What It Means to be a Real Estate Entrepreneur
One of the things I love so much about small balance real estate (SBRE) is the wide variety of strategies that are pursued all over the country by what I’d call “small balance real estate entrepreneurs.” From making private hard money real estate loans to fixing and flipping houses to buying and selling seller contracts or distressed bank notes, there are multiple ways that these real estate entrepreneurs not only “do a few deals” here and there, but actually build complete businesses around these strategies. There are many, many people who get started in real estate by buying, fixing up and selling a house and there is a lot of material and resources out there catering to this first time real estate “investor.” But there are far fewer people who actually turn their desire to invest in real estate into a full time business replete with written strategy, objectives, priorities, staff, office space, overhead and other characteristics of an operating company. It is these people who are pursuing their particular SBRE strategy as a full time endeavor that I categorize as “real estate entrepreneurs” and to whom we are dedicating our time, effort, and energy to help them build their businesses to higher and higher levels of growth and achievement.
These SBRE entrepreneurs are the private lenders, homebuilders, flippers and rehabbers, commercial and investment real estate syndicators, note buyers/sellers and other serious minded individuals who have devoted their professional lives to real estate. There is a fine line between when a person is doing a few deals and when they make the move to becoming an entrepreneur pursuing any given real estate strategy as a business. The language in the industry around how to categorize these people and this transition is not very clear at all. People doing any level of SBRE deals (whether as a hobby or a business) are often referred to as “real estate investors.” I find this moniker somewhat confusing because in our vernacular an “investor” refers NOT to the person who is the one finding and arranging the deal, but rather someone who more passively invests in individual deals originated or procured by others, or in our case and many others, in a pooled investment fund created and managed by an SBRE entrepreneur which invests in such deals. Let’s call these investors “HNWs” (an acronym for “high net worth” or “accredited” investors). This is an important distinction that will become clearer in a moment. But first, back to my narrative.
Once someone decides to become a full-fledged real estate entrepreneur and actually build a business out of their SBRE strategy, they all face a very similar path and very similar challenges, as I have learned both through my own path and those of dozens of clients and hundreds or even thousands of others I have seen or encountered in our business (and continue to do so regularly). In addition to the more common challenges that all entrepreneurs face (such as finding quality employees, negotiating office space, purchasing and financing equipment, dealing with payroll, producing accurate and timely financial statements, etc.), SBRE entrepreneurs have a never-ending issue they must confront that most businesses and entrepreneurs do not have to face. Namely, they must continuously raise capital to fund each and every transaction they routinely do as part of their business strategy. Obviously many businesses face the challenging prospect of raising capital, but most of them have to do it at the operating level, not at the deal level, and not every single day, day after day, week after week, month after month, and year after year. This is the reality that almost all SBRE entrepreneurs face that many “real estate investors” (as they are generally and in my opinion confusingly called) do not and, in my experience, is the No. 1 most difficult, challenging, and misunderstood aspect of being an SBRE entrepreneur. And remember, I am making a big distinction between the SBRE entrepreneur who is doing it as an ongoing business and the “real estate investor” who is doing a deal once in a while or for the first time.
I have observed a discernable pattern with most SBRE entrepreneurs that goes something like this. They start with a single deal or a few deals using their own money or that of close family and friends. This carries them a ways but, with a few rare exceptions of people who are fortunate enough to come from or possess significant wealth, they soon find themselves constrained by their limited capital. Because they have focused on the deal side (i.e., learning how to find good real estate opportunities), they soon have more deals than their insufficient capital base can accommodate. Moving inside out from their sphere of influence, they are often able to relatively easily gather some amount of additional capital from the next rung of people with whom they are tangentially connected and with whom some degree of trust is extant in the relationship. This carries them a little further, but the smart, hardworking and dedicated ones find that their deal flow still continues to outstrip their access to this next, usually limited layer of capital. They are now forced to move beyond their current networks and relationships and start attempting to raise capital from HNWs they don’t know well or at all, including more professional or institutional sources such as registered investment advisors, fee based planners, and other centers of influence who can connect them with these HNWs. This is when they begin to hit a wall and when it gets considerably harder to scale to higher levels of deal volume (or even maintain current levels). The inherent trust that exists with family, friends, and the first layer of connections is not there with these people and they look at the investment much more clinically. If the SBRE entrepreneur has not considered the factors that are important when raising capital from HNWs they do not know well (and in my experience they often do not even know what many of these factors are), obtaining the money they need to grow the enterprise further begins to get much more difficult.
At this stage, still a good percentage of SBRE entrepreneurs are able to push through this barrier and raise capital from HNWs one-deal-at-a-time through the syndication model. I have written about this extensively in the past, but the short version here is that many HNW accredited investors will still invest with people they don’t know all that well via the one-deal-at-a-time model IF that HNW understands real estate well because 1) they can mitigate their risk by picking and choosing which deal they will invest in and 2) they can drive a hard bargain on their terms. For the professional SBRE entrepreneur who is truly good at his or her craft, understands their asset model well, and proposes attractive and aligned terms on the deal, they are often able to scale their enterprise to significantly greater heights using this model at this stage of their company’s development. This is an effective and important capital structure approach that can allow many SBRE entrepreneurs to achieve greater level of success than having to remain at the family, friends, and extended network level. Even then, there are often inherent inefficiencies to this model and limitations to how far they can take it using the syndication or one-deal-at-a-time approach. The next rung of the proverbial ladder for many who have achieved this level is to create their own pooled investment fund, which is an entirely different capital structure as well as capital raising and administrative challenge. As any regular follower of this blog will readily recall, I have elaborated at some length on the issues associated with making this next leap. Suffice it to say here, I believe it is only appropriate for some asset models, some managers, and some situations, but when it is, it can be a fantastic way to push through the syndication level at which many SBRE businesses peak and stay.
Whether using the syndicated one-deal-at-a-time model or a pooled investment fund, either way requires the successful SBRE entrepreneur to deal with HNWs outside the existing circle of influence. The degree of success SBRE entrepreneurs have in their efforts at doing this is the biggest and most important element that separates the many who have small, aspiring businesses from the far fewer who really turn their endeavor into a true company that employs people, produces investment returns to its passive investors, builds enterprise value and produces income and wealth to the SBRE entrepreneur over a long period of time. This to me is a truism that necessitates a commitment on the part of the SBRE entrepreneur to develop strategies, competencies, and processes to systematically improve this aspect of their businesses. As I look around the landscape of resources available to the SBRE entrepreneur for this purpose, I do not see a great deal of truly helpful information. There are lots of tactics available for consideration or purchase that rarely are provided alongside any context of the overall puzzle that is facing the SBRE entrepreneur and thus that are mostly sub-optimal unless the entrepreneur genuinely grasps how that particular tactic fits into his or her overarching strategy and unique business model. However, to get to that point generally has required lots of wasted money, time, and resources pursuing such sub-optimal tactics. As we move into 2015, it is our mission to become the number one resource available in America to SBRE entrepreneurs to help you understand the issues at hand, improve your capital raising capabilities and options, and take your SBRE enterprise to higher and higher levels of performance, achievement, and profitability.
Matt Burk is founder and CEO of Fairway America, LLC, and SBREfunds.com, and Chief Investment Officer of Fairway’s two proprietary nationwide small balance real estate (SBRE) asset based pooled investment funds, Fairway America Fund VI, LLC, and Fairway America Fund VII LP. Fairway is the nation’s premier consulting, advisory, and investment firm in the SBRE private pooled investment fund space, providing a full spectrum of practical, real world products and services (including capital) needed for true success for SBRE entrepreneurs all over the U.S. Matt is a highly regarded adviser, consultant, and mentor to dozens of SBRE fund managers and author of a widely read blog followed by serious SBRE entrepreneurs and investors. For over 20 years, Matt has led Fairway’s deal underwriting as well as capital raising efforts in Fairway’s seven proprietary funds and individual trust deed investments, resulting in more than $250,000,000 in capital raised from accredited investors through more than 1,000 SBRE deals. He is currently working on multiple SBRE fund consulting engagements nationwide, authoring a book on how to raise capital for and effectively manage pooled investment funds, and dedicating his efforts to create greater awareness and drive more capital to the many high caliber and deserving SBRE entrepreneurs around the U.S.