OPM is the key to building wealth quickly. Understanding how to use “other people’s money” will help you acquire more wealth than you could just using your own cash. But you have to do it right. Unfortunately, lots of people are trying to take investor money when they don’t really have the experience to do so.
Most people know that banks are our financial partners. We can go to them to get financing to buy a home or commercial building. It’s straightforward. You agree to the loan terms, sign the docs, and they wire you the funds. If you don’t pay the bank back, they take your property as collateral.
As we get more advanced as real estate investors, we learn to “joint venture” or JV. This means we might partner with another investor, often splitting the work load and the profits.
But when you JV, and one person is doing all they work while the other person is just putting up the money, this is no longer just a real estate deal. The person doing the work — the operator — is getting capital from an investor who is passive. This is no longer just a real estate transaction. It’s now become a security, and falls under SEC requirements.
Unfortunately, too many people are taking money from passive investors without fully understanding Security Exchange Commission laws. And you’ll need a really good SEC attorney to truly understand these rules. Or you could start by reading some books on how to raise capital legally.
My guest today has been putting on events to help people raise money properly. In fact, I’ll be speaking at his Raising Money Summit in Denver this weekend.
Adam Adams, welcome to the Real Wealth Show!
Podcast Transcript : Stepdad As Real Estate Mentor
Kathy Fettke: Adam Adams, welcome to the Real Wealth Show.
Adam Adams: Hey, thank you for having me.
Kathy: You have an unusual name. It’s two first names so I guess not that unusual, but it’s two first names that have the same name. How did that happen?
Adam: Well, that is a really good question. I will give you guys, your listeners something that not everyone knows about me. I was born in Utah, on a polygamous colony, where my mother happened to be the last of six wives. When she left, and she said, “This isn’t the lifestyle that I’d like to live,” and she took my sister and me away from the colony and we needed to have a name on our birth certificate. She didn’t want to necessarily have a different last name than my sister and I so I actually got my mom’s maiden name when I was four-years-old.
Kathy: Oh my gosh, I’d never ever in a million years would have guessed that is the reason. That is fascinating. You could write a book on it.
Adam: I plan to write a few books as soon as I can get an assistant in my office to help me with it.
Kathy: I understand or a ghostwriter. Just have someone interview you and let them write it. That is fascinating. Okay. Well, then what? Where did you end up growing up?
Adam: I grew up in Utah, without mainstream Utah-isms. My mom stopped going to that church and we just grew up here. We lived in Salt Lake. We lived in Provo. We lived in St. George and ended up being in Davis County. That is up in Kaysville about 30 minutes north of Salt Lake City and that’s where the rest of it all started. We met my stepdad, who is a multi-family investor, a self-storage investor, an entrepreneur, and he has land all over.
It was his thing to try and teach me what I needed to do to be a successful young man. I wouldn’t listen to him until college when he made me listen to him. It was 2005 and my dad gifted me a piece of land that he bought off of a tax deed and he bought it for $100. He gave it to me, and a week later, he said, “I need you to actually pay me a $100 for that for my taxes.” As a college student, that was too much for me, but I committed. It took me a couple of weeks to save $100. Two years later, somebody offered me 12 grand and I sold it and the return on that is pretty good. If you do the math, it’s a lot of percentages off of $100 to $12,000.
I read the book Rich Dad, Poor Dad that my stepdad told me I had to read. I finally read it because I saw the power of real estate, learned about Robert Kiyosaki, that he made his money as an entrepreneur and put his money into apartments. I said, “I got to be in apartments.” I started a handyman company. It was going really well right before the crash and I started managing an apartment which went really well right before the crash. We took that apartment. I was just the property manager getting $12 an hour, but we took that and I made the owner literally $1 million in 12 months of managing it. Again, I was like, “This is incredible.”
Then I bought my own multi-family, got hit with the crash right in 2008 so when people say, “You want someone who knows what that feels like,” I remember very clearly what it felt like to own a multi-family when most of my tenants, my residents couldn’t pay me rent and I was forking out money just to keep the mortgage going. Eventually, years later as I got back into confidence with the markets in 2015, I bought a whole bunch of different things. I’ve been involved in almost everything. Right now, if you could fast forward to 2019, the end of 2019, we’re heavily invested in large multi-family.
Kathy: That’s quite a story. Your mom remarried then, it sounds like, and your stepdad really stepped up?
Adam: Yes, in a big way.
Finding Good Deals on Multi-Families
Kathy: Incredible. Getting into multi-family in 2015, that seems like it would have been a somewhat difficult time to get in because values had already gone up. How’s that process been for you to find multi-family properties at this stage in the economic expansion?
Adam: Really good question. My company, we brought on four extra people to help us underwrite and look for deals because the deals are much harder to find. When I got back in to multi-family and other asset classes as well in 2015 and ’16, that was one story. I believe that 2019 is a completely different story. It’s been really difficult. I’ve been able to close on seven total syndications, it’s 1,400 doors. As far as like most recently, we brought on bigger staff and we’re having a really tough time finding deals that actually makes sense.
In case there’s another downturn doing our stress test, it’s really tough to find something that makes sense but we’re still pushing forward and working as hard as we can to get some more deals.
Kathy: Are you looking all over the country or just specific markets?
Adam: One of the things that we changed about a year ago was to focus on just one market. We were going everywhere and that’s not a good idea for most teams. There’s probably a few teams that can handle that easier. All the different flights that we were taking with a few different properties that we owned that were in four different states, it was too much for us. We had to hire a second asset manager so we don’t just have one full-time asset manager. Now we had to hire a part-time assistant asset manager, just to make sure that everything’s getting taken care of.
We have 12 people on the team. It’s like, we’ll switch from one person to another to go and fly out to different properties. It’s not easy, and I don’t suggest it to anyone and we learned our lesson. Right now we’re focused on just Oklahoma City.
Kathy: Oklahoma City, that’s a great solid, linear market. I don’t even think it was affected very much by the last recession.
Adam: Yes. They’ve had a really good run for the last 10 years, growing about 1% year-over-year on just the population for the city. CoStar reports are showing good growth for the next five years and it’s nothing like that compared to Tulsa, Oklahoma even. Oklahoma City is going to be a lot stronger than Tulsa in a downturn, we see negative like, well, the absorption rate is going to be so bad that in some markets over the next three years that they can see these are going to increase to maybe 12% and Oklahoma City’s one that’s not going to do that. That’s really one of our big metrics is just trying to understand.
Nobody has a crystal ball, but just really trying to understand what might happen, what’s the best case, what’s the worst-case and it’s really had us choose just one market for right now,
Raising Millions with the Right Partners
Kathy: Very sage advice. You’re at a lot of the same events that I’m at. You’re actually putting on great events. You have a meetup in Denver, and you’re exposed to some of the same things I’m exposed to, which is new people in the industry raising millions of dollars, and maybe not exactly having the experience. What are your thoughts on that? What are some of the things that you’re seeing out there when you’re out and about?
Adam: Well, my first syndication deal, I don’t know what number of all-time deals it was but the first time we ever raised equity and used a private placement memorandum, we only had seven investors. We wanted to do it on our own and it took us a long time, to be honest. There was three different quarters in a row where we couldn’t payout to investors. That was not the business plan. That was not the goal. We’ve learned that you have to partner with other people that have done a lot more than you. The big thing that I see is that was a 16 unit and that was 1.2 million in seven investors.
I feel like there’s a lot of– I don’t just feel this way. I see many new investors doing what I did but on a bigger scale and trying to raise multimillions and not having the right partners. We got lucky and that property is finally turning around, which is going to allow us to pay out what we said we would pay but with three quarters in a row. That’s not three months in a row. Just so everybody understands like nine months in a row we were really stressed and trying to figure out how to operate this and get the right management company in because there was some fraud, there was some stealing, there was some really weird ways of fixing mold by just covering it up and our hands weren’t on it.
We weren’t in one market. There was so much right. I see people doing the same thing but on a giant scale and their biggest care seems to be number one to close deals, and number two to keep the most of the pie. I think those are very bad things to have happen right now, in this part of the market. If all you care about is closing the deal, and all you care about is holding on to the biggest amount of the pie. What that really is saying is you’re not going to have the right partners that have gone there before and done that and been able to operate in these types of properties.
I believe you can go big. I want people to go big, but I don’t want them to go big all by themselves. I think that that’s just a recipe for disaster. I felt it and we’re lucky to be getting out of that. This right now as we’re recording we’re finally in a really good place on that one property. The rest of ours, we learned. We gave half of the deal to a sponsor on the second deal and we kept doing that. We kept partnering with other people, co-sponsoring, partnering with people that maybe we only had 300 doors at the time.
We’re partnering with somebody who has had 3,500 or 6,000, and has gone through all of the cycles and understands what’s going to happen when you have to fire a property manager, which we took a long time to fire the property manager. Our hearts were saying, “We want to give her another chance.” It was like our feelings got in the way and really when you’re running a business, you can’t let that happen. We learned our lesson. I feel like just to try to bring it full circle, I’m scared honestly for some of the groups when they’re not at least partnering with somebody who’s done a lot more than they have.
Make Sure There’s “Gray Hair” on the Team
Kathy: Absolutely. Well, the good news is that there’s strong rental demand, at least for affordable housing. There’s a little tiny room for error right now but that could change in the future. Investors just need to look at that. When investing in someone else’s deal, just make sure there’s someone on the team that has gray hair. Not just has gray hair, but has a lot of gray hair from experience in that exact field. Because this is what I’ve learned personally too is anytime you try something new, do it with your own money. An example of that for us is we raised money at RealWealth for a really cool tech company.
It was a roommate matching service and I just thought that really would go so well with what we’re doing, where it would be an app where people could find a perfect roommate and then we could rent out our houses by the room and not just buy the house. I loved the idea. We raised a bunch of money, but I didn’t know the tech business. It’s a completely different ballgame. I understood the concept of the app, but we weren’t investing in dirt or real estate. Anyway, long story short, I had to freeze the bank accounts because they weren’t spending it, the money according to what was in the business plan and I was able to get most of the money back to the investors.
I had never invested in a tech company before so I should have either had someone on the team who had done it many, many times successfully or just do it with my own money. I think that’s wise of you that your first deals you kept small and wanted to really understand it. The fact that you were a property manager, that’s fantastic. That’s how Ken McElroy got started. He was a property manager and then the next obvious step was raising money and buying his own apartments and making that million dollars for himself and not for the landlord.
Adam: Yes. It would be a different story. It was good to just have a mentor there who could really just say, “Adam, the next thing you need to do is you need to replace all the bathroom tile. You need to replace all the bathroom faucets. You need to paint the walls. You need to replace carpet.” The first few of the units that got turned, I was just following orders and then I got into a rhythm that, I started to understand it. I think it was very beneficial for it and it will be for anybody if that’s the way that they do it, is they go with somebody first, that has been able to accomplish this before so that they can really just learn the ropes and do it the right way.
Kathy: Absolutely. Coming up, you’re putting on an event to help those syndicators and investors understand the basics of these bigger deals. Tell me a little bit more about that. I know I’m honored to be a speaker there. What can people expect from that if they can get out to Denver?
Adam: Well, first off, I’m thrilled to have you again. Your keynote last year was fantastic. I know you’re going to just crush it again. You add so much value when you speak.
Kathy: Thank you.
Getting Your Funding “Ducks” in a Row
Adam: Thank you. One thing that I notice is people that have done some deals and they have a track record, and they can find good properties, they don’t always have the right tools to be able to raise equity, raise money, because they focus a lot on just doing deals, which is great but there is a part where you’re going to need to raise money. What we focus on at the summit is to just correct that for future operators who are solid and they can find great deals, but they haven’t done it. They haven’t looked for the money first. They haven’t focused on making sure that the money was going to be there. I’ve gotten a lot of calls from people that are strong operators, but they’re in the final hour, the ninth inning. They call me and say, “How do I raise two more million over the next week,” and the whole raise was three million.
It’s like, really the way you do it is you start to focus a long time ago, you start to focus on actually starting to get your brand out, starting to have lead magnets. What this really just means is a piece of value that a passive investor would want. You might share with them how do you look at a deal? How do you look at a market? I encourage people– To try to sum it up because I don’t want to get long-winded and I apologize. We talk about everything you need to do to get in front of your target audience, everything that you need to do to have your passive investor opt into your list, everything that you need to do to manage the list appropriately, how to run a webinar to make it more systemized.
Some of the people that are speaking, they have millions of dollars ready to go to the next deal. Some of the people that are speaking have hundreds of thousands, if not a couple of million committed every single week, just because they’ve automated it the way that we’ll learn at the summit. That’s the goal is to solve those problems for real estate investors so that they can raise money on autopilot and focus on the deals.
Kathy: Excellent. Because you know what, what does happen is if they do run short, say there’s they need to raise three million and they only raised two. I’m starting to see people run out and look for other people to raise money for them but they can’t do that. You can’t raise money for somebody else unless you’re a broker-dealer. You have to actually be a part of the deal. You have to be one of the managers. Again, that’s something that people got to be careful of. I imagine that’s one of the speakers will be going over that.
Adam: Two of the speakers, two attorneys are going to share how to raise money the right way.
Kathy: I love that because it’s the United States of America. We have a lot of freedoms. People think, “Hey, I can run out and raise some money for this apartment I want to buy,” but there actually are rules, and you got to follow them because you don’t want to end up with orange being the new black or whatever that is. All right, Adam, well, thank you so much for being here on the Real Wealth Show. I really look forward to seeing you soon. Hopefully, some of our listeners will be there as well. We’ll have the link to the event on the blog for this podcast at realwealthshow.com. Thank you, Adam. See you soon.
Adam: Thank you. Bye.