Welcome to The Accelerated Investor Podcast with Josh Cantwell, if you love entrepreneurship and investing in real estate then you are in the right place. Josh is the CEO of Freeland Ventures Real Estate Private Equity and has personally invested in well over 500 properties all across the country. He’s also made hundreds of private lender loans and owns over 1,000 units of apartments. Josh is an expert at raising private money for deals and he prides himself on never having had a boss in his entire adult life. Josh and his team also mentor investors and entrepreneurs from all over the world. He doesn’t dream about doing deals, he actually does them and so do his listeners and students. Now sit back, listen, learn, and accelerate your business, your life, and you’re investing with The Accelerated Investor Podcast.
So, hey, welcome back to Accelerated Investor. Hope you’re enjoying this series on private money, private investing. I love talking about this stuff. It’s absolutely just the funnest part of the real estate investing business for me is acquiring the capital, buying assets, stabilizing those assets and creating massive passive cashflow and equity. And in this part, part number three, we’re going to talk about why private money partners, private investors, private lenders, why did they give active real estate investors money to do deals, right? Why would somebody who’s got a half a million dollars or $1 million or $10 million from exiting their business or selling their ECOM company or you know, saving money in their pension, their 401k, why would they give money to real estate investors to do deals? As opposed to just leaving it in the stock market, leaving it in stocks, bonds, mutual funds, leaving it with a financial advisor.
And the reason why is because the investment alternatives in the stock market all suck and the returns are far better. There’s much more advantages and they’re much more predictable in real estate, okay. Let me explain. You see, when I was 21, 22 years old, I was graduating from Baldwin Wallace University, small division three liberal arts school in the Cleveland suburbs and Berea, Ohio. And I played college football there. It was awesome. We had a great time. It was graduating from school and I got an internship. And I was recruited into a company called Northwestern Mutual, Northwestern Mutual. I got my insurance license to sell life insurance and health insurance and longterm care and disability insurance employee benefits. And I became serious six licensed. I eventually over the next couple years got my series 6, 63, 66 when eventually became a fee based financial planner, okay. A fee based financial planner.
And I started to learn very, very quickly that I could help people with their retirement plans, rollovers, 401k’s, IRA’s, life insurance, health insurance, company benefits, etc, etc. And then from 1997 to 2001 things were fine, I was recruiting money, I was managing more and more money was also the time of the internet bubble. First time the Internet was the Internet, I don’t know, but what’s this internet thing and all these internet stocks and different websites and you know, Amazon back then was losing money. Imagine back then Amazon was losing money. Now they just kind of own the internet, losing money and all of a sudden prices kept going up and up and up and they talked about the new economy, the new economy. Everybody was talking about how prices could keep going up even though companies were losing their ass.
And we eventually found out in 2001 that that was not the case, that it was really the case of who’s the bigger fool behind me? If I’m willing to pay $50 a share, is there a bigger fool behind me who’s willing to pay $53 a share or $56 a share or $57 a share? And that essentially is the stock market. It’s stocks go up and down because companies come up with good products, they come up with good services and there’s constantly new money being poured into the market because people are constantly pouring money into the market from their 401k’s. There are businesses that are making money, they’re constantly pouring money into the markets because they want to get a return. And so the stock market though, when I think about it, is completely out of our control, right? So if you invest in Apple stock, you invest in Facebook stock, you invest in, you know, any publicly traded company. Let me ask you a question. Do you even read the prospectus?
Do you delve into their financial situation? Do you understand what assets they really own? Do you understand the expenses, the commissions, the 12B1 fees, the marketing fees? Do you understand what the 401k company is charging you? Yeah, not really. You know, even when I was a financial adviser, none of the financial advisors sat around and read the disclosure agreements and read the prospectuses and looked at all the different fees. Nobody did that. And when 2001 hit, I was like I really, even though I am a financial planner, I have zero control over what’s going on in the market. I’ve got zero control over what my clients are getting in the market. I’ve got zero other than the typical strategy for most investors, which is what? Diversify and wait. That’s what every single financial advisor is going to tell you is diversify and wait diversify and wait.
All right, so we’re going to talk a little bit more about that on part number four coming up. So let’s talk a little bit more about why do private investors give money to real estate investors, active real estate investors to do deals? So a lot of my clients and students, a lot of my own investments have a ton of active investments, meaning they’re the operator actively investing in fix and flips, actively investing in rentals, actively investing in residential assisted living, actively investing in apartments. And then we’ve got again about $30 to $35 million of passive private investors that are just giving us the money in order to deploy. And those passive investors just want to get a good return. They’re retired, they’re nurses, they’re teachers, they’re doctors, they’re business owners, they’re lawyers. They don’t have the time to do active investments, so they just lend on it.
So when I look at why do private investors invest with active investors? There’s a couple of reasons, right? Write these down. First of all, the deal has to do the talking for you, okay. When you look at my case studies, if you visit any of our websites, our social media accounts, you’ll see just hundreds and hundreds and hundreds of deals that we’ve closed and the deal does the talking for you. And you know when I survived pancreatic cancer and came out of that surgery, I crafted my first like irresistible offer and I started paying investors 12% interest or 15% of my profits from my fix and flips my rehabs, 12% interest or 15% of my profits, whichever was greater and all of a sudden people started saying, wow, that’s awesome return. That’s an awesome idea. I never had anybody say, God, that’s a dumb idea or God, that’s a dumb concept or that seems, if anything they would say, hey, that sounds too good to be true, okay.
Another thing I would start doing is I would pay people 10% interest when I bought it to refinance it, 10% interest. And then if I refied it and paid them back their principal and their interest, I would then leave them in the deal in perpetuity for 10% 20% of the deal and the cashflow and the equity in perpetuity. So they had no money in the deal anymore that all their chips off the table and they stayed in the deal and they owned a small piece of it. And so passive investors invest with active investors first of all, because the deal does the talking, the deal make sense. There’s an irresistible offer when it comes to the return. Now the second thing is that the deal, not only the return upside, but the return downside, we’ve got to cover that. That’s number two.
And so when I think about why do active investors successfully, the active investors that I know that recruit a lot of money, they answer the question, which is when am I going to get my capital back? So if I’m a passive investor, the question becomes what’s my return? But when am I going to get my principal back? There has to be a clearly defined way of when exactly am I going to get my principal back? Is it a year from now? Is it six months from now? Is it three years from now? Is it from a sale? Is it from a refinance, right? When we were flipping properties, it was easy. We’re going to pay you 12% interest or 15% of the profit. We’re going to pay it all to you at the end when the property sells, and we’re going to do this within one year, there was a one year balloon.
Now we always tried to flip properties and four months, six months, eight months, much faster, but we would get them their money within a year no matter what, okay. And so they were rock solid in knowing when am I going to get my principal back? If you watch Shark Tank, if you watch, you’ll Kevin O’Leary, I love to watch Kevin O’Leary and when he spoke at our events in the past. His biggest question he always asks on Shark Tank is, you know, when am I going to get my principal back? When do I get my investment back? That’s the first thing that he’s really focused on and that’s something that every investor wants to know is what’s the return, but when am I going to my principal back? Another reason why active investors borrow money successfully or use money successfully from passive investors and passive investors are comfortable is because they are comfortable with the operator.
The operator has a clear defined plan for that deal. They have a clear vision for what the property is going to look like. They have a clear path to achieving the pro forma or the exit strategy. So they believe in the operator, okay. So if you in the past have a terrible credit score and you’ve borrowed money and you haven’t paid it back and you’ve got judgments and liens and you’ve got outstanding child support, do me a favor. Don’t borrow money from private lenders because it doesn’t seem like you’re ever going to pay it back. Just be a wholesaler, make some money wholesaling and you’re fine. But if you are legitimately serious about building your own personal freedom and having passive income and equity, then you’ve got to take people’s money very, very seriously. Kevin O’Leary told me, said, look, Josh, when I look at my businesses, the number one objective is to protect the investors capital.
Protect the investors money, protecting investors, capital. What are they going to get in return when that’s the number one thing. Doesn’t matter if your company is public, if your company’s private, if you have private investors, passive investors, whether you did an IPO, whether you’re on Wall Street, it doesn’t matter. The number one is to care for and take care of and be a good steward of other people’s money. And if you are, you will recruit so much money over time, right?
So that’s the fourth reason why passive investors invest with active investors is because they believe not only is that person a good operator and has a clearly defined you know, exit strategy for the dealer, a clear path, a clear pro forma for that deal. But number four, they feel like that investor, that active investors, a good steward of the passive investors money they’ve borrowed money before they’re of a high character of high moral value.
Those are the kinds of things that passive investors are looking for. Like, am I going to want to hang out with this guy? Am I going to want to hang out with this girl? Am I going to want to get beers or play golf? That’s sort of important, right? But what’s really important is if I give you my money, are you going to take care of my money, okay? So you’ve got to do deals where there’s that a tremendous amount of profit spread, whether it’s cash flow, whether it’s equity, whether you’re buying it, two thirds of the value, whether it’s an apartment deal, whether it’s a rehab deal, whether it’s a wholesale deal. When you buy at 60 to 70 cents on the dollar and then you’re repositioning, let’s say an apartment or a rehab, and it’s going to be worth 100 cents on the dollar and there’s 30% to 35% equity, and you can show them that and you can convince them that you’re a good steward of their capital.
Now you know you’re in a position to recruit a tremendous amount of money all right? And what’s great about it is that private lenders will never check your credit score and they’ll never check, you know, your assets, your credit. I’ve never had somebody say, send me your balance sheet, Josh. I’ve never had a private lender say, Hey Josh, I want to check your credit. I’ve never had a private investor say, Josh, I want to see how much money you make. What’s your income? Never. Never in 15 years, not one person. And so private investors when they’re comfortable, okay, in giving money to an active investors because they check those four boxes, okay? One, is there an irresistible offer or a great return to when am I going to get my principal back? Three, explain to me the deal. What’s the exit strategy? What’s the pro forma?
Give me the numbers. How does the deal pencil out, is there enough profit spread. And fourth, and probably most importantly, is that investor passive investor has to be convinced that you are going to be a good steward of their capital all right? That’s why passive investors invest with active investors. And I play both sides, right? I’m a private money lender on the hard money lender. I borrow money, I use money. I’ve invested in apartments, I’ve invested equity, I’ve invested with other groups of people. We’ve done it all. And I know when I get text messages from my friends and my investors that say, Hey Josh, you know, my life is better because I’m investing with you. Thank you so much for what you do for me. I’m able to provide a better lifestyle for my family. I have a clear path to my retirement because Josh, I’m working with you is because they’re convinced that I’m a good steward of their capital, right?
One more comment about that before I wrap up. You know, I’ve done a handful of deals, not many. I’ve done a couple, maybe three or four deals in my long career of investing that I’ve actually lost money. And you know, I could have gone to that investor and said, hey, you know, you put your money in and you put in $400,000 grand and you know, unfortunately we’re going to sell the property. We are going to lose money and we’re only going to net $350,000 here $375,000 and you know you’re going to lose $25,000 or $50,000 from this transaction. You know, I’m sorry, but you’re out and you’re going to lose some of your interest and some of your principal. And, you know, I’ve had that happen maybe three or four times where I’d invested that was about to lose money and not one time have they actually lost money.
I brought money to the closing table in order to make them whole, so they were able to get their principal and their interest that they were promised their principal and their equity, their principal and their cashflow, their principal and their interest. I brought money to the closing table to make them whole, okay. And so if you’re going to be a good steward of other people’s capital when there is a bad deal, you have to over communicate. You have to tell them what’s going on. You have to explain to them how you’re going to refinance or sell the property, whether you’re going to lose money and then how you’re going to make up for the loss that you’ve incurred, okay? It’s 100% up to you. If you want to recruit more capital, you make them hold, you take care of them. You bring your money to the closing table if you need to.
You put them in another deal where they have no money in the deal, but you put them in the deal for free, okay? You do something to make up for it because you’re a person of high moral character. You’re a person that’s a good steward of other people’s money and you do that, you’ll recruit even more money. You’ll get even more capital, more introductions, more referrals, and your spider web of influence will grow. If you let that investor lose money, they’re never going to invest with you again. They’re never going to give you another nickel. They’re never going to reinvest with you. They’re never going to show any kind of trust in you and they’re never going to introduce you to their friends.
So keep that in mind. Sometimes when you do a bad deal, sometimes when you lose money is ultimately the time to recruit the most capital. Because when you lost money and you show that you’re a person of high moral character, you do what you say and you say what you do. Those people become rabid fans of yours because even though they could have lost money, they didn’t. And that’s exactly why passive investors invest with real estate investors like us. And if you can convince other people that you’re that same kind of person like we are, you can have the funding you need for all that kind of freedom and cashflow and equity in perpetuity that you’ve ever wanted.
You’ve been listening to Josh Cantwell and the Accelerated Investor Podcast. Leave a comment on our iTunes channel and let us know what you want to learn next, or who you’d like Josh to interview. While you’re there, give us some five star rating and make sure to subscribe so you can be the first to hear new episodes. Follow Josh Cantwell and his companies, the Strategic Real Estate Coach and Freeland Ventures on all social media platforms now and stay up to date on new training and investment opportunities to start your journey toward the lifestyle you’ve always dreamed of. Apply for coaching at JoshCantwellCoaching.com.
With all the alternative investment options out there – stocks, bonds, savings accounts, retirement accounts, etc. – why in the world would someone choose to lend their hard-earned money to an active real estate investor?
Well, the two main reasons are this: the ROI is usually much higher in real estate AND the results are much more predictable and controllable than other types of investments.
So, if you’re an active real estate investor who is hoping to build solid connections with private lenders/passive investors, you’re already fighting a winning battle when you approach these individuals with a property deal.
In Part 3 of the Funding Equals Freedom Series, Josh shares more insight on this topic – including how to create an “irresistible” deal that any private lender would jump to invest in.
He also discusses his background as a financial advisor, and how this gave him some valuable insight into the world of investments. This experience convinced him of the overwhelming benefits of real estate investments, as compared to other options.
So, if you’re ready to build your portfolio and secure more funding, find out how you can also create appealing offers that will allow you to present a win-win situation to your private investors.
- Josh’s background as a financial advisor and how it gave him an insider’s perspective on the stock market and other alternative investments
- Josh’s strategy for creating an irresistible offer for passive investors/private lenders
- How to clearly define when your passive investor will get their principal back
- Your #1 objective as an active investor (hint: it has to do with your character)