Benefits of Being a Passive Investor
On this episode of Next Level American Dream, Abigail and Sean are joined by Fadi Boumitri. Fadi is the Chief Investment Officer at Legacy Wealth Holdings. His primary responsibilities are the strict adherence to SEC regulations and guidelines. During the episode, Sean and Fadi discuss the ins and outs of passive investing.
Key Topics
What is a passive investor in Multifamily RE?
What are risks investors should lookout for when reviewing a deal?
Is it hard for investors to make the transition from Traditional Investments to Real Estate Investments?
Connect with Fadi Boumitiri:
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SUMMARY KEYWORDS
deal, people, investors, passive investors, business, money, partners, real estate, syndicator, stock market, underwrite, find, absolutely, fees, syndication, investment, limited, multifamily, Tim, asset management
SPEAKERS
Fadi Boumitri, Sean Thomson, Abigail Thomson
Abigail Thomson 00:01
Welcome to the Next Level American Dream Podcast brought to you by Thomson Multifamily Group. Your hosts, Abigail and Sean, will discuss how you can take your American Dream to the next level through real estate investing, business practices, and personal development. Join us as we share our experiences as a father daughter duo who are trying to accomplish our goal of financial freedom. We hope you learn more about how to define and achieve your American Dream. Here's another episode of Next Level American Dream. Welcome to the Next Level American Dream Podcast. We have a wonderful guest for you today, but first please make sure you have subscribed if you haven't already. We also love getting your feedback through likes, comments, ratings, and reviews. Today, Sean is chatting with Fadi Boumitri. Fadi is the Chief Investment Officer at Legacy Wealth Holdings. His primary responsibilities are the strict adherence to SEC regulations and guidelines. During the episode, Sean and Fadi discuss the ins and outs of passive investing. If you found any value from today's episode, then please share it with a friend and help us grow! For more information on our sponsor, visit thomsonmultifamilygroup.com to start taking your American Dream to the next level through passive investing.
Sean Thomson 01:17
Hi Fadi, welcome to the Next Level American Dream Podcast. I appreciate you being on!
Fadi Boumitri 01:22
Pleasure to be here!
Sean Thomson 01:24
So finally let's talk about just introduce yourself to the to the audience and talk about what kind of where you came from and then where you are today and what you have going on now.
Fadi Boumitri 01:32
Sure. I'm Fadi Boumitri, the Chief Investment Officer for Legacy Wealth Holdings partnered with Tim Brats on syndicating apartment buildings, as well as other commercial assets around the country. I come from a background of being an attorney by trade, was Tim's attorney for a number of years prior to partnering on a handful of deals here and there, and then eventually came in and became a partner across every real estate deal that he does. We also have an education company as well, that helps whether it's beginners and or experts, helps bring people to the next level of what they want to do in the real estate world. As well as you know, things outside of the real estate world. We have a number of people that have other businesses, and we try to help whoever we can wherever we can the principles that we try to apply, transcend just real estate.
Sean Thomson 02:21
Right, yeah. So, what was your background for so you're, you participated as a lawyer as your career right? And then you were you in real estate much before meeting Tim?
Fadi Boumitri 02:31
Yes. So, I was an attorney in the real estate space. And my family had some real estate investments. I had very minor Real Estate Investments myself before then Tim was actually my first venture into putting my own money into on a bigger scale into other deals. And then eventually, that turned into full time becoming the liaison between the investors themselves Tim's investors, my investors and legacy wealth holdings. So, my responsibilities primarily include educating our investors on what the process looks like, educating them on what we do, and how we do it, letting them know what deals we have coming up, keeping them apprised of what deals the deals that they're in the progress of those deals, making sure they're getting their quarterly distributions, things along those lines.
Sean Thomson 03:19
But you were so you were practicing as a lawyer, but you saw through your family some real estate success, you were kind of exposed to what real estate could do for you. That was kind of I guess, you're the, the catalyst for kind of being having an interest in that in that area beyond law, right.
Fadi Boumitri 03:32
So, realistically, I only, I only became an attorney for the background, never intended to practice law. But as soon as I graduated, I took the bar, just because it was the natural progression. And my parents encouraged me to do so. And so, I did. In the meantime, while I was waiting for the results, I started, you know, just hustling here and there trying to make side money by buying cars or starting businesses doing whatever I could, once I got my law degree and up and actually got my hung up my shingle, essentially, I started getting phone calls from people asking me to get involved in their legal issues. It grew into a full-time business. And before I knew it, I was seven years in. And the whole plan that I had to use the background of law in order to be a businessperson had become, you know, nothing but a law firm, right? And I'd love to say that it was a business. Well, the law firm was a business. But essentially, it was just me. And so, it didn't feel like a business. To me, it felt like the rat race. And sometimes the worst boss you can have as yourself. And that was definitely me. So, Tim actually asked me to come out to a mastermind. And in that mastermind, were a number of real estate investors. And it really just opened my mind to a whole different world of a whole different level of the real estate world. And the things that that you could do in the real estate world that I had no idea you know, I had I had clients that were wholesalers and flippers but I never really understood the whole the whole system of things until those masterminds and it really helped me realize just kind of how small While I was playing and how much I was limiting myself, as opposed to leveling up by using my resources, whether it's the people that I know or the money that I have, and just kind of taking a new risk, it was something that I had been saying I was going to do for years. But unfortunately, the mastermind calls you out on that and says, Well, yeah, you say you're going to do it. But did you actually? So, it was very much an accountability piece for me as well.
Sean Thomson 05:27
Yeah. You said, you said you're going to do it. Let's go, right?
Fadi Boumitri 05:31
Absolutely.
Sean Thomson 05:32
Well, if it's okay with you, let's talk about let's talk about passive investing. That's kind of your specialty with legacy and kind of what that looks like for people and how that kind of works. I know, that's a topic of interest for a lot of our listeners. So that's, that's your role at legacy is helping people through that process? I don't know where really start, let's talk about what it what a passive investor really is in a multifamily syndication or multifamily deal. What what's the role of the passive investor?
Fadi Boumitri 05:58
Absolutely. And this is extremely important, limited partners. Generally, the purpose of the word Limited is twofold. Number one is limited in their liability. And the reason why they're limited in liability is because of the second part of that equation, which is, they're limited in their responsibility, right. So, because they're only investing cash, they're not actively involved in this business, their liability is also limited to the amount of cash that they've invested into the deal. So, we have a lot of higher net worth individuals, or even people who just don't want to subject themselves to higher liabilities, who prefer to be the limited partner in a deal specifically, because whatever amount of money they put in is the maximum they could ever lose. If the deal gets sued. If the general partners get sued, the limited partners are going to be insulated from that based on the fact that they don't have any responsibilities. And therefore, they could not have been responsible for any of the potential issues that arose whether it's negligence in one way or the other, or it's just a recourse on the on the loan itself for a real estate deal. So, the beauty of being a limited partner mostly is that whether you're a W two employee that's making good money there and doesn't want to quit, your job enjoys what you're doing, whether you're a businessperson that has a million things on your plate, and just doesn't have time to manage your own investments. Either way, it's beneficial to be able to put your money into a fixed asset, such as real estate, where you have a much more predictable return than you would in the stock market or in Bitcoin, or basically any other investment. In my opinion, it's a lot less volatile. It's something that has been around since the dawn of man, and in my opinion, we'll be around as long as human beings are on this earth, they're going to need a place to live.
Sean Thomson 07:46
Right? Yeah, for sure. shelter is definitely one of their core requirements of life, right. That's why I say that all the time. You know, shelter is just it's something that that everybody has to have. So, let's sort of expand on that, if you don't mind. So, the passive investor really in the deal structure itself, you have the GP sign you already you already started talking about the limited partner side, the limited partner side of the process is are those that that are, like you said, passive, they're just they're just putting money into the deal. The general partner signs are going to be the more active participants, they're the ones managing the deal, bringing the deal together, you know, managing all the process of everything, and they're also injecting money as well, most of the time.
Fadi Boumitri 08:22
Yep. And finding the deal, you know, so you've got to remember that finding the deal is one of the hardest things right now, especially with the valuations that we're seeing right now, on real estate, finding a good deal is especially tough. So a part of the general partners responsibilities is finding the deal, making sure that it is a good deal, finding if they're going to property manage themselves, or if they're going to find a third party property management company, if they're going to find a third party property management company than they have to asset manage on top of that property management company to make sure they're doing what they should be doing to make sure that the asset is moving in the direction that they intended it for it to move, they're also going to be responsible for raising the money, right? If they're syndicating it, they're going to be responsible for raising money from private investors in order to be able to put all of this together, because generally, while you're absolutely right, they're going to put some portion of the money in themselves. The majority of that money in a traditional syndication is going to come from other sources, limited partners that are looking again to be completely passive and make a return on their investment.
Sean Thomson 09:27
Yeah, and so just to sort of explain the passive side of it in, let's say, you have a large project, a larger project projects worth $10 million, or whatever it is, so the bank is going to give you a certain amount of money against that property as a debt commitment. And the rest of that money for the equity side, and for repairs, expenses, all those other things have to come from the limited partners and the passive investors. And so, the purpose of that is to pool several passive investors or however it works, but you take other people or a group of people and Put them together that way. That's what allows you to do these larger projects. Right?
Fadi Boumitri 10:04
Yep. And that that allows two things. Number one is it allows the people that have significant money to get into multiple different deals in order to in order to make sure that they're not keeping all of their eggs into one deal. Right. So, it's basically the very basic strategy of diversifying your investments. That's the first thing it does. The second thing that it does is it allows people who otherwise wouldn't be able to get into a multifamily deal because they don't have the cash to take it down on their own to get a 50,000 or $100,000 piece of that deal based on the syndication bringing in multiple investors. So, it's, it's a benefit to both sides. And if you find the right syndicators, obviously, the whole goal for you, Shawn, and for me, is to find a deal that's going to win for everybody, right, win for the investors, for the general partners for everybody across the board for all of us to make money.
Sean Thomson 10:53
Yeah, so I spent all that time finding the deal, putting the deal together, collecting the passive income and passive investors. And, like you said, it allows people that may not be able to get into a real estate project of this size, because they just don't have the capacity, but they can get into a deal now because they can get all the benefits of being a real estate investor without having to have that $10 million, or whatever it is, you know, they can put their $100,000 in and still be and still get all those real estate investment benefits.
Fadi Boumitri 11:21
Absolutely. The other the other piece of that is, this day and age, you actually need a team to find a good deal, right? You could accidentally stumble on one Sure, I suppose so. But the majority of people a don't have time to accidentally stumble on one and be don't have time to underwrite it, even if they did accidentally stumble on one. So, it's important to realize that generally what people like your group do, what people like my group do is we have not just one or two, but you know, a number of people searching for deals, underwriting those deals based on prior experience, figuring out whether this deal is going to work for us and for our investors. Right. So, it also removes that piece of you know, an investor putting the time in to have to find a deal in the first place, which could take several years to find a good deal in the first place. Right? If especially if you don't have a team of people looking, but then also underwriting it, even if you find the deal. How do you know it's a good deal if you don't have that experience? And so, this allows, in addition to people who just don't have the time to put to put their money to work in real estate, this allows the people that also don't have the resources to underwrite deals and find deals themselves to also get involved in the real estate world.
Sean Thomson 12:33
Yeah, we spent I bought, I didn't realize how much I was traveling, but we bought a new car. And we put like 9000 miles on it in the first two months, because we were looking at deals, you know, we look at deals within about a five, six-hour radius of my location. And so, we just run out, you know, for a day or two and go look at properties. But you do that enough times and the mileage on your car just goes up, you know, and all that there's expense to that it takes a lot of time. So, people that I don't love, people don't understand what it really takes to find deals, and especially in this climate, it's so competitive. I looked at a property the other day, and they had 10 offers already. And it was only two weeks on the market 10 offers already they were at 18 shillings by the end of that day. Sure. It's just It's crazy. How many people are out there looking for those right, the right type of property.
Fadi Boumitri 13:19
So not only that, but then from there when you find that right property. How do you know what to do from there? Right? I've had numerous investors in the past who have put money with us. And then actually one of them specifically said, You guys made it seem so easy, that I went out and tried it on my own, he lost $20 million dollars over the course of a year trying to do it on his own because he thought, hey, if these guys are making it seem that easy, why can't I do it myself and keep a lot bigger piece of the pie for myself and realize this is an extremely, extremely smart person who's got a gigantic net worth. And still, it doesn't matter how smart you are, it matters, whether you have the experience to be able to know what you're looking at in the first place, right? So, you've really got to make sure that you understand what you're doing or that you're working with somebody that understands what they're doing. And that's one of the benefits that we bring to our investors. And then obviously, the investors bring the benefit of allowing us to also diversify our portfolio and grow that portfolio significantly larger than we could using just our own money.
Sean Thomson 14:22
Yeah, the success feeds itself, right? So, the passive the passive investors are successful because you're successful and you're successful because they're successful, right? So, if it's structured properly, that machine feeds itself and you can do more deals because you have more passive investors that are participating that are having more success. And the passive investors are more secured because you're able to do more deals and put them in a different deal. So, I mean, its kind of really is a is a great system if it's if it's deployed properly. And yeah, it's true if you're not if you're not running the process, with an acquisition from front to back if you if you skip any steps if you miss a step if you're if you're just not running the process. Looking at stuff that it can get. Yeah. And that's what passive investors really, I think it's critical for passive investors to find people that they can work with, that they that they know understands what's going on, you know, those sorts of things. So, finding the right syndicator for a passive investor is a critical step as well.
Fadi Boumitri 15:16
Absolutely, not just finding the right syndicator. But knowing what you're looking for, right? If I'm a limited partner, and I happen in a number of deals, what am I looking for? Well, number one, I'm looking for a sponsor that I trust, right, somebody as a general partner that I feel comfortable will do what they say they're going to do, right, they will, they will actively try to do what they're saying they're going to do a number two, you've got to be able to know that they're capable of doing what they're saying they're going to do, right, so I could trust me I trust my brother to the moon, right. But that doesn't mean that he would know what to do in finding a deal or managing that deal for the next 510 15 years. So, it doesn't matter whether you trust them, you also have to know that they have the capability in addition to having your trust, then from there, what are they doing to protect you to protect the investors investment, right, so a lot of I would say the overwhelming majority of syndications in the United States fall under the category of what I call traditional syndication, what is a traditional syndication mean? It means that generally, the general partner found the deal, they found the money, and they found the property management company, and they are going to give the investors a significant piece of the deal that can be anywhere from, you know, 50% of the equity to 80% of the equity potentially, in exchange for bringing the investors in for a big piece of the pie. The general partner who basically, as I said, they found the deal, they found the property management company, they found the money, they put it all together, and then from there, they're going to ask that manage, they're going to look over the property management company, which is significantly less work than actually property managing. But just as important, right between those three things, the way that they make their money, not just on the back end with their split of the 20% equity, but they also make money on the front end. So, there's going to be acquisition fees, typically anywhere in the range from 1%. To I've seen 10%, there's going to be asset management fees every single year. Again, same range, I've seen 1%, I've seen 10%. But you're going to want to make sure that you find in a general partner who is not going to feel the deal to death. And this is extremely important, because limited partners are generally what you call preferred equity. And what does that mean? That means that they actually are supposed to get paid before the syndicator, or the general partners get paid, their equity is receiving a return, that return is preferred over the syndicator. Right. So, in the case of let's say, an 8% pref, is what you call it, an 8% pref means the investors brought $10 million to this deal, they're going to see an 8% return on their money off the top. So, to the extent that there is an 8% return available, it will go 100% to those investors. And that's extremely important, because that's essentially what investors are looking to first as far as the return on their investment, then from there, they're also going to see 80% in some cases of the sale price at the end of the five-year span, right? So generally, people think of that and they go, Okay, I got 80% of the equity and I'm getting 8% on my money. Well, there's two really important things to realize when you're looking at that deal. Number one is the general partners fees are almost always going to come out before your 8% pref. So, while they call you a preferred partner, they're actually preferring themselves through that management fee. And that's across the board. That's almost every single deal that I've ever seen. So, you have to make sure that you realize that as an investor. And then the second thing you want to realize is that even after these asset management fees are paid, and even after the splits are created, there may not be that 8% to pay you in year one or year two as the property becomes stabilized, right. So that 8% in most syndications is really only paid when that money is available. So that may not be in year one, it may not be in year two, but maybe it starts in year three. And now in year three, they start catching you up for year one, they start catching you up for year two, and then hopefully they've caught you up to year three. So, a lot of investors may not realize that there's a one or two, maybe even three-year span of zero return on your investment until you get there. We generally try to do everything that we can to ensure that our investors are essentially put in a position to succeed, right. And so, what we do is we actually on our investments, we actually will charge an upfront acquisition fee, but it's not going to be something that is life changing money. This is enough money to repay us for the years of looking for deals for the team that we have to pay just to constantly be looking for deals, for the flights out to underwrite deals, or all of those things, right? It's not even going to cover all of those things. It's just there to help cover those things. And then from there, we don't charge asset management fees on an annual basis. Instead, what we do is we wait until the investors get their money back to take any additional fees. And so essentially, what that does is it creates a fire under our, you know, assets in order to get that money back to the investor so that we can start making money on the deal. And it's extremely important because it's one of the one of the many ways that we ensure that our investors are protected. And the best way to do that is to ensure that we want them to succeed, because in this case, if they don't succeed, neither do we, right. It's not just a when we succeed, eventually they'll succeed. As we see in a lot of syndications. We try to make it so that both the investors and the general partners are in the same boat and rowing in that same direction to that refinance, or to that sale in order to make sure that everybody makes money at that time.
Sean Thomson 21:07
Yeah, so I'm just going to recap, some of the things that passive investors should be looking for are, you know, someone that you trust that has a little bit of a track record that note that you know, understands what they're doing and how they're looking at the properties and knows that they can find a successful needle in a haystack essentially, right. So, you want someone that kind of meets that initial criteria that you feel that you that you trust, and that knows what they're doing. And then you want to look for someone who's putting deals out in front of you that aren't just patting these fees, right. So, like you said, a couple of fees, the acquisition fee, we charge, we charge an acquisition fee, for sure. But you know, I've spent six figures easily just trying to find a deal, right. So, it seems like a lot of money sometimes, but it's really compared to what we're spending is not. So, you want someone that's charging a reasonable fee on that and reasonable fee for asset management. So reasonable, I guess, is really the term you would want to look for there. If they're excessive, and they're trying to they're trying to home run this, this front-loaded fee system, that might be a red flag for you.
Fadi Boumitri 22:10
By the way, asset management fees, like I said, across the board, I see them everywhere, but then you see things like capital management fee on top of the asset management fee and a capital event fee on top of that, and then you know, you could legitimately feed the deal to death. So, you want to make sure that Listen, you want your sponsor, you want your general partners to make some money so that they can continue to operate this deal. And they have an incentive to continue to operate this deal, because it does cost money to do that. So, you want them to make some money, you just want to make sure you're absolutely right, Sean, you want to make sure that those amounts that are being charged, are reasonable based on everything that they're doing.
Sean Thomson 22:49
And I think what a lot of people forget and talking about these fees, and who's making what money is that you're buying a business, right? An apartment, an apartment is a business, it charges rent, it has its operating expenses, and you have maintenance expenses, and all these different expenses. And then it spits out profits, right. So, it's essentially a business that you have to operate. And if you're if you're charging excessive fees in the operation of that business, you're just you're suppressing cash flow. And if you get if you get your cash flow to a point where it's so hard to operate the business, then there's it's going to be unsuccessful, right. So you want the business to operate as fast as possible on your cash flow, you know, you want that to be a strong operation, to ensure that at the end of the day, at the end, like you said, 510 15 years, that those profits are there, and that the business is just operating Well, the property is well maintained, you've got the best property management team on site, the best maintenance team on site, you know, you want those things to be there for that. And the how that's done is cash, right, and the money coming in. So, if you if a syndicator is just loading this thing up with, you know, expense line items that don't need to be there, or fat expense line items, you're just you're jeopardizing the overall business itself, you know, and that's, that's definitely not what you want to do. So, you want to find someone that knows how to look at it as a business and takes that part of it seriously as well, I think.
Fadi Boumitri 24:18
Yep, absolutely. And that's why a lot of investors really, they look at the splits in the fees, and they look at things and they want to know, okay, well, what's my return going to be? But it's very important that you also look at what is the return for the general partner going to be because if it's not big enough, they're going to find more incentive somewhere else to put their time. So, you want to make sure that there is enough of incentive again for them to do what they said they were going to do and get this thing to the finish line. But you also want to make sure that the returns for you are fair. So again, it's a balancing act. And just like you said, this is a business, right, so for the investors, it's a passive income. But for the active partners, the general partners This is not a passive income. This is a full-time job. And a lot of people think they can dive right into the GP side, thinking that real estate is passive. And I'll tell you, every single one of them has come out and said, This is not what I thought I was getting myself into this is a lot more work than I thought. And it absolutely is. Right. And that's the whole point is, if it were that easy, you wouldn't need syndicators wouldn't need limited partners and limited partners wouldn't need general partners, because it's just easy to do. The reality is both sides absolutely need each other because each brings whether it's a certain skill set, or just, you know, the cash itself. Those are very, both very important to the growth of both sides.
Sean Thomson 25:40
Yeah, that's for sure. So I just, I'll run it through again. So look for look for someone you trust, and that understands it, look for this, look for how everything is divvied out on the front end as well as over the time. And then look for someone that that talks about it as a business and how they're going to operate that business and the success of the business, the wins and losses you want someone that's looking at, hey, here's what we think we can do for the winds. And here are the risks that we're running into, or that we think we may run into or could run into, you want someone that's looking at the business side of it as well. Because if someone's focused on operating the business, they're more they're going to be more likely to be more successful, long term for that for that investment. So I think those are probably three critical things as someone is in the passive investor role and trying to look for deals, I think those things would kind of give them the best education on is this going to be a winner or not? Right?
Fadi Boumitri 26:32
Absolutely. The only thing that I would add into there is also I'm as a limited partner, I'm always looking for not just how does this general partner going to maximize my upside, but also how are they going to limit my downside, right? What are they doing to protect me to protect my investment? And I think it's crucial that you find somebody that again, has the experience to know how to limit that downside.
Sean Thomson 26:59
Yeah, that's for sure. So you want someone that's looking at that further down the road, what kind of things can happen? So like a COVID shows up? What are you gonna do, right? That's an unpredictable, but let's talk about so let's say someone is out there. And they they're in stocks, bonds, mutual funds, they've got their, you know, their their investments that they're doing now, their IRAs or whatever they're using for their their retirement accounts. Let's talk about maybe transitioning someone that wants to get away from Wall Street, you know, Wall Street's, it's crazy, that Reddit thing the other day, I was just laughing because it's, it's, it's not based in fundamentals anymore, you know, I in the real estate world, you still have to build a business that's based in fundamentals of profits and losses, right. And, and the stock market just is it's that doesn't matter that doesn't exist anymore. They're buying in stocks, priced stocks are priced on all kinds of things. I looked at that GameStop. And I think it was trading at six, almost 700 times earnings. And I was like that, that makes zero sense. You know, it's just crazy.
Fadi Boumitri 28:01
And as much as GameStop, I want to make sure people understand, even when you're looking at a normal stock, I mean, Tesla's a very prime example to right. But Tesla's not the exception, it's basically the become the rule on the stock market, that it doesn't matter what the company is actually making, doesn't matter what the company is actually worth today. It's not like Tesla, for instance, it's not like Tesla could go and sell the business for what it's trading at on the stock market, no chance, nobody's ever gonna come close to paying that. Instead, what the stock market is predicated on is people's perception of what this company either is worth or will be worth. And most of the time, it's their perception of what it will be worth. And that's the crazy part to me is you're basically buying in, not at not at like what this company is worth today, which is what every business owner in the every good business owners should be doing is looking at what is this business worth today? or What is this business worth to me today? Right, as opposed to what could this business be worth if I put all the time and all the effort and get lucky or whatever it is, right? And that's essentially what I see going on in the stock market is people looking at stocks and going Oh, someday that has the potential to be great. Tesla again, I'll keep using it because this year is or 2020 was the year of Tesla, right? It was the year of Amazon and Tesla take a look at Tesla and realize that their earnings probably will never be on par with what their current current valuation is. But people love the concept. And people love Elon Musk and his vision and they really believe in him. Well, realistically, five to 10 years from now, when the other technologies catch up. You have no idea if Ilan musk will have come up with the next big technology or if he will have essentially let all of his competitors catch up in the electric market. And now the valuation of that company. If he goes one way and creates the next big thing. It goes exponentially larger and if he goes the other way, and Lets everybody catch up it goes exponentially smaller. So essentially, what does that equate to equates to a bet? You are betting on what lon musk will make the right decisions or not. And largely in any business, you're taking a risk by by investing into that business. But I would argue that they're not all a bet, right? You can look at the financials of an apartment building and have a educated understanding of what this building should be able to produce as far as income when when you do it in the stock market, it's really just, what can we sell people on our ability to do right, our projections, we may hit them, we may not hit them, we could hit our projections and lose valuation. Or we could, you know, way underperform our projections. And again, valuation just because people's perceptions change. And to me, I'm not a fan of other people's perceptions. I think, frankly, most people are not smart enough to evaluate those companies, I'm not even smart enough to evaluate most of their companies, right. And I also know for a fact that those companies get to kind of decide what their financials look like. Whereas we on the other hand, we take it extremely seriously deciding what our financials look like, it comes right off of a statement, as opposed to what we think we can make. Right? You have to put some projections on paper, but you have a rationale for those projections.
Sean Thomson 31:28
Yeah, and I have a lot of people, a lot of my passive investors that are, they're scared of the market right now, you know, they they see that this is just, it's not based in reality, it's some sort of other thing that's happening. And they the volatility, it's been pretty stable for a long time. But the problem is, it's not rooted in any sort of fundamentals, you know, if you buy an apartment building, you have to, you have to base your your speculations, if you know, on that on the fundamentals of the business, just like you said, You've got to look at the historical performance, you've got to look at market data, you've got to do all these things to sort of have a foundation for what we think this business is going to do. And then stock market, you know, the stock market is has nothing to do with anymore. You know, they're not they're not running their businesses that well.
Fadi Boumitri 32:10
Still, those principles should apply. It's just not what the valuations actually.
Sean Thomson 32:15
But they don't Yeah, I mean, there's these guys are still running their businesses, but their stock price has nothing to do with how they run their business anymore. It's you know, so I have a lot of my investors that are like, I want to get out of the stock market, you know, they have half a million dollars, or $100,000, or whatever it is in the stock market, and they're scared every day. And they're like, how can I get this into something that, you know, that's the beauty, I think, for me in real estate is I can drive up to my to my building, and look at it, it's there, I can see it, it's a real asset, I can paint it, I can put a better manager in there. I mean, I can make improvements to increase value, you know, you can do things to it to make it better, right? I have some control over how successful or unsuccessful that operation is going to be right here. And I love that, you know, for me that that that means everything. You know, that's that's the old school way of doing business. And all apartment buildings are operated that way. And so I think for someone that's that's in the market now, and wanting to transition, I think you know that they're really looking at doing that. So let's talk about, I guess that that whole thing was to really just talk about how can someone who is in the market, who does have that same kind of perspective that you and I just talked about and wants to get into real estate and get some of their money? Not all of it, maybe but some of their money out of the stock bonds and mutual funds into real estate? What does that transition look like for most people? Because I know you help several people kind of make that transition, what does that look like?
Fadi Boumitri 33:40
So it really depends on how they're holding, right. So if they're holding through their personal name, it's as simple as you know, selling those those, whatever amount of stocks or bonds or whatever it is, and taking that money out of whether it's a trade or whatever, whatever custodian has your money and putting it into a syndication or whatever else it is that you want to invest in. Now, if you have a retirement account, what whether it's a 401k, or an IRA, and the process largely could be the same, instead of sending it directly to the syndicator, you're actually going to tell your IRA company that you want to self direct, if they don't have the capacity to allow you to self direct, then you're going to want to move your money over to an IRA company that does allow you to self direct, and then you will be able to invest in essentially anything that you want. If you want to invest in real estate through a self directed IRA. Absolutely. That's the most common thing. If you want to invest in livestock and cattle, you can absolutely do that too. So there's an unlimited number of options. It's just so happens that real estate is one of the most again predictable and most used tools through a self directed IRA or you know, a 401k that you can direct the hard part is if you're a W-2 employee, and your employer doesn't allow you to remove the the IRA money or move it out of whatever custodian they use. That's, that's usually the only limitation. But generally, it's as simple as finding the self directed IRA company that you'd like to use, having the funds moved over to that company, and then finding the syndicator, in this case that you'd like to use, and, and having them submit paperwork to your IRA company to get it funded.
Sean Thomson 35:24
Yeah, it's really not that complicated. There's some when when gets into self directed there are, there's three or four accounts, different types of accounts that you can do. And, and there are some kind of quirks to it, there's a there's a UBIT tax thing that comes into play with with syndication and things like that. But the actual just, if you decided, Hey, I don't want to be in the stock market anymore, I want to I want to do real estate, it's really not that complicated. You just had to find the right sort of resource, I guess, to go to, you know, there's a lot of custodians out there that do self directed, that are fantastic, you know, I deal with two or three of them pretty much all the time with our stuff. And then we, you know, we don't three or four or five of them, that they're all really great, and can help people set up their accounts. So I know that's not it's, there's a lot of decisions to be made there. And it's it is kind of complicated, but the process itself can be streamlined a little bit.
Fadi Boumitri 36:10
Absolutely. It's it's not like physical work, right? It's as simple as calling an IRA company that does it and telling them that you'd like to have your funds moved over then calling your current IRA if they don't have self directed capabilities, and telling them where to direct your funds. And that is to the self directed company.
Sean Thomson 36:28
Yeah, that's great. Oh, funny. What else would what would a passive investor really need to know about? I think, there, are there other issues that they should be aware of as they're as they're trying to make this transition? Or are considering real estate investing?
Fadi Boumitri 36:42
Well, I think those are the basic principles. Obviously, you can get as deep as you want to get, we have passive investors that want to underwrite the deal themselves. We have others that trust us, and just say, Hey, listen, if you guys like this deal, then I want to be in on on this deal. So it really depends on whether you're the type of person, you know, I like to point out lawyers and engineers. Why? Because that's what I'm accustomed to. I'm an I'm an attorney, and I know many engineers very closely, we're very analytical people. So we're going to want to look at some of the data ourselves, and we're going to want to understand the data ourselves, then you have entrepreneurs who are extremely busy with their time. And even though they could probably look at that data and analyze it just as well or better than I can, they don't have the time to do that. And they're going to go off their instincts or their experiences. And they're going to trust this person, not all of them. But in general, I do find that entrepreneurs and and fellow real estate investors are usually the people that that kind of, they may look at the information, but they're not going to take the deep deep dive, whereas the engineers and the lawyers, they're going to look at every word, they're going to look at every number, and they're going to want to underwrite the whole thing themselves. So realistically, you can go as deep as you want to go, we do offer the capability to look at the data for our investors. But I would tell you that 95% of the investors aren't going to dive that deep into it, they're going to look at the basics they want to they trust the operator, and they want to look at the very, very fundamental Well, what is the projected return on my investment? The other thing that I will say, for limited partners is anybody that guarantees you anything, or, or makes it seem like this is a slam dunk, and you never have to worry about your money, run away from them. Because realistically, in every business, there is risk. The reality is, again, what you're looking for is somebody who's smart enough to mitigate that risk. And I often get a really good question is, what's the worst case scenario? What could potentially happen to my money. And what I like to tell investors is, number one, we try to get the investors money out as quickly as possible, we pride ourselves on getting that investor money back to them as quickly as possible, not only because it limits their downside, but also because it means now I get to make money too, right? It's very important to me that I make money, I live my life based on, you know, based on the fundamental principle that money is the tool that allows me to do all the things that I want to do, right. So it's really important that I make money off this deal, too. And that's why it's extremely important to us as the general partners to get those investors their money back to start making that money. But even even as you go, even as all of these deals go, again, you're looking for how do I limit the exposure and so what I also like to tell our investors is we put top notch insurance in place, we don't just you know, we've we've gone through the ringer of lawsuits with insurance companies that didn't cover things in the past or tried not to cover things. So now we actually have a an insurance person who is well versed in an insurance for commercial real estate so that he knows which policies in which writers to put in place to protect us the investment in our investors ultimately, right. That's an extremely important piece. The other one is how we structure in a syndication how its structured is that we raised this money to buy the asset asset but we also raise money to fix the asset, right? That money doesn't get used unless you actually fix the asset. So that money gets put in. But as it gets put in the assets value also continues to rise. And so that also limits the liability of the investors based on the fact that that money as it goes in, as long as the general partners are doing what they should be doing what they said they were going to do, each passing day should be a little bit a little bit more a little bit easier sleep for the investors, because they know that the value of that building should be increasing with every passing day.
Sean Thomson 40:36
Yeah, incrementally going up, the business plan is operating. And that's kind of what I was saying before is that you want to find someone that that has a business plan, that makes sense, and then they can explain how they're going to make that trajectory of growth in that building for the future, too.
Fadi Boumitri 40:51
Yeah, and frankly, we are a large part of our portfolio is heavy value add. So we actually we educate our investors up front that, hey, first, you're gonna see a dip, right? We might be at 60% occupancy when we buy, but how many of those people are actually paying, and of the people actually paying, how many of them are going to be able and willing to pay the higher rent after we renovate these units. So we actually expect that 60% to drop to maybe 30% occupancy at some point. And so you have to make sure that your investors are aware of that. So they're not looking at your the quarterly update and going Wait a minute, we went from 60, down to 30. It's gonna scare them, right?
Sean Thomson 41:29
That's scary, right.
Fadi Boumitri 41:30
We have to let them know upfront that this is a value add play that this is maybe a little bit more risky, in that we are going to go down to 30%. But we've already accounted for all that by by saying by raising the money that we need to raise to renovate these units by looking at the the units in the area and what they're renting for based on whether they look like the current units that we have, or the units that we want to create by being the nicest units in the area, we basically guarantee that we have access to the best tenants in the area, because now you're going to have twice or three times as many applicants per unit because you have the nicest units in the area. And you're at the same or a similar price to everybody else. Right? So it means you get to select the best renters in order to fill your entire building with the best renters. And now that means less turnover and turnover is one of the biggest hurdles in our business.
Sean Thomson 42:23
Yeah, what seems scary on especially on the deals that you guys do, what seems scary is actually necessary, right? So you can't remodel those units until people leave. So you kind of you know, sometimes the sometimes the occupancy is gone, it's got to tank a little bit. So you can clear those units out. So you can do what you have to do to get to that next level. Right? So absolutely. In when but in operating a business plan like that, it's like that that's like, wait a minute, your people are leaving, you know, and it's like, that's, that's the opposite of what people think it should be doing. But yeah, that's that's kind of. So that's funny that you said that, because that that is it, if you're not running the business, you're like, well, what's going on, you know, so that's good.
Fadi Boumitri 43:01
It's also the opportunity, right for the investors and for us the opportunity and the upside is in that reinvestment into that rehab. And it's also the opportunity that most people don't want to touch it, because it's a lot of work. Right, most indicators are looking again, they want to find the deal, they want to find the money, they want to find the property management company and they want to put it on autopilot. We are doing heavy value ads, it's a lot more work. It's a lot, a lot more watching over the project managers watching over the the property managers because there's so much more work involved on this thing that if you're not watching over them like a hawk, they're going to miss something. But it's a it's a no brainer. And that's why it's so crucial number one to educate your investors on the fact that is going to dip so that they're not getting scared. But number two, that you have the experience, the knowledge, the underwriting of this building to make sure that it goes the way that you expect it to go.
Sean Thomson 43:57
Yeah, you've comp it, you've you've considered that in your business plan. And that's just your model. That's how it works. Right? So as long as you've got a good business plan on that, it's no problem right? Well, finally, I appreciate you coming on the show, man, this is a this is a great talk, I love this subject. You're extremely good at explaining these things. I I'm happy that you were able to come on and and talk about it. I think this is I think this is kind of a mysterious world for a lot of people, they they're out there and they don't know that they can invest in real estate and and once they do figure it out, they don't know exactly how to do it or what it's all involved and, and how to be safe and how to educate themselves. So I think when we talked about it's going to help a few people at least so I really appreciate you coming on.
Fadi Boumitri 44:38
It's my pleasure. A few years back when I didn't have any experience of it myself, you know, other than being an attorney in the space, I was afraid of it to what I will tell people is that you have to find somebody you trust and put put that small piece in to see how it works and you're going to understand more and more with every deal that you do.
Sean Thomson 44:57
Well speaking of that, so how can people reach out to you seeing what's the best way to kind of reach out to you guys and get more information on what you guys have going on, is there like a website people can go to or something like that.
Fadi Boumitri 45:09
Our website is legacywealthholdings.com that's where you can find all the information about whether it's our properties or whether it's our education business. In addition to that, if you follow Tim on Facebook, he's much more active than I am. Tim Brats, my business partner, he's going to be giving all kinds of nuggets and all kinds of value helping people to keep up the right mindset whether you're a business person or whether you you're employed by somebody else, just the mindsets and the the visions and the thoughts that he has people across the board find them extremely helpful. So if you guys want to, you know, he's a good person to plug into because he's never going to put negative content out there. He's always going to be looking to add value to people and so it's a really good resource.
Sean Thomson 45:56
So, www.legacywealthholdings.com and then and then for sure, look up Tim Brats on your, on your whatever social media you like the most. I think he's on Instagram and Facebook. And yes, he is like probably LinkedIn.
Fadi Boumitri 46:07
By the end of this month, they'll probably be on. He's definitely on LinkedIn, he'll be on tik tok. And then we're getting him to actually switch to iPhones so that he can be on what's the one that people are using?
Sean Thomson 46:18
Clubhouse.
Fadi Boumitri 46:19
So I'm not on that one. I'm very limited in my social social media interaction. But yeah, Tim is extremely active and provides really good content.
Sean Thomson 46:28
Okay, great, so people can reach out to you guys that way. Absolutely. Well, thanks, Bonnie. I really appreciate you coming on. And hopefully i'll talk to you soon.
Fadi Boumitri 46:37
Sounds great. And thanks for having me!
Sean Thomson 46:39
See you soon!
Abigail Thomson 46:41
Thanks for joining us for another episode of Next Level American Dream. If you would like to learn more about what we talked about today, want to contact the team directly, or are interested in passively investing and being a part of our deal room, head over to our website at www.thomsonmultifamilygroup.com -- Before you go, please leave a review! Your comments help us create more episodes for you to enjoy.