Never Do This When Investing In Real Estate (or You're Done) | Ep 90

James: There's one mistake that will sink more deals than bad markets, bad tenants, or even bad luck. And if you make this mistake, you're over before your investment even starts. Yikes. That's what we're gonna be talking about today on the Furlo Capital Real Estate Podcast, where we dive into the intricacies.

Passive real estate investing and our mission is to equip people to not make those mistakes and instead invest wisely in both properties and peoples so that together we can build wealth while improving housing. I'm James, and this is my wife, Jessi.

Jessi: Sounds so ominous. Oh yeah. I'll, I'll share something cuter than that.

Okay, go for it. So our, our puppy has been teething and his, his teeth, like they get wiggly and fall out just like little babies. And I had forgotten, I mean, it happened with, with Vinny several years ago. Yeah.

Speaker 3: But.

Jessi: With Chuck now his teeth, his teeth are wiggly and they've come out and I like to save them.

And the kids think I'm so weird, but

James: that's just the kids. Well, yeah.

Jessi: Okay. You think I'm so weird, but it's so cute. It's, oh my gosh. And then it's like his big boy teeth grow in and Mm. Yeah. It's like, that's fun. Although the timeline for puppies is super fast. So like True, he's, it's like months five months old.

Yeah. Yeah. And he's already lost like all the front teeth on the top and bottom, and now it's like working way back. And the new

James: come in pretty quick too. Yeah. Like with kids, you're like. Right. They

Jessi: lose it. And then there's a hole there for, for a long time. All I want for Christmas is my teeth.

James: Nope. He's like, yeah, I know.

It's been fun to watch. Oh, it is fun.

Jessi: And of course he chews on everything.

James: That's true. That's true. So amazing. Well, maybe people can chew on this idea. Mm, nice transition. Big mistake that that people make. Here's big mistake. So here's the big huge, the, the core danger is that is this thing that can ruin your returns.

It can even rep ruin your reputation. Yikes. Yeah, it's yeah, it's pretty bad. So here's the deal, like as an investor, like you can survive a bad quarter, but you cannot survive a bad sponsor.

Speaker 3: Oh,

James: yep. Alright. Yep, yep, yep. Because there's just, there's a high opportunity cost to all of this, right?

Like, not only could you lose your money mm-hmm. But it's tied up for a ton of years. Mm-hmm. And, yeah, and if you've. Recommended this person to other friends and family. Yeah. Then your reputation is really like reputation risk. Yeah. It's, it's not good. Hmm. So I know we tend to talk all about due diligence stuff on this podcast, but like it's the thing Yeah.

As a passive investor, and so I will continue to harp on it

Speaker 3: Yeah. Over

James: and over and over again. So in this case, what happens when you skip out on due diligence on the people side of things? Mm. Okay. So I've invested passively in, in a deal. And they weren't like, not horrible. Mm-hmm. But there were some things that I just did not do.

The proper thing vetting that I got surprised by. Okay. Communication was the big one. Like they never. They never sent updates or that's not true. They did send updates, but they had nothing to do with, they just weren't helpful. Me as the investor. Yeah. And it was during the build stuff. Now that the build is over and it is being managed by property manager, that manager is actually sending regular updates.

Huh. Which again, is kind useful. At least you're like, all right, things are happening. That's cool. Yeah. I guess haven't yet to receive a financial update. Interesting. Which is like the whole we care about. But you didn't ask ahead

Jessi: of time Correct. To know that's the deal, how they were gonna communicate or what they were gonna communicate.

Yep.

James: Yeah. Yeah, exactly. Hmm. And, and I just think it just makes your experience as an investor so much better. Mm-hmm. Now, I'll admit for some of my stuff, I don't tend to give, like, when we're doing flips mm-hmm. I tend to not give a lot of the financial updates. Mostly. 'cause I'm also like, I A, the loans.

Yeah. But b, like, it's just, it's hard to give a financial number mm-hmm. In terms of the budget. Hey, like o other than like, yeah, there's a budget. We're still going for it.

Jessi: Mm-hmm.

James: And then at the end I'll say like, Hey, we either hate it or we didn't.

Jessi: Yeah. I would imagine you give updates when something change, when or if something changes or Yeah.

If something happens often. Mine are all

James: about timelines. Sure. 'Cause like that's the thing that matters. Yeah. Most. And we gotta do it right now that timeline's taken forever, but we talked about it on a previous podcast. Yeah. But yeah. Yeah, so that's so that's part of the issue. So here's what professional investors do to make sure that it, that is good.

Number one, they just investigate their, their track record. Mm-hmm. Which go to furlo.com/properties. You can see all of mine that I have bought, both present and not future, both present and past. Man. Wouldn't that be sweet? That would be impressive. Dang. And I have some high level metrics for each of them.

And if you wanted more information about them, like we can share some of 'em we've talked about on this podcast as well. Mm-hmm. Which, that's not a bad idea. I should link them on there. But anyways yeah. So you could do that. Do you wanna verify the communication patterns again? This is one that I wish I had done.

Jessi: Yeah.

James: Like how fast they respond. How transparent are they?

Jessi: Yeah.

James: And what's going on? So I know like for me, when people call and ask about the deals, I'm not instant on the spot, but pretty quickly, like, yeah, here's what's going on. Happy to get on the phone with people.

Jessi: Or you're at least willing to share.

Like I'll respond with some sort of response within 24 hours or whatever it is. Yeah. You know, a general rule of thumb. That way they know what to expect.

James: Yeah, yeah. Yeah. And it's important to understand how the sponsor makes money. Mm-hmm. Are your incentives aligned or not? Right? I just had a really good conversation with a guy who's investing in a deal.

Mm-hmm. Who that's, that was one of the questions. He's like, how are you making money on here? Mm-hmm. And the way this is worded, I wanna make sure that it's all worded correctly. Yeah. That kind of stuff. Which the thing is like. Smart. He's a pro smart, and he asked a great question, so I thought it was good.

There's also things to look out for. Yeah. A big one would be someone who offers a higher preferred return to their investors. They're trying to dangle a carrot. Hmm. Which means the deal may not be great, or they may be having trouble attracting

Speaker 3: Hmm.

James: Return investors potentially. So how do you know

Speaker 3: that?

James: Because there's like industry standards. Oh, so, so you need to research what the standard is. If they're doing like a double digit preferred return, you might be like, oh, that's weird. What's going on with that? Or if they're like, we're offering a loan and it's gonna get you a 15% interest, like, well, that's not normal.

That's really great. Tell me more. It does sound great, but it's also like, why? Yeah. You know, that kind of stuff. There's also the rise of Instagram syndicators. These are people who interesting. They're more like, they're just make a ton of videos. Yeah. They don't necessarily have experience. I've seen this 'cause 'cause the, the idea is you have a limited pool of friends and family.

Mm-hmm. You have a virtually unlimited pool of not friends and family. Right. And so the question is, how do you make yourself known to that bigger pool

Speaker 3: Huh.

James: Of people. And so people who are just getting started will they'll start the bigger network thing. And so but they may not have done a deal or they're gonna partner with someone else.

Who has done a deal and they're just bringing in the funds potentially. Okay.

Jessi: That's super interesting.

James: Just relying potentially. Well,

Jessi: how do you, how do you, again, like how do you know that?

James: Track record.

Jessi: Oh, so you, you may hear about them on Instagram, but they've done, then you don't instantly reach out.

You look them up and yeah. Figure out they or do reach out. Reach out and

James: ask all those questions and learn about what they're doing. And you're gonna find for a lot of 'em, like, yeah, I'm partnering on my first deal. Exciting. Got it. Okay. Cool.

Speaker 3: Hmm.

James: Yeah, which I've looked at those kind of deals and they're, it's interesting there are genuine like partnerships where you get someone like, yeah, this is my first time and I'm working with someone.

Yeah. Who's doing this? Sometimes you get it. Where it's a guy who's got a really good track record, is essentially lending his name. Oh. But the newbie is doing all of the work. Right. Which is less. Compelling. Yeah. But that's a thing. Yeah.

Jessi: They're, they're just endorsing the person, I guess, kind of. But

James: yeah.

And just another trend that's worth watching for is like, what's going on with the markets? Mm-hmm. Like are they creating riskier? Are they going after riskier projects? Trying to chase after yields? Yeah. Or just like, does the market conducive to it? So let's like, just kind of be on your guard mm-hmm. For that.

Yeah. So things you should always ask for. I bet you can guess some of them.

Jessi: Track record.

James: Yep. And Yep. Including their failures. Yeah. Which, if you wanna know about my biggest failure, listen to this previous podcast. I believe it's number 89. Whoa. Whoa. When I talk about how I invested in $1 into a property and ended up losing 14 grand.

So sad. So there's my answer. Yeah. But ask

Jessi: about their track record. Yeah. What else? Guess about like. How they get paid.

James: Yep. That's a good one. Yep. Fee structure. Yeah. Perfect. Yep.

Jessi: How are they getting paid? How am I getting paid? Maybe ask what they know about the market or,

James: oh, yeah. Maybe potentially.

Yeah. I, I had like ask about references from past investors. Sure. That'd be good. Which I think would be good. Smart. Which now that we've had a few di cycles. Go full cycle, few deals go full cycle. Mm. I should get some of those previous investors on here. Yeah. And I go, yeah, just list to millennials.

Interview. Here you go. Problem solved. That's kinda my hybrid Instagram slash real experience thing. So here's some questions that you can ask before sending funds. Tell me about a deal that didn't go to plan and what you did, which is not necessarily a failure, just didn't go to plan. Sure. Which for me, a lot of it's timelines don't go to blame.

And how did you protect investor capital? In worst case scenarios, like for me, if it's a loan it's personally guaranteed. So they're paid no matter what. Don't get paid back. Yeah. And then if it's more of an equity, longer term play, I'm like, yeah, that one's a little bit harder, but I was super conservative in minor writing and blah, blah, blah.

You know, do things like that. And then another question to ask is, if I invest and you disappear tomorrow, what happens? Which I did have a guy ask me that. And he so interesting was like, this deal seems really dependent upon you. Mm. He's like, 'cause you're the sponsor. Mm-hmm. And you're managing it, like, what happens if something happens to you?

Speaker 3: Mm-hmm.

James: Which I was like the answer Key man insurance. But even then he did bring up some good points where I was like, I haven't fully thought this through. Okay, fine. Something does happen to me. The insurance is there, but like now what? Somehow the investors. To somehow get together and make some decisions as a group.

Hmm. Which is hard to do 'cause I don't necessarily hand out the investor information. Yeah. But maybe I should, I don't know. Or maybe you

Jessi: should have a, someone allocated as your backup or something.

James: Yeah, that's a good idea. Some sort of. Like the equivalent of a, some sort of last will. Yeah. Of like, here's who I'm, yeah.

Someone steps in and here's who I want,

Jessi: finishes out

James: the deal to manage. Yeah. And they'll somehow get access to all my information and investor stuff. Yeah. Yep. Yeah, man. I don't know. Those are good questions. Yeah. And just another tip is if it is someone brand new that you've never invested before.

Yeah. It's our small and uncle. Go crazy. Yeah. Don't be like, yeah, here's all my money. It's all right. Yeah. So. So there you go. So I think the, my big takeaway is that the, the deal is not the deal. The operator is the deal.

Speaker 3: Hmm.

James: I think that's a new, like one-liner. You know, we talk about the deal of a lifetime comes once a week, fall in love with the deal, not the property.

And I think it's just, furthermore, the deal is not the deal. The operator is the deal. Sponsor is the deal. Like that's the, that's the thing that honestly, that's gonna make or break it. Interesting. Yeah. So

Jessi: fall in love with the sponsor, but don't, 'cause I'm married to the sponsor, so Yes, exactly. Just, just build trust with the sponsor.

We're gonna, we're gonna workshop that one on a future episode.

James: Yeah. And, and kind of related to that, right? Like. It's, so, here's an interesting thing that I've noticed in this latest deal that I'm doing. I've had a lot of questions about the numbers themselves. Mm-hmm. Like the metrics that, for me, like I, I find super interesting.

They're good. Like the cash on cash, the average annual return mm-hmm. The earnest money, the IRR, but I've talked to a lot of investors and they're like, yeah, I kind of know what that is, but not really.

Speaker 3: Hmm.

James: And so I'm actually trying to think through how do I change the way that I market my investments to people?

To like, yeah, the numbers are important, then it should be there. But maybe that's not the top of the fold thing anymore. Interesting. Is kind of what I'm trying to, I'm trying to figure that out. 'cause I've noticed it's, it confuses people, which is a problem. And but I'm also like, you should know these numbers that are like, they are important.

Hmm. But but I'm also noticing super interesting, which tells me. The numbers are not why people are investing with me.

Jessi: Yeah, yeah. Which is good. I mean, what, what they're missing? What is it that people are wanting to know?

James: Well, I think a lot of 'em, they wanna know that I've done the due diligence and I know what the numbers represent, and I think they're good and they trust that I know what I'm talking about.

Jessi: But they don't, if they can't verify it, then

James: yeah, that's hard.

Jessi: They don't really know.

James: Yeah. Yeah. So I don't, yeah, those test,

Jessi: that's where I, I feel like those testimonials, once you get some of those built up, like that could be above the fold. That way they're like, okay, cool. Someone else has done this.

They went through the process. It was good. And then I, they still should known the numbers and,

James: right. Yeah. I mean, playing around with the idea of what would it look like to write a short book. Hmm. That does, I'm like,

Jessi: what do these numbers mean?

James: Yeah. Because I, and I've talked about this with other people where like, there's this one book, it's a really good book.

Where it's like, it's a book for passive investors and it's like 350 pages long and it's a textbook. Hmm. It's dense. I mean, I was even like, I gotta slow down, take notes on this. And like, and I know numbers and I like this topic. Yeah. And I was like, this is a lot. And I'm like, and this is for passive investors.

Yeah. Nope. Yeah. I wouldn't have gotten through that one. Yeah. So I'm kind of like, I think there's gotta be, there's a middle ground between reading some BiggerPockets blog posts. This book. Hmm. That I think that could be accessible and helpful,

Jessi: I feel like. Okay. What this made me think of was I don't remember the guy's name.

It's the guy who writes the comics, but he wrote about rocket science. Oh, yeah. Using the,

James: the XKCD guy.

Jessi: Yes. Using like the top most common hundred words or whatever. Yeah, yeah, yeah. I feel like that's what you need to do. The thing go upper

James: was like, what do you call a rocket? Exactly. That's

Jessi: what you need to do for the numbers.

Mm. You know, it's like IRR is. Normal person talking.

James: I like it. We're like having an on air brainstorm. This is sweet. Yeah. Yeah. No, like, like, yeah. I think there's there. How would you describe that? So no promises. It's not happening this year. I got way too much other stuff going on, but there's something I totally find

Jessi: that very helpful.

James: There's something there that I think makes sense to make. Yes. Mm-hmm. And accessible. Like, here's how I look at deals, here's how I analyze them. But in like, for normal people Yeah. To understand. Yeah. I

Jessi: mean, it's like essentially like the Robert Kiyosaki, how you define assets and liabilities, like money in your pocket, money outta your pocket.

Mm. Like that is a very easy concept. And asset assets, money

James: and liability takes money out. Just so you know,

Jessi: to, to say like, okay, instead of using the terms asset or liability, you are gonna think about it as it's either money in your pocket or money coming out. What's a,

James: what's a, what's a visual, like a physical, visual way of thinking about it.

Jessi: That's, that is, that's one way a, a concept. Yes. Okay. That's a layer of it. But also using terminology that's like money in, money out. I totally get those words. Yeah. Asset liability. Okay. I don't know, you know. Okay. Money in, I like, I like where, I

James: like where your head's at.

Jessi: We're gonna, we're gonna keep good.

We're gonna keep talking about this caveman. It's like caveman descriptions. Anyways, that was a sidetrack.

James: Yeah, so that was good. So in conclusion it's not about the markets and it's not about the property and I don't even think it's about the debt terms and a lot of other stuff. I think like the number one thing really is that sponsor.

And if you get that wrong, you're done. Yeah. It doesn't matter. None of the other stuff. Is relevant at that point. Yeah. So before your next investment, here's what you gotta do. You gotta ask yourself, do I know enough about the person I'm trusting with my money? Or am I just hoping for the best?

Jessi: Mm.

James: So that's, that's the question.

And if question you don't know

Jessi: enough, find out.

James: Find out. Yeah. Don't just walk away. They might be awesome. Like me give like a,

Jessi: a resource that's like, here's the questions that I would ask a sponsor.

James: Oh dude, wait till I lot that softball there. Why? Yes, I do. If you,

Jessi: I just feel like that would be super helpful for people.

Oh man. Be like, if you don't know what to ask, ask this. Yeah. Yeah.

James: So part of my good deals only. Book that you can download. Mm-hmm. It's a whole bunch of questions. It's like 192 questions that you should ask before investing. The very first section are all questions you should ask the sponsor.

Mm-hmm. There's like eight sections. Yeah. Yeah. And that is, it's number one. 'cause it should be number one. And those are all a great, all great questions. Yeah. Yeah. It's good. And I'm actively trying to answer all of them in a bunch of different ways. This is one of them. And and whoever else you invest in should do the same.

Yeah. So, yeah, that's the, if

Jessi: you don't understand what one of the questions is asking. Can contact James and he'll give you like, I love talking about this stuff. The easy description of what it actually means. Exactly. Exactly.

James: Yeah. I actually do, for the top 40 questions, you don't even have to download it.

I actually have an article that you could just access and Nice. Just read 'em all right there. So there you go. Trying to make it easy 'cause it's, it's really important. Mm-hmm. So, yeah, that's a don't get lazy on the sponsor. Like that's the thing that you gotta be worried about. So with that. Thanks for listening, and if you would like to learn about more of about investing with us, you can check us out at furlo.com.

You can see our whole investing thesis, what we're about, our track record, the works. It's all there. It's awesome. Again, thanks for listening. Have a great day.