Building wealth outside your agency with Chris Prefontaine

Announcer:

If you’re going to take the risk of running an agency, shouldn’t you get the benefits too? Welcome to Agency Management Institute’s Build a Better Agency Podcast presented by White Label IQ. Tune in every week for insights on how small to mid-sized agencies are surviving and thriving in today’s market. We’ll show you how to make more money and keep more of what you make. We want to help you build an agency that is sustainable, scalable and if you want down the road, sellable. With 25 plus years of experience as both an agency owner and agency consultant, please welcome your host Drew McLellan.

Drew McLellan:

Hey everybody, Drew McLellan here with another episode of Build a Better Agency and this one is awesome. We are going to talk about money, but in a way we have not talked about it before. But before I get into that, I want to remind you that we are literally giving away a, almost $2,000 prize every single month. We are giving away a free seat at one of our live workshops or a free seat of access to one of our on-demand workshops. And all you have to do to enter this drawing is leave a rating and review for the podcast wherever it is you download your podcast. So for many of you, it’s going to be on iTunes. For some of you, it’s going to be on Stitcher or on Google. All you got to do is leave a review, give us a rating, take a screenshot of that review because as I keep telling you, I don’t know who Biker Momma 109 is.

So a lot of times your user IDs are not in alignment with your professional name or your email address. So take a screenshot and send it to me. That’s all you need to do. And then we put you in the proverbial hat and we draw a name out every month and we give away a great prize. So you can use it yourself. You can send a staff person to one of our AE workshops. Someone inside your shop can use the workshop. You have a year to use it. So please don’t not take advantage of that opportunity. So happy to offer it as a prize. Happy to have you come to the workshop. I love meeting podcast listeners in person. It’s always fun to have conversations about how they listen and what episodes mattered the most to them, so really love that. So please go and leave a rating and review and we will reward you accordingly.

You only have to do it once and then you stay in the drawing. So, all right, let me tell you a little bit about this episode. So here’s the deal. I want many things for you. I want you to have a sane life. I want you to have a stable staff. I want you to have grateful clients, but one of the big things I want for you is I want for you to make a lot of money. I want your agency to be an ATM machine that funnels and fuels your dreams, your family’s needs, your team’s needs. And there’s no reason why that can’t happen. One of the big mistakes we make in agencies is we leave too much money inside our business. And when we leave a lot of money inside the business, we forget somehow. And this, by the way, if you’re a C-Corp, this is a little different, but most of you are LLCs or partnerships or S Corps.

We forget after a while that the money that we left in the business is actually our money. We’ve already paid tax on it. And so it’s Drew’s money. It’s not the agency’s money anymore, it’s Drew’s money. And Drew is in essence leaving it in the bank account of the agency for the agency to spend my money. And oftentimes what happens when you leave an excess of earnings inside the agency, you make bad business decisions. You keep staff longer than you should. You do lots of things that you wouldn’t do if you had to lend the money back into the business. So this is a whole different topic which we’ll talk about another time. But my point to you is I want you to get the money out of your agency and build your wealth outside the agency. And for many of you, one of the more attractive ways to do this, and for many of my agency owners who are already doing this, one of the key vehicles for building that wealth is real estate.

And so I met a guy, all he does is real estate deals and he partners with business owners and other investors. He does this stuff on his own, he partners with his family, but he’s built this amazing business on not only doing real estate deals but teaching other people how to do real estate deals. And when I met him, I started asking him questions about real estate. And what he was saying to me is that most of us if we’re investing in real estate do it wrong. And we do it wrong because we put our own other personal assets, our house, whatever it may be, on the line, we put it at risk. And there are ways that we can do this that are safer for our family. And that there’s a variety of ways to invest in real estate that are not just about buying a house or a commercial property.

And so I asked him if he would come on the show and tell us all about it. And he said, yes. So Chris Prefontaine is his name. I’m going to let him tell you a little bit about his background, but I’m excited to pick his brain for me personally and for you. And again, as you’re listening to us talk, I want you to hear my voice in the back of your head saying your agency should create cash that you get out of the business and you build your wealth outside of the agency. I want you to have a diverse portfolio. I don’t care if you invest in ponies or real estate or poppy fields. I don’t care, but I’m suggesting that for many of you, real estate is kind of high on your interest list, which is why I asked Chris to be on the show. So without further ado, Chris, welcome to the podcast. Thanks for joining us.

Chris Prefontaine:

Well, thanks for having me. Pleasure.

Drew McLellan:

As you and I were talking about, off-air, one of the mantras of AMI is get the money out of the business. And so many of my listeners and AMI clients look at real estate as a huge opportunity, but it’s one of those things sort of like diamonds. I’m sure I could make money buying and investing in diamonds, but I don’t know how to look at two diamonds and know which one is good or bad. I think a lot of business owners feel the same way about real estate. They know there’s huge opportunity there, but they don’t know how to maximize or take advantage of the opportunity, which is why I thought you would be a great guest on the show. So give everybody just a quick snippet of your background in terms of real estate. And then I want to dig into the meaty topics that are a part of your new book, the new rules book because I think that outlines all kinds of different ways for us to think about real estate investing.

Chris Prefontaine:

Yeah, for sure. So I’ll date myself a little bit. I’ve done this for like 28 years now, so that gives you some perspective on my age, but Drew, just to give you an idea of where this came from, the book and everything, I’ve done everything from single-family building on single lots to multi-family to commercial, to raise the roof or we tear off a roof and go up another floor to new homes. So we ran the gamut and then I learned the hard way in 2008 with the crash why not to be on personal signatures in loans and things like that. And so we re-engineered the whole business in 2008 and that’s what we do today, which is buy on terms only. We don’t use banks and we buy everything on lease purchase, owner financing, things that don’t require banks. So I go to bed at night with a different calmness than I did pre-2008, let me put it that way. It’s a family company too. Just so you get a picture, it’s myself, my son-in-law, my son, and then a great support team. And we buy and sell ourselves and then we teach others around the country to do the same.

Drew McLellan:

So let’s talk a little bit about the buying on terms because I think for a lot of people they… I just had a conversation with an agency owner yesterday and he said, once I get $1 million in the bank, I’m going into real estate. And I said I don’t think you need $1 million to start. I know I didn’t start with $1 million. I still don’t have $1 million in the bank. I know that I didn’t start that way. So I think maybe you’re thinking is askew. So talk a little bit about this idea of being able to jump into real estate without visiting your friendly banker.

Chris Prefontaine:

Yeah. You’re %100 correct. That person thinks like so many in that, okay, I got $1 million. If I buy X amount of properties, I put 20 to 30% down because that’s what they require then I can buy X amount of properties. That’s a little bit limiting. So we use two vehicles mainly. Lease purchase, we have a whopping $10 deposit built into a lease purchase. So if I’m going to buy your house on lease purchase, I’m going essentially pay your underlying debt if that number works for me. In other words, if that number is less than I can get on the market for rent or what we call a tenant-buyer. And I’m going to then at the end of that term, usually 36, 48, or 60 months, I’m going to pay off the underlying debt. Now it’s lower than day one so I benefited from that and I’m going to give the owner any equity we agreed to at the beginning if there was any. We protect it and give it to them at the end when we pay off their loan. Now, none of that required a deposit. None of that required a bank. The loan stayed in their name, I just paid it. And so we’re creating, I don’t want to say out of thin air, but we’re creating income literally from a $10 deposit. That’s the lease purchase route.

Drew McLellan:

Why would an owner do that? Why would an owner stay on the hook for the note if somebody else is paying it as opposed to having somebody… What’s in it for them, I guess?

Chris Prefontaine:

Yeah. Great question. Students ask that. They’re, come on, why would a seller do that? Well, in no particular order, some sellers need debt relief. So I’m going to go bad to good. Some sellers need debt relief. They got a second mortgage payment. Some sellers divorce and need to get rid of it now without having a hassle. Some sellers frankly are in good shape; they just want more money. In a lease purchase they’ll usually get more cash out if they can wait. The only person this doesn’t work for, this is the easiest; if someone says I need or want the cash now to go buy another house for my family. I need this cash to go buy a house and I’ll even take less. Okay. We can’t help them. Everyone else, we can help them get more money out of the deal because the longer they go term-wise, I don’t care about price, I care about term.

Drew McLellan:

Right. Because you’re getting rent.

Chris Prefontaine:

That, it’s a monthly cash flow, but I’m also getting principal paydown every single month that goes farther. So sometimes homeowners just care about their number they’re getting at the end as long as they can wait. I care about pushing out as far as I can and getting that principal paydown.

Drew McLellan:

Yeah. Right. Okay. So in your new book, because you’ve written several, but in your new book, you outline lots of ways that somebody can be involved in real estate and benefit from real estate investment without owning a commercial property or without owning a rental property all on their own. So let’s say I want to jump into real estate, but I don’t have the time, I don’t have the expertise to manage a bunch of properties? I don’t want to be a property manager. What are some of the ways that I should be thinking about real estate?

Chris Prefontaine:

Okay. So again, in no particular order, I’ll use my CPA and my attorney who know our business integrally, obviously. They’ll come to me every now and then. My CPA just sold his house and he said, hey, Chris, I got $165,000. I know I won’t make any money on it, where can you pocket it for me? Do you have a deal? And so we’ll look at what we have going on. We’ll propose two or three things. So he does a passive investment, he couldn’t care less. He knows our books. He knows how strong we are. And so he just does it passively. They could also dig into, like in the book, things like tax liens, tax lien certificates because they could have someone do that. They could subcontract that out, have someone hunt that down and just invest in tax lien certificates.

Drew McLellan:

So explained to us what a tax lien certificate is.

Chris Prefontaine:

Okay. So all around the country forever in the United States, different every county. If I use an example, in Illinois, I have a building there. In Illinois, if you don’t pay a tax for a long time they sell that tax certificate to an investor. That investor buys the face value of the tax and they’re guaranteed statutory interest. So what we talk about in the book, say I go in, I’m late on my taxes, I go and I pay it off, well, that person who bought that tax certificate gets the principal back plus a statutory, whatever it is for that state interest rate, guaranteed. I think it’s Texas, some states as high as 25%.

Drew McLellan:

Okay. So let me just see if I understand this. If in Texas or some counties in Texas it sounds like, somebody has not paid their taxes on a commercial property, I could go in and pay their tax and so I’m absolutely protected, I’m guaranteed that I’m going to get not only my principal back but whatever their stated interest is. So as you were saying in Texas it might be 25%. So let’s say they owe, I’m just going to make up a number, $25,000, I go in, I give them $25,000, I’m guaranteed to get my $25,000 back plus a 25% interest kicker.

Chris Prefontaine:

Correct. Whatever it is in that state. Yep.

Drew McLellan:

So let’s say the building owner doesn’t come in and make good on their taxes, when do I get my money back or what happens next?

Chris Prefontaine:

Yeah. This will get your attention. So different states are different. I’ll just give you some examples. So some states have a right to redemption. Like they’ll let the homeowner or the building owner come back after X amount of months or a year. Some of them are a year. So give them that long to pay it, but if they don’t at whatever that point is, six months, a year, some of them are deed states, you’ll own the property. You’d actually own the property.

Drew McLellan:

Okay. So I pay their $25,000 in taxes. They go whatever the period of time is, let’s call it a year.

Chris Prefontaine:

Yep.

Drew McLellan:

They don’t make good on that and now I own the building.

Chris Prefontaine:

You own the building in some states. It’s crazy.

Drew McLellan:

Wow.

Chris Prefontaine:

And this has been around for decades. This is not new. It’s just that a lot of people don’t talk about it. So in the book, we have an expert on that because I’m not so naive to think our niche is for everyone. Right. So there’s all kinds of experts in there.

Drew McLellan:

So in other words, what I’m hearing you say is I could hire someone who has a depth of expertise in these tax liens. They could help me identify, based on the dollars that I have and I guess maybe where I live but it sounds like it doesn’t really matter, properties that I could pay the taxes off on. So what if it’s not a deed state? So again, let’s say they’ve gone a year, they haven’t paid back the $25,000 that I in essence have paid on their behalf, how long do I wait before I get the principal and the interest back?

Chris Prefontaine:

Yeah. There’s still a cutoff because that’s when the government guarantees it. There’s still a cutoff date. It doesn’t go on forever. And you know that going in which state you’re in. And to your earlier point, a lot of this can be done online now, believe it or not. You used to have to go physically. And you do still have to on some, but some you can do online auctions for this. Okay. So let me draw the distinction. So there’s kind of a gap between what you said earlier like, hey, I don’t want to get in the trenches. I don’t really want to do that, I’m an agency owner and then full passive. Tax lien will be towards the full passive, but you’ve got to set someone up and get them trained. So there is some override, some overseeing. It’s not heavy, but it’s somewhat involved a little bit.

Drew McLellan:

Right. Or you have to hire someone who already has the expertise and for a fee, they would manage it for you. Yeah. Interesting. Right. So tax liens, is one. What’s another way that I can invest in real estate without wholly owning a commercial property and being a property manager?

Chris Prefontaine:

Yeah. So aside from the passive thing, I say, well, you just get involved in a deal. There’s in the book, we talk about and some experts talk about the crowdfunding now no longer is there a restriction. And I’m not going to get to SEC stuff, but no longer is there a restriction for the small investor. The person wants to kick in $2,500, $5,000, $10,000, they’re not going to put it in $100,000, there’s vehicles for them now. And those are talked about in the book as well. So they can go on to these funds that have been approved by the SEC and they can invest little amounts of money like the old REITs or things like that, that you used to be able to invest in.

Drew McLellan:

And is there a name for those kinds of funds?

Chris Prefontaine:

They’re just private funds, but I’m calling the general concept crowdfunding because somebody will go online and they’ll do their raising of funds and you can get involved in that. Now, you probably want to know and vet that out a little bit, but there are some great ones out there. That’s why I started the passive thing with, hey, pick someone that you know, like and trust and go to them and say what do you have for deals that I can invest in?

Drew McLellan:

So I know you do this and I’m sure there are other people that do this. Let’s say somebody is interested in doing this and they don’t know anybody. So the very first time they’re even being introduced to this concept is with this podcast. So for example, if I wanted to do a deal with you, what questions should I ask you? I don’t know you from Adam. What questions should I ask you to vet? Because again, I’m not a real estate expert. What questions should I ask you to vet whether or not I should invest in something that you’re doing?

Chris Prefontaine:

There’s two things. I’m going to say the first one that will probably surprise some listeners first and then go backwards. The first one is its math. So if your investment is a low loan to value relative to the value of the property, I almost don’t care as long as the thing is not a shack. So you want to know things like value of the property, loan to value ratio, but you also want to know the person running it, their experience. I always say on our staff, with our niche, I always say, look, we’re in the trenches. We do deals. We’re not just throwing stuff around. So you want to know how long they’ve been in it and do a little vetting on them. And then the deal is just math in my opinion.

Drew McLellan:

So if I’m vetting them, this is a little like in our world, if an agency owner is hiring somebody to do SEO and the agency owner doesn’t know the mechanics of SEO, it’s hard to know what interview questions to ask, right? So same thing. So if I’m vetting someone like you in terms of, yes, I’ve been doing it for 28 years, are there documents I should ask to look at or is there some proof of success that should reassure me that this is somebody who really knows what they’re talking about? Like how do I suss that out?

Chris Prefontaine:

Yeah. So I’m trying to flip the coin to see if I was interviewing you for that reason. I’d want to know, this sounds crass, but things that don’t lie like is there a BBB profile that’s accredited. Okay. So that’s a start. Like, are we hiding behind these things, important? Secondly, what types of deals were done? And then again, the deal itself is kind of like a standalone deal, always. If the person knows what they’re doing, it’s a standalone deal.

Drew McLellan:

Yeah, because you don’t want to risk other property or other assets. Right.

Chris Prefontaine:

Right.

Drew McLellan:

Yeah. Okay.

Chris Prefontaine:

Right. So that’s it. I mean, on its basic level, that’s it for sure. Because look, put all the math aside even, Drew, wouldn’t you think that it’s a comfort level too, right? I can jump on a Zoom or have a coffee with someone and go yeah, yeah, yeah, you know what, my gut’s feeling it. You got to go by that until you do the gut check.

Drew McLellan:

Right. So I have some friends that put together their own buying group and bought a multi-family, like apartment building. How is what you’re talking about different than what they did?

Chris Prefontaine:

Okay. A couple of questions then. So did this group put their own money in and then that money purchased the apartment building and then presumably they hired a manager to run that?

Drew McLellan:

Yeah.

Chris Prefontaine:

Okay. So I would say not terribly different because they didn’t go out and try to raise money. That’s why I asked you that question. They just did it with their own personal funds. Not terribly different except for they’re in the driver’s seat there and they just have a management company running it. So they are a little bit more hands-on there. And so they’re going to have some more risks and liability, obviously.

Drew McLellan:

Right. If the roof needs to be replaced, that’s on them.

Chris Prefontaine:

Yeah, or if it’s a lawsuit. If someone falls down, we’re in a very litigious society, right? So if something like that happens, it’s them.

Drew McLellan:

Right. Okay. So let’s go back to the deal then. So let’s say you’re putting together a deal and I’m like, okay, Chris, I’m going to pony up whatever, $20,000, $30,000, whatever it is, $100,000, whatever. What is the protection, somebody falls down the stairs of the apartment building or the commercial property? I’m an investor in that. So what is the protection for me or what kind of protection should I be looking for in that?

Chris Prefontaine:

One of two things depending on what type of property is. You absolutely need an instrument of protection. The instrument of protection could be if the property is owned, real simple, by a promissory note protected by a mortgage. Some people think they’re one and the same. A promissory note is just a promise to pay. A mortgage is an instrument that it gets attached to the property and clouds the title. That thing can’t sell without them coming to you and going, hey, Drew, we need you to get this thing released. Well, I’m not going to release it until I get paid. That’s simple. A lawsuit, a lien, and anything that came after, you’re what’s called a priority lien before it. So you want to make sure that the title is clean. The title is clean meaning there’s no other liens on it. And so that when you put yours on or your attorney put yours on and then it comes back behind you, you almost don’t care

Drew McLellan:

Because I’m going to get paid out first.

Chris Prefontaine:

Correct.

Drew McLellan:

Yeah. Okay.

Chris Prefontaine:

Correct. Super important. So example, this is a little bit more detailed. This will get you to the next level here. So we had a deal where it was an owner financing deal and we had a balloon payment coming up with a seller and the seller was getting older. And he said, look, I don’t want to give any more extensions. I kind of want to get cashed out and we said okay. And simultaneously we had our CPA come and say, hey, I got this money, I want to pocket it somewhere, I want a really good return. So we simply paid off the first lien and put a new first lien in front of it who could wait a longer time. That’s it. Very simple. We kind of just exchanged collateral there. That’s all. Just exchanged the loan.

Drew McLellan:

So what you did was you used the CPA’s money to pay off the seller.

Chris Prefontaine:

Yeah, the CPA became the new first position.

Drew McLellan:

Right. And so then you were basically paying him back over time.

Chris Prefontaine:

Exactly.

Drew McLellan:

He was in essence earning money over time because he wasn’t in a rush.

Chris Prefontaine:

Right. Exactly.

Drew McLellan:

Okay. All right. So we’ve got the tax lien, which is fascinating. We have this idea of finding somebody who’s managing deals and being able to put in as little as you were saying, $2,500 or $5,000 up to I’m sure millions.

Chris Prefontaine:

Right.

Drew McLellan:

What about REITs, are they still a viable option? I still hear people talking about them.

Chris Prefontaine:

I’m not an expert in it and even though I’m in the business I’ve never put money at it because, again, for me, I’m kind of the opposite of what you’re talking about. I want to be able to control it in some shape, form, or fashion. And some of those have gone broke because I look at that as a stock.

Drew McLellan:

Yeah. Right.

Chris Prefontaine:

Here’s a fact. They hate when I do this on radio, but the stock can go to zero. My property can’t go to zero or even with a crash, it can’t. And so I’m much more comfortable with that. The stock market is, I’m going to probably piss someone off of this too, but it’s like gambling in my opinion unless you’re a big guy in the market.

Drew McLellan:

Right. So for you managing the deal and having an asset that to your point can’t have no value, that feels more secure to you.

Chris Prefontaine:

Yeah. Because if you, A, buy it right and, B, push the term out long enough to our earlier conversation, you get a home run no matter what the market does.

Drew McLellan:

Right. Okay. So we’ve got the tax liens. We have the be a minority player in a bigger deal, which requires finding someone like you or someone locally who does this and who is taking investors in. Right.

Chris Prefontaine:

Sure.

Drew McLellan:

And I’m assuming because the dollars are low, you don’t have to be an accredited investor, right?

Chris Prefontaine:

No. As I mentioned it’s different now. Yeah, it’s different. And obviously, if you do a one-off deal with someone like if you and I were doing a one-off deal it’s not a “pooled investment,” it’s just one deal.

Drew McLellan:

Right. Okay. So what’s another option for me if I want to get involved in real estate?

Chris Prefontaine:

There are what’s called turnkey companies. Some really good ones. And what that means, Drew is if I was a turnkey company, I go out, I buy the properties, I get a renter in there, I get the cash flow stream looking attractive to an investor and then I offer that turnkey package. It’s all rehabbed. It’s got a renter in it. I offer that out to an investor. An investor comes in and buys that. And basically, the cash flow and the management of the property is run by the turnkey company. The investor just put the money in. So it’s like an offshoot of all of this that we’re talking about, but it’s specifically on homes that were just rehabbed and placed a renter in them.

Drew McLellan:

Okay. So let me see if I understand this. So somebody goes out and buys a single-family home, in essence, flips it, gets it ready to have somebody live in it, all of the candidates. They create the lease, they put the renter in, and then they package that whole thing up and you’re going to buy that. You’re going to stroke them a check for $400,000 or whatever. Are you going to buy it all?

Chris Prefontaine:

Yeah. You would actuall