Passive real estate investment options with Chris Prefontaine

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.

But properties can’t go to zero, number one. And number two, when I was a pre-sold, you have a pretty darn chance of hitting the date, nevermind having a challenge.

Drew McLellan:

So what you’re saying is people could have money, not… One of the things I’m always preaching is that agency owners leave too much money inside their business, and they need to get it out of their business to build their wealth outside of the agency. But what you’re saying is, even if you don’t have a bunch of money in the agency, that you could pull out as cash and invest in a deal like this. If you have a self-directed IRA, you would be able to use those funds and then the funds just stay in the IRA, right?

Chris Prefontaine:

Yeah. Yeah, absolutely. And then they go back in and then the other thing that came to mind when you were talking about that is, a lot of people are probably as agency owners, but I know people in general are big on the infinite banking or bank on yourself, it’s called different things. So a lot of people use that to go ahead and fund these deals and then put it back. So there’s all different ways of pulling it in and out.

Drew McLellan:

So infinite banking, listeners, if you’re not familiar with, we’ve talked before about overfunded whole life insurance policies where agency owners can, in essence, create a stash of cash inside an insurance policy that you can borrow against. Basically, you’re being your own bank. You’re borrowing it from yourself, and all you’re doing is paying yourself back interest, but completely inside this insurance vehicle, which means that there are some really big tax advantages to doing that. And I would assume, Chris, that some of those same tax advantages are available when you’re doing it inside your IRA?

Chris Prefontaine:

Right. My understanding what the Roths because I do them is, you’re plowing that money back in and letting it grow, so it doesn’t… People get confused, they say, “Well, I only can put so much in my Roth. I didn’t understand there was so much confusion about this. Yes, contributions. But if you have a $500 or a 1,000 or a 10,000 or a $50,000 investment, that can grow infinite, literally. So that’s why I’m a big advocate of that too. Yeah.

Drew McLellan:

So, what are the downsides of doing this? One of them we talked about, which is, you can’t really time your money, you have to be patient and let the deal work itself out, whatever that may be. What are some of the other disadvantages of doing this?

Chris Prefontaine:

Other than the time factor, I don’t know of a negative from a passive investor standpoint, unless you’re the type that loves, loves, loves the micro hands-on, because there’s no real exciting updates. We have a buyer in there ready, here’s the cash out date. If there’s a curve ball or two, I’ll call you, but if not, I’m not calling. So it’s pretty autopilot if you have the patience to maybe deal with a curve ball or two.

Drew McLellan:

I think about the first deal that I did with you. I gave you some money. You said, “Drew, it’s going to be three years.” I was getting my checks every month. And then, I don’t remember if you called me or sent me an email, but it was basically, “Hey, the deal closed early, the buyer was ready to buy faster. I know we’ve only been in this for a year, but I’m going to send you your initial investment back, plus your percentage of the profits? Sorry, it’s so early,” which obviously wasn’t a bad thing, right?

Chris Prefontaine:

Yeah, yeah.

Drew McLellan:

So yeah, you’re There’s no conversation other than that, really.

Chris Prefontaine:

Right. And those happen, I’d give metrics on this, we track it, all those happens somewhere around maybe max 10% of the deals that we have at any one time, will call us. [inaudible 00:24:16] price like that. And during COVID, you’re getting two ends of the spectrum, you’re getting the, “Oh my gosh. I thought my credit was pristine. I can’t get a loan today.” But you’re also getting that have been working hard with the homes, and so their rates are the way they are, I’m doing it now. And so we’re getting those calls now. So you get both ends.

Drew McLellan:

I know you’re not the only person out there to do this. If people are like, “Oh, this could be it for me. This could be a great way for me to build wealth without, frankly, doing a lot of work. Somebody else is doing all the hard work, but I’m also sending somebody, not an insignificant amount of money and trusting that, A, I’m going to get my money back. B, that the deal they’ve struck is a good one. C, that the buyer is legit,” all of that. So how does somebody vet someone like you? How do they know if someone is legit and is worthy of partnering with, because that’s really what it is. In some ways, it’s kind of a blind partnership.

So yes, you get the address of the property and all of that, but like in the deals that I’ve done with you, I didn’t know the buyer’s name. There was nothing I could do, if it went sideways, other than coming back at you, there’s nothing I could do. So how does somebody vet someone who’s in the role that you’re in?

Chris Prefontaine:

Yeah. So a couple of things I like to say. One is, because information is readily available, I always tell people, dig into the niche that you think is going to be your safety net. As Drew, you and I talked, I love this niche of terms, people doing owner financing, people doing lease purchase, people buying on terms. Why? Because in an upward trending, flat or down, it’s okay. That’s how we built it as far as how we do it. Now, can you go on the internet and find other people buying property and probably educating on it too so they really have a shop so that they know what they’re doing. Yes, you can.

I would, however, look for a couple of things. I look for people in the circle or a community where I go, “Good. I trust him, her,” so you have some connections. But I’d also look for that person that you’re investing with or partnering with to have some track record relative to weathering a market or a storm. I’ve been big on this lately because this is what a lot of the shows I’m on call and new money. So if you were post ’08, I used to say, don’t talk to them because they had no storms thrown at them or curve balls thrown at them. Now with COVID, I’d say, “Okay, if somebody was pre ’08, like I’ve been through ’08, I’ve been through three or four of those. If somebody was pre-’08 and then had COVID, now they had an economic market change and they had a storm thrown at them. Two tests. I think you have a-

Drew McLellan:

And just for clarity, you don’t mean that they contracted COVID. you mean that their business of investing survived through COVID?

Chris Prefontaine:

Yeah, yeah. Sorry. It’s a big test, it’s life events, not just economic events. ’08 was a major economic/bigger national event, but there are other life events, like my son’s accident, things happen. All you have to do is research people and you’ll find out what they went through.

Drew McLellan:

Yeah. We were talking before we hit the record button. So your deals are called term deals, term niches, where you’ve got terms in place before anybody gives you money. But there are also things like, I don’t know how anyone on the planet can’t know about people flipping houses and stuff like that with the advent of HGTV, but people also can invest and partner with flippers, right?

Chris Prefontaine:

Of course. Yeah. And actually, they’re the ones that tend to need money if they’re in that mode, if that’s how they get their funding not from a bank, they need money on every deal. And so there’s a little more due diligence for you there because how much are you lending relative to the value? How much is the value today? When is the money going into the deal? It can get overfunded if you’re not careful. So there’s all those things. And then the market turns and you’ve got a flip that just went south. So there’s just a lot of variables if I’m personally invested and I’ve been at this a long time, my best friends in the business, I probably would shy away from investing in flip deals, me personally, too many variables.

If I’m going to be passive, I want to be passive. If I want to get in a deal, I’ll get in a deal, let’s say.

Drew McLellan:

So we’ve got the terms deal, we have the flippers. Are there other passive real estate investments that I’ve got a friend who, he and a bunch of buddies bought into apartment complex. So in some ways, that’s more active ownership because they then had to hire a property management company. So that’s not really the passive thing we’re talking about, right?

Chris Prefontaine:

Well, yeah, to that point, though, there are good large apartment building property owners, investors that do take investments, and there’s great ones. You just have to do your due diligence. There’s an attorney turned investor that I love, and so if I was going to invest in [Maltese 00:28:53], he’d be my first call. If I have a student that asks me about Maltese, I’d say, “Go to him.” So yeah, you can do that passively too, not just get in a group that’s buying one, but just be passive. Sure.

Drew McLellan:

So in all of this, as you’re teaching people how to do this, because I’m assuming part of what you’re teaching is for people to also take passive investors if they want to in their deals, right?

Chris Prefontaine:

Right. I taught it at a mastermind to just my higher level students, because these deals are complex as they are, nevermind bringing on somebody.

Drew McLellan:

Right. So I’m curious what you warn them about in terms of investors. Who or what is a good investor in this kind of a property? So if I’m thinking, if I’m now flipping the lens and I’m saying, “Okay, I’m the Chris in this situation and I’m looking for $100,000 of investment into the business.” What am I looking for in an investor?

Chris Prefontaine:

I would say just, real simple, you and I touched upon most points, but accredited investor who doesn’t need any timeframe behind their back to make this deal work. Really, that’s it. Your ideal situation is someone like you and I dealing with it. It’s on a very simple level, accreditation, and you don’t need it tomorrow. There’s no pressure.

Drew McLellan:

And if somebody got into a deal like this, and as you said, life happens, and they needed their money back, is there a back door where they could get their money back?

Chris Prefontaine:

Good question. There’s not a backdoor when I go into the deal, because if I did that on every deal, that’d be hard to live by, right?

Drew McLellan:

Right.

Chris Prefontaine:

However, as I said to you, I’ve had deals that were going to be delayed so long, and I said to them, look, I’ll just pull it out of another deal. I’ve done it, I just would never say up front, “Hey, this is a guarantee. No matter what happens in your life, I got it covered.” That’d be a little bit too risky for-

Drew McLellan:

For you, right. Yeah. So I want to take a break. And when we come back, I want you to walk us through some specific questions that if we met someone like you, or we did our due diligence and we found somebody, what are some specific questions that we should be asking, or what information should we be asking to be seen, to be shared with us, to vet this person? So let’s take a quick break and then we’ll come back and dig into that.

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All right. Let’s get back to the interview. All right. I am back with Chris, and we are talking about real estate, but specifically in this episode and the last episode I had Chris on the show for, we talked in broader terms about all different ways that you could invest in real estate, which I think for many of you, this is water you’ve already walked in. Many of you already own your own building, or you have some rental properties. We all know that as Chris said, one of the advantages of real estate is a piece of real estate barring a storm or something can not have no value.

You can ride the economic waves with real estate in a different way than you can ride with a stock investments, for example. But in this episode, I really wanted to talk to Chris about this idea of passive real estate. Because when I’m hanging out with you guys, when I’m teaching money matters and or I’m doing a webinar, and I’m talking to you about getting your wealth out of the agency, leaving just enough money in the agency, the appropriate amount of money in the agency, having a safety net of some money you can lend back to the agency if you need to, a lot of you have excess cash beyond that.

And you say, “Drew, what should I do with this cash?” I wanted to do this show because I wanted to show you one of the things that you can do. There are infinite possibilities, obviously, but this is one that I know, this is someone I trust. This is something, as I’ve disclosed already in the show, I’m already doing, and my 27-year-old daughter and I are doing together. So obviously, I have a lot of confidence and faith in the safety of this. So anyway, before the break I had said to Chris, let’s identify some questions that if you wanted to go out and vet someone like Chris, or even if you wanted to have a conversation with Chris, what are the kinds of questions someone should ask the active investor, if they are thinking about going in with them in a passive deal?

Chris Prefontaine:

Yeah. I’m going to make some assumptions. It’s going to be a deal-by-deal basis, like we do with you. So I’d want to know the exit on the deal, obviously. We happen to exit creating those paydays, others have their own way of either buying hold or flipping, like we said, so that’s one. What’s the exit and when? Clearly. I’d also want to know… I mean, we talked about my situation. So you say, “True, but the bottom line is that I want to know this investor, not only have they gone through two cycles or storms, but I want to know how many deals they’ve done of this type.”

Now, we’ve done hundreds and hundreds, if not thousands, so that’s important, just like those two storms or markets would educate you because success doesn’t. So, while doing 100, 200, 300 deals, every possible scenario could come up. I would think you’d want that in the operator, in the person doing the deal, for sure. Those are high points that come to mind. The backup plan, like you just asked me. Okay. Well, what if, what if, what if. I’d want to know that in any deal. You asked me those questions, so those are based-

Drew McLellan:

What about, would they want to talk to other people that have done deals, would they want to know how many people have done multiple deals? Like that the first deal went well, so they said… When you cashed me out on my first deal, what I said to you was, “Great. I’m just going to give you back that money and let’s do it again.”  So I would think you’d want to know in essence, what kind of repeat investor they have.

Chris Prefontaine:

Yeah. That’s what came up really when I said, find out in the circle, there got to be someone you know or someone who knows someone you know if that person is that reputable. So in our case, the community tends to grow like that and people can just pick up the phone, without even me knowing, they can pick up the phone.

Drew McLellan:

Right. So people are probably checking you out without you knowing they’re checking you out?

Chris Prefontaine:

Yeah.

Drew McLellan:

Is it better, do you think, I’m making this up now, but let’s just say I have $50,000. Am I better off putting all $50,000 into one deal like this, or am I better doing five, $10,000? I don’t know what the breakup would be, but what’s better from my point of view as the passive investor?

Chris Prefontaine:

Quite honestly, the whole idea of diversification doesn’t really apply. I know I’ve been asked this, this is very good, but I honestly don’t think it matters, it’s exactly the same formula for us. Now, could you have a little bit of a better liking to a particular deal in a particular state for some reason? Maybe. I have people that say, “I don’t like doing deals in California” That’s what I mean by that, but other than that, no, it’s more personal preference. Some people, Drew, when they put the head on the pillow at night would sleep better if they knew they had two deals instead of one, but again, it’s personal preference, really, really is.

Drew McLellan:

Again, it’s really, I’m going to give you $25,000 in this property in Rhode Island, and I’m going to give you $25,000 that’s going to go into this property in Arkansas or whatever, or I’m going to put all 50 in the Rhode Island project?

Chris Prefontaine:

Yeah. In essence, yes. And what that would do on a positive note, what that would do if you split up is, you would have different cash all times, no matter how well these were times, you’d have different cash all times. So that might be neat for someone too.

Drew McLellan:

Yeah. But again, if this is money that, much like we would do in the stock market, we would just reinvest it over time, then the timing of the payout is inconsequential?

Chris Prefontaine:

Comes in a moot point. Yeah.

Drew McLellan:

When you think about the people who have been the passive investors for you, is there a minimum amount that somebody should think about doing a deal like this, or is there where they need to have at least this much net worth in their life, or are there some thresholds that someone should know that they’ve crossed before they’re ready to do this?

Chris Prefontaine:

Yeah. Just in the general term of putting money with anyone, I think that, not my rule, the SEC rule, they should be accredited investor, they shouldn’t need the money, they should have a million dollars net worth, etc, etc. This is the criteria. And you can Google that. Aside from that, I think that’s going to be the technical answer at high level, beyond that, it’s more, again, it gets into personal stuff.

Drew McLellan:

Yeah. Where their family’s at, where they’re at, where they’re with cash flow in their own life.

Chris Prefontaine:

Yup, absolutely. Absolutely. And to answer your question, a minimum on our end, you get below 25 and there’s not a lot of advantage for us because we can just do out of cash flow as many deals as we do. So no, it’s usually 25 or higher is what we do to make it make sense.

Drew McLellan:

From a tax perspective, how does this all play out on an investor’s taxes? So they make an investment in you, they’re getting a few hundred dollars, whatever it is, every month as they’re part of the, in essence, rent. So they’re getting some income along the way, and so they’re going to get tax form, a document from you at the end of the every year, right?

Chris Prefontaine:

Yeah. Just like interest.

Drew McLellan:

And then when they get, that buyer purchases the house, then they’re going to get a bigger payday. And again, that shows up just like interest as well?

Chris Prefontaine:

Yeah. Same exact thing. So above and beyond the principle, yes, it’s just like reclaiming your interests.

Drew McLellan:

Okay. Again, this is where perhaps doing it through an IRA or an infinite bank situation, now you’ve got some firewalls for taxes on that new income, right?

Chris Prefontaine:

I agree, 100%. Yeah. What we’re describing, we put our own money back into the same exact thing with our own deals, through the 401(k), through the IRA, through the bank on yourself.

Drew McLellan:

Yeah. So, you can certainly do it from your own cash, but it seems like there are tax advantages to do it through some a tax-deferred vehicle of some kind.

Chris Prefontaine:

Yeah. And by no means, I should have said, I don’t know all the tax laws, I’m just talking generically.

Drew McLellan:

So noted. Consult your tax advisor. Anything else folks need to know about this sort of investing? And then I do want to talk about the courses that you have and stuff for somebody who does want to be an active investor, I want to talk about that, but first, is there anything else we haven’t covered that if you were talking to someone like me for the first time, you would want me to know or ask, that I haven’t asked?

Chris Prefontaine:

Yeah. One thing that comes to mind, and that is trends. I personally like to get ahead of trends, I think you get more lift. I don’t care what you’re investing, you get more lift. So example, I love reading Peter Diamandis and Steven Kotler’s books, the most recent one about how fast the future’s coming, man, that get you thinking where your money should be. Same in real estate, pre-COVID, we built this niche of terms in the way we do it in the three payday trademark and all that. Why? Because we felt that it weathered all the markets.

Well, then COVID came and approved it. So do you want to be in that kind of trend? And when I say trend, as the banks through push their bar up higher and higher, and this is prevalent everywhere now, it’s not new, they’re doing it. And they’re pushing a lot of the high-end buyers that would get jumbo loans and a lot of the borderline low-end buyers’ right out of the market. If that’s the case and they know they can come through us, man, that’s a trend to get ahead of too. I’ll give you a quick stat ’90s, early ’90s, ’92, ’93-ish, I pulled this stat two, 3% of the deals were done outside of banks. That’s it? everybody was using the banks. Now that number has gone up.

Drew McLellan:

That’s crazy.

Chris Prefontaine:

Yeah. I don’t know the exact, but I can tell you, I said to my wife, I honestly think it’s probably in the teens now nationally and growing fast where people want to be outside of banks. That’s a cool stat to get ahead of. So that’s all that I think is important for them to know about this niche in particular.

Drew McLellan:

Well, and I can speak from my personal experience, and I think this is true for a lot of listeners. We’re trying to mitigate our tax obligation by being really strategic about how we handle our finances and our taxes, which often means that when the bank looks at our finances, they go, “Hmm, maybe you really can’t afford to buy a $3 million building or a blah, blah, blah.” So I knew early on as I was starting to purchase rental real estate that I was going to have to be my own bank. And I started super simply where I bought a property, I paid it off, and then I used the equity in that property to buy the next part.

That’s like baby step being your own bank, and then you get into the whole life insurance policies and using your retirement accounts and all of that. And I think for a lot of the listeners, going to a traditional bank and saying, “Boy, I want to buy a series of buildings or whatever it may be,” I think the bank would go, “Hmm, when we look at your finances, and we totally get that you are a savvy business owner working the tax laws to your advantage, but based on our rules, the bank rules, even though we know that, we can’t lend you that money.”

Chris Prefontaine:

Yeah, 100%. And here’s a good example. I’m standing today, I come in once a week in my building. So we own this building we’re in, I did not go to a bank. Now, what would it take if I did? Probably 30 or 35% down, it’s a mixed-use building. We have tenants and pristine credit. This is pre-COVID we would’ve taken this. I went to the owner, he loved it, we were both happy as clams. I have to sign on a bank loan and go through the microscopic surgery of going through underwriting. So for the agency owners, just do your own building that way and get rid of the headaches for all the reasons you just said, because self-employed or solopreneurs, entrepreneurs in general, are always going to be in that lane that you described.

Drew McLellan:

Yeah. Okay. So changing lanes a little bit, if folks are listening to us and they’re going, “I don’t know, I think I like the thrill of the deal of finding the property and doing it all. And maybe I want to do what Chris is doing. Maybe I want to bring some of my family and friends in, and we’re going to do this together.” And all of that. I know you have classes or courses maybe, is a better word, to teach people how to do the kind of deals you do. Can you tell us a little bit about that?

Chris Prefontaine:

Yeah. And again, I’m a big advocate on free, so we have a free 35-minute presentation my son-in-law and I did, it’s repeat, you can just go watch the replay of it. It’s webinar, go to Smartrealestatecoach.com and do that. But you can also camp out on YouTube, on YouTube, Drew, literally some of the deals we’ve done, all the deals, we have hundreds of deals on YouTube where we whiteboard the three paydays. We say, “Here’s how it works.” It’s a challenge, we’re pretty open, we’re from New England, we got to be blunt and open. So if you go on YouTube, you get it all. And that doesn’t cost a dime. So that’ll get you comfortable with, does this niche get me excited, like you just said to go get in the trenches.

And if it does, certainly just do a strategy call, I can give you a link later if you want, but I’ll do a free strategy call with you or my son-in-law will, or Brian will. There’s only three of us that do it, and we’ll see if it’s a fit for you. That’s easy.

Drew McLellan:

Okay. That’s awesome. Chris, this has been great. I’m hoping this has people just going, “Oh my gosh, I have so many new ideas of where I can put my money, how I can grow my money, how I can build my wealth to take care of myself and my family and leave money to my kids.” So this has been a great conversation. Thank you so much. I always appreciate your candor and how open book you are about everything. I’m just grateful that you were on the show. Thank you.

Chris Prefontaine:

Right on. Thanks for having me. I appreciate it.

Drew McLellan:

You bet. If folks want to learn more about you or whatever, we’ll put all of the links that you just mentioned in the show notes. YouTube, I’m assuming you have a YouTube channel that they should go to?

Chris Prefontaine:

Yeah, they can just put in Smart Real Estate Coach, it’s come up. And then the strategy call is just smartrealestatecoach.com/action.

Drew McLellan:

Okay. We’ll get all that stuff in the show notes if anybody wants to reach out to Chris. And again, understand that in the show. I’m not saying to you guys, “Boy, you need to do a deal with Chris.” What I’m saying to you is, “Here’s someone I know and trust enough that I’ve sent him money, and I know he’ll tell you the right things to think about and do. If you want to build your assets in a passive way inside real estate, whether you do it with Chris or you find somebody else, or maybe it’s you who wants to do it actively, I just want to put this on your plate for you to think about what’s possible.

I know Chris would be happy to talk to you, but I know there are other folks out there who will do that as well. But I invited Chris on the show because I know him and I trust him, and so I know you can get to know him and you can trust him as well. So Chris, again, thanks so much for being on the show.

Chris Prefontaine:

Thank you. Appreciate it.

Drew McLellan:

All right, guys, this wraps up another episode of Build A Better Agency. I want you to be bloody rich. That’s what I want for you. You take so many risks with your business that you deserve to have a safety net for you and your family. You deserve to have money to go on vacations and buy the things that make you happy, that you can donate to charities that you feel strongly about. I want you to have the resources to do all of that. And so, as I am always advocating, I want you to build that wealth outside of the agency. Not that the agency isn’t a great asset, but when you leave too much money in the agency, you end up spending that money in places where perhaps you shouldn’t.

So this episode was really just dedicated to opening your mind to some possibilities of where you might be able to put some money and just let it work for you without you having to do a lot of the work. All right? Before I let you go, a big thank you to our friends at White Label IQ, they’re the presenting sponsor, as you know, And they are the friend of many AMI agencies. They provide white label services in design, PPC, and dev, and you can go to whitelabeliq.com/ami to learn more about them. I will be back next week with another guest. And in the meantime, how to track me down, I’m [email protected] Thank you so much for listening, and I’ll talk to you next week.

That’s all for this episode of AMI’s Build A Better Agency Podcast. Be sure to visit agencymanagementinstitute.com to learn more about our workshops, online courses, and other ways we serve small to mid-sized agencies. Don’t forget to subscribe today so you don’t miss an episode.