INDUSTRY VOICES
FUNDING DEALS & OPM
HOWTHE JOBS ACT CHANGED THE GAME I n 2012, President Obama signed the Jumpstart Our Business Startups (JOBS) Act into law. That legislation was created to help small businesses raise capital by easing some U.S. securities regulations. For the first time ever, private companies could raise money by marketing their offering to the public rather than only to investors with whom they had that “preexisting relationship” as defined by the SEC. However, there was one major ca- veat. Only accredited investors could subscribe, and they would have to prove their accredited investor status in writing via a third party. The SEC defines accredited as an individual who earns $200,000 or more per year or a married couple that earns $300,000 or more per year. An investor can also be accred- ited if they can prove that they have a net worth of at least $1 million excluding home equity. The JOBS Act also gave birth to many of
one, even Donald Trump, runs out of their own money eventually. That’s why you need to learn how to use OPM.”
BUTWHAT HAPPENSWHEN THERE’S A RECESSION? At that time, the only way I knew how to use OPM was to use the bank’s money through conventional financing. Since we were tapped out on down pay- ments, I just stopped investing for a bit. As it turned out, I’m glad I did, because shortly thereafter the Great Recession hit and real estate investors nationwide got hammered. One colleague of mine had a private lending fund in which he had raised millions of dollars in capital using OPM. His own father-in-law had invested over $5 million. As property values plummeted, borrowers walked from their loans and my colleague had to repossess most of the properties in his private lending fund. By 2009, the homes were worth much less than what was owed and they didn’t cash flow so he was forced to sell them at a major loss. The investors in his fund were furious and
The True StoryAbout Investing with Other People’s Money BE METICULOUS AND TREAT INVESTOR FUNDS LIKE YOUR OWN, AND YOU’LL BE FINE.
some tried to sue him, even though he obviously wasn’t respon- sible for the housing melt- down. Never- theless, the legal
dence, taking as much cash out as I could to buy cash-flow properties in Dallas, Texas, where properties were much more affordable. My mentor approved of this plan and helped review the properties my husband and I were purchasing. We ended up buying 14 rental homes, but then ran out of money. I wanted to con- tinue building up cash flow, so I asked my mentor what I should do next. He replied with a grin, “Ah, yes. Now you get to become a real investor.” I asked him what he meant. I thought I was doing pretty well already! After all, I had just finished buying more than a dozen houses in Dallas, Texas, at the beginning of its boom cycle. Noticing my confusion, he continued. “Real in- vestors use other people’s money. Every-
the crowdfunding platforms we see
today. While this is a huge boon to small
business growth, it is also still very restrictive. Many people who would like to invest may not be accredited. As a result, Title
bills mounted and he ended up losing everything, including his marriage. I watched all of that hap-
by Kathy Fettke
M
ost of us start out in real estate investing using our own capi-
of your own capital will limit the size of the deals you can transact.
investor who acted as a casual mentor. I’d run ideas past him and he’d give the thumbs up or down. At that time, California properties had recently doubled in value. Since I was a mortgage broker, I was well- versed in the potential represented by leverage and bringing “dead equity” to life. I refinanced our primary resi-
III, the CROWDFUND Act, was created to enable non-accredited investors to participate in capital raises. However, the capital raise is limited to $1 million, and requires a tremendous amount of reporting and oversight.
pen and realized using OPM is serious business. Honestly, I was in no hurry to implement that strategy. I stuck with helping people buy foreclosures, having no idea just how exciting OPM was about to make my life and the lives of my real estate investing network’s members.
tal to make investments. This can be highly profitable, and a lot of investors never switch gears to investing with OPM (Other People’s Money) because the income from previous investments funds the next round. However, in most cases, restricting yourself to the sole use
“NOWYOU GET TO BECOME A REAL INVESTOR” Back when I was first learning about real estate investing and living in Cali- fornia, I worked with a highly seasoned
62 | think realty magazine :: year end 2017
thinkrealty . com | 63
Made with FlippingBook flipbook maker