Table of Contents - Raising Private Capital with Matt Faircloth
Dave Debeau [00:00:09] Well, hey there, everyone, this is Dave Debeau with another episode of the Property Profits Real Estate podcast. And today it is my pleasure to be interviewing a fellow real estate entrepreneur, author and raising capital specialist, Mr. Matt Faircloth. How are you doing today, Matt?
Matt Faircloth [00:00:27] I am awesome. Dave is much for having me here.
Dave Debeau [00:00:29] My pleasure. You know what? I'm a big fan already because I rent out. I bought Matt's book Raising Private Capital. I am partway through it and I am loving every page of it. So, Matt, I love having you on the podcast here, my friend. So thank you. That aren't familiar with you yet. Just tell us very, very briefly a little bit about your background, because you've been doing real estate for at least 15 years.
Matt Faircloth [00:00:52] How about 15 years? Yeah, first of all, thank you for picking up a copy of the book. That's an honor and I'd love to hear what you think of it. So I started investing in two thousand five when I quit my job. I was a traveling salesman for a company called Ingersoll-Rand and they made large equipment that went in factories. It was a fun job. I get to see how things were made. I went to a lot of factories and a lot of manufacturing operations, met a lot of great people, but my soul wasn't in it, know. And so I read Rich Dad for Dad, which my girlfriend, now wife had given me a copy of, and I loved it. And I was like, this is changing my life. And this is completely you can't look back now. And I love what the possibilities of this book is opening up for me. And so in thousand five, when my wife and I got married, I quit my job and started the DeRosa Group, which is a real estate investment company. And so since then, my wife and I have been full time investing in and building that built our investment company, have done all kinds of fun stuff from apartment buildings to single family homes to mixed use buildings, to land deals, to office complexes, which I'm sitting in right now in my office building. And we scaled up and grew over time. We didn't just jump in and do big deals first. We did small deals and worked our way up through real estate. So it's been a fun journey.
Dave Debeau [00:02:04] Excellent. So tell us a little bit, I don't know, from your book and your bio, you started your whole real estate journey with a thirty thousand dollar loan, I believe, from a family member. And since then, you've done like, I think forty million dollars worth of transactions using other people's money. So you definitely do that in when it comes to raising capital. How did that start?
Matt Faircloth [00:02:26] Sure. So well, first of all, the thirty thousand dollar loan that we got was from my girlfriend's father. And so I don't recommend that your listeners go to their girlfriend or boyfriend's parents and ask them for money. It just happened to work out that way that I ended up marrying her and, you know, made an honest woman of her and all that kind of stuff. So that was our first private loan was from her dad to buy our first true rental property in Philadelphia. When we first got started, we scaled up over time. We did a lot of small deals and then we started doing larger deals, which is where the dollar amount, the forty million in transactions started to bubble up pretty quickly and that once we got into larger deals. But what I want to put out there to your listener base is that you don't have to go buy a ten million dollar apartment complex to be in real estate or to be the syndicator to be raising capital for investing. You can start small and you can get into this business in bite sized chunks and it scales quickly. And so we scaled up slowly and built up a business over time. And I'm happy we did it that way.
Dave Debeau [00:03:29] Excellent. Yeah, that makes a lot of sense. And and what I find with a lot of my clients up here in Canada, it's it's the mom and pop real estate investor. They sell finance. Their first one or two or three little single family homes are up down duplexes or whatever it is, and they run out of cash or credit to do more deals. And that's when they really need to start. Tapping into other people's money, so we were talking a little bit off camera about this and some of the big problems I see with people up here in Canada when they first get into raising capital is that they go about a wrong and they risk running afoul of what we have up here are provincial securities commissions by going out to the general public and basically trying to raise capital without a license. So there are certain rules and regulations around that. What are some of the big mistakes you see people making when they first kind of tiptoe into this south of the border?
Matt Faircloth [00:04:24] Well, aside from going, I love that you called it south of the border. I've never heard of the word America called up before, but doesn't like the lower forty eight or the lower something. Sometimes you guys have the best names for us. We have no names for Canada as I'm from Canada. But you guys are the best nicknames for America, you know, for the United States down here. That is so cool. Anyway, south of the border first I already mentioned going too big, too fast. That's a major mistake I've seen people make. I also think that people go in too many different directions at once. So trying to buy. OK, I'm going to go buy single family homes and let's give me my direction. Oh, you know what? I buy apartment buildings. Oh, you know what? I want to buy a land deal or whatever. I'm not doing too many different directions of real estate investing at a time. That's mistake number two. And I think that, as you said, just not knowing the rules and it's funny, a lot of the rules in America are very similar to the rules in Canada about, you know, having to properly file yourself. And then if you break those rules, you're pretty much setting yourself up as selling securities without a license. And that's just not having an advisor in place like yourself for like a good lawyer or whatever. They can tell you what the rules are. And to go out and start raising money from people willy nilly without really knowing exactly what you can and can't say to people not having the right documents in place. So those are my mistakes that I think people would make too big, too fast, not going too many different directions and not knowing the rules and having a team to help you with those rules.
Dave Debeau [00:05:49] And I mean, are there rules really radically different from one state to the other or is it pretty much similar across
Matt Faircloth [00:05:56] in the US? It's all the same. Yeah, yeah. I mean, there's different filings and conversations you've got to have with people in different states, like I'll give an example. So we're raising we raised for an apartment building a couple of months ago. Right. And one of our investors was in Oregon and in the state of Oregon in the US. He cannot enter an investment agreement like that by himself. His spouse has to sign a community property waiver. Right. So he had to have his spouse sign off on this community property waiver to be in on the deal in other states. In America, there is no community property waiver for him to sign in that. So there are nuances that go state to state. And it's extremely important in the US to have an attorney that knows, OK, that my attorney put in letterhead to the investors when they reviewed our investment documents that if you live in these states, you have to sign this piece of paper. And if you live here, you have to do this. But it's not like, OK, if you live in Arizona, you do this. If you live in Mexico, are you going to do this? This just certain states have if you add on things that people have to deal with when they raise money from investors. But for the most part, it's a state
Dave Debeau [00:07:05] so that you focus on apartment buildings, larger deals, probably doing syndication type stuff when it comes to raising capital. What about the mom and pop real estate investor who's raising capital to buy and let's say a single family home? Yeah, you just need maybe one investor on board and perhaps up here, what we do is we we sometimes bring the investor partner on board. They qualify for the finance and the property goes into their name. We're secured with a caveat on title, something like that. How would somebody get started in the States with that level of raising capital?
Matt Faircloth [00:07:38] Yeah, so here's what we did, that same thing. Right? So my first investment with the passive investor was fifty thousand dollars. It was passive. He was just a private equity investor. And I think that in the US, if your equity investor is active at all in your deal, it's not a security. And so the key to that is just simply if you've got somebody investing equity in your deal, give them something to do. Give them give them a role in the deal. Having them directly take title is probably not something I've seen very often, as you guys have in Canada, because the title rules in America are a little more absolute meaning. Like if the investor has title, that is their deal, their control. Whereas in Canada there's probably some caveats and carve outs like, as you had said, where the syndicator still can have some control and make the decisions, even though the investor has title. I like that because the investor has collateral. That's an issue that we have, is that when someone's investing in the deal, they actually don't have true collateral. All they have is the operating agreement for the LLC that they bought into. But in our in our country, what you can do is just simply look for my first deal. It got put in fifty thousand dollars. We bought two town. Homes in Trenton, New Jersey, you know, he helped keep the books on the properties, he ran the finances, he also personally guaranteed the mortgage alongside me. Those two things by themselves made him defined as an active investor and that made it not a security. Now, you can scale that up over two or three investors. If you've got some mom and pops that are looking to scale up a bit, it's hard to do that kind of thing for 40 investors. But for one to two to three investors, you could likely give them something to do to make them active in your deal.
Dave Debeau [00:09:19] All right. So and then otherwise, if they're not going to be active in the deal, then you're going to be doing this corporate structure, something along those lines, right in their
Matt Faircloth [00:09:29] shareholders, exactly what we're going to be shareholders in the deal. Yeah. And they're just going to be passive investors or limited partners, is what we call them. Just or member shares, whatever you want to call it.
Dave Debeau [00:09:40] Very cool. Now, we've got a few loopholes up here in Canada with you can you can have on board.
Matt Faircloth [00:09:47] So I'd love to compare notes on your loopholes compared to our loopholes. Tell me about them.
Dave Debeau [00:09:51] But close friends, family members, Business Associates is one of those loopholes that we like to work in. Those people we can bring on board as investor partners and not be considered as security. All right.
Matt Faircloth [00:10:05] So I wish you could do that here.
Dave Debeau [00:10:07] I came in here. I'm not a lawyer, not an accountant and not a not working for the securities commissions of this. My understanding of how things work. Right.
Matt Faircloth [00:10:14] So neither am I a lawyer or a CPA, but both those things out there. Good.
Dave Debeau [00:10:20] Yeah. So so nothing nothing directly like that in the States.
Matt Faircloth [00:10:26] So let me ask you a question. This is an interesting conversation. And one of those tangents you said we might go on. Right. What what is a close friend?
Dave Debeau [00:10:34] That's a good question. That's why it's kind of an area, right? It's a bit of a gray area. So.
Matt Faircloth [00:10:39] Yeah, yeah. So that's interesting. So here's the way it works with us. You can raise money one or two ways. You can raise money from only accredited investors. You guys have investor accreditation.
Dave Debeau [00:10:50] That's another that's another loophole that so we have to do
Matt Faircloth [00:10:53] so only accredited investors. And then the bar on what you have to do is extremely low. You know, if only you raise money from accredited investors. Now, there's also some leeway there on how you define that accreditation for that investor, how you validate it, how you actually need to do self stated, whether if the investor tells me they're accredited and they sign off on a form that says, yes, I'm accredited and I know what accredited means, and then you define the accreditation in the form that they're signing, it says, yes, I meet all those things and I sign here. Other syndicators like to take it one step further and actually have third party validation, meaning like show me your tax returns that show me your bank statements to validate the accreditation. We don't do any of that. So if you're accredited dealing with accredited investors, then you can pretty much solicit investments. You can market you can fly a banner that says I buy apartment buildings and you should too kind of thing. Right? If you don't if you're going to take friends and family that might not be accredited, then you're raising money from what's called sophisticated investors in the US where they need these silly people to state that they have a wherewithal and that they have some background, some education, some mental capacity, everything like that to handle what it is they're getting themselves into. But I think that that's a gray area. No. One. Right. But the biggest gray area there is in this whole thing is you have to have something called a preexisting relationship with these sophisticated investors. Right. But there's no SEC law that I just like there's nothing says it says in your world what a close friend is. There's nothing in RACC that says what is a preexisting relationship. Now, I've developed something that in my world called the three touch rule. You know that. And it doesn't exist. The FCC doesn't have that definition. But I do in saying if I'm working with an investor and I'm going to put them in the preexisting relationship bucket, I want to have three touches with them. Right. So a touch could mean an email that was sent and responded to it could be a phone conversation or a face to face meeting. Right. And one of those touches has to be a face to face meeting or a phone conversation on which we discuss their goals and where we're going as a company and everything like that. So that's the way I've defined it internally. But he doesn't really give you much guideline, the SEC in America, they allow the courts to define these things.
Dave Debeau [00:13:18] Yeah, so that's speaking to to a security specialist here in Canada. That really bottom line is, where are you going to get in trouble is when you lose somebody their money and they complain to the Securities Commission, that's that's when that's what they're going to do. Yeah, that's. Yeah. And so I've got I don't have the three touch rule, but it's what I'm working with clients. I say, OK, when we're creating that list of people with preexisting relationships, they should be when they see the name, a face should pop into their mind. They should actually know who that person is and not feel like punching them in the face. Right. So that's that's the starting line of how do we know if we got a decent preexisting relationship? But I like that
Matt Faircloth [00:14:00] it's tough when you scale, though. I mean, you know, when you're where I'm at, where you get a lot of investors that are showing up that want to work with you, you know, and with the mom and pops that you're working with end up, you know, getting more and more deals, more and more investors, because that's what's going to happen. You should talk about the stages. You're going a lot of podcasts, whatever, that people are going to figure out that what you're doing. And then I want to be a part of the conversation. They want to be a part of it. Right. So at the end of the day, that's kind of one of those things that you have to mitigate is how do you build business systems around developing these preexisting relationships in a streamlined manner to where when somebody comes up to invest with you, it's not like you have to have a 10 year relationship with somebody, you know, for them to invest with me. How do you create that preexisting relationship with somebody who shows up on your doorstep, you know?
Dave Debeau [00:14:46] Yeah, definitely. Definitely. Well said there. So in the last couple of minutes, we got him out and I told him, time flies when we're having fun, my friend. So we'll have to we'll have to definitely come back and revisit your whole process of raising private capital. But I think we can probably agree that one of the safest areas to go after our safest categories is an accredited investor. Yeah. Or any quick tips on for the mom and pop real estate entrepreneur out there that wants to start raising capital from accredited investors to listen?
Matt Faircloth [00:15:16] They full disclosure, I've never raised money just from accredited investors, although the way we raise money for a winery, we did a winery deal, a winery, hotel and golf course in South Jersey that was accredited. Only then I found that to be a different conversation and we had to turn a lot of people away. So if you've got mom and Pop that's looking to raise money and they're debating, OK, do I want to go accredited and have less hurdles and less securities conversations like that, or do I want to go not accredited or just accredited and not accredited and open up the floodgates to have more people able to be involved? Right. That's the crossroads that you're at. And we've always chosen the latter about opening up the floodgates. We're probably going to be moving to more accredited based conversations, but in doing that, you're going to be excluding people of color, because in the, I would suppose, the same things in Canada, the majority of people in the US that have wealth to put into deals and have money to put into a deal, it's likely in their retirement account. And it's up to us as syndicators to educate people. Hey, listen, did you know you can take your in America, it's called an IRA that you can take your IRA account and run it through a self directed custodian and put it into my deal and they'll love that. The thing is that they might not qualify in us to be accredited. Is over a million dollars net worth, right? This person could have a half a million sitting in their IRA, but that along with whatever they have in investable cash, only accredited thing in America, the million doesn't count your home. You can't count on your house.
Dave Debeau [00:16:43] A very, very similar. Yeah. Yeah.
Matt Faircloth [00:16:45] So but you know what? Where do most people that are middle income or high end middle income keep their wealth, retirement accounts and in their home? Right. So you're excluding one of the largest sources. And I'm not saying the S.E.C. should do that. It's good that they're doing that. But the other one is their retirement account. And so we want to be able to give them access to that. And so that's the main reason why we chose the non accredited path, is because we want to give people access to another source of investing with their retirement accounts is probably my biggest source of investments is retirement accounts. So that's why we've always gone on accredited. So but I am at the crossroads because I think it'll will the market more and brand more. And that's something any other investor that you deal with on your side would have to have that conversation with themselves about how do you want to put yourself out there?
Dave Debeau [00:17:34] Definitely. Definitely. Matt, great, great stuff. Again, really enjoying the book. I look forward to interviewing again and a few months and we can go more in depth up to. And in the meantime, if people want to find out more about Matt, their thoughts and how to get your book and how to find out more about you, what should they do?
Matt Faircloth [00:17:54] Just simply everything is on the group's website. My company, DeRosa Group, Dotcom, DENR, OSA, G.R. Up Dotcom DeRosa group Dotcom. They can actually link over to buy the book on the website. They can check out my YouTube channel on the website. They can check out my wife's podcast, which is dedicated to real estate investing. Jurnee. Real estate investing journey of a woman called the real estate investor her show, and they can also, if they want to hear more about investments we have to offer, they can begin that journey there on our website as well.
Dave Debeau [00:18:22] Awesome. Thank you so much. Really appreciate your time on the call today.
Matt Faircloth [00:18:26] Thank you, dear. This has been great. Thanks for having me. Looking forward to doing it again.
Dave Debeau [00:18:29] All right, everybody take care and we'll talk to you next time. Well, thanks very much for checking out the property profits podcast.
Matt Faircloth [00:18:36] And you like what we're doing here.
Dave Debeau [00:18:37] Please head on over to iTunes, subscribe read us and
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Dave Debeau [00:18:47] regular flow of inbound investor inquiries about your real estate deals, then I invite you to attend one of my upcoming live online demonstrations. And you can check that out at Investor Attraction Demo Dotcom Ticker.