Passive investing is one of the most effective ways to build wealth while maintaining a full-time career. And instead of doing this all by yourself, you can level up your strategies by getting into group investing. Lisa Hylton explores this technique with the Founder of Left Field Investors, Jim Pfeifer. He explains how they bring people together in tribe-like communities to work hand in hand in investing passively and navigating the world of syndication. Jim discusses the effort needed in establishing such tribes of like-minded people, detailing why this requires long-lasting commitment and proven real estate practices.
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How Group Investing Benefits Passive Investors With Left Field Investors Founder Jim Pfeifer
I have on the show, Jim Pfeifer. He is one of the founding members of Left Field Investors and the host of the Passive Investing From Left Field podcast. Left Field Investors is a group dedicated to educating and assisting light mind investors to negotiate the nuances of the passive investing landscape in the world of syndication. He is a former financial advisor who became frustrated with the one path fits all approach in the financial services industry, and now concentrates on investing in real assets that produce cashflow and is committed to sharing his knowledge with others who are interested in learning a different way to grow wealth. Welcome to the show, Jim. I’m super happy to have you on.
Thanks. I’m happy to be here.
To jump right in. in your bio, I talked about what Left Field Investors are. It’s a group dedicated to educating and assisting like-minded investors to negotiate the nuances of the passive investing landscape. Can you talk about why you guys decided to create the group? How did it even come about?
Sadly there’s no great, intentional origin story, but it was unintentional every step of the way. It was selfish at the beginning. I was transitioning from being an active real estate investor to a passive one. I wanted people to talk to because I was new to it. I had started a group for active investors and it helped me. I did this with passive investors. My goal was to have a twelve-person group and do a little mastermind in Columbus, Ohio, where I live. In our first meeting, we had it all planned out to go out to dinner and we’re going to be a monthly dinner club. March 18, 2020, was our first meeting. I know you’re in California. In Ohio, the state shut down a couple of days before that for the pandemic.
We never met. In fact, we still haven’t met. Our first meeting is going to be in October 2022. We went two and a half years on Zoom. The group grew. I kept it small at first, even though we were just doing Zoom meetings. It allowed us to get some high-profile guests to come on and speak to us because no one had anything to do because we were all stuck at home. We got some great guests, just word of mouth and former financial advising clients and some friends wanted to join because they were interested in passive investing. We slowly allowed the group to get bigger, but we were restrictive at first. We realized that there was a need for a community like ours where we could help people learn about passive investing.
I remember the first time I ever met somebody who had done a deal. It was Steve Suh, who’s one of our founders as well. I remember when I first talked to him, he said, “I’m in a deal with this syndicator.” I was like, “So am I.” I was excited and relieved because I wasn’t sure if it was real or not. I met someone, a smart guy, a doctor who had invested in not only the same operator but the same deal. That gave me confidence. I realized that community is key in passive investing because if you walk out your front door and talk to your neighbors about finance, they’re going to say, “401(k), stock market, mutual funds, and IRAs.”
You say, “I’m looking at real estate syndications.” They’re, “That is risky.” They’re not going to know what you’re talking about. There’s nobody to talk to. Our community kept growing and we kept finding these people who needed a place to learn and get together. We got a website, eventually the podcast, and everything snowballed from there because there’s so much interest. Now, we’re a group of about 1,200 people and we help each other learn how to navigate the world of passive real estate investing in order to grow our wealth.
What does the group invest in? It sounds like syndications, but does it run the entire gamut of all the different asset classes?
We’re not GPs or sponsors. We are just a community where you can get together, learn, and have a network. Occasionally, we might present a deal from a sponsor if we like the deal, we like the sponsor and they’re willing to give our community better terms. We don’t raise capital or anything like that. The kinds of deals are everything. A lot of us have shiny object syndrome, where we’re chasing one thing or another. We try to rein that in.
As far as asset classes, most people start out with multifamily, and then they might go to self-storage or mobile homes. There are debt funds out there, ATMs, RV parks, or Bitcoin mining. There is resort investing. There are many different things that once you dip your toe into multifamily, you find out there are all kinds of other stuff out there. We try to not chase this shiny object, but there are so many interesting things out there. We do like to look at all of them.
I’m going to come back to looking at all of them in my due diligence section, but I want to continue with, how does it work? When people come in and you say the operator might give better terms if I am a member of your group, how do I end up investing in any opportunity?
We are a do-it-yourself group, but we also help people along the way. We’re never going to say, “This is a great deal. Go invest in it.” What happens is we have a regular group, Left Field Investors. We have a monthly meeting. We have lunch and learn. We have deal webinars. There are lots of Zoom opportunities to meet and talk to people, then we have a membership group that we called Infield.Community is the key to passive investing. You need to find like-minded people and learn together. Click To Tweet
There’s a forum there. That’s where a lot of the conversation happens where people are talking about deals. They’ll throw out a sponsor name and then everybody will chime in, “I’ve heard of them. No, I haven’t. I’ve invested with them.” That’s a lot of what we have, but if you were wanting to invest in a deal, for instance, sometimes we do deal webinars.
Those are typically from sponsors that either one of the founders has already invested with or a large number of people in our community have invested with. We know them a little bit. That sponsor has said, “If you can get $1 million through your group that we added together, we are all investing individually, then we’ll give you better terms, whether it’s a point extra on the prep or a 10% bigger cut on the back end.”
Those are the deals we have. As far as somebody joining the group, if there isn’t a deal that we have that we’re presenting, then it’s do-it-yourself. If you want to research a syndicator, you can come onto our website, you can ask questions, talk to people, get a lot of opinions, and then make your decision, “I like this operator.” Now you go to evaluating the deal.
You guys also use Trivest a bit to execute some of your investing. When does that platform come into play?
Trivest is a group investing platform. All they do is help people invest together. What that does is it allows you to get into deals for lower minimums. You have more diversification and you create your own mini mastermind. People can talk about deals because if I bring a deal to the tribe or the group, I have to defend it and say, “This is why we invest in it.” I’m in nine tribes, which is probably too many, but each has its own purpose. We probably start one tribe every couple of months just from people that are interested in the Left Field Investor community.
We tell people, “We’re starting a tribe. If you’re interested, you can get in on this one.” You can use Trivest for any type of deal. You can use it for one deal and have a tribe set up just for one deal, which we’ve done before or you can have a tribe that’s ongoing in a group of ten. That’s like your little mini mastermind and you put in X dollars a year. You keep investing in deals and keep on going. Trivest works perfectly with us because you can use it or not use it. It’s completely up to you.
In the tribes that are created that are ongoingly investing, all of those investors are investing each time in every single deal that’s presented for that tribe.
Basically, you create an LLC. Now you’re all owners of the LLC and you can have different ownership shares. Maybe someone owns 2 shares and someone else owns 1, but in any deal that you do, if you need to bring capital, everyone has to put capital into the LLC according to their ownership percentage in order to invest in that deal.
I want to touch a little bit back on the Left Field Investors, the initial founders. I went to your site. I saw there are 4, 5 6, or somewhere around there, founders. I was curious how you guys got together as a team to create what you’ve created now.
There were five of us and Steve Suh and Sean Donnelly were one of the first ones. I met Steve through my active investing group. I found out he was a passive investor. He’s the one that said, “I’m in this deal.” I’m like, “I’m starting up this group. Do you want to be part of it? I need some help organizing.” It was the same for Sean Donnelly. I used to work with him back in the corporate world many years ago. We maintained contact. He is a guy that’s thirsty for knowledge. He heard me getting into this passive stuff and he wanted to know more. We started. Once we realized we had something, we reached out to a couple of other people who were super interested.
One was Chad Ackerman, whom I also met at the active group. He was getting into passive investing and was interested in helping us out. I went to a networking event a few years ago and met Ryan Stieg. He’s the only one that isn’t local. I knew he would be a great help. We called him in and it was interesting. There are five founders. We spent hundreds or thousands of hours on Zoom working on Left Field Investors. I’m the only one that met Ryan. He hasn’t met anybody yet because of the pandemic. We’re not getting together until October 2022 for the first time. We’re excited for everyone else to meet Ryan.
For people who are seeking to put together tribes, you talk about how you guys create this community and maybe it’s a situation where you are investing directly with the operator or within the community, you’re like, “I’d prefer not to put $50,000. I want to do a lower minimum. I want to create a tribe with some other people.” Are there any best practice tips that you have seen in terms of creating communities with other people in the terms of like tribes?
If you’re investing together, the first thing is that everyone in the tribe should have the same accreditation status because it’s hard if you’re non-accredited. It limits your opportunities. There’s still stuff out there for you. If I were accredited, I wouldn’t want to be in a non-accredited tribe because it limits me. That’s one thing.
The other thing, when you’re starting a tribe, we do it all on Zoom now, but in person or in Zoom, you need to meet 4 or 5 times. Get to know each other. Make sure you all are in it for the same reasons and have the same goals. What usually happens is that a few people attend meetings and say, “I don’t think this is the right group for me.” They drop out and that’s awesome because you don’t want them in it if they’re not into it, then maybe a few more people get added down the road.
It’s important to set those ground rules and make sure everyone is on the same page. You need to understand that syndication investing is a long-term illiquid investment. Trivest is a great platform. What Trivest does is it makes it long-term and more illiquid, which is not necessarily a bad thing. Sometimes liquidity makes you sell at the wrong time, but I make sure people understand, “You’re starting a business. It’s an LLC. You’re getting married to a group of people and you’re going to be investing with them.”
Let’s say a deal goes five years. If you have 5 deals in your tribe and 1 goes 5 years, 1 goes 7, and another goes 10, you’re in that tribe for 10 plus years. You need to make sure you understand how to get in. You have to make it so people can exit if they need to. You got to make sure you understand all that upfront.
On the exit part, I would assume it’s quite challenging to exit a tribe because, in syndications, no one’s fair valuing during the whole period.
That’s why we’re careful to tell people, “You are making a big commitment here. If you think in the next five years, you need that money or you think this tribe isn’t going to be for you, do not invest.” We tell people, “Don’t do it.” We discourage them in a way, but then we’re like, “If you’re committed, we’re in.” We put in the operating agreement that if you exit, you exit with the capital you put in, the distributions that have paid thus far, and that’s it.
You forfeit the appreciation because it’s impossible to value these things. Everyone going in understands that if they exit, all they get is their capital plus any distributions that are allocated to them for the time they’d been in it. The funny thing is that of 9 tribes and I’ve mentored probably another 10 or 15, there’s only been 1 time that someone’s left the group. It was because I didn’t want them in the group anymore. It was my dad.
He didn’t understand it very much and wasn’t sure if he wanted it. He kept asking all these questions. He was being a roadblock. I said, “It’s not working out.” He’s like, “Yes, I don’t want to be part of it.” Years later, he regrets his decision, but at the time, it was amicable and it made sense because he didn’t understand what he was getting into. If he did it again, he would stay in. At the time, we’re just like, “Dad, you’re out.” That’s the only issue we’ve had.
I want to pivot to a full-time passive investor. You are a full-time passive investor. For many people, that is something that they aspire to achieve and to get to that status. Can you talk a little bit about your journey on the active as well as the passive road? How long did it take to get there?
I was a horrible active investor. I was saved by the market because the market kept going up. My property never cashflow like it should have. I was not a good asset manager. I had problems with property managers. When I figured out you could invest passively, I decided that’s what I wanted to do. I sold all of my active properties. Because the market had gone up so much, I had a lot of capital gain. I wanted to get into this passive, but I needed income. I was a financial advisor at the time and I was phasing out of that. I needed income. The snowball starts small and it builds.Do not stop investing just because the market has changed. You don’t want your money sitting in the bank. Click To Tweet
In the first year or two, I took a lot of the capital that I had from the sales. I put that in the bank realizing that you don’t make any money in the bank, but that was my security blanket to make sure that I could pay for food, mortgage, and the kids’ college. I started investing in syndications. The syndications did two things. One is that when you invest in syndication, you get a paper loss from depreciation in year one of the investment. For some of them, you invest $50,000. You could get between $25,000 and $60,000 of paper loss. I invested in quite a few syndications and wiped out all the taxable gain that I had. I didn’t pay any taxes on the sales of all those properties.
I started my snowball and I started investing in syndications that would produce some cashflow. In the first year, I had hardly any cashflow because some of them didn’t cashflow for 3, 6, 9, or 12 months. In year two, I had a bunch of investments that were cashflowing. I started new ones and they started to cashflow. Your cashflow slowly builds. I kept that extra cash in the bank for living expenses. As I realized, my cashflow was increasing. After about 2 or 3 years, I realized I didn’t need as big of a cushion in the bank. I slowly reduced that to where now I have enough cash coming in that I still have a cushion, but it’s not as big as it used to be because my snowball has grown larger.
Digging deeper onto that, one of the things that come up for me is if you are a full-time passive investor and you’re depending on that cashflow to come in, you’re investing in deals in the current marketplace that, for instance, are on bridge debt. They have a cap rate and the interest rates are continuing to go up, so then what gets paid to investors becomes less. There’s less cash because you have to pay interest or there’s a big CapEx expense that’s unexpected. That wipes out cashflow or decreases cashflow. Have you had any of those instances or how do you handle that aspect of being a full-time cashflow investor with that aspect of it?
I don’t mean to sound crass, but I’m in a much better position than someone who has one W-2 and that’s their only income source. The economy goes the wrong way and they’re laid off, then they have zero. If you compare those two, my situation looks a lot better because I have multiple income streams. If I had invested all of my capital into one syndication, then I would be concerned, but I’ve had a few deals that haven’t worked out and haven’t paid as much as they were supposed to or things like that. That’s always going to happen. I’ve also had a bunch of deals that were supposed to be 5-year holds that went full cycle in 2 years because they reached all of their goals. I got way more cashflow on those than I was expecting. It goes both ways.
The key is multiple income streams. It doesn’t matter if you have a W-2 or you’re a full-time passive investor. If you have multiple income streams, you’re protected. I diversify. I have some with bridge debt with straight caps. I have some long-term debt. I diversify by debt and asset class. Some asset classes are going to do better than others. I diversify by the sponsor because some sponsors are struggling and some aren’t. You’re diversified and you have all these multiple income streams plus the Trivest. When I invest through Trivest, instead of $50,000 in a deal, I might be doing $5,000 in a deal. I can get in ten times as many deals. I have 100 income streams.
If 20 of them stop paying, I still have my 80. I still have 80% of my income, whereas if I get fired from my job, have a disability, or something happens in the economy and I get laid off, I have zero income streams. I feel a lot more comfortable than the typical W-2 person who has 1 income stream because if they lose their 1, they have 0. If I lose 10, I still have 90 left, rounding numbers. As long as you diversify and think ahead, you’re going to be okay. During the pandemic, a lot of people stopped paying distributions for a short time. I was nervous about that. Diversification and multiple income streams, we got through that.
Diving into that, investing for cashflow, we’re in a place in the market where a lot of multifamily deals, the cashflow that’s kicking off of them, year one could be anywhere between 2% to 5% and average cash-on-cash money you’re getting back on your money that you’ve invested each year of roughly on average 5% or maybe even 6%. For people who are looking to invest for cashflow, what do you say to them?
You need to be consistent. Almost dollar cost average into your investments like you would any other investment. I don’t stop investing just because the market has changed. I look at different things. I may want to see if someone has longer-term debt and all those things. I do change maybe the frequency, amounts, and things like that. I keep investing because I don’t want my money just sitting in the bank. I want to keep it going. I’m a cashflow investor. The upside isn’t as great, but the cashflow is still similar. I’m seeing in the 6%, 7%, or 8%, you can still find deals that cashflow at those rates. It might not be for 6 or 9 months until they start cashflowing.
If you’re doing value add deals, there’s still the likelihood that you will get significant cashflow. I compare it to where else are you going to put your money. You put it in the stock market. You lost 20% or 30% over 2021. I don’t pay attention to the stock market anymore. All of this is to say that you’re not getting the same returns you were before. I realize interest rates are going up, but they’re still historically low-interest. It’s uncertainty that’s causing the problems, not interest rates.
Once interest rates stabilize and people see, “We’re not going to 15% interest. We’re not going back to zero or negative,” then I think things will start to stabilize and we’ll be more comfortable. I don’t see a problem with, “You only pay me 5%, but it’s tax-free.” If you do it right, you’re not paying taxes on it. That beats 7% and minus 20% in the stock market any day. I look at it, but I’m not changing everything I do just because interest rates have changed.
Now I want to dive into due diligence. I believe that as passive investors, due diligence is a very large part of the role that you play as the custodian or allocator of your cash into a variety of deals. From your perspective, what’s most important, the sponsor, market, or deal?
It’s not even close, it’s the sponsor. I hear some people that say it’s the deal and I don’t get it. If you have a bad sponsor, it doesn’t matter how good your deal is. You’re going to have problems. We’re going to find that out because even people like me who didn’t know what they were doing made money in the last many years in active real estate. I had multifamily properties. I did it horribly and made a ton of money. It’s not going to be the same thing for the next years, because of all this economic uncertainty.
You want to find quality sponsors. That is the key because those quality sponsors know more than you. This is their full-time job. They are going to pick the right market and the right deal. That’s not to say you don’t analyze the market or the deal because you do, but I’m going to spend 80% of my time making sure the sponsor is somebody that I know, like, and trust who knows what they’re doing and is capable of changing plans if they need to.
What are some of the key things that people who are coming into this space or maybe they’re already in, and they’re now exploring new sponsors because they want to expand what they’re investing in? What are some of the key things that you have educated or taught others in your community to look for when evaluating sponsors?
The reason for a community is to find sponsors. Let me tell you how I used to find sponsors. When I first started this, I went to a seminar. I had a 401(k) rollover and a self-directed IRA, burning a hole in my pocket. I went to a seminar and met syndicators. I didn’t know what syndication was before I went. I met some people and I’m like, “You are a syndicator? Here’s the money.” I just started handing out checks to people I met because I figured they were in the seminar. They must be awesome. Some of those deals were fine. Others are not so good. I would not invest in those deals now because I didn’t know what I was doing, then I figured, “I got to find a better way.”
I started listening to podcasts and reading books. When I heard someone on a podcast, I’d call them up. I’d have a 30-minute conversation with them. They’d send me a deal. I’d look at it. Maybe I’d have another fifteen-minute conversation and then I’d have to decide, “Do I want to give them $50,000 and send a wire to this person I don’t know? Maybe they’re an awesome operator. Maybe they’re just good podcasters?” I don’t know. I invested with them and I had better results, but still not where I wanted.
Once I started this community, Left Field Investors, I started asking other people in the community, “Who have you had a good experience with?” It made all the difference. How do I find sponsors now? I will only invest in a new sponsor if they’re introduced to me by somebody I know, like, and trust who’s in my community and who has already invested with them. They don’t have to go full cycle. They’ve invested with them. I know that I’m going to send a wire to a person that exists. That’s one of the things that I’m always nervous about, but more than that, I know that the person that invested with me told me they’d paid distributions. They’re sending out quarterly reports.
This is a totally active thing before you send the wire. After you send the wire, you’re done. You’re passive. There are only two things, hopefully you get. 1) Cashflow. 2) Reports. That’s the only way you can judge this. What I want to know before I invest is, “Are they legit a sponsor? They know what they’re doing. They send you cash and reports.” The only way I know to figure that out is to talk to someone who has already invested with them, and it’s somebody I know, not somebody the sponsor knows.
You’re going to get their favorite investors. You’re going to get their brother-in-law if you ask a sponsor for a referral, but I’m asking my community. I still do the same due diligence that I did before on the sponsor. I am starting from a place of trust and trust transfers. I trust whoever recommended them and they trust the sponsor. Now I can have a level of trust and sponsorship. That is the power of Left Field Investors or any community. I tell people, “If you want to be successful in passive investing in real estate syndications, you need to be part of a community.”
It does not have to be Left Field Investors. I’m biased. I think ours is the greatest group, but there are others out there. I’m a member of a couple of different communities. Join one whose culture fits your personality. That’s the way to success. Maybe in 1 or 2 years, I’ll have a fourth iteration of how to find sponsors. Right now, I trust in my community and I’ve seen the results. I am ten times the investor I was years ago before this group started. It’s because of the people in my community.
We are digging deeper here on due diligence, community, having that referral network of other people who may have invested with that sponsor, etc. When I was doing some research on you, I noted that you had invested in over 45 different passive investment opportunities that range everything from notes to ATMs to all these different asset classes. In addition to this community and the referrals etc., when you’ve presented an asset class that you have not invested in, what is something else that maybe helps you in terms of getting comfortable, and up to speed with whether it’s a good investment for you?
That’s a struggle because you’re always seeing these new asset classes. I like it when a new sponsor I already know, like, and trust starts in a new asset class. As long as they hire someone who has knowledge in that area, then at least it’s a relationship I already have. If it’s a completely new asset class, a lot of times, I might want to try to invest with a tribe because instead of a $50,000 risk that I’m taking, I’m maybe taking a $5,000 or $10,000 risk. We have a tribe that’s set up just for that. This tribe is only for investing in sponsors we don’t know very well, asset classes we don’t know very well, or other things we don’t know about.If you have multiple income streams, you will be protected. Click To Tweet
The reason is that then we can try them out. We can take them for a test drive at 10% of the risk because we’re only investing $5,000 instead of $50,000. That’s how I manage that. I still sometimes take swings because it’s fun and exciting, but I try to do that in a small amount of my portfolio. I do have a speculation bucket and sometimes a new asset class I might allocate to my speculation bucket because I’m not sure of it. I think 10% in speculation makes sense because sometimes that’s where you hit the home runs. Most of the stuff I do and syndications I invest in are boring and not exciting at all, so that’s where I saved 10% for the fun stuff.
As a part of your community, do you guys do any work around markets or underwriting and things to look for in those areas? I’m curious.
There are a lot of conversations, especially in our Infielder forum, our membership group, about which markets are best and things like that. We’ve developed some tools. We have a deal analyzer. It’s mostly for multifamily, but we’re optimizing it for self-storage and mobile homes as well. It’s an Excel spreadsheet that has a bunch of metrics you get from the financials. You put them in the Excel spreadsheet and every cell turns red or green, whether it fits into our parameters or not.
We’re not re-underwriting the deal because we’re investing with a sponsor we trust. We trust them to do the underwriting, but we’re just doing some checks to make sure that everything fits how we like it. That’s what that tool does. We talk all the time about sponsors. That’s 80%, but we talk about and look into the market. We always analyze the deal because even if it’s coming from a sponsor you like, you want to make sure it still fits the parameters that you’re comfortable with.
I’d like you to share a story because you’ve invested in over 45 different deals. I’m sure there have been times that you’ve alluded to already where things have not gone as planned. Can you talk about a situation where this has happened and maybe the lessons you’ve learned from this experience and how it’s impacted your investing going forward?
One is I invested with the guy who was a single-family home turnkey operator in Texas. That market changed. That was no longer profitable. He switched and decided he was going to do office buildings and CBD equipment because CBD became the next thing. He didn’t know what he was doing. It was a lending deal, but we still lost money. It was one of the few times I’ve lost money. The lesson here is that I’m not going to be someone’s guinea pig. If you’re changing asset classes, I’m not going to invest with you unless you’re changing asset classes and you’ll hire an expert. He didn’t know what he was doing and he was going to manage this new asset class.
There are other examples where a sponsor that I like was 100% multifamily and they decided to go into self-storage. My initial thought was, “I am not participating.” They said, “We hired someone who’s been in the industry for 30 years and they’re going to run our self-storage operation.” For them, I said, “I probably won’t invest in the first one, but I’ll look at one after that, so you have a little bit of track record.” I’m not a guinea pig to them because they hired someone to take care of that. The one thing is you don’t want to be in a new market, a new asset class, or something new with an operator unless they have some advantage there. This person didn’t and we lost money.
Another example is that you need to screen the sponsor for communication. I only invest in sponsors that communicate appropriately because you have no control. These are illiquid long-term investments. Once you send them a wire, that’s it. If you are not hearing from them, you don’t know whether the deal’s going poorly or well. I don’t care if it’s going poorly or well if you don’t communicate with me. I want to know.
If it’s going poorly and you communicate with me, I’m going to be okay with that if you can explain it and what’s happening. If it’s going poorly and you don’t communicate, I’m done. I have this one deal that is one of the first ones I did when I went to that seminar and started throwing money around. I haven’t heard from the guy in once or twice over three years. The deal is not going well. They will not answer phone calls, texts, emails, nothing. I’m never investing with them again. It’s ridiculous.
The other thing is that you need to make sure you’re working with the right partner, but you need to make sure they communicate. If that same partner was communicating and explaining things along the way and saying, “Here’s what’s happening,” I might have a whole different opinion. I might say, “I get it. The deal didn’t turn out, but you’re working on it.” Those are the two big failures that I’ve seen so far.
One other item here is deal structuring. Do you typically have any preference in terms of investing in deals that have preferred returns or no preferred returns, the different types of splits and even the sponsor fees, acquisition fees, refinance fees, and all these things as a part of your due diligence process? Are these some of the parameters that you set for yourselves?
Each person in our group is going to have an individual answer on this, but the main thing is that it depends on the sponsor. If it’s a sponsor like one that I have that’s been in business for many years, they have a 30% annual average return on all their deals. They have high fees and the splits are more favorable to them than to me. The net returns are 30%. Do I care that they’re paying themselves? I don’t because they’re doing a fantastic job. If you’re a brand new syndicator, this is your first deal and you’re going to do a 60/40 split, no, thank you. If you’re experienced and you want to do 60/40, maybe. Now I’ve seen a couple of guys that are going to 20/80, 20% for the passives, and 80% for themselves.
You can be an awesome syndicator. I’m probably taking a pass on that one. It’s got to be fair and it depends on the operator. The longer the operators have been in business and the better the results, the higher the fees I would be acceptable or accepting of. On the other end of the spectrum, if it’s somebody newer, then I’m probably not as much.
I go back and forth on that because there are a few sponsors who don’t do the prep. Their opinion is, “We’re in it with you. We’re partnering. You make money when we make money.” For other people, I would say, “We’re going to pay our passives first. Can we get money on the back end?” I get both. It’s a sponsor-by-sponsor decision for me because it’s all on the level of trust and the experience I have with the sponsor. I’m willing to change the terms based on that metric.
I want to touch on metrics. I don’t think this is a metric, but nonetheless, have you and your group ever invested in any deals that had bridge loans with no caps, and how that may have may or may not have panned out within the environment?
I haven’t seen any problems yet, but I expect that we might. I think it’s too early to know for sure. A few years ago, people weren’t thinking of interest rate caps. There is some bridge on my books that probably doesn’t have a cap. Now that we’ve seen, “Maybe we should have done that,” we haven’t run into problems yet. I would expect that there will be some deals that run into problems, for sure, but I haven’t seen them.
Another key item here is looking at things like expense ratios and cap rates. Do you have a stance in terms of what are the most popular asset classes like multifamily? You mentioned you had this deal analyzer. One of the things that you’re looking at there is maybe even cap rates and expense ratios. Are you guys looking at that, too?
All of that is in our deal analyzer. We have ranges. We haven’t updated it in a while and it needs updating, but when we do update it, we’ll change the ranges. The cap rates and expense ratios will probably stay the same, but the proforma IRRs, rates of return, and all that have come down. All those numbers will change, but we do have target numbers for probably 30 metrics that you see on a typical multifamily or self-storage deal. We try to make sure it’s in the range, then if it’s not, we ask a question. One of the ones I like to look at is rent increases or economic vacancy. As long as those two are reasonable, it’s okay.
If someone has a huge rent increase on their proforma, I am going to ask the question and maybe the answer is, “It’s Phoenix. Rents always go up in Phoenix”. I might need a little bit deeper answer on that, but that makes sense that Phoenix would have a higher rent increase than Dallas or something like that. It’s specific, but we do look at that. We don’t dig in and figure out why the numbers. We just look at the numbers and make sure that they make sense to us. We’re not going to re-underwrite the deal.
They’re trending in the right direction as well. The last question here is back to Trivest. One thing that I thought about is that as people create tribes and invest in deals together, I was curious about if there would be any impact on the returns as a result of creating an entity on the Trivest platform and how you guys navigate that in terms of communicating to your group, the fees connected to the Trivest setup?
There are two extra costs that come in. One is that because you have a multi-member LLC, you have to file a tax return. That is a cost that you have to think about. The other is there is a small fee that you pay to Trivest. In year one, that fee covers setting up the LLC and a bunch of other costs. In year one, it’s not a huge hit. In years 2 and 3, you still have to pay that fee and it’s smaller. It’s not a big deal either, but if you’re only doing one deal a year with a $25,000 minimum, then those fees feel like they’re taking a big chunk out of what you’re doing. If you’re in a tribe that’s investing $100,000 or $200,000 a year, then those fees become minimal.
Typically, if you’re only doing one deal a year at the $25,000 or whatever range, it’s usually a training tribe. It’s not a tribe that you’re looking to build wealth with. You’re trying to learn and grow so you can either start your own tribe or invest on your own, but you’re learning in this tribe. The fees don’t matter as much because it’s an investment in your education.Run your investments like a business. As long as you’re getting revenue, you can hire professionals to help you and take care of your expenses smoothly. Click To Tweet
You’ll still make money because the cashflow should exceed the fees. When the deal goes full cycle, you certainly make money. It does take a little bit off of your returns for sure having to pay those fees. The benefit is diversification, lower minimums, and becoming a better investor through mastermind type of activities. In my mind, the fees are minimal and worth it.
If someone is choosing to put together when the tribe starts becoming economical from a wealth-building perspective is when you start hitting $100,000 in terms of cash invested in deals. Say you have four members that are doing $25,000 each invested in a deal, and then that same four are doing another $25,000. Now you’re at $200,000. The idea is that the $100,000 mark gets you a comfortable amount of cashflow coming in to cover the fees that you don’t feel like.
It could be $100,000 or $50,000. It depends. The thing is that in year one, the fees are paying for the LLC. You’re saving money there. After that, you’ll have cashflow that will pay for all of that. You have to find an accountant who understands what you’re doing and realizes it’s an easy tax return. You don’t have to charge a whole lot for it because of the couple of K-1s coming in. Finding someone to do your tax return is part of it. I haven’t seen fees get in the way of anyone at Trivest because the benefits are worth it.
What I’ve figured that I wish I would’ve figured out a long time before is that sometimes it’s worth paying fees to professionals to help you do stuff. I now pay for an attorney, CPA, financial advisor, and platforms like Trivest and Vyzer to help track all of my passive investment syndications. There’s no software that does that. I’m willing now that I realize I don’t want to have to do all this myself. There are some things that are worth paying for. Those are the cost of doing business.
You have to run your investing like a business. Businesses have expenses. If you have those expenses, as long as you’re getting revenue, it’ll take care of those expenses because you don’t want to be stuck in a spreadsheet all day. You want to be out looking for new sponsors and looking at deals. I’m a big fan now of using professionals and paying them appropriately.
Can you touch a little bit on Vyzer? I listened to one of the episodes that you had with the Vyzer founder. I thought that was so interesting that they decided to create this. Could you talk a little bit about what it is and how you are using it?
We initially tried to build our own portfolio tracker for syndication investments and it was complicated. We couldn’t figure it out. About the time we were ready to give up, I ran into Vyzer. These Israeli guys started a company because they had a startup before. It went public and they sold it, so then they became investors. They invested in real estate syndications. They looked at all of the wealth management platforms out there. None of them could handle a syndication investment. They decided, “Let’s just build our own.”
They built this system that tracks all of your investments. It has all the syndication stuff. It is purpose-built for people that invest in passive syndications, but you can also hook your bank account to it or your brokerage account. You can track your expenses. You can track all of your wealth there. I’m doing it mostly because it helps me track my passive investments. Now I have probably 60 or 70 investments over the 45 that you talked about. In Excel, it is a nightmare. It is impossible, but with Vyzer, it takes a few clicks and my distributions are in there. I can see everything. It’s been great.
One last thing on tax returns. Let’s say you create a tribe and the tribe is invested in a variety of different deals. You are essentially going to get a K-1 from each of them. The tribe will then be able to do its K-1 to kick off to its investors. It’s also important that people who are deciding to create this tribe together are going to be waiting for all of those K-1s to come in before the tribe can then kick off their K-1.
That’s another thing when I talk about tribes to people. I say, “K-1s are due March 15th.” That’s the target date. The Tribe LLC that you create is going to get K-1s from the investments they make. That tribe is going to have to file its own tax return and send out K-1s to each of the members, us, the investors, and we give them to our accountant to do our tax return. There is a lag. What I tell people is, “You might have to extend your taxes. It doesn’t cost anything. It’s weird.”
I haven’t filed my taxes yet for 2021. It’s coming up on October 15, 2022, as the new deadline. You have to be comfortable might have to do that because some of the K-1s come late. If they do, they have to go to your LLC first, file that tax return, and then come to you. There is a delay and it’s something you have to think about and get comfortable with the thought of extending. If you are a passive investor who’s getting K-1s anyways, you might have to extend even without Trivest. It’s not that big of a deal, but it’s a great point and one that everyone is looking at a tribe should understand.
This was so good. Thank you for coming on. I appreciate it. We learned so much about Left Field Investors and how you guys are able to invest as a community and build wealth together. This was awesome. If my readers want to learn more about you and Left Field Investors, where are the best place they can go to learn more?
The best place is to go to www.LeftFieldInvestors.com. If you want to subscribe to our newsletter, there’s a subscribe button there. You can also reach out to me personally. My email Is Jim@LeftFieldInvestors.com. I talk to 4 or 5 new members every day. I’m more than happy to set up a conversation. There’s a link on our website to schedule a call with one of the founders. We’d love to hear from you and explain more about our community.
I’ll also add that you want to take to his podcast, The Passive Investing From Left Field. I enjoy listening to that. There are always good guests that you have on. It’s awesome.
Thank you. I appreciate that.
Thank you for coming on. I appreciate it.
That was great. I enjoyed it.
- Left Field Investors
- Passive Investing From Left Field
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About Jim Pfeifer
Jim Pfeifer is one of the founders of Left Field Investors and the host of the Passive Investing from Left Field podcast. Left Field Investors is a group dedicated to educating and assisting like-minded investors to negotiate the nuances of the passive investing landscape and world of syndications. Jim is a former financial advisor who became frustrated with the one-path-fits-all approach of the standard financial services industry. Jim now concentrates on investing in real assets that produce cash flow and is committed to sharing his knowledge with others who are interested in learning a different way to grow wealth.
Jim not only advises and helps people get started in passive real estate syndications, but he also invests alongside them in small groups to allow for diversification among multiple investments and syndication sponsors. Jim believes the most important factor in a successful syndication is finding a sponsor that he knows, likes and trusts. He has invested in over 95 passive syndications including apartments, mobile homes, self-storage, private lending and notes, ATM’s, Bitcoin mining, commercial and industrial triple net leases, assisted living facilities, resorts, and international coffee farms and cacao producers.
Jim is constantly looking for new investment ideas that match his philosophy of real assets producing cash flow as well as looking for new sponsors with whom he can build quality, long-term relationships. Jim earned a degree in Finance & Marketing from the University of Oregon and a Master’s in Business Education from The Ohio State University. He has worked as a reinsurance underwriter, high school finance teacher, financial advisor and now works exclusively as a full-time passive investor. Jim lives in Dublin, Ohio with his wife, three kids and two dogs. In his free time, he loves to ski, play Ultimate frisbee and cheer on the Buckeyes.
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