The SBRE Vision
Creative destruction is alive and well. Technology combined with the entrepreneurial spirit is transforming entire industries. There are some very obvious examples – Uber in transportation, Airbnb in hospitality, Tesla in automobiles, and others. Many industries have long established structures that are not well equipped to stand up to changing technologies and new ways of doing things. The financial services sector, including the world of investing money, is ripe for such transformation. Many investors are not comfortable with the stock market and would prefer something less abstract with better returns. “Alternative investments” or “Alts” are available in increasing numbers in a variety of forms, strategies, and asset classes. Investors do not, however, have good access to these Alts for a variety of reasons that are mostly related to the well-entrenched “way it has always been done” in the financial services industry. Registered investment advisors and traditional wealth planning professionals by and large do not understand Alts, nor do they have any idea how to perform due diligence on them. This, combined with a variety of administrative and compliance challenges, mostly precludes them from recommending Alts to their clients. Yet investors still want better returns and more connection to what they are investing in whether their advisors recommend such investments or not, and changing technology is making Alts more and more available to them regardless of their financial planner’s input.
Real estate asset based products, as near as I can tell, are the most popular Alts for investors. Many have either owned property, participated with others to own property, invested in trust deeds, or otherwise been involved in one way or another in real estate. It is real, tangible, and understandable for most investors. But investing in one deal at a time is hard for many passive investors unless they want active, day-to-day involvement. Real estate asset based pooled investments funds, therefore, can be more far more efficient for both the small balance real estate entrepreneur actively involved in originating those assets and providing the opportunity in the first place and investors who are seeking better returns that are largely non-correlated to the broader equity markets. These funds, most often 506 Regulation D funds, can be an attractive alternative investment but also have their own risks and dangers, and they are widely misunderstood by investors, financial planners, and often even by the fund managers themselves. SBRE funds are, in short, both attractive and scary at the same time. And this is where opportunity lies to transform the industry.
I work regularly with SBRE entrepreneurs and managers all over the United States. Like any industry, it contains people who run the spectrum from competent, capable, honest and diligent to the very opposite of all of those things, and everywhere in between. I can say without reservation that there are many highly deserving SBRE entrepreneurs running funds (or considering running funds) who can and do make excellent managers and deliver quality results for investors. I also know there are, at the same time, just as many or more investors who are looking for precisely the type of investment these SBRE entrepreneurs provide but who do not know of their existence, where to find them, how to gain access to them, or have an advisor that does either. Building the bridge between these SBRE entrepreneurs and these investors (and advisors) is Fairway America’s and SBREfunds.com’s mission. Changing regulations and evolving technology is enabling this to happen.
The biggest issue for SBRE funds when it comes to deserving capital and earning trust from investors is transparency. Investors and advisors need to know that the manager is not going to turn into a Madoff and run a Ponzi scheme with their money. The difficulty is that they largely do not even know what to look or to ask for and that managers do not know how to provide the needed transparency without chewing up all of their time. What is needed is a platform that allows managers to easily and seamlessly incorporate best practices, oversight, and transparency into their operations and provides investors and advisors with the confidence that the manager is highly unlikely to be a Madoff. There really has not been such a platform and thus the SBRE fund industry has been and remains highly fragmented, localized, and anything but uniform in how people operate. Such a platform is precisely what SBREfunds.com intends to become.
For a manager to expect investors to not only place their money with them, but to also entrust in them discretion over how and where to invest that money, they need to be willing and able at the same time to take steps to provide those investors with protections that will help prevent that manager from being able to commit fraud. Technology has made many steps increasingly viable, even for new, small and emerging managers, to take. Using a 3rd party fund administrator is one step. Having the fund’s assets held by a third party custodian, making it much more difficult to fabricate the existence of such assets, is another compelling step. Having the fund audited by outside CPAs is another (which by itself is not enough). Becoming approved to have the fund listed on the major investment custodial platforms in this country (e.g. Schwab, Fidelity, Ameritrade, etc.) is another. Completing and being willing to provide comprehensive background checks is another. Providing investors with asset level detail in letters, shareholder meetings, and ultimately in online access is another. Doing all of these things in combination demonstrates to investors and advisors that a fund manager is serious about their commitment to proper transparency and being above board. Doing this systematically as part of how they run their fund can actually be easier and more efficient for managers than trying to convince one investor at a time of their integrity in the absence of most or all of these steps.
Investors and advisors want to be able to know that significant steps have been taken to minimize the risk of fraud, which all of the above does to a very significant degree. It enables them to short circuit the primary concern of “how do I know they are not going to rip me off”. Once these are in place, they can be free to focus on the particular fund strategy, asset class, return profile, income characteristics, etc. SBRE funds can and should be an excellent alternative investment for many investors, but collectively as an industry are really just in their infancy in terms of becoming a true asset class with some uniformity of operations. The industry needs to do a much better job of inspiring confidence from investors and, perhaps more importantly, their financial advisors, if it wants to gain access to the extremely large appetite among them for what it has to offer. Those SBRE fund managers willing to do what is necessary to engender greater trust and build credibility will be the ones who garner larger shares of that capital over time. Helping both sides understand and take action on how to do this for the benefit of both is at the core of our SBRE vision.
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.