There’s a right and wrong way to raise private money for your real estate investing business, but the laws are changing rapidly. True that it’s getting easier, but there are still very strict laws that you need to abide by. Jillian Sidoti, an attorney and expert in teaching others to raise money for real estate investing, joins us on this episode of the FlipNerd.com Expert Interview show to tell us about the correct way to raise money for your real estate investing business. She also shares an update on all the recent changes and clarifications in regulations. Don’t miss it!
Mike: Hey it’s Mike Hambright with Flipnerd.com. Welcome back for another exciting expert interview. We are interviewing successful, real estate investing experts and entrepreneurs in our industry. Today I’m joined by Jillian Sidoti. She’s actually joining us for a second time. She was on almost over 200 episodes ago. She’s a partner at Trowbridge Taylor Sidoti, and where she focuses on teaching investors how to legally raise capital for their investment projects. As quite frankly most people are doing this all wrong in many instances even illegally, but with that said, there are a number of changes lately in laws for raising money that if you are looking to raise money, you need to know about these things. So today we are going to discuss the correct way to raise money for your real estate investing business. Before we get start with Jillian now, let’s take a moment to recognize our feature sponsors. Man: RealtyMogul.com is an online market place for real estate investing, connecting borrowers and capital from accredited and institutional investors. Get a rehab loan fast, and close in as well as 10 days with rates start as low as nine percent. For more information, call 888-296-1697. B2R finance makes loans tailored specifically for rental investors. They can help you unlock equity from existing property so you can get cash to grow your rental portfolio. That’s huge, and it opens up lots of opportunities previously not available to rental investors. Need a loan? Call 855-819-4412, or visit b2rfinace.com today. National Real Estate Insurance Group is the nation’s leading provider of insurance to the residential real estate investor market, form individual properties to large scale investors. National Real Estate Insurance Group is ready to serve you. We’d also like to thank Crystal Funding, Mid-Atlantic IRA and Renters’ Warehouse.
Man 2: Please note, the views and opinions expressed by the individual in this program do not necessarily reflect those of Flipnerd.com, or any of its partners, advertisers or affiliates. Please consult professionals before making any investment or tax decisions, as real estate investing can be risky. Mike: Hey Jillian, welcome back to the show. Jillian: Hi, thank you so much for having me, Mike. Mike: Yeah it’s funny now because we’ve just started recently having some people back on the show that had been on before, that have lots of other great information to share. And so as I was just telling you this is show number 222, the first time you were on show number eight. So you are one of the very first people on the show at the beginning of last year I guess. Jillian: Well, I’m so honored that I’m one of the few repeats so far. I’m sure you could have other repeats, but I like thinking I’m special, so we’ll go with that. Mike: You are, we are all special. Jillian: So, no, I’m very excited, and you couldn’t a more appropriate time to have me here, because we do have a big law changing in just four days on June 19th. So I’d like to talk a little bit about that, and share that with your audience. Mike: Okay great, well, hey before we get started to talking about raising money, and a lot of the laws that are changing, and a lot of the rules that are changing, or being clarified and things like that, maybe you could talk about you, let’s talk about you Jillian, tell us who you are and what you do. Jillian: Well as you’d said, I work for Trowbridge Taylor Sidoti; we are a law firm. If you got our website, our website syndicationlawyers.com there’s tons of free information on there, because what we do is we focus on money raising for real estate investors, specifically. So, and that’s always what we’ve done.
But before I did this, I was a real estate entrepreneur myself. We did condo conversions down in San Diego. One of market dried out back in 2007 that’s when I started practicing law full-time, and I still I’m an investor. We were just talking about investments right before we got on the air. So I still do investing just more on a part-time basis and then full-time law firm thing. Because as many of you out there know investing is hard work, it does take time, it takes energy, and I have three not that a law firm doesn’t, but I do have three little kids. And I want to try to spend as much time with them as possible, so I do a lot of my investing passively, and my law firm actively. Mike: Yeah, that’s great. And so even since the last time we talked there was just all these laws that are changing, or rules that are being clarified, and it’s such a different world today than it was even just a few years ago in terms of raising money right?
Jillian: Oh it is, so the last time I was on I probably said some things about how you can’t use general solicitation to advertise for investors, because that’s illegal, and that’s still holds true to some and but there has been some fantastic changes in the law where people can now advertise for investors.
So before, I would say if you put on your website offering an eight percent return on investment, call us to learn how to invest today, that would have been illegal to do. If you are selling private securities now, there are some carve outs in the law that, allow that. The one most frequently used carve-out I see these days is, and I wrote some little notes so people can write it down in case they didn’t hear me correctly. Mike: Yeah. Jillian: The first one is see that it’s 506(c) as
Mike: That’s backwards, did you write it backwards?
Mike: I don’t know how that happened, okay 506(c) let’s
Jillian: I’ll have to write it in a mirror next time. So 506(c), as in Charlie, and what that means is that if you only use accredited investors, an accredited investor is somebody who makes $200,000 a year as an individual, $300,000 a year as a married couple, or has a net worth of a million dollars, then they can invest with you.
And you can only have those types of investors under 506(c). You don’t have to get approval from the SEC, you don’t have to get approval from the states, you can go out and advertise, and say, “Hey everybody, I’m looking for investors.” But once those investors come through the door the only type you can take are those accredited investors and so
Mike: That’s what I meant before as you can just generally solicit everybody now, and then you can only work with them if they fit that criteria, but it used to be that you couldn’t you had to they had to fit that criteria before you could even solicit to them right?
Jillian: That’s correct, that’s absolutely correct so now if you sell securities under 506(c), you can use general solicitation. It’s really nice so I have a tone of clients who are using that now. So there is that, and then the other one is that now I have a backwards written thing. So everybody get your mirrors out. Mike: So did you write those things backwards or they just show up backwards?
Jillian: They are just showing
Mike: I thought you tried to be creative and write it backwards, because you thought it would be like an ambulance or something. Jillian: No, I don’t
Mike: Okay. Jillian: I should have thought about that though. So this is regulation A+ and that’s all that’s changing on the 19th. And if you take your offering and send it to the securities exchange commission under regulation A+, you can advertise all the livelong day. You can take in any investor, practically any investor that you want, you don’t have to get state approval, but what you do have to do, and this is a big thing, is you do have to get audited financial statements.
So that’s really the biggest obligation, and you do have some what are called, on-going reporting requirements, where you have to update the Securities Exchange Commission as to what you are up to every six months saying, ” Hey, this is what we are up to.”
But regulation A+ allows you to advertise for investors, allows you to take in any investor you want, but you do have to get approval from the SEC before you start going out there and raising money. Mike: Okay, and are there any rules that are different now in terms of, you can fly under the radar if you are trying to raise a lower amount of money?
Jillian: Not really, there is I think called Title Three under the Jobs Act, it’s going to allow to raise up to a million dollars from almost any investor, and use a crowd-funding platform where you can advertise your security, but you do have to use approved crowd-funding platform. But that’s not approved by the SEC yet, and we don’t know when that is going to get approved, so kind of just waiting on that and see how that turns out. Mike: So what is we have a number of even sponsors of the show that are crowd-funding platforms, so what is an approved crowd-funding platform, is that a company or is it a process, or what is
Jillian: Well, we don’t know what it exactly looks like right now, but the folks who are out there crowd-funding right now, they are either using Regulation A, or they are using 506(c), or in some cases they are using what’s 506(b), as in boy, which is the old rule, and because they already have a network of accredited investors. And so they are just going out to that network of accredited investors. Mike: Okay, so for the let’s just talk about the average person that doesn’t want to go through a crowd-funding platform to raise money for themselves, not necessarily not use a crowd-funding platform as a lender, but to raise money. Just Joe Schmoe that would like to raise half a million, a million dollars a couple of million dollars to fund their business and their market, it’s gotten easier right?
Jillian: It has gotten easier, again I would say you should use if that’s the case then try seeing if you can use 506(c), as in Charlie, because then you don’t have to worry about general solicitation, but you do have to worry if your investors are accredited.
If you have your favorite uncle is not accredited, and you really want him to invest with you then what you are going want to use is 506B, as in boy, where you can take in some un accredited investors as long as they are sophisticated enough to know what they are getting in to, and then you could also take in as many accredited investors as you want, but you can’t use general solicitation with that one. So but that to me, it’s still probably the most popular type of filling we do, because we do have a lot of clients that have an existing network, they just want to tap in to the existing network, they don’t necessarily want to do general solicitation, or they are raising small amounts of capital, and so the 506(b), as in boy, continues to make sense for them. Mike: Okay. Jillian: So yeah. Mike: Okay, and in every instance somebody needs to this is a plug for your law firm but everybody needs to work with an attorney?
Jillian: Oh yeah. Mike: To get those kinds of structure, it’s not like you can just well, somebody said 506(c) so then you write that on my loan doc or it’s still a process of getting approval from the SEC right?
Jillian: Well, you’re not getting approval from the SEC, it’s more about you are protecting yourself from potential liability, from investors who say, “You didn’t tell me that, I didn’t know that,” you definitely want to avoid that, or from liability from the state or the federal government saying that, “I didn’t
” that you didn’t provide the proper disclosure to your investors, or file appropriate exemption paperwork, or the filling fee that might need to be filed. What I say to people is that, you can pay a little bit of money to me now to help you do it the right way or you can pay me a lot of money later to get you out of trouble. Mike: Yeah. Jillian: So, and absolutely you have to pay me, but as securities attorney. And that I particularly don’t care to go to doctors, I don’t know why I have this unreasonable thing where I think I should be able to cure everything with Ibuprofen. And sometimes I have to come to conclusion and the reality that that’s not possible, I need professional help. I cannot do my own appendectomy, so
Mike: Don’t try that. Jillian: Yeah, I wouldn’t try that, and you shouldn’t try it, just like you shouldn’t do your own securities documents. I really think, even if you are raising a small amount of money, and quickly, no amount is too small, you should really just call a security attorney and say, “Hey, look what do you think I should do?” And then determine, is the cost worth it, or should I try to go at a loan.
We do offerings as little as $250,000. So don’t think that I’m not raising enough money to call securities attorney, because it’s probably not true. Mike: Yeah the truth is anybody that you’re looking to eventually raise money from or probably feel a much higher level of comfort if you have an attorney and you have all the formal documents you need, and all that stuff, and it’s not just something that’s on a legal tablet somewhere. Jillian: Oh yeah, and I’m never going to guarantee a client that they are going to raise gobs and gobs of capital, but I will tell them that it is a lot easier to raise gobs and gobs of capital when you do it the right way, because people are impressed that you split the time, money, and energy to do it the right way. Mike: Just talk of more professional, yeah. Jillian: Oh absolutely. Mike: So what about, and I’m just curios because I think some people are probably thinking this, and not to like pigeon hold in to a cost thing. But if somebody wanted an offering to raise a quarter million dollars, 10 million dollars, what could they expect in total legal fees from any securities attorney, get that packaged up and out the door. Jillian: Look that’s a very good question, so let me I’m going to work backwards and some of the numbers I might tell you would be a little scary. But if somebody came to us and said, “We are going to do a private placement memorandum, where are in a syndicate in an apartment building,” for example, our typical starting price is $15,000. If you just came in and said, “I’m going syndicate an apartment building.” We will tell you, “Okay, that’s going to cost you $15,000 for everything.”
But if somebody comes to, me and this is offered, somebody comes to me and says, “I only want to raise 250. I have five friends we all want to get together, blah, blah, blah.” Then what I would do is, I would analyze how many investors do you have, what is their experience level, what can we get away with, what’s the minimum we can get away with, and still be legal, and still keep you safe from any liability. And so that price ranges between 5,000 and 12,500. Mike: Dollars?
Jillian: So yeah, that’s what I would typically speaking if it’s under a million dollars, I try to keep it under $10,000. Mike: Yeah, and I guess on some level, if you’re going after private money, I don’t know what I’m about to say may be totally, you may totally disagree with. That you’re probably going to find somebody that you can get better rates on then going to the hard money road if that’s what you’re doing now. Jillian: Yeah Mike: So there are some up front expense to get the setup where you can raise money, but it’s probably at a much lower rate, so that it would pay for itself probably after a few deals. Jillian: Oh it does, because okay, so one of my biggest hard money lenders right now is charging 15% and five points. So, and then one of my funds sis charging eight my funds are eight percent. Eight percent preferred return with an equity kick around the back end. So, the difference is that you are going to definitely save the money in what you’re paying out, if yours used to using hard money. Mike: Right, so for folks that let’s just say that there’s a lot of real estate investors that are on and pops they are buying say five to 15 houses a year, a house a month on average, then they may be rehabbing. What are the pros and cons, some people get so I’m not just worried about my business. There are some things that I know, I could save money on, I could be more efficient, but there is this up front work. It’s like, I’ve got to go through this process, and quite frankly I just don’t have time to do that right now, and so I push it off. But in terms of kind of level of difficulty to get somebody to a point where they could raise money which presumably would benefit them, what’s the kind of level, aside from the costs, what’s the kind of level of effort to go through this process? And I know that’s a very vague question. Jillian: Look, we try to do as much of the from our point of view, we try to do as much of the work for you. All you have to do is think about your business, that’s what we try to get you to do is think about your business, and how you want it to look. And then I know we’ve done so many interviews that I kind of know what your answers are already going to be. So I just have to pull out and have you understand how it’s going to work, and what it’s going to look like. So for example somebody will say, “This is what I want to do with my business, and I’ll say, “Okay, that’s 200 doing your business.” So now here are some things to think about. Once you have a chance to think about those things, you now have given me the just in our conversation, you’ve given the frame work by which I can write your documents without having to write anything down. A lot of times the only thing I ask people to write down, is their biographical information, and provide that to me. But if they, or in some cases like again, I’ll use the apartment building as an example. If they are purchasing an apartment building, send me all the information you have on the apartment building, and then I’ll incorporate that in to your documents. So we can get something done in like it depends on how quickly the client acts, but we can typically get something done in two weeks. Mike: Okay, and for people that go through this process and they get the legal ability to raise money, how long does that last, is it what’s the life of
Jillian: The document?
Mike: The document yeah. Jillian: First of all, a lot of it is up to you, but we usually write there for 12 months, and then extend them for six months with an option of extension for six months. But generally speaking they can’t last longer than 18 months, because the document is stale. Because if you think about it, I’m making all this disclosure about your business, and where you are, and what you’re doing, and what the risks are, all of that hopefully would change from day one to the 18th month. Mike: Right, but then if they wanted to refresh I assume that they’ll also start from scratch, it doesn’t matter. Jillian: Mm-hm. Mike: What are the new laws, what is your risk profile look like, some of those things right?
Jillian: Right, so we so there’s a couple of things you can do, you can either, and we it really goes from client to client. We can discuss that with each individual client, like should you start another fund and separate assets out, or have interest rates going down. So should you start another fund, and do a different interest rate, or rate of return for your investors, because their expectations should be lower at this point. Or do you want to cash out anybody out, do you want to just continue on with this fund? There’s a couple of things that we’d have to look at, but no, you don’t necessarily have to start from scratch, and of course we always offer a discount to repeat clients so
Mike: Yeah, so talk let’s change gears a little bit and talk about the difference between somebody that’s looking to raise money for themselves, for their own projects, and somebody that’s looking to raise money to then relend out, as a hard money lender, or something like that. So what are some of the differences there?
Jillian: Well it there’s not a whole lot of differences except in terms of what the business plan looks like, and what the risk profile is. So for example if you’re going to be a hard money lender, you don’t necessarily have control over the end investment, or as you do, so that’s one of our risk factors there. But again one of my hard money lenders, they pay out a 12% preferred return flat, that’s it. And then as pros, so a lot of my property people who pay out an eight percent plus equity upside, the hard money lender now what they are going to make. They know because they know they are going to charge 15% so this spares three. You want to make three so they pay their investors 12 and may and so they can do that. Whereas an equity investor or a property owner, there could be a lot of upside or there could be a little upside, and so they can share that with their investors. Mike: Right, so just from some of the clients you’ve worked with, what are there’s a couple, maybe there’s more than two different scenarios, so some people that I now have raised money, I’m just trying to think of how to structure this, in terms of how deep people can structure things, sometimes they raise money and it’s in a fund, and they are paying interest whether it’s being used or not. And then sometimes you have almost like a revolving line of credit where you could put the money back in somewhere, and therefore you are not paying interest on it. Of course everybody would like to have that right? You can put it back in, I’m not paying interest on it, that’s just sitting on the sidelines, talk about those different structures and maybe anything else that I missed, their commodores or I guess. Jillian: The book keeping for the second way is really difficult, or can be very difficult. And then you’ll just trace people’s money and things like that, and it’s it becomes a pain more than it becomes an advantage. So this is what I typically recommend, that when somebody comes in, and wants to invest in your company you tell them that, they are not going to start accruing a return until you invest the money. But once the money is invested that’s it, it’s invested, it doesn’t come in and out and in and out, it stays in. So what you want to do is figure out instead of on a property basis, you want to figure out on annual basis, how much am I going to yield this year?
So yeah, I can make 25% return on investment on each property annualized, but if I skip a month between every property then my return is drastically on an annualized basis, is drastically reduced. So you want to take that number and then work backwards from there to figure out what you’re offering your investors, and that way you don’t have to do that messy accounting. It’s just we are paying you eight percent, eight percent, eight percent, and then if there is some distributions left over at the end of the year maybe we’ll give you some of those too. Mike: Sure okay, so we’ve had a number of people on the show talk about using self-directed IRA money?
Jillian: Right. Mike: Does that change anything, if you’re looking to raise money from people that are suing their self-directed IRA, that maybe would invest in your fund, is that possible or how does
Jillian: Oh yeah, it’s absolutely possible. The big thing is the only problem is if you’re a hard money lending fund versus a real estate holding company, if you are buying assets and [inaudible 00:22:19] assets, or funds assets that could be considered a real estate operating company. So if it’s a real estate operating company, it’s exempt from ERISA laws, and anybody with a self-directed IRA or 401(k) can invest.
However, if you have a hard money lending fund, a hard money lending fund is not going to be exempt under ERISA, so if you take in IRA or self-directed IRA money you got to be cautions not to take more than 25% of your investors as IRAs or 401(k)s, because then you become a fiduciary to them. So real estate holding company? A-okay, take as much of it as you want. Hard money lending fund? Make sure you only take make sure only 25% of your investors are actual retirement accounts. Mike: Okay, awesome so what are we missing, what are we missing here, what’s what are the after regulation A+ comes out here in a few days, what’s next?
Jillian: I think that’s going to be a real awesome advantage. I have a bunch of them going in, in the next week. I think it’s going to be a great advantage to the real estate companies out there. If you are looking to raise more than five million dollars definitely look at regulation A+, because it will change your business in the way you raise money and capital. Mike: Yeah, and these things are not these are not just real estate based; these are the ability to raise for money anything.
Jillian: Anything. Mike: Essentially yeah. Jillian: Oh anything yeah, anything and I just anything so yeah. Mike: We love real estate so we talk about that all the time where the reality is this. Jillian: Exactly. Mike: This is AA, you could use this for anything. That’s right. We ain’t got time for nothing that’s not on our real estate so
Jillian: That was terrible. Mike: Yeah, so are there any how do you think this is impacting the landscape of lending, it just seems there’s this obviously huge movement towards crowd-funding platforms, and away from more traditional sources, where do you kind of see things going?
Jillian: I don’t think, although I think regulation A is awesome and 506(c) and a lot of things are coming out that are great from the jobs Ad. I don’t think crowd-funding, in the pure sense the word is going to be the great savior of small business money raising that everyone thinks that it’s going to be, especially for the real estate investor. If you want to really expand your business beyond what you are currently doing, you are going to need more than crowd finding. You’re going to need a long term fundraising plan, and crowd-funding will, in a pure sense the word is not going to provide for that. So you if you are going to use crowd-funding, think of how you can use crowd-funding in an expansive and growth filled way, because otherwise it’s not going to help your growth. It’s going to truncate your growth, because of the restrictions on the type of investors you can have, and the amount of money you can raise. Like I said, crowd-funding in the pure sense is only going to allow you to raise a million dollars in a year. If you are in any kind of real estate investors that’s going to look to expand, you are going to be looking for more than a million dollars a year, but eventually. Mike: Yeah, awesome, well so talk a little bit about if a couple of things, the folks want to learn more. I know you guys have a lot of information on your website. Jillian: Oh we do. Mike: Tones of those like white papers, and lots of great information what…tell us again what the website is where they would go. Jillian: Syndicationlawyers.com. Mike: Okay, and what are in terms of just getting stated, people that get start what are some of the general advice you give people to start thinking about, and researching whether this is something that they need to do, or want to do, or
Jillian: Well, I will go to the website and read as much as you can, because there’s a lot of information there. But beyond that I would also write your bio, write about who you are. And number two write down just write bullet points, bullet points is what you want to do with your business. And then think about how much money could I use in the next year to be successful?
And start with that as you magic number, and then if that number is more than $100,000, or let’s just say more than $250,000 don’t hesitate to call me, that way we can talk through your plan and see what the next step should be for you. Mike: Okay, great hey one more question if you could just take a minute to talk to people about
.you’re talking about writing your bio, and I think in conversations like this we always talk about raising money, raising money. All that people start to forget that they are the point person. A big part of whether people invest, or not is how much faith they have in that person, and how much trust they have in that person. Maybe take a couple of minutes to talk about some of the dos and don’ts in terms of branding yourself to look like a reliable person to invest money in. Jillian: Oh, okay so this is great. So it’s kind of the same way I run my own business, how do I get you to trust me? I give you, or I could tell you about securities laws all day long, I could recite the securities act of 1933 for you, give you all the tips and tricks on money you’re using. Are you going to go out and get your law license and compete with me in that world? You can answer that question. Mike: No. Jillian: Yeah. No you’re not. And likewise if you tell I’m not telling everybody, give out your sources, and give everybody your contact list or anything like that, but what I’m saying is, is if you go out and tell people what you’re doing, what you’re up to, educate them on how they can do it, then that’s going to build trust. It’s going to couch you as an expert, and people are going to believe you, it’s going to give you credibility. And at the end of the day, what’s going to happen is people are going to see you know how to do it better than they do, and they are just going to want to write you a check, because writing a check is easier than working, it really is. So don’t hesitate to share what’ inside here, because no one is going to steal it. They are not, they just simply not going to steal it. It’s easier for them to write you a check than steal your information. Mike: Yeah, and how about things like sharing projects you’ve done, and just kind of positioning yourself as an expert like, “Hey I’m trying to raise money now, but I’ve been doing this for a while, and here are some examples of what we’ve done,” maybe talk about the importance of that, almost creating like a resume, if you will, of what you’ve done and why somebody should trust you. Jillian: Well, that’s exactly really you should do, and one of my biggest money raisers was a guy who educated people on only how all he did was have multiple websites on how to invest in real estate with your self-directed IRA. So he’d write article after article after article on how to invest in real estate with shelter act or IRA. And then he would give examples of properties he had that were purchased, and sold, and rehabbed, or what have you, with self-direct IRA money. And he raise millions and millions of dollars just doing that, never asking anybody for a dime, just educating people on how to do it themselves. Mike: Sure, awesome well, Jillian hey thanks so much for your time, that it is good to see you again. Jillian: You too thank you for having me. Mike: Yeah, we have the link of syndication lawyers down below for those who want to learn more. I looked at the site it’s terrific, and there is a tone of information on there, so great way to educate yourself if you are looking to learn more. But Jillian, please stay in touch, and I’m sure we’ll be talking again soon. Jillian: Thank you. Mike: Have a good day. Jillian: You too. Man: Are you a member of flipnerd.com, the most robust real estate investing platform in existence? Well you can find off market wholesale deals and great vendors literally in your market. You can get access to advice from experts and learn about local clubs and events right in your back yard. If not, please visit flipnerd.com and register for a free account. You can register in less than a minute. It’s pretty much the coolest site that’s ever existed in the real estate investing industry. So get on over to flipnerd.com.