Epic Real Estate Investing - Joel Block - Raising Capital | 475

Episode Date: September 20, 2018

Do you want to raise $20,000,000? Learn how on today's episode with Joel Block, a former CPA at PricewaterhouseCoopers, the owner of a real estate syndication firm, and the host of his own podcast, Profit From The Inside. Discover why Joel decided to leave PwC and start his own business, why you should be raising capital gradually, and Joel's upcoming event in October. Learn more about your ad choices. Visit megaphone.fm/adchoices

This is Terio Media. Everybody wants to raise $20 million. I mean, everybody wants to raise a ton of money. And that is just probably not a great idea. In fact, one of the things I always say is the best way to raise $20 million is go get a half a million dollars and go do some good. And then go get another half a million or a million, go do some good. You know, if you promise that you were going to do whatever it was, go do it, return the money. And then you go back to people and say, look, now we're raising $3 million.

Well, all of a sudden, those people are going to come back. They're going to give you their friends. They're going to come back. And then go do, let's say, $5 million. And then after you've done that, you can raise all the money you want. Hello, I'm Matt Terrio of Epic Real Estate. And welcome to another episode of Thought Leader Thursday. So today, I am joined by an entrepreneur who began his career as a CPA with the prestigious

firm of Pricewaterhouse. And during his time with the company's entrepreneurial services group, he immersed himself in the real estate syndication business after reviewing hundreds of partnership agreements and preparing as many tax returns, he left Pricewaterhouse in 1986 to start his own syndication firm and raised several million dollars in three very short years. By 1990, he had built a property management firm of more than 40 employees with a portfolio exceeding $100 million. He continues to syndicate real estate and other assets as well as counseling other promoters on successful syndication strategies. And my favorite part of his bio is that he's a fanatical Dodger fan.

And if you want some free advice from him, invite him to a game. And he's all. mouth. Just make sure you are rooting for the right team and he'll give you what you want. So, or you can just listen to him here as I get him to reveal his biggest secrets of the private money game and he's got his own new podcast that just revealed as well. And I'll talk about that. So please help me welcome back to Epic Real Estate, Mr. Joel Block. Joel, welcome back. Matt, you are too much. It's like our third time recording this and, you know, the little gremlins got into our internet digital world and messed it up. So,

let's recreate some magic and retell your story and and share with people how you can help them. Hey, listen, whenever we sit down, we always figure it out. So no, no sweat. Yes, you do. Super. So before we, you know, get into what you're doing today, you were working at Pricewaterhouse. What inspired you to leave Pricewaterhouse and start your own firm? Well, you know, listen, anybody who knows those environments, you know, as a youngster, I became a CPA. I worked in the trenches. You know, my job was to do the tax work for like 500 real estate partnerships. And the tax work was terrible.

I just hated doing the tax work, but I love reading the partnership agreements. And I wasn't that great at the tax work either, by the way. I just didn't have the mindset for the detail and to do all this stuff. My handwriting was sloppy. The dimes and pennies didn't line up. The columns ride. And, you know, they would yell at me. It just wasn't my thing.

But I was really focused on the big picture of the partnership agreements, the deal structure, the strategy, the deal making, and that was my thing. So, you know, it kind of came to a head and I said, hey, listen, I'm going to go off and do something different. And I went off and started a little role to say syndication firm and never look back. So it's worked out pretty well. Nice. So you went from, I mean, on accounting firm to start your own syndication firm.

What type of impact were you looking to actually make that you weren't making over at your previous place? Well, you know, I don't know about impact. I don't know that when I was in my early 20s, I was thinking about impact. You know, now we think about impact. You know, as a youngster, I was just thinking about, you know, freedom, making money, doing it in a better way, not being told what to do all the time. You know, I knew better than everybody.

And here's the thing. When you're an entrepreneur, you can say you know better than everybody because if you do, that's great. If not, you are the only one who suffers the consequences. So, you know, except for your family and other people you drag down with you. But, you know, it really, if you want to say you know what you're doing, then go out and be an entrepreneur and, you know, take the consequences. And that's really what I was prepared to do. So that's what I went out and did.

And listen, I've always been able to sell. And that's kind of where I started. So I was just selling the syndication memberships and deals we were putting together and made it happen. Super. Okay, cool. So just for, I don't know, let's clarify, what is a syndication? You know, here's the thing. First of all, the people we're talking to are the active real estate people. These are people that are buying, selling, fixing, flipping. They're people that are rehabbing. They're doing the work. And they need capital from other people. Those are inactive or limited partners. So those are passive people. So active people and passive people need to work together. So when we talk about investors, I'm talking about the passive people, not the active real estate guys. So syndication, is really the process of putting together a group of people, some passive and one or two active,

that are going to work on a deal together. And it's a project. It's a limited term project. So you set it up like an apartment building. You buy it, you rehab it, you rent it out, you do whatever you're going to do. At some point in time, you sell it, you distribute back the money and everybody made their money and now you're back to where you were before. A fund, on the other hand, is an ongoing process. It's more like a business. So it gives you investors put in their money. They expect the money's going to be there for a while, and then you can turn that money over and over and over again.

So the money comes in, you know, and you go buy some real estate, you buy another piece of real estate and another piece. You're managing it. You're running it. You're organizing it. You sell one piece. You give the investors some profit. Not all the money back, just the profit part.

You keep the profit, and then you go buy something else. So as a promoter or as the manager of the deal, as the active investor, it's great to have a fun because it gives us the ability to recycle the money over and over and we're not scrambling around for the money all the time. Right. So it's basically one raise that runs the business for a while rather than having to raise money for each individual deal. That's a great way looking at it.

Yes. Okay. I have a great vision for this stuff. Super. Okay. So ideally, you know, it's all real estate investors that listen to this show. in some form of capacity, some are more active than others, some are more full-time than others. At what point in a real estate investor's career was creating a syndication for themselves

in their business, when would that start to make sense? Well, you know, that's a really important question, because you're going to be taking money into your stewardship of other people. So you have to be confident enough and you have to be competent enough to be competent enough to be able to take that money, you know, and be able to do something with it. So you have to have a little bit of a track record. That might mean five or 10 or 20 fix and flips or whatever. So you're getting your money from hard money sources, private money sources,

wherever you get your money from you're cobbling it together. At some point in time, you kind of realize, you know, my cost of capital should come down because I'm getting better at this business. They're not losing money. I'm successfully completing my projects. I'm keeping my word. Everything I say is starting to come true. because you've got the experience.

When that happens, you might go to your hard money or your private money guy and you might say, can we bring the price down? And they'll bring it down somewhat. They can't bring it all the way down to the floor because they probably are using other people's capital too. And then they've got to put a spread on top of that. So there's only a lower limit that they can get to. But what happens is that at some point, you kind of realize even if they bring it down

to a low price, price isn't everything because the quality of the money is very poor with those guys. Number one is they encumber your property. which means if you don't make a payment, they can foreclose, they can do all kinds of other things. It also means that when you have to go to them and you say, do you like this deal, they can say yes or no. If they say no, that's a deal your family is not going to make money on. And I don't know about you, but one of the reasons I left Pricewaterhouse because I didn't like people telling me what to do. And if you don't mind having somebody tell you that we'll finance this one, but we're not going to do this one, you can do this.

If you don't mind having somebody else run your business, then fine, stay doing it that way. But if you want to run your own affairs, at some point in time, you have to control your own money. And the way you control your own money is by putting together a syndication or a fund where you're in control. And in order to do that, the investors have to trust you. So they have to have some background. And anyway, the bottom line is that you're going to know, you're going to know when you're ready, when you kind of get tired of using private money and hard money. And you'll know you're ready for better money where you control more of the activities.

Got it. Okay. So someone has identified that they want to, it's a good time for them to start lowering the cost of their money. They're competent and they're running their business. When it's time to go out and start raising enough money like to put into a fund like this, what are some of the biggest mistakes you see people make when they go out to do that? Well, first of all, everybody wants to raise $20 million. I mean, everybody wants to raise a ton of money.

And that is just probably not a great idea. In fact, one of the things I always say is the best way to raise $20 million is go get a half a million and go do some good. And then go get another half a million or a million and go do some good. You know, if you promise that you were going to do whatever it was, go do it, return the money. And then you go back to people and say, look, now we're raising $3 million. Well, all of a sudden, those people are going to come back. They're going to give you their friends, are going to come back and then go do, let's say,

$5 million. And then after you've done that, you can raise all the money you want. So number one, you have to recognize that you have to do good on what you do. You have to stare step up. It doesn't happen in two weeks. You have to come to the table with excellent property, with an excellent opportunity. You have to come to the table with excellent deal terms. They have to be investor-friendly.

And we can get into what investor-friendly deal terms are, but they have to work for the investor. They have to make sense. You also have to give them something that if their attorney, their accountant looks at it, they're going to say, yeah, this is an industry standard deal. We understand it. We get it. We like it. No problem.

If you make up your own terms and you just start coming up with stuff, they are not going to read it because attorneys and accountants, when they go to law school or accounting school, they learn about these deals. They learn how it works. The Supreme Court of the United States has ruled on all these things. The IRS understands that you can't just start making up your own rules because everybody gets for the last 50 years how this business works. So a lot of mistakes that guys make relate around them just kind of making up their own stuff and trying to figure stuff out. So those are things in raising money. But there's one other thing if I could say. And that is a lot of guys think that they can get around the rules,

the securities rules, the tax rules and these other rules, they can save money and not do a private placement by doing a joint venture. The joint venture generally is two people that work together, or three people, however many people. And, you know, one guy's probably going to be active. The other people are not going to be active. They're going to put their money in, but they're not going to be active. and then what happens is something goes wrong.

Well, when something goes wrong, the guy that was passive goes to his attorney and says, hey, look, you know, this other guy just lost all my money. What can we do? Well, what do you have? And they show the agreement. It says joint venture agreement. Well, you know, the attorney is going to say, well, were you really a joint venture partner? He goes, well, what do you mean?

He goes, well, were you active? Did you vote? Did you go to meetings? Did you go to the property? Did you make decisions? No, I didn't do any of those things. He goes, well, then you weren't active. you are in fact passive, which means that this was a security. And if it's a security,

there should be a private placement. If there's no private placement, then we can sue and all hell breaks loose. So if you're going to do this, you have to do it right. It's not expensive to do it right, but you've got to do it right. You got to learn how it works. If you're going to play this game, just like you originally had to learn real estate, if you're going to get to the next level in the money side, you've got to learn how the money business works and you got to do it properly. otherwise, you know, you're going to be subject to a whole bunch of problems that you don't want. Right, right. Okay, so what I heard was, one, don't raise more than you can actually put to work.

Right, right. And, yeah, so don't try and go for the grand slam. Just go out and get some money and stare, step your way up. I like the way that sounds. Second thing was make sure that you actually have the, oh, gosh, there was a second thing. I had it all summed up and then you went on your fourth thing. It was going to be fantastic what I was about to say. But the one thing, and I can confirm this is like, don't raise more money than you can put to work.

Second is, did you have the second one? I apparently had four of them. I don't remember the time. You had you have four of them. They were really good. So if you missed those, go ahead and rewind and you can listen to them again. I had them summed up perfectly. But it's really good advice because a lot of people out there, they understand that they can get rich with their own money, but you really get wealthy using other people's money.

and a lot of people strive to go do that and they have all different ways of approaches of doing that and some are good, some are not so good. So you want to make sure you do it right. Let's see. So this all makes sense. Maybe you already kind of said it.

Because you have your own fun. And you've done this before on your own before you were starting to show other people how to do this. What's one you wish you knew when you got started? Something you know now that you wish you got started, knew when you got started. Wow. Um, is there a list?

I'll, I'll tell you. Um, and, and sometimes you learn these things along the way, uh, you know, on a scale of one to 10, uh, one of the things people always ask me is every property, uh, syndicatable. Can every property be owned by a fund? Can we do any kind of deal we want? The answer is really you can't. On a scale of one to 10, I would tell you that properties that should be syndicated are the sevens, eights and nine's. If it's a six and below, it's not going to be suitable for syndication. And that doesn't, there's no pure answer here, but if it's a medium to low quality property that doesn't have a lot of juice in it, you can't syndicate that kind of property because there's just not going to be enough meat on the bone

for the syndicator to have some and for the investors to have some. That's a really important thing. So I would be very careful to make sure that you're not syndicating things that can't really be syndicated well. The second thing is, I always advise that there's just not room. Just to back up, that doesn't count like buying a six with the intent to turn it into an eight, though, right? Oh, that's different. Okay. Yeah, I'm talking, you know, I'm buying a six that's going to be a six or you're going to turn the, you know, if you can turn a six into an eight, that's awesome. I understand. That means that there's juice. But if it's, if it's a low quality property, you know, and it's just always going to be a low quality property and there's not a lot of

juice in it. I would be very careful. And, you know, very early on in my career, we made this mistake. We bought a property. It wasn't a great property. And it never became a great property. And it was just, it started out as a dog. It was always a dog. And it just didn't work out for us. And so, you know, I would be very careful about doing those sort of things. The second thing that I would be very careful about is never, you can't have two syndicators in one deal. And here's what that means. Everybody wants to go to a big hedge fund and get the money. Oh, I know a billionaire. I know, you know, I got a few things I'll share with you here.

So I know, I know these really rich guys, this big hedge fund is going to put money in my deal. Well, here's the thing. A hedge fund is also a form of a syndication because, you know, it's not, the money doesn't belong to the guys who are running the fund. They take in other people's money and then they put a layer of overhead for themselves in the deal. So if they've got a layer of overhead and then they want to come in your deal and you've got a layer of overhead, there's only so much money to go around. I mean, there only is a certain amount.

So somebody's going to have to get crammed down, and it's probably not going to be the big investor. The big investor is going to cram you down, and they're going to ask for a lot, and that's a big problem. If I give you maybe a third thing here, probably among the best advice is don't go after billionaires. I mean, all the time people say,

Joel, I know this billionaire, and he wants to put a bunch of money in my, fund and it's going to be really great. The guy's never putting money in your fund. Billionaires and very wealthy people, 50 million, 100 million, 250 million dollar people just don't need people like us. They generally have an entourage of stockbrokers and other lawyers and accountants. That guy becomes their gravy train. And this entourage is going to protect that person. And they do not want the money going to guys like us because we're outside the fence. And if money leaks out and goes outside the fence, it's money that they're not going to be able to control and make money on.

So don't even bother. I would be very careful. And there's another reason. When you deal with extremely sophisticated people like hedge funds and these very wealthy people who have incredibly large teams of attorneys and financial people, they tend to be smarter, better educated, and more experienced than most of us. And they can tie us in knots in ways that you cannot yet imagine, but I promise you they can. I do a little bit of expert work in the court in the court system. So attorneys and courts of law will call me for my opinion. And I have seen the most devastating cases where guys have taken money in from hedge funds and the way they tie them and knots, it is devastating. So I would tell you to be very careful about who you work with. Work with people

that need your services. Those are the guys that make between, maybe they're net worths between in $1 and $10 million. They're decent guys. They've got enough money that it's important. They're still trying to grow. They're not surrounded by an entourage. And they're going to be better investors. So be very careful about who your investors are.

Those are some great tips that I think will be helpful. Got it. Okay, cool. So we've talked about, you know, some of the biggest mistakes you see that people make when they're raising private money. We talked about several of the things here that you wish you would have known and what can happen if you get this part wrong. What happens if you get it right?

Give me a case study of a typical client of yours that got it right and where are they today? Well, listen, most of the guys do get it right. Most of the guys, if they follow our lead, they'll set up a small fund. And the thing about a fund, a fund grows so it's additive. So what happens is, you know, you might raise in the first several months, $500,000 and you go deploy the money. Then you might raise another $500,000 over the next couple months. And keep in mind, you still have the first $100,000 now it's in real estate.

You sell that property, it turns over. So now you got a million dollars in cash. And then over the next six months, you might raise another $500,000 and then another $500. And over a couple of years, you end up with millions and millions of dollars. And by the way, it kind of escalates over time, too. So if you raise $500 now, you're probably going to raise more than $500 next time because you're going to get referrals and other things are going to start happening. So the way that the money starts moving in your direction, it starts moving faster than it

started before. You may have a little bit of low-hanging fruit and people that want to do some stuff with you, but you haven't really yet developed a client base of investors. As you start building that client base and you're out there looking for those people, talking to those people, asking those people for referrals, it really starts to speed up. So a fund grows over time and that's the beauty of it. It really, you know, and now when you've got the money committed, of course, instead of scrambling for money, now you're scrambling for deals. But I would imagine, Matt, most of your guys are not scrambling for deals because that's the business they're in is finding deals are always usually instead scrambling for money. So if you syndicate, you're scrambling for the

money because you lock up the deal first, then you go find the money. With a fund, you get the money first and then you go find the properties. So the guys have to ask themselves, what would you rather scramble for, the money of the deals? Yeah. The deals are the hard part. Right. Well, you know, I mean, it depends. I mean, your guys are probably in the business of finding the deals. And they're not in the business. Yeah, I see what you're saying. Right. Right. So, right. So, right. So, So for most of your guys, you know, listen, finding great deals is not easy. That's why investors need us. But it's probably easier for them to find deals.

They're having more exposure to deal flow than they are to investors. True. True. Yeah. Super. So you do something twice a year for people that want to go and get involved with what you do. So for someone that's listening right now that feels like, okay, this makes sense. I'm ready for this.

What's the best way for them to seek you out and get you? share assistance. Well, if somebody is at the level where they're raising money, they're doing deals, they're getting putting the hard money together with the private money and all, whatever, however they're doing their money, if they really recognize that they're ready to control the money better, they're ready to kind of go to the next level. And by the way, as you will know, there's fees. There's other kinds of things that happen. The way people get paid in my business. I mean, this is the way Wall Street puts the money together. And let me just promise you that Wall Street does it the best way that there is to do it. And so we want to do it more like Wall Street does it.

And that's what I show the guys who come there. And so twice here, we put on a program and 50 guys come out. And it's a relatively small group, although this one coming up in October will probably be a little bit bigger because it's our 21st national event. It's amazing to me. We've done this so this to be our 21st time, which is extraordinary. I mean, how many programs last 21 times? Really, it's because we've produced a lot. And we probably have produced more syndications and funds than almost anyone in the country.

I mean, we have really produced an awful lot of success. So, you know, that's that's where it is. And they can go to the website, dealmaking symposium.com. They can learn all about the event. They have to go through me in order to buy their tickets. I mean, they really need to talk to me, make sure it's right for them, make sure it's a good fit. And as long as it is, then we'll set you up, we'll put you on your way.

And I can promise you that for guys that are at the right place, this is a really good tool. It's a fantastic tool for managing your capital and for, making a lot more money. The main reason that you make more money this way is because most of the guys in your business, Matt, they're getting paid for being smart. Being smart means they find a good property and they make a good profit on it. That's being smart, right? But they also need to get paid for their time. And when you're using your own money, which is basically when you're borrowing, it's still your own money that's at risk there, you can't charge fees, brokerages, construction

management, whatever all the property management services, whatever all the different labor services that are going into the project, you can't charge anything for those. But when there's a fund and you're like a third party, you can be a vendor to the fund, you know, and you just have to disclose that in advance. And everybody understands that somebody needs to be the broker, might as well be the promoter. Somebody needs to be the property manager. And if the promoter is capable of doing that, they might as well do it. So there's lots of ways to make money so that you make money in the short run, the midterm, and the long run. And it's really a much better wealth building strategy. than what most people are executing.

But again, you can't get in that until you've kind of paid your dues in the short run. And so, you know, let's take some guys that are really at a high level that are at the right level and let's move them to the next level. Yep. And I can vouch for everything you're saying because I'm a product of your symposium. I've been forever grateful for that experience

and really grateful for your friendship because you become a friend with many of the participants and the attendees after the fact. And, you know, and you never really cut that assistance off. you're always there and I really yeah I mean you know why because because you're a peer I don't I don't think of it as students and I don't think of it that way I mean you know what I'm doing is I'm bringing guys who are in the business into my business into my not my company but my business or industry and we all become peers and I kind of bring them up there's a lot of guys I've

gotten to speak at conferences and I've kind of turned them on to a lot of really great opportunities you know, they're guys that I've put on my podcast that helps them to kind of go into the community and get the reach that I have. You know, listen, just like you and I do for each other. And then, you know, then we go to ball games and, you know, as I go around the country, I see guys in different places. So it's really, it's a really nice community of guys. And that's been, been really valuable.

Absolutely. And, you know, I'm very selective of who I have on my show as a guest. and I'm very careful of who I promote and I feel very comfortable promoting you. So for anyone that's listening, that feels like this is the next step for them, I recommend that you go and you at least have a conversation with Joel at dealmaking symposium.com, dealmaking symposium.com. And if you feel that's too quick and you need to know some more information, Joel just launched his own podcast. And what's the title of your podcast, Joel?

Profit from the inside. Profit from the inside. I think that's appropriately named. When you attend his symposium, you start to see, and he kind of touched on this a little bit, you start to see the parallels between Wall Street and the biggest, wealthiest fund managers in the world and how you can run your real estate investing business in very similar ways. You know what the thing is, is that the guys in the money business always take the inside track. And so I'm all about strategies to give guys the inside track.

And that's what, you know, they need companies and real estate investors. I mean, anybody who wants to be successful really needs the inside track. And, you know, most people don't know how to get it by themselves. But, you know, I mean, listen, did I show you the inside track of how this business works? Totally. I was just, yeah, I was just acknowledging that. It's pretty amazing. That's, but it's, so you're an insider now, you know, and then somebody has to bring

the inside. And if you want to be on the inside, you know, if you've got the job for it, we'll do it. Perfect. So if you want the secrets, go to dealmaking symposium.com and you'll have a quick conversation with Joel and you'll figure out if it's a good fit for you to attend or not or get to know him even more first through his new podcast, profits from the inside. All right, brother, Joel, it's been a pleasure. Let's stay in touch. We'll do it again. Thanks, Matt. Take care, Matt. All righty. So thanks for tuning in to this week's episode of Thought Leader Thursday. And I will see you next week for another episode of Thought Leader Thursday. Take care. This podcast is a part of the C-suite Radio Network.

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