richard Thornton discuss travails with setting up funds and other fun stuff!
Key Takeaways:
Resources and links discussed
About the Host
Justin Bogard – Note Investor specializing in performing Residential Real Estate Debt. He finds deals and acquires them for his own portfolio as well as educates investors while walking them through the process of owning a Real Estate Note!
Connect with the Host:
Be The Bank S5 Ep4 - Travails with a Fund
On episode 4 of season 5, Justin Bogard and Richard Thornton discuss travails with setting up funds and other fun stuff!
Key Takeaways:
Resources and links discussed
About the Host
Justin Bogard – Note Investor specializing in performing Residential Real Estate Debt. He finds deals and acquires them for his own portfolio as well as educates investors while walking them through the process of owning a Real Estate Note!
Connect with the Host:
Interested in real estate. How about wealth? Well, they go hand in hand. And here you'll learn all about it. About it. Welcome to Be the Bank, a podcast where we discuss and debate the topics centered around real estate investing. Your host, Justin Bogart, shares insights into investing in real estate to create real wealth and passive income for you and your family. He'll share stories of real estate investments done right, walk you through the process of owning a real estate note, and most importantly, educate you so you can be the bank. The bank. This is be the bank brought to you by American note buyers. Now here's your host, Justin Bogard.
Justin Bogard:Hi. Welcome to episode number four. I am your, one of your hosts, Justin Bogard. And my other host is Mr. Richard Thornton, who you'll see on in just a minute. Today we're gonna be talking about kinda the travails of setting up a fund. Uh, what has happened with the people, the naysayers on the recession that was supposed to happen here soon, or the economic downturn. And how was your Valentine's Day? Stay tuned. Traves is my new word, Richard. All
Richard Thornton:Right. Are are you sure you wanna talk about Valentine's Day?
Justin Bogard:Yeah.
Richard Thornton:Oh man.
Justin Bogard:Yeah. I kind, you had led me to believe that you and your significant other Gita were going to the beach, and you're gonna have a nice little romantic, uh, afternoon at the beach on Valentine's Day. Did that happen?
Richard Thornton:No.
Justin Bogard:Oh my God, Richard, did you forget,
Richard Thornton:We did not forget. It was, it was, uh, for our area, uh, cold and miserable<laugh>. It was, uh, it was overcast, the wind was blowing, like, you know what, all around. And we looked, looked each other and said, I'm not going out of the beach. Freeze my, my tail off. So, uh, we did not go.
Justin Bogard:Well, that makes perfect sense. So you had to, you had to au you had audible there.
Richard Thornton:We, we had to, uh, you know, come to our senses. Yes. Romance was not going to, um, blur our vision regarding that
Justin Bogard:<laugh>. So you just put on the big screen and a picture of a beach with the waves crashing. That's right. And you just sat in front of it and said, yeah, this is much better.
Richard Thornton:Actually, we got the hot tub and that was kinda nice.
Justin Bogard:Ooh, interesting. Okay. That's
Richard Thornton:A Northern California thing, right? It's hot tubs,
Justin Bogard:Right? This is pg, we gotta leave it, leave it at that. How
Richard Thornton:You know, how you go there? I didn't you go there.
Justin Bogard:<laugh> Richard. That is awesome. So my daughter's got some candy and some stuffed animals. Um, I haven't done flowers for them yet. Mm-hmm.<affirmative> number one, because they're transitioning between me and their mom's house, you know, every other week and stuff. So, um, I didn't think flowers would, would be that good cuz there's no really continuity for them to stay, but, and they get older. I think I'll do flowers more mm-hmm.<affirmative>. But right now, you know, they, they want the candy and the stuff, the animals, they, they love that stuff.
Richard Thornton:Yeah. I, I, you know, my neighbor, my kids never, especially my daughter never was much one for flowers. It didn't work quite so much, but what really worked, and, and, uh, what I read a very interesting article in the paper about this last week Yeah. Was the little, uh, heart cans that they say be mine and leathers yours and all those things. Yeah. And, uh, you know, there's a whole science behind that, sort of like fortune cookies about what to put on there. And, and it's, it's worse than it worse than a tweet. You don't have 140 characters. You've got about 15 characters.
Justin Bogard:That's
Richard Thornton:True. And so you've gotta get your, your point out there very directly. There's none of this, uh, long conversation stuff. Know b mine or it, you know,
Justin Bogard:<laugh> love l u v, so l that's, and even abbreviate it so quickly.
Richard Thornton:That's right. So that's right. So we could, we could, uh, do a takeoff of, of like what we do with, uh, text messages Right. Rather than Yeah. Than writing out cu we can just put the letter C and you, and then, you
Justin Bogard:Know, or I heart you.
Richard Thornton:That's right. You know? Yeah. How do you do
Justin Bogard:It, Richard? Is that, is that the heart?
Richard Thornton:That's right. That's right. Yeah. Mm-hmm.<affirmative>.
Justin Bogard:All right. So we are not in a recession, are we?
Richard Thornton:Last time I looked, no, as a matter of fact, I think, um, uh, uh, the, uh, economy is saying ne ne boo boo. We fooled you to a lot of the pundits because, uh, the, uh, fed was going in and tightening down things and, you know, trying to drive us not to into a recession, but slow us down as much as we can. And I was reading, um, just yesterday and mm-hmm.<affirmative>, uh, employment's at 3.6, one of the lowest, uh, that has ever been at. Um, and they are now calling, um, the great resignation, the great reshuffling
Justin Bogard:<laugh>
Richard Thornton:In, in that, uh, a lot of people, you know, they said, well, it's not that a lot of people resigned during the Covid. Um, they had time to reassess and to use a, a good example from my neighbor who is a restaurant owner, his, uh, executive chef quit. And since restaurants are closed for the first part of Covid, um, I say he quit. He, he, you know, quit post covid. Um, but he didn't come back into the profession because he had time to sign up for one of these computer co uh, coding classes for a year and is now making three times the money that he would've, uh, being a chef. And he's only working eight hour days as opposed to 15 hour days. And there's a whole lot of that reshuffling going on. Yeah, that's very interesting.
Justin Bogard:It's very interesting. So we're not in a recession. Real estate seems to be doing pr pretty, pretty normal. Yes. Nothing, nothing major flopping in the worst direction or gaining in the super appreciation, uh, right now. That's
Richard Thornton:Right.
Justin Bogard:So a lot of people looked at 23 and 24 being kind of a, probably gonna be a down year to expect it. I don't know what I thought at the time when that information came out. Maybe I saw that in late 22 or maybe early 22, or I'm sorry, late 21, early 22, when I saw some information come out from people that I respect and, and knowing the business, um, because that's the information they had in front of them that, that day. Right. And they said their projection was like, yes, it's probably not gonna look that good. Let, but they're you're the weatherman at that point, aren't you, Richard?
Richard Thornton:Uh, you are, you are a weather man. And, uh, to, I mean, so to your point, uh, as you know, we're, we're raising monies for the, the fund right now. Yep. Um, I had several people, uh, say, look, you know, we're coming into a a, a slow down, some sort of recession here. I'm gonna sell now. And Richard, I'd like to take the proceeds all that and put it into your fund. Well, I talked to a guy just yesterday from your area, and he says, you know, I got 15, um, houses that I'm running out. And he said, my rents haven't fallen. Matter of fact, I raised my rents a little bit. Yeah. And my housing prices have dropped maybe a little bit, but not much. And he says, I'm gonna hold on. Um, makes it a little bit tough for us for raising money, but, uh, I'm glad for him because there's a lot of people, I think they're in that same boat where prices did accelerate exceedingly. Yeah. You, you and I found this out, um, when our we're trying to, uh, generate, uh, privately held notes where I thought a lot of this run up was just due to San Francisco and maybe in Indianapolis and larger metropolitan area. We found out that it was in Podunk America. Yeah. I mean, you know, Lulu Ville in the middle of Kentucky has always, you know, they've got 30% increases in their, their, uh, housing values. So they're gonna hold onto'em. Why? Why not?
Justin Bogard:Why not? Yeah, why not? Makes sense, right?
Richard Thornton:I think so. I think so.
Justin Bogard:Travails,
Richard Thornton:Travails, yes. We've having, there are travails out there.
Justin Bogard:Richard teaches me these words, and then I start using them and I probably use them incorrectly, but I dislike how he comes up with these words sometimes. I really think they're made up. Mm-hmm.<affirmative> and I have to challenge him. What's that game that you can challenge people on? A word, um, is a scrabble where people make words and then can That's right. And then they say like, oh, this, this, you know, I can't even think of an odd word. Mm-hmm.<affirmative> something that comes outta your mouth. Really?<laugh>.
Richard Thornton:Yeah.<laugh>. Yeah.
Justin Bogard:So I have to start using, so Richard told me about travails, uh, just before we got on the recording. And so I just had to start using it. So, so make myself sound more intelligent
Richard Thornton:There. You know, you learn things about your significant others about things like that. Not that you're my significant other, but
Justin Bogard:Sometimes it feels like it.
Richard Thornton:No. Yeah. Let's, let's not, let's not go there. Business partners. But anyway,
Justin Bogard:I'm, I'm your significant business partner,
Richard Thornton:<laugh>. That's right. You're my significant business partner. I used to have this woman that I ran a company with, and she was, we were, we were, we said we had a business marriage because we were, you know, you, you bicker and you do everything. It's like you do in a marriage but's just for business. Anyway, uh, gda as you have mentioned, my, my significant other, uh, loved playing Scrabble with me.
Justin Bogard:Okay.
Richard Thornton:When, when we first, uh, became a couple. And the more I played, the better I got, the better I got, the more I started to win. Now she won't play with me anymore.
Justin Bogard:<laugh>, it sounds like.
Richard Thornton:She said I had a good time playing as long as I was winning, but I can't win anymore.<laugh>,
Justin Bogard:It sounds like I need to help her out and, and challenge, challenge you on, um, some of the works that you come across. So
Richard Thornton:<laugh>,
Justin Bogard:I may have to team up with her against
Richard Thornton:You. You may have to. Yeah.<laugh>. That's funny,
Justin Bogard:Richard. We, we brought the word travails and we had a good, good time, uh, poking fun at that word a little bit. And so I appreciate you, you being humorous with us there. But when it comes to setting up a fund, there are many people in real estate, whether they're in the note business or traditional real estate, they think that's what they should be doing. And it does make sense at a certain point to have a fund, right? And it's a, and it, it doesn't at a certain point as well. So if you're just starting out in the business, it's apparent you shouldn't set up a fund because you really haven't experienced all the trials and tribulations of the real estate investing that you're doing. But there does come a point to where you, you have that, that that pivot, right? To where you're like, okay, I do really well. I raised some private money. I do one-to-one deals with people, but starting to become more, um, apparent that I need more, more money, right? And I'm, I'm coming across more deals than I am money. So it's like, do I continue to find the one-to-one relationship partner with, match a deal with a partner, or do I start raising a bunch of money now and don't worry about the one-to-one partnership and just have a, a, a big surplus of savings, let's just say, and to go after these deals. So, uh, that's kind of step one for me is, is that how you see, see it happening?
Richard Thornton:Yeah. I think that's the, that's the allure. Um, Ooh,
Justin Bogard:I actually know that
Richard Thornton:Word. That's another word. How about that? Um, I, I think that's the, you know, the sparkle that a lot of people have in their eyes. They have to, to, as a matter of fact, there's somebody that you and I both know right now and they're talking about setting up a 20 million fund. And I don't think they're, uh, quite balancing out, um, how they're going to do that, how they're gonna get from point A to point B, because, uh, it's a lot more difficult than you would think. That's sort of what it comes down to. Yeah. And it's not, it's not necessarily the big stuff. You can get a lawyer to, to draft your documents and all that stuff, but what's, what, tell me one of the things in setting up our fund, what gimme two or three things that you have found to be, uh, much more difficult than you thought.
Justin Bogard:Why think It's the, the how it works, the, the functionality of it. The, the triggering one event to cause another event to happen. Understanding from the investor's standpoint, someone that's pledging capital, cuz they're pledging their hard-earned money and trusting that the process is gonna work. And what they're investing in is gonna be, you know, a sound fund that's, you know, very secure. It's low risk to them if that's the type of fund that they invested in, and to make sure that they get their return. So there's, there's a whole operational flow chart diagram of how this works, even at a simp at the simplest level of a fund, uh, because you don't wanna look like an amateur when you do this, right? You wanna look like a professional, you wanna have it set up correctly. Obviously you mentioned using an attorney that's, that, that's the easy part, right? You hire an attorney, say, draft my documents, you read the documents. It's very lengthy, but you need to read the documents and understand what you're doing. But then setting it up operationally, it can be challenging because you have to kind of figure out, oh, I never thought about this because I have to have a reporting process, right? When I give distributions to investors, I have to, you know, think about, okay, I need to manage this money in a certain way because there's a cost of doing business for us as the fund manager. And then there's, you know, inventory that we have to go after or assets that we have to go after to make sure that we meet a certain threshold price point so that we can pay the debt service and also make a little bit money as well. So that's, those things are a little bit more complex and everybody's situation is unique for a fund manager. Uh, but that will be the first, first thing to, to come across my mind, Richard, when you asked that question, was just the operational foundation of how the structure works internally.
Richard Thornton:Yeah. So for those of you who don't know, in our, in our fund, Justin runs more of the operations and I run more of the marketing. I've got a bigger mouth, so, you know, I can see it making
Justin Bogard:You got fancier words, that's for sure.
Richard Thornton:No fancier words, right? Allure,
Justin Bogard:Travails,
Richard Thornton:Allure. That's right. Just aran. Uh, just a bigger mouth. Anyway. Um, and so one of the things that I think we immediately thought of on your side and was very obvious and simple to talk about, but then how do you get into implementation? Yes. Um, of putting it together is, is that when we set up the website, first of all, we had to have two websites. We wanted to have an investor website and a seller website. Yeah. And they had to have very different, um, they had to be positioned very differently because we want a seller to go on and say, all right, uh, here's my website. I want to get my information in there because I want to quote bam, bam, bam. And you're not, you know, trying to, uh, talk that person into investing, or they may be an investor, but by the, for the most part, um, they want to get in, get their quote, know what we're gonna do and, and, and move on. So how do we implement that? Well, as you know, we set up, um, input on the website. Yeah. That data has to feed into the C R m, it also has to feed into the loan servicing management and all, all these things have to be all wound together. Um, easier said than done.
Justin Bogard:Yeah. There's no manual for it, right? It's, it's kind of, you have to walk through it in your mind. You have to set up, you know, like I mentioned before, some sort of flow chart or some sort of diagram that just kind of tells you, okay, this is step one. How do you get an investor? Right? Right. Where do you find the product that we're buying with the investor's money? Um, so we kinda have two clients, right? We have an investor client, and like you mentioned, we have a seller client mm-hmm.<affirmative>. So we're, we're, we need to have, um, we need to appeal marketing to two different types of individuals, two types of investors, two types of LLCs, what whatever, whatever the case may be. And then we have to go find the, the product as well. Then we have to manage it all too. So it, it becomes, it becomes a complex machine and it, I don't see how it can be done as an individual yourself. If you're doing a very small capital raise, I can see it being very easily managed. Like, let's just say, um, a half a million dollars and under. That's, if you can set up a fund of that size, which I'm not sure if you can, but if you could, that would be easy to manage because you probably don't have a lot of investors and don't have a lot of inventory to manage. Okay. That's, that can be a one-stop shop type of person. Right. Uh, but when you get over the seven figure threshold, it, you can get quite, quite a bit of inventory with that. You know, I, I'd venture to say you can probably easily get 50 loans, um, with a million dollars.
Richard Thornton:Right? And, and you want to be, like, with a lot of ventures, you wanna set it up correctly from the start. I mean, our whole idea is to do volume, right? I mean, our eventual goal is to buy portfolios. Okay? In doing so, you don't want to have this cumbersome ones Z two Z system where I'm not sure if you're putting in data or I'm putting in data, uh, you have to have it very set and rote and do it one specific way and have it all be smoothly or else it's gonna come down around your knees and you are gonna forget that you didn't pay Bill or Sally or Harry or, or whatever. Um, you know, and if you're doing partials like we are and, and not, there's just a lot of moving parts.
Justin Bogard:There is, and you can't shortcut anything. It, it needs to be done correctly. And in today's environment, it's instantaneous communication is crucial. And also having a system with a lot of really good processes in between there so that you have great quality control checks, that you don't have to have a ton of human interaction. You can have human checkpoints right throughout the process, but if you can automate more things and you can have things more streamlined and very clear as to what the next step is, it makes it really easy to get through deals one time as opposed to making mistakes and going back and fixing things. So luckily with our experience with just buying notes ourselves and selling them, we have a lot of processes in place. It's just adding the component and the complexity of a fund on top of that to make sure that you're compliant and we're going, uh, along with what the rules and regulations are with, which is the PPM and the operating room.
Richard Thornton:Plus you wanna make sure that other people can help you. So as we found out with our email system, we've gotta design it not just for Richard and Justin. We've gotta have it. So somebody who's helping us, one of the staff people that we now have, um, can dip into some email account and do what they need to do and find out where we are. And if they leave, we can pick up where they left off. And
Justin Bogard:Yeah, it's, it's running the business and running it efficiently. Mm-hmm.<affirmative>. Um, and that's, that's what separates, uh, some of the funds being really successful in the others, you know, at the, if you're looking at it from outside the tower, you know, everything looks nice. The building looks like it's nice and shiny, but when you go inside, you know, the building and you just see, like, I can just imagine going to the, um, uh, the, the stockroom, the stockholder's floor room, you know, there where they're, they're trading stocks all the time and everything's going crazy and everyone's on the phone yelling and screaming and waving their ticket in the air. Like it can be that crazy inside of an operation, but you can't tell from the outside. But, um, having a very smooth process, a very good operation, a very clean, clear set of instructions that people are following and you have good deliverables and receivables, uh, it, it makes the fund a lot easier to manage and number one, and then number two, to be profitable.
Richard Thornton:Right. And I mean, one thing, so, so let's not be just totally dismal about this. Let's talk about some upsides. The wonderful upsides is obviously you're not tied to a single asset. So Right. We, we can raise$300,000 from one investor and it goes into the general pool. They have a diversified fund, uh, and and set of loans that, uh, they have a security, uh, and we can trade them in and out. We can say to them, look, you don't have to have a 10 year whole period. You can be a minimum of two and we can trade you in and out there. I mean, it's just once you get it up and running, well, it is, it is a wonderful tool.
Justin Bogard:Yeah. From, from the outside an an investor's standpoint or even a seller's standpoint to sell us inventory, it's, it's really simple. Okay. The investor puts in money, they agreed to sign the paperwork, they understand what the paperwork says, and they basically get paid out on an ongoing basis, um, as they're supposed to be paid. And it's, it's very simple and clean that way. And then we try, we try to make it that way. If you make it too complex and you have a lot of different preferred returns and you have a waterfall effect, and if this, then that type of stuff, maybe it may, may be a little bit more lucrative for somebody in the long run, but it's extremely complex and it has a ton of oversight on it. So that's not the first series of funds we wanted to do. We wanted to make a more simple, clean, easy to follow fund, and then kind of build on top of that to the next fund. That'll be, uh, you know, maybe two or three times larger than the current one, and then just kind of go from there until we graduate to a, a very large fund.
Richard Thornton:Right. Right. And that's the goal. And, and I really think from the way we're starting, um, we're doing it as right as we can in terms of getting our systems in place. And even if we have to swap out, I mean, I see us going to a, you know, a much larger, uh, database at some po some point a sales force or something like that. But even using two or three, uh, and melding them together the way we're doing now, we can still do quite a volume. I think we could, we could probably do, I'm just pulling, I'm just guessing on this, we, we could probably easily do 50 million, maybe 70 million with our systems the way we're currently setting'em up and not Yeah. Not be too strange.
Justin Bogard:Yeah. We definitely didn't wanna chew off more than, than we can handle. Right. And so we started off with something manageable. That's why our fund size is a, is a 10 million fund. So we feel like that's on the, the very low side of things on what we can do. And we just wanted to, to meet expectations and get through this. And we know the next time that we do a fund, we, we can make it much larger than what the current one is. And, uh, we can also get feedback from our investors on their experience as well and, and move into the next one.
Richard Thornton:Right. Right. So yeah, it's, it's been a real, um, learning experience. Uh, I think overall it's been a good learning experience and, and would, I would certainly do it again. We sort of wanted to talk about this a little bit today because I think the market is ripe. I, I've talked to several different, uh, people in the note space who are, you know, hot to have a fund and that's great. You should do it when the market conditions are right. And I do think that the market conditions are right, but it's a little bit, um, caveat eor, you know, buyer beware when, uh, when you get into it,
Justin Bogard:It is, and it's just like any other business or trades person. Um, I think of them often as to where they're, uh, in the term. Like you're, they're a glorified ex, you know, they're just a glorified person in that position, meaning they do the task extremely well or the craft or the trade or the service mm-hmm.<affirmative>. But they don't have the business skills to run a really good business. So that's why they only go so far in with their business mm-hmm.<affirmative>, um, until they can take on a partner that can help them get to the next level, or they can get the knowledge and the training and the mentorship from somebody. And I, I think those two things need to go hand in hand, especially with the fund. You need to know the craft, number one,<laugh>. Right. And then you need to know how to run a business. Number two. And I don't see how you can do it by yourself at a, at a very high success rate without having either many partners or many mentors on a consistent basis that are helping you graduate, you know, to the next level, to the next level, to the next level to make sure that you have a good running business. Cuz it doesn't work by yourself.
Richard Thornton:No, it doesn't work by yourself. And you know, there's a little bit of a metaphor there. So I was, um, I taught at one of the local universities here for a while. I, I taught, um, finance
Justin Bogard:Professor Thornton,
Richard Thornton:Professor Thornton, if you can believe it, right? Yes. Um, uh, yeah, I never really liked it when people called me professor
Justin Bogard:And going, well, now I have to
Richard Thornton:Say it. Yeah. Now you have to. Anyway, I was teaching master's level finance and I had a lot of fun doing it because we had a lot of people who were in finance for utility companies and things like that. And you could, uh, always learn a lot from them and their experience mm-hmm.<affirmative>. But as I was doing the lectures and lessons plans and all this, I was always, I always found it very interesting, um, at how much I had to know that was outside of exactly what I was teaching. Okay. By what I meant. There was so much peripheral information that I had to know to be able to make, um, uh, the, the class, uh, come alive, the lecture to come alive, um, that you would think would have nothing to do with finance<laugh>. But nevertheless, it, it did. It's, you know, it's, um, it's just interesting. Sometimes this is very much the same way. There's just a lot of, a lot of things you gotta know that was really not core to the business at all.
Justin Bogard:Right. All right, Richard, I think, I think we've, we've beat this drone pretty well today, so this was a great conversation. So I appreciate you being on today and taking the time to do this with me. Mm-hmm.<affirmative>. And, uh, this is episode number four and we are American No Buyers is episode. And this brought, uh, this podcast is brought to you by American No, bris, and we will see you guys on the next one.
Richard Thornton:Bye-bye.
Nararator:Thanks for listening to Be the Bank. We hope you learned something from today's show. If you enjoyed this episode, please rate and review us. Plus check out our channel on YouTube and follow us on Facebook and Twitter at Be The Bank and on Instagram at Be the Bank podcast, be The Bank is sponsored by American Note buyers. Thanks again for listening.