Episode 284

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At AMI we preach the idea of building your wealth outside your agency, while you still own your agency. Sadly, many owners leave too much in retained earnings inside the agency and over time, they piddle that money away. Every agency owner deserves to profit from the risk they took to start the business and the sweat equity they’ve put into it for years. Agency owners often ask me about how other agency owners are building a nest egg outside of the shop. Most will consider real estate but rarely do they think about passive real estate investments. I want to make sure we change that!

Chris Prefontaine is a returning guest (episode 203) who talked in general terms about real estate investing last time. I asked him back to specifically talk about passive real estate investments. Speaking from personal experience, one of the beautiful things about this option is that you can generate a pretty remarkable return without you as the investor doing any of the leg work!

In this episode of Build a Better Agency, Chris and I discuss the good, the bad, and the ugly of real estate investments, especially passive partnership options. We talk about ways to vet these estate opportunities, what kind of investor would be ideal for this kind of deal, and the questions to ask when considering an investment.

A big thank you to our podcast’s presenting sponsor, White Label IQ. They’re an amazing resource for agencies who want to outsource their design, dev, or PPC work at wholesale prices. Check out their special offer (10 free hours!) for podcast listeners here.

Passive real estate investments

What You Will Learn in This Episode:

  • The three paydays of an active real estate investment and which two of those apply to passive real estate investments
  • What the payouts look like for passive real estate investors
  • How to vet passive real estate opportunities
  • Who makes a good investor in passive real estate
  • What questions to ask when faced with a passive real estate investment opportunity
  • Does it make sense to invest in multiple properties or a single property?
  • Specific financial requirements for being a passive real estate investor
  • How does this work from a tax perspective?
  • The trends that are happening in real estate investments
“Your agency can be, and should be, a money machine.” @SmartRECoach Click To Tweet “Passive real estate investments are great for people who are super busy and don’t need a payout on a specific date.” @SmartRECoach Click To Tweet “One of the draws of a passive real estate investment is that you can’t lose money. At the very least, you will get your investment back.” @SmartRECoach Click To Tweet “Property values can’t go to zero.” @SmartRECoach Click To Tweet “Agency owners leave too much money inside their agency and they need to get it out of their business to build their wealth.” @SmartRECoach Click To Tweet

Ways to contact Chris Prefontaine:

Additional Resources:

Intro:

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-size 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 from Agency Management Institute. And as you might’ve guessed, I am back with another episode of Build A Better Agency. I do not take it for granted that you are out there and that you make the time to listen to these episodes. I know how busy you are, and I am just grateful that you make the time to be here, and so thank you for that. I’m excited about this episode because I think it’s going to really give you some new things to think about. But before I do that, I just want to remind you that we are trying very hard to provide resources and content for you, whether you’re ready to travel and be with us at some of our workshops, like we’ve got that workshop coming up in April called Running Your Agency for Growth and Profit, that’s going to be in Chicago and we would love to have you there.

We know that all of you aren’t ready to make travel plans yet, so that’s okay too. We’ve got some things that all of you can tap into, whether you’re ready to travel or not. So I’m hoping you are on our newsletter list, which means that you get an email from me every Sunday night here in the US, depending on where you are in the world, where I answer a question that an agency owner asked me that week via video. And that you’re also getting our Wednesday newsletter, which we try and make very useful and valuable for you. I also hope that you are connected to me on LinkedIn. I know you’re not all connected to me on LinkedIn, because I know how many of you are out there and I don’t have that many LinkedIn connections.

So if we’re not connected on LinkedIn, please feel free to make that connection. Every Monday, I share a video, kind of a tip for agency owners. I’ve been talking about the financial dips that happened recently, that was the last couple. And they range on a whole bunch of topics, but I would love for you to see that video as well. And then if you really want to do a deeper dive, then we do have on-demand courses. They are very similar to our workshops. You buy a seat for a single person or you can buy multiple seats for a team. We have a biz-dev workshop, we have a Money Matters Workshop, which the big thing that one is missing is, it’s missing the US tax conversation because obviously a lot of you aren’t in the US and you don’t care about US taxes.

So if you want to talk about tax strategy, you got to come to the live event in December. But anyway, Money Matters. And then we have an AE Bootcamp. So for all of you, there’s no reason for you not to invest in yourself and your team, if you are so inclined, just because you don’t want to travel. We’re trying really hard to make sure that we are providing really good resources for you no matter where you are in the world, and no matter where you are in terms of wanting to travel. So hopefully, that’s helpful. So if you’ve listened to me at all, and you have attended a workshop or we’ve had a conversation, or we’ve met at a conference, you’ve probably heard me say the phrase, agency owners must build their wealth while they still own the agency.

Too many agency owners short themselves all through the running of their agency because they’re convinced they’re going to sell their agency for some great multiplier at the end of the day and that’s going to be their treasure chest of money. And you know what? I hope you all have that happen, but I also know for many of you, that is not going to happen. And so I don’t want you waiting for that payday that may never come. I want you to get your payday now. There is no reason why you cannot have an agency that has a healthy amount of cash in the business. Frankly, most of you leave too much money in retained earnings in your business, but you can have a healthy amount of retained earnings in your business, you can have a safety net, which is going to be a money market account or something else that’s very liquid, that you have in your own personal name, that you can lend into the business.

And then there’s this third pot of money, which is money you’re taking out of the business to invest in other things, and I often say, real estate ponies, whatever it is. And honestly, there are an infinite number of ways for you to invest your money that will allow you to build wealth, to take care of yourself and your family, to leave a legacy, to contribute in a significant ways to the charities that you care about. And I want to make sure you’re doing that while you are still running the money, machine because your agency can be and should be a money machine. And if it’s not, then you’re missing some metrics, you’re missing some things, which is a whole different discussion.

But I want you to be thinking about, how do I think about my agency like an ATM machine? How am I making regular withdrawals out of that machine so that I can put the money someplace else? Today’s guest is going to talk to us about one of the ways you can build wealth. Chris Prefontaine is a guest that I had on a few years ago, I think. And we talked about, just in general terms, some of the different ways that entrepreneurs can invest in real estate. And many of you, this is the first place you go once you get some extra money and you want to build it outside of the business, you go to real estate, you buy your own building, maybe you buy some rental properties.

And that’s a great way to build wealth. And as many of you know, that’s certainly something that I’ve done. But I asked Chris to come back on the show today to talk to us about a more passive way to invest in real estate. So certainly, you can go out and you can check out commercial properties and you can get a loan and buy the building and you can be your own landlord, or you can be a landlord to other people, or you can buy residential property and do Airbnb or rental property, you certainly can do that active, “I’m going to go find a property and purchase it.”

But for many of you, you are going to be like, “Yeah, I don’t have the time for that, I don’t have the skill for that. How in the world do I know if it’s a good buy or not? I do want to invest in real estate, but I want to do it in a more hands-off sort of way. And so I’ve asked Chris to come on the show because he’s been in real estate for, I don’t know, 30 years. He does a lot of these active deals where he’s buying mostly residential property, I believe, and then selling them to buyers or doing rental agreements, things like that. But he also has what he calls a term niche. And what that is, is a more passive way for people like you and me to invest in real estate and get a great return without having to go shopping for houses and properties.

And the reason I asked Chris on the show is, please understand, this is not a commercial for you to go and invest with Chris. The reason I asked Chris to come on this show is because I’ve known Chris for a long time, I’ve done deals and you’re going to hear us talk about it during the show. I’ve done deals, these passive deals with him. I know him, I know other people who know him, I trust him, and I trust him to tell us the right way to do this. So some of you may very well want to do a deal with Chris, and I wholeheartedly endorse that, but this is not about me recommending you work with Chris, this is about me asking Chris to come on the show as a subject matter expert, because I trust him.

Because these kinds of deals are big dollar amounts, it’s 25 grand, 30 grand, more than that. So I want to make sure that if I bring someone on the show to tell you about this investment option, that it’s somebody that I know and that I trust is going to tell us the real deal. And so that’s why Chris is here today, is because I know he’s going to tell us the good, bad and ugly of doing these kinds of investments. I’m anxious to get you this information, I’m going to be looking for other folks to help you think about what to do with your money and how to get money out of the business in the coming months. This is not going to be what the show is about, but every once in a while, I do want to bring guests in who get you thinking about, “Gosh, I’m working my tail off. I want to make sure that I’m getting well rewarded. And when I get well rewarded, what do I do with that money that is a good investment for me and my family?”

So I’m going to be doing that periodically. So without further ado, let’s bring Chris on the show and let him explain to you this investment opportunity. And for some of you, this might be a great fit. And for some of you, you might be like, “No, thank you.” And I think that’s okay. Maybe you do want to invest in the stock market or you do want to buy a pony, a racehorse. Watever makes you happy, I don’t care. I just want to make sure that you are reaping the rewards of your hard work. And so here’s one way to build your wealth. All right? Let’s get to it.

Chris, welcome back to the podcast. Thanks for coming back.

Chris Prefontaine:

Hey, thanks buddy. Good to be here.

Drew McLellan:

The last time you and I talked, we talked in general about different ways that agency owners who are trying to build their wealth outside of their core business, outside of their agency, we talked in general about different real estate options. And I asked you to come back because you’re doing a kind of real estate partnership, if you will, that I think a lot of agency owners would be interested in. And certainly, you’re not the only one who’s doing this, but because I know you had, and because, in full disclosure, you and I have done these deals together. In fact, you and I and my daughter are in a deal right now together. I wanted to talk about this idea.

When we were back talking last time, we were talking about active deals where agency owners would go out and find property, either commercial or residential property, and purchase it for themselves and then do with it whatever they wanted. In many cases, a lot of the listeners, the very first piece of property they buy is the building that their agency lives in. Right?

Chris Prefontaine:

Right, for sure.

Drew McLellan:

And when you teach, because I know you teach this through your classes and you’ve got peer groups around real estate and all kinds of other ways that you’re helping entrepreneurs learn how to invest in real estate. So when you’re talking about active real estate, you talk about there being three paydays with that kind of a deal. What are those three paydays?

Chris Prefontaine:

Yeah. This is unique to us. The trademarks pending, I think it’s like 99% there, so it’s pretty solid to talk about this. We exit all our deals with buyers that need time, and so that translates to a rent-to-own vehicle. And the three pay days are the buyer, because they are a true buyer. It comes in with a non-refundable down payment. Then every single month, there’s a monthly spread between what we collect from them and what we’re paying out to the underlying debt or to the seller. And then third payday is when the cash is out, when we accumulate all their principal pay down that we’ve gotten and any money from the property. So those are the three paydays.

What’s neat about is, now money, over-time money, long-term money.

Drew McLellan:

I just want to make sure I have this. So the first payday is, some Bob Smith wants to buy a house that we have under contract or we own, so Bob is going to give us a deposit to start the rent-to-own process, right?

Chris Prefontaine:

Correct. Yup.

Drew McLellan:

So that’s payday number one. So then Bob pays his monthly rent and there is a split between… Let’s say Bob’s rent is $1,000 and we owe on the mortgage $700, so there’s a $300 profit, if you will, every month, right?

Chris Prefontaine:

Correct.

Drew McLellan:

So that’s payday number two. And then the third pay day is when Bob actually executes on the purchase of the house, and so there is equity in the house, that is the third payday, right?

Chris Prefontaine:

Yep. Precisely. Yep.

Drew McLellan:

All right. But that also requires, and this is a conversation you and I had, gosh, a year or two ago, that also requires that somebody wants to check out property, do the inspections, manage the property, all of the stuff that comes with owning property. And I have some rental properties, so I understand that, but I didn’t want any more rental properties. So there are some people like me who are saying, “I totally get the three pay days, but I don’t want to go through all that hassle.” Right?

Chris Prefontaine:

Right.

Drew McLellan:

Absolutely. And so you and other folks like you have created an opportunity for investors to participate in this real estate transaction, but in a more passive way. And so I believe what you said to me before we hit the record button is, when you participate in a passive way, you get to participate in two of the three paydays. So can you walk us through that?

Chris Prefontaine:

Yeah. And just I’ll preempt it with this, this came about, and I think you and I talked about this, by two people coming to me, it was my CPA, coincidentally, and my attorney. They both saw what we were doing, and this is going back eight years now, and said, “Well, I’d like to participate here, but I don’t want to do it,” just like you just said. So the way we should it is, we will, from the partner/investor, we call profit sharing partner because it’s really want it is, that when the funds come in and they can be used to have us get a better deal with buying down the seller equity or backend equity, it could be used for repairs, it depends on the deal.

But then we take a portion of the payday two and we pay that monthly to the investor/partner. Some people prefer to let it accrue, but we pay that monthly or we allocate it monthly. And then on the payday three, there is also a percentage. So that’s down the road, but what’s neat about it is, our monthly, Drew, as you know, is usually a decent competitive rate, for the lack of a better way of saying it, based on the partnering. And then in the backend, there is really the extra gravy, it’s how I look at it in just regular layman’s terms. And I’ll get to technical. Does that make sense?

Drew McLellan:

Yeah. So part of your deal and part of, I know what makes it attractive to your CPA, your accountant, to your attorney, people like me, is that part of the deal is that if I give you $10,000, part of the deal is, I’m guaranteed to at a minimum, get my $10,000 back. So I can’t in this kind of a deal, I can’t lose any money. I might not make any money, but I can’t lose any money. Correct?

Chris Prefontaine:

Right. These aren’t like speculative flips or timing the market, which can be dangerous. I’ve been around that scene. These are done deals that are pre-sold before we even talk to a partner/investor. We have a buyer in the house. These aren’t tenants, to our earlier conversation about staying clear of that. They’re buyers that need time, and I think it’s super important for anyone looking at any deal to know the security behind that piece. So think about COVID, it has pushed some great buyers with great credit into our camp, more so than even over as busy as we were, because the banks have raised the bar so high, they just need more ramp, they need more time to save more, to put more reserves, to raise the credit even more, but they’re great already and by anyone’s standards.

And so that’s who we’re dealing with. So the deal is sold before we get involved.

Drew McLellan:

So you’ve got the deal all structured and you just basically need an infusion of cash to do whatever you need to do, to buy the house, to do repairs on the house, like you said, to buy down the mortgage so that there’s more equity in the house, right?

Chris Prefontaine:

Yeah. There’s all kind of scenarios. I’ll give you a couple. Like there was a divorced couple that came to us recently, I think we’re about a year into this now. And they had before granted arrears, it wasn’t huge. They had some fixing it up when they came to, then they got a divorce. And so they would have been really up to [inaudible 00:16:27] and structure something. So that’s a great example of when we bring in a partner, because we don’t always, when we bring in a partner, cure the arrears, fix the house up, and then put a buyer in there that needs time. Perfect scenario, happens probably too often, sadly.

Drew McLellan:

Yeah. Okay. So investor partner, profit partner comes in, they give you 10, 20, 30, $100,000, whatever it is. And then what they’re going to get is, they’re going to get from you a timeline of, here’s how long we think it’s going to take the buyer to be ready to purchase the house, right?

Chris Prefontaine:

Right. So we get the buyer pre-qualified ahead of time where they mortgage, we call it a mortgage-ready plan, and there’s a path they have to take. Now, barring things like COVID and other life events that happen of five or 6% of the time, they’re going to be pretty dead on the system. We’re going to keep our finger on their back, we’re going to make sure they stay accountable. And so that’ll usually cash out on time or early. And then some deals, two to 8% is an accurate metric, where a life event happens, a delay happens and we have to extend the date, but that’s not a catastrophe, just more time.

Drew McLellan:

So again, what you’re saying to your investor partners is, “Look, we think this deal is going to cash out in two to three years.” So worst case scenario is, buyer needs another year to build up credit or do whatever they have to do to qualify for a mortgage. So the deal then cashes out at four years. But the investor is still getting their monthly check for that extra year, right?

Chris Prefontaine:

Yeah.

Drew McLellan:

And then typically, what kind of percentage would an investor expect to see on the third payday?

Chris Prefontaine:

Yeah, they’re usually getting around three to 5% on the monthly. The way we do the profit sharing, but it comes out to like three to 5% on their money on an annualized basis, that comes out monthly. Some investors choose to go yearly. And then on the backend, if you do the math and you back it back in historically with us, on their money, it’s usually another five or 10%. And again, this is all projected upfront, so it’s not like it’s guesswork and we’re usually close or over what we’re trying to project.

Drew McLellan:

Right. So for an investor, something like this, so basically you’re doing all the heavy lifting, you’re finding the property, you’re purchasing the property, you’re finding the buyer, you’re curating the buyer to make sure that they stay on the path, you’re acting as the landlord, so when their toilet blows up at 2:00 in the morning, your property management is getting the call, not the investor’s property management company. So really, you’re managing the whole deal, and all the investor is doing is passively participating in this. So as I think about this, I think about agency owners are typically super busy people, and some love the hunt of real estate, and others really do want to have a more turnkey solution for them to be able to invest their money.

So this would be a great fit for somebody who ,A, super busy, B, they have money that they don’t need to have back on a certain date. So this is not money you would want to invest if you needed it in 13 months and no later than 13 months. You have to be willing to ebb and flow with the timeline, right?

Chris Prefontaine:

Yeah. I tell the profit sharing partner the same as they tell the students, “Don’t do it, don’t do any deal like this if you need it like to live or need it very time sensitive, it’s not worth the stress for either party.”

Drew McLellan:

I know one of the ways that you help people get into these investments is, maybe they’re not sitting on 10 or 20 or $50,000 of cash, but they have other investment vehicles that they can tap into to put into a deal like this. So tell me more about that.

Chris Prefontaine:

Yeah. So my attorney, I think is what you’re referring to, does all the deals with us through his self-directed IRA. He has the same place, coincidentally, that I do, and he does a direction of investment and does it that way. It’s just, especially, again, I keep using COVID as a stop gap, but I know a lot of changes went on administratively with that last year too, and I don’t know where that sits now, but either way, self-directed is a great place to pluck that. Look, I’m super biased to estate for obvious reasons, I’ve been at it 31 years, but look at the stock market and I’ve said this on stock shows and radio shows, the stock market can go to zero. It’s why I stay away from it.

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