Entrepreneurs looking for lucrative and impactful investments have an opportunity to solve the mortgage crisis and make massive gains.
Serial entrepreneurs Rick Allen and TJ Osterman are seizing that opportunity. They believe in this real estate investment strategy so much that they’ve built an online tool to help other investors get in the game.
In this episode of the Capital Gains podcast, Rick and TJ show how it’s achievable by detailing their own success and explaining the process for other investors who want to enter this lucrative market.
For the past five years, they have been purchasing non-performing mortgage loans and returning double-digit profits. Not only that, they have given low-income families the opportunity to keep their homes removing the stress and low confidence that comes with being on the brink of a foreclosure.
Purchasing these seemingly unattractive loans is an opportunity that more and more investors are exploring, and there are educators, resources, and technologies which open the world up to anyone interested in moving into this attractive space.
But, how easy is it to get into? Rick and TJ talk to us about the strategy, how to make that strategy successful for you, and making social responsibility a component of your business.
Five years ago, Rick and TJ were offered the opportunity to purchase their first small balance mortgage loan when a bank agent called them and asked if they wanted a frame duplex. The property had $100,000 of debt attached to it, but they took a chance and bought it for $8,400.
The first five properties they invested in within this market went so smoothly, they couldn’t believe how easy it was. They were contacting borrowers and offering to take their vacant properties off their hands, arranging foreclosure agreements, and paying them for their time.
In one case Rick and TJ acquired a vacant property from a lady who was happy to hand over the keys in lieu of foreclosure. They gave her $100 for her time and sold the property for $28,000.
From contacting the borrower to selling the house, the whole process took 15 days.
The discounts on a mortgage note can range anywhere between 20-50% and can cost from $25,000 to $150,000. Why are the discounts so big? Because no institution has the ability to handle them.
The discounted purchase of the mortgage means that Rick and TJ are able to offer a lowered rate for the borrower. In this episode of the podcast, they say that they have sometimes initially been out of pocket as they work to build the trust with the borrower.
But because of the cut-price they paid out, in the beginning, they are able to create an affordable home for the borrower and still make a double-digit profit from their investment.
Rick and TJ soon learned that the reward from investing in mortgage notes was more than just financial.
The unexpected but emotional impact of helping buyers to keep their homes was huge. Rick and TJ are passionate about their business because it has the ability to improve the lives of thousands of homeowners. That’s why they launched paperstac.com.
Rick and TJ created paperstac.com to help people find buyable mortgage notes. With around $400bn of unpaid principal balance non-performing loans still waiting unclaimed, it’s a market with massive financial and emotional gains to be had.
Borrowers have had the fear of losing their home hanging over them, and investment serves as an opportunity to remove that fear with an affordable housing plan. The pair has the goal of saving 10,000 low-income family homes in the future. Learn more in this episode of the Capital Gains podcast.
Visit CloudCapitalManagement.com for more information on their fund if you are interested in learning more as a passive investor.
Check out Paperstac.com where you can buy and sell mortgage notes and learn more about what’s available.
More to come soon on the Money With Meaning website: mwmfund.com
Richard Allen on LinkedIn
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Richard Allen on Twitter
TJ Osterman LinkedIn
TJ Osterman on Twitter
Papterstac on Twitter
Connect with Jonathan Twombly at www.twobridgesmgmt.com
Jonathan Twombly on Twitter
Jonathan Twombly on LinkedIn
In 2006, a year after selling his first successful internet business, Mark Daoust was on the verge of going broke. No savings, no rainy day funds, nothing for retirement.
Since successfully exiting his first venture, a content-based website called Site Reference, his next projects had not been working out and was hemorrhaging money.
It was at this point, on the brink of pennilessness, that the sale of his friend’s web hosting business was closed - a deal he had brokered after the experience of selling his own company the previous year.
With the commission he made from the sale, Mark went on to start Quiet Light Brokerage, Inc., a marketplace for buyers and sellers of internet businesses, which has conducted over $100million in business transactions over the last 10 years.
Mark discusses the returns available to buyers of existing internet businesses, as well as the risk that comes with buying them. He also shares some very important guidelines for both buyers and sellers of online companies.
Listen in for Marks’ stories and advice after his 10 years in the business. They include a lawsuit and some of his favorite deals that Quiet Light Brokerage has put together.
When selling online businesses, finding buyers is the easy part, says Mark. Investors are always looking for new opportunities, so building up that side of Quiet Light Brokerage was less of a challenge.
The more difficult part in the early days was preparing a business for sale. It’s an area that business owners looking to exit often don’t get right. This was one of the most important things Mark learned early on - understanding what motivates buyers to buy and what information they need to make an acquisition.
Sellers are often very proud of the products and systems they have built and focus on these areas during the sale. However, buyers are interested in making a return on their investment and so the information sellers present needs to be shown through that lens.
So Mark and his team set to work making more compelling cases for their clients. That meant showing more than a simple P&L statement. It meant monthly reports going back three years, dissecting the accounting and financial sides of the business.
It also meant highlighting the growth potential and analyzing the threats that the company faced.
And finally, it was about communicating what the asset was and why it was worth investing in. Online businesses are all cash flow based -- there is no physical asset that you can sell if the business fails -- and so presenting it correctly is vital.
They also learned pretty quickly the processes needed for keeping clients’ information safe while providing proper access to potential buyers.
Mark breaks down the process of preparing a business for sale into four categories:
So when buyers are evaluating the ROI, what do they want to see? Firstly, they want to see that it is not a risky investment. Online businesses are inherently risky and buyers need to be aware of that, but from the seller’s perspective, it is about clearly identifying and mitigating areas of risk.
What are the areas of risk? Are there any factors of dependency in terms of a technology or platform, e.g. is the business dependant on Google rankings or is it entirely based on Amazon? Changes to these platforms could have huge implications on the profitability of a company that is dependant upon them.
Once these risks and dependencies are identified, the seller must come up with systems to mitigate those risks.
Buyers want growing businesses, not declining ones, so is it growing currently?
Outside of that, what areas of future growth have not yet been explored? Using tangible, tested experiments and examples is much better than hypotheticals here.
How easy is it for the business to transition to a new owner? This often comes down to ‘key man’ dependencies -- if the success of the business is tied to a personal brand or a key partnership between the owner and a supplier, then that complicates the process of purchasing a business.
Clean financial records and documentation of the business is the easiest area to control, and often the lowest hanging fruit for sellers to look at to increase the value of their business.
Most of what you’re buying is good will, says Mark. Often buyers will ask, ‘should I build this instead of buying it?’
In some cases, it does make more sense to build, but by purchasing an existing business, you are buying the brand, the reputation, the relationships and partnerships that come with it.
You’re also buying all the decisions that went into getting it to where it is today. What worked and didn’t work along the way. And the systems and automation that has been built to run a lean online business.
Generally the more staff a company has and the more systems and procedures that are in place, the higher the value is likely to be. It’s worth noting that the more staff members there are, the more friction is created in the transfer of ownership. And the more processes that are in place and well documented, the more attractive an acquisition is.
Outside of the risks within the business you’re buying, is there anything you should know about yourself to identify what sort of business you should purchase?
Firstly, it’s important to understand if you want to buy a big or a small online business. After his first exit, Mark bought two businesses for low five-figure sums and it became clear that the work he needed to put into them was not worth it for the money they were returning. So it’s important to match the scale of the acquisition with what is worth your time and effort.
Secondly, know what your strengths are and invest in something where those strengths are an asset. For example, if you’re great at negotiating deals with vendors, look for an e-commerce company where that skill is valuable. Don’t enter the world of a software as a service company where you’ll have to become good at working with developers creating new product features, which may not be a skill you already have.
It’s true that many online business owners have created companies that create mid-six figure bottom lines that take just 10 hours of work per week to maintain.
In Mark’s case, for instance, he was able to take his entire family out to Europe for a month while working remotely from his phone without impacting his businesses at all.
Mark does stress that it takes a lot of work to get to that passive level, with a lot of automation, good people, and strong processes in place to allow it to run seamlessly. A buyer shouldn’t expect to be able to walk into an acquisition that is immediately passive and low maintenance, some ground work is always necessary.
But it is possible to get there relatively quickly -- and doing that is all about systems and procedures.
You can reach Mark and his team at www.quietlightbrokerage.com
We all hear stories of highly lucrative angel and venture capital investments. But without an existing portfolio and a Rolodex full of Silicon Valley contacts it can be hard to identify the right opportunities.
So what are the telltale signs of a founder or company that is destined to succeed? Or the warning signals of one that isn’t? And how do you meet them in the first place?
To find out we spoke to Tristan Pollock who, after successful exits from his two previous companies -- Social Earth and Storefront -- has made the move into the venture capital world.
Tristan is the entrepreneur in residence and venture partner at 500 Startups.
500 Startups is the world’s most active venture firm based in San Francisco with nodes and investments across the globe, with nearly 2,000 investments in their portfolio since starting out six years ago.
In this episode we talk about Tristan’s successful exits from his two companies, Social Wealth and Storefront; his transition to venture capitalist and advisor to startup businesses; and what green and red flags he looks for when evaluating new investment opportunities.
This is a title we’re seeing more often in the venture capital world, says Tristan.
Typically, the entrepreneur in residence (EIR) will be brought in on a salary or stipend to assist the firm with their portfolio and in evaluating new potential investments. Usually, the firm will also be investing in the EIR’s next company.
This is all a part of the 500 Startups program but in addition, their EIRs will spend time with their accelerator program, advising younger founders and companies on a weekly basis.
Through this four month program, Tristan predominantly helps startups in three main areas:
For the first two to three months, the focus is on trying every growth experiment possible and on testing and iterating on every available acquisition channel.
In the last month or two, the focus shifts to how the startups are pitching their companies. This can be a challenge for founders at first because they are so deep in the weeds of their product that it can be difficult to take a step back and simplify their story.
Investors need to be able to quickly understand what is interesting about them and what differentiates them from other companies.
It’s also important to be able to communicate the problem or pain that a product solves. People need to feel a pain, says Tristan, in order to adopt a new product -- as an investor, or as an end user.
As part of the program, founders will be introduced to the investor network in San Francisco and coached through the process of finding funding.
Tristan has experienced both forms of entrepreneurship. His first successful company, Social Earth, was self-funded. Whereas Storefront, his following venture, was backed by 500 Startups and went through their accelerator program.
There is no one-size-fits-all route. Some founders want to maintain control of their companies and stay true to their vision for the product.
Others feel that there are skills that they need or a network they need to build, which they can only get access to through an incubator or accelerator program.
Tristan describes the 500 Startups accelerator program as an important part of getting him and his company up to ‘San Francisco’ speed, as he calls it.
Tristan is a Minnesota kid. He and his co-founder Erik Eliason bootstrapped their first business, Social Earth, with no outside funding and without an existing network.
Before Huffington Post’s ‘Impact’ section, there was a huge gap in reporting positive news around the solutions affecting social change. Around the same time, social entrepreneurship, purpose before profit, and the ‘triple bottom line’ were becoming widely recognized terms.
They launched Social Earth, a content business, which grew organically and became the leading source of news in the social impact niche and a strong brand, allowing them to be their own bosses and work on a project they really cared about.
Three years in, they were approached by a number of potential buyers and sold the company to 3BL Media, which gave them the funds to transition into their next company, Storefront.
After taking a break, the co-founders got back together. While walking the streets in Minneapolis and speaking to friends and family, they noticed a trend of vacant storefronts. It turned out that 10% of stores in the US are sitting empty.
At the same time, the pop-up retail trend was growing. Many small businesses who couldn’t commit to five-year leases, were looking for short term rentals to hold art exhibitions, launch a fashion brand, etc.
Triston and Erik saw an opportunity to create a marketplace to bring these two needs together. In the summer of 2012, they tested the idea in their local area as a basic MVP (Minimum Viable Product) while interviewing for AngelPad, a San Francisco accelerator.
They were accepted into the program and at three days notice moved over to California and spent 10 weeks sleeping their four person team in a one bedroom apartment, hacking the first version of Storefront together.
After the accelerator program, they reached demo day where they had the opportunity to pitch their new product to investors in just three minutes. Through networking at the event and setting up meetings, they went through a period of five investor pitches per day and were able to close a round of $1.6million in March 2012.
They successfully sold the company in 2016 to a French company called Oui Open who was expanding globally and wanted access to the US.
After this experience, Tristan wanted an opportunity to give back to the entrepreneurial community, and so came to join 500 Startups.
With financial projections and limited quantifiable information, it’s more of an art than a science at the early stage. Tristan talks us through the flags he looks for.
Chief among them at this point is to look at the founders and core team. One of the first and most obvious signs is previous experience and past successes. If a founder has proved that they have what it takes to execute by grinding it out on something they care about, then you can feel more confident about their next venture.
Listen in to the interview for more.
Tristan relies on pattern recognition to identify warning signs of an inexperienced or untrustworthy founder.
Instead, he would prefer to see a strong sense of empathy from a founder that can empower people and inspire diverse teams.
Tristan has written an article on Silicon Valley etiquette which you can read over here. He has also compiled a list of some of the strangest pitches he has seen, which are certainly red flags.
500 Startups offers a course through Stanford called VC Unlocked, which can be a good starting point.
Outside of that, it’s important to start building a network around VCs and founders that you trust to get introductions to potential opportunities. When you’re starting out as an angel you will need to piggyback on other people because your check size is smaller.
You’ll want to get in on opportunities early with founders that have some of the positive signals mentioned above. You may not invest in the first opportunities you are exposed to, but they will give you a valuable learning experience.
In many cases, investing in startups is similar to investing in real estate. You may want to have 25-50 investments in your portfolio to increase your odds of one of them bringing a positive return.
It’s important to appreciate the passion, grit, and resilience that founders need to display in order to create their companies and so fostering a relationship of respect between investors and founders is key.
You can reach Tristan on Twitter @Pollock or his website.
Today’s guest, Paul Moore, left a successful career at the Ford Motor Company to create financial independence through entrepreneurship. He successfully exited several businesses over the years and is now in the process of building a platform for investing in multifamily real estate.
Paul is a co-founder of Wellings Capital and author of the book “The Perfect Investment: Create Enduring Wealth From Historic Shift In Multifamily Housing.”
In this episode, Paul talks about how difficult it is to find good investment opportunities in the current environment -- particularly when your objective is to preserve capital. He also talks about the surprising ‘big why’ behind his investment business, so tune in to hear what that is.
Paul’s business, Wellings Capital, purchases class B and C properties to update them, brings on investors, updates the buildings to standard, increase rents and returns a profit for those investors. But what is a class B or Class C property?
Typically commercial sized apartment buildings from the ‘70s, ‘80s, and ‘90s in Paul’s case, they fall into two categories:
A class B property is typically outdated. Between 10-30 years old they (not always, but usually) have some level of functional obsolescence or that are in some way dated.
A class C property might have some additional things going against it. For example, it could be in a less desirable area. Or it could be very outdated or have some major deferred maintenance required on it.
After getting his engineering degree and MBA, Paul went to work at Ford headquarters for five years. He enjoyed his time there but wanted more.
He knew that he was built to be an entrepreneur and so set about creating a life of independence with a classmate and colleague. Together they started an HR outsourcing company.
Fast forward another five years and their Detroit-based business had sold to a publicly traded company.
With his new found freedom, Paul moved his young family out to Virginia and became involved in flipping houses, building homes, and rental properties.
Having caught the investment bug, he began experimenting. In 2010 he put some of his money into oil and gas in North Dakota. While visiting the area with his partner, they noticed there were limited places to stay, so they decided there was an opportunity to build a multifamily property.
The project did well, but Paul later realized the risks associated with the volatility of the oil and gas market.
After they had sold the asset, and following the oil and gas boom, the value took a nosedive. This combined with other experiences -- such as a Hyatt Hotel development that didn’t work out as he had hoped -- convinced Paul to avoid development in future, which led him to the current strategy of Wellings Capital.
In 2013 Paul and his partners came across 37th Parallel Properties out of Richmond Virginia. Rather than building a portfolio from the ground up, they decided to partner with 37th Parallel who mentored them into the business through their programme, which is how they got started.
Wellings Capital as a group are extremely risk averse and so are as yet to find their first, perfect multiplex investment.
As has often been mentioned on the podcast, when investing in real estate, you must invest for cash flow and base your projections on the current market conditions and assume that they won’t improve.
Paul’s philosophy is to shoot for singles and doubles rather than swinging for the fences.
His group opts to invest in large and growing markets. They have a 24-point screen for markets and look for things such as:
They look to avoid:
Investing in large markets also gives them access to a choice of property managers, which is a key part of their formula.
Paul looks for stabilized properties. He stays away from properties with less than 85-90% occupancy.
Paul also avoids buildings with things like aluminum wiring, asbestos, lead paint, etc.
When they are underwriting a deal financially, the metrics that they’re looking for include:
Aside from forced appreciation, Paul is looking for appreciation of equity. This has two leverage factors. These two factors combined can allow properties to appreciate at a good rate.
The simplest of these is leveraging with debt:
If there is a 67% loan to value ratio, the equity is being leveraged at a 2:1 ratio.
The second is related to net operating income. For example:
If rent is a $1 and the cost of managing the property is 50¢, we have a 50¢ net operating income.
If you raise the rent by 5%, it goes to $1.05. The net operating income has now been raised by 10% because we have reached a 55¢ margin over the original 50¢ margin.
Wellings Capital look for properties where they can raise rents to see a net operating income increase of 20% or more for a strong ROI.
Given Paul’s strict criteria, it is a challenge to find suitable opportunities. This is due to a number of reasons:
One of the things that Paul and his partners at Wellings Capital are passionate about is stopping human trafficking.
If you take the record annual profits of GM, Nike, Starbucks, and Apple combine them and multiply that number by 2, that is the approximate revenue generated by human trafficking in the world. It’s a $150billion business.
They are working with organisations like Harvest Home, Exodus Cry, to provide funding to fight the human trafficking industry.
You can find Paul’s book, “The Perfect Investment” on Amazon.
You can also visit the Wellings Capital website.