My Big Mistake – Partnership Creation & Deal Structure

My Big Mistake: Partnership Creation & Deal Structure

(Click the play button above to watch video Training)

Summary

Here is another video from a live real estate training that I did in Baltimore Maryland.

In this video I reveal some huge mistakes I made early on in my real estate business as well as some embarrassing truths.

This was a difficult and painful time for me but the lessons I learned and share about in this video training on creating partnerships, accountability and structuring deals were priceless.

Many of our clients at Legacy Capital, started out as individual investors but as their aspirations grew, realized that bringing on partners and/or additional capital was necessary to achieve their goals.

We hope you hope you find some good take aways here that you can implement in your business immediately. If you haven’t done so already click the play button on the video above and discover how you can obtain an infinite return on your real estate investments.

Transcript 

That’s all good and sunshine and rainbows and all that stuff when everything works out good but if I actually share with you some tough decisions and tough things, some of the pain points that I’ve gone through in that process and just as a real estate investor because the one thing and this is part of the reason you guys are here not only to learn but you want to be inspired. You want to be motivated. Is that happening this weekend? Are you guys inspired and motivated, right? Let’s give them one round of applause.

I also want to talk about some of the stuff that a lot of people don’t like talking about where you make mistakes, where you lose money, where you have some of your most embarrassing moment. I just shared with you the model that I had starting out as a real estate investor and this was early on when I was dating who’s now my wife. Alexis is her name. We weren’t married at the time. I’m talking about everything that I’m doing, all the wealth that I’m creating, all the properties, all this, all that. One day she just says to me she says, “Doug you talk about making all this money. Where is it?” I’m like, “Whoa!” Like that was my response. I had no answer.

You want to talk about throwing me for a loop and it’s one of the things I love about her because she keeps me in check and keeps me honest. I didn’t know how to answer her and I was obviously really angry and upset initially. Days after thinking about what she said she made a point. Do you ever have people in your life maybe even come into the seminar “Why are you going in that seminar for?” As you start down that path … Now she wasn’t coming from a negative aspect, she was just coming from an authentic being real aspect. What are you doing when you’re talking about this, where is the money?

It had me learn an extremely valuable lesson and something that I am so passionate and adamant about now with everything that I do. That’s about being accountable and specifically accounting. As the statement says there accounting leads to accountability. I’m a big Robert Kiyosaki fan. Any Robert Kiyosaki fans in the room? This is a quote from his book A guide to becoming rich without cutting up your credit cards. I was reading this right at the same time Alexis had that zinger with me. I was like “Wow this is me.” It says, “If you’re willing to face the truth and learn from your mistakes, you will learn far more about money that I can ever teach you.”

He went on to explain saying “When you face your own personal financial statement, you face yourself and your own financial challenges. You begin to find out what you know and what you did not know. When you look in your financial statement you become accountable to yourself.” As I said facing my financial problems and solving them was the best education I could have received because by facing my mistakes, I became accountable for my own shortcomings. By facing my financial statement, I found out that I have failing grades. I realize that I was not as financially smart as I thought I was.

By improving those grades, I learned what I needed to learn in order to become a millionaire and that is the price I pay. I paid the price because I really wanted to become a millionaire. For me when I looked at my financial statement I realized I did have a bunch of good things going but I wasn’t as smart as I thought I was because the numbers don’t like. The numbers are what the numbers are. This is exactly what my financial statement looked like. I had a bunch of real estate that I own. The great news it was … that’s the bad news. That’s not the good news. I had $70,000 in personal credit card debt. I’m talking about creating wealth, doing all these things. I do own a rental real estate portfolio. I have 70 grand in credit card debt which I wasn’t really looking at. I did have income coming in.

Because of this, I thought I had a money problem. It’s like, “Man I have 70 grand in credit card debt. I got to make more money to pay it off.” I got a money problem. I need to be making more money. That actually wasn’t what it was. The issue that I had was I had a deal structure problem in terms of how I was structuring my deals because I was great at finding deals. I spoke to you about the structure that we were doing. That structure works. The issue was though as I said I started out as a broke college student. When I raise money I was partnering with people that were giving me money. We were splitting things 50/50.

Anyone ever heard that? “Hey let’s partner together. Let’s do this and we’ll be 50/50 on things.” One of the things my mentor says is 50/50 is always unfair. No matter what it is its always unfair except maybe in some short term opportunities. Here’s the reason why. This is what I experienced because I said, “I’m going to do …” You’re excited. You’re inspired. You want to raise money. It’s like, “I’ve me that money. I’m going to do all the work. I’m going to handle everything and we’ll split the profits.” I was 21 at the time. I go the money. I was the happiest kid in the world. Things couldn’t be rosier but how we structured it didn’t work.

The problem with that is, is I was going to do all the work so I was managing the property. First I had to find the deal. Then we had to renovate it. I had to spend my time to manage the construction. I wasn’t doing the construction because my wife is better on that stuff than me. I wasn’t doing the construction but I was managing the construction. Then we had to find the tenant. I was finding the tenant. Then we had to manage the property. I was managing the property. I didn’t get paid any money yet because it’s 50/50. We’re splitting the profits 50/50. No money has come through the door yet.

Depending on the size of your project or how long it is, that process initially for me when I first started out took about 3months. It wasn’t bad. As I got larger deals, 6 months, 18 months, 24 months. They become much longer cycles. Fortunately I realized I had a deal structure problem before things were 24 months out but I was structuring all these deals that way and I wasn’t getting compensated for the things that I was doing to get it to that point. I learned some valuable distinctions and this is extremely important. As you look to structure your deals is understanding the difference between an operational contribution versus an asset contribution.

Some examples of operational contributions are again doing the renovation doing the renovation and construction, could be managing the rehabs, accounting, bookkeeping, property management, maintenance. If you go out in the field and you need some work done as a contractor they’re going to charge you money to do the work. Yes, right? If you then need a property manager and they’re going to find a tenant for you and then manage a property for you, are they going to charge you for it? Yeah.

I was so focused on the 50% I wasn’t thinking about what I was doing operational wise. As we started to grow, as we started to scale, I couldn’t spend my time doing those things because we had too many projects going on. I had to then hire people to manage the construction, to manage the properties. I had given my word to the investors there would be a 50/50 split and I don’t want to go back to them and say “Hey look we need to change it up now.” Because I didn’t do that, because of that time I didn’t do that, that was the main thing for me that had me rack up all that debt because I now instead of getting paid for these things that I was doing I was only getting paid on the back end. Then sometimes their own profits which we’ll get to in a second which leads to another problem. For me I had a deal structure problem.

Then the other side of it asset contributions are when you contribute assets such as cash, such as credit, such as real estate can be intellectual property or knowhow. I mentioned that some of the key mistakes with this and this is one of them right here is that if you only receive equity or ownership compensation for the operational roles when there’s no profit, you don’t get paid. That’s fine if it happens on 1 deal but if it happen well 1 it depends how long it happens for and then if it happens on multiple deals, you can end up digging yourself a big hole.

Then the taking a step back the bigger picture thing and then this is when I change things up was that if I only get ownership for what I do operationally, I can never be financially free because how I get paid and how I made money by operationally working in that business, does that make sense? It’s important to know and understand because I imagine most of you in this room you guys are real estate entrepreneurs. You’re going to be working in your business. You’re working in your business now. You’re going to be working in it from the get go.

You want to make sure that you’re structuring it in a way that’s fair for everyone but also fair for you and works for you. I had to go back to my investors and have a conversation with them and say, “I know I said we were going to split it 50/50. I was going to handle all this but I just can’t do it anymore. It’s killing me. I have racked up all this debt. I’m not asking you to solve that but I need to get compensated for the operational roles that I’m performing.” All of them were … they were all great about it. They said, “I totally understand. It’s no problem” it worked out great.

In hindsight I wish I did that before I racked up 70 grand in credit card debt but I had the conversation. Eventually I had the difficult conversation and it went well and as a result I was able to get rid of the $70,000 in credit card debt through not only changing the existing structure of my portfolio and the deals that I had but then moving forward this was the new model that I was using for structuring all of our deals. After I resolved that, that’s when we took our first mini retirement. We took 3 months throughout Asia and Australia. This was us in Phillips Island in Australia. This is in Vietnam on the Mekong Delta I think. This is Tiger Temple in Thailand and this was a beach I think Bali in Indonesia.

When you have winds, you got to celebrate. I got rid of $70,000 in credit card debt I said “All right we’re celebrating.” We did that from cash flow not by going back into credit card debt. We get back from our first mini retirement. Life is great. Got rid of the $70,000 credit card debt. I think everything is perfect. Nothing to worry about anymore and that’s when I learned that money doesn’t solve problems. Money doesn’t solve problems because I had a new problem on my hand which was cash flow management and allocation problem.

Let me explain to you what I mean by that. When I first started in real estate as I said I had no other form of income. How I was making money was off of the income that was coming in. I wanted that money that was cash flow to come into my pocket instead of putting money aside for rainy days, putting money aside for this, putting money aside for that. If you have a property and as you’re looking at deals, if you have a property that cash flow is 200 bucks a month, that’s fine. That’s $2400 a year but you better be putting money aside for that rainy day fund, for that reserve. Because if your hot water tank goes, that’s a few hundreds bucks. Your roof, that could be a few thousands dollars.

That money that you think you’re making can be gone like that. You need to structure your deals to plan for that and you want to put allocations for those buckets and we’re going to go into those buckets. The reason why is the allocations are there to serve so that basically you’re not stealing from your business to afford things. Now before any money comes to me or our partners, we have those cash allocations that money is going to and there’s a few things.

One it allows for when the rainy days are there that money is already there for it. The other thing it doesn’t mess with our cash flow because we already had that rainy day fund. The money that comes in next month that can still get distributed to us. Now we may have to replenish that rainy day fund but there’s still cash flow coming into us as business owners. It allowed me to project my cash flow much better as a business owner.

For real estate investments you have to have a minimum reserve before distributions are made or you can have a percentage of the income that comes in every month. Have a percentage of that go towards a reserve. I’d suggest putting it in a different account so that you don’t touch that money and don’t mess with that money.

Business wise for business owner there’s a book called Money Mastery which I really like. It recommends 10% savings, 10% investing and 10% emotional spending. Then you can put caps on those categories. You don’t need to put 10% in savings for the rest of your life. Maybe you just want to have a nest egg for that property of 10 grand and then once you hit that you don’t need to put any more money in that bucket. These buckets are important because those buckets get hit before money flows through to you. Still with me?

Anyone ever read the Automatic Millionaire? Half of you. It’s basically a book about stocks. I’m not a stock guy but the concepts in there I found really powerful. He talks about automating your savings, automating your investments. It’s written by David Bach who I actually met at another … it’s actually a real estate event and that’s him and I there. What I ended up doing for myself was when that money came in I had a separate bank account set up for the savings for the minimum reserves. When that came in every month I had to automatic ACH that would directly go into the other account.

This is where you need to know yourself. For me at that point I didn’t have a bookkeeper. I was doing the book. I need to automate it because I honestly didn’t have the discipline myself to every month make that transfer myself. I kept saying I was going to do it but it didn’t happen. By automating it I set it up. I didn’t have to think about it. If you have a bookkeeper, you can have your bookkeeper do it but if you’re just starting out and you’re doing this stuff yourself, I definitely suggest automating it because that was a lifesaver for me and that’s what I used initially before I started building a team to help me with that.

The biggest and most important thing really is to set a strong foundation where you have assets coming in. You have passive income. This can take time to do but being able to set that strong foundation is what allows you to build a sturdy house. Because of the way that I did things initially, my foundation as you just saw was not that strong. I actually had to take a step back when I realized that to go back digging that strong foundation.

I mentioned at the beginning I developed about $5 million in real estate. This year we’re going to especially if the 41 unit goes through, it’s going to be a multiple of that that I have in a single year but the only reason that that was possible was because I had to go back and make sure I set a strong foundation. If I had tried to do that 4 or 5 years ago when I had weak foundation, I would had killed myself and drowned. Does that make sense?

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