Risk Mitigation for Syndication Investors with John Rubino

Full Transcript

SUMMARY KEYWORDS

investors, investing, deal, company, money, real estate, sponsors, people, investment, market, project, development, opportunity, returns, property, condo, business, buy, year, nice

SPEAKERS

Taylor , John Rubino

John Rubino 00:00

No, that makes sense. And the returns look good. And it's a win hate to say Win Win mutually beneficial for both awesome and the sponsor, then we're going to take a look at. I would say, though, that 80 to 90% of deals I look at don't make it to my investors because it just doesn't meet our criteria or we just feel it's not a good fit.

Taylor 00:21

What's going on guys? This is passive wealth strategies for busy professionals. I'm your host Taylor load. Thank you for tuning in. Today our guest is john Rubino from j id investments. Today we're going to talk about risk mitigation for real estate investors. JOHN has a background in real estate investment, syndication, raising capital for very big deals in the DC area and other areas as well. Today he's going to teach us about ways he uses to mitigate risk in his deals. For those of you that are new and don't know who I am, I'm your host Taylor load. I am a busy professional. I'm a real estate and investor I'm a real estate syndicator who buys multifamily with passive investors? I love talking about investing and real estate and learning with others, learning with you and bringing you the best information that we can find on real estate investing for busy professionals. Thank you for joining us once again. Without further ado, here we go with our interview with john Rubino. JOHN, thank you for joining us today.

John Rubino 01:26

Hey, Taylor. Thanks for having me. I appreciate it. It's great to be on with you tonight.

Taylor 01:30

happy to talk to you like you said tonight we're recording it's, it's well it's only quarter after 7pm but that's it. Yeah, not too bad. But we're both burning the midnight oil here a little bit, but we won't complain about that too much. Can you tell us about your your interesting history and how you got into real estate syndication?

John Rubino 01:48

Yeah, sure. So I'm 20 year Navy vet. I was a pilot in the Navy which is a lot of fun. I got into real estate back in 2004 2005 on a station down in Southern Maryland to some active investing. Doing some rehab innovation, new construction properties. And I got the bug. I loved it. And but I knew I wanted to stay and I had a family of two at the time we have. We have four kids now my wife, we did an overseas tour in Italy and an instructor pilot tour in Texas. And I took about $200,000 and money I earned on that.

And on my time when I first started, and I invested with a very good friend of mine, who now runs a $400 million development company. He just had gotten started. He's been my mentor. And he's the guy that you know, I kind of invested with passively for about a good seven year period. And the nice part about that was I was getting all the deals that he was Infineon so I was doing the underwriting I was doing the reviewing of the the packages and getting used to everything. And when I moved back to Washington, DC, where I am now like 2011 and after my first year at the Pentagon, get my butt kicked. I decided, Hey, I know I'm going to be retired. Navy and a few years I want to kind of stick with real estate I want to I want to try what I did passively with my buddy and I want to expand on that. So I started talking to some friends, I started to add a lot of friends in the Navy, obviously I have big family and started sharing some concepts and strategies for this. And the guy went to who really was excited about it was my accountant at the time was now our company, financial officer, Chief Financial Officer, and he and I decided to put this little plan together.

It took a full year to get the ball rolling. And really the concept was to bring in equity and private money to developers sponsored operators, ambassadors and single family residential, commercial, mixed use real estate, anything that made sense from the real estate, but that he and I thought were getting a good fit, we would take a look at and lo and behold 2013 we launched the business started very small a single family renovation anywhere from hundred hundred thousand dollars of capital. And my partner and I, along with a small group of investors, maybe three to four started funding the projects and from there we started to grow we started doing more single family renovation, we started growing in our investors and again you know you're learning something every day you're learning something every time you do you a new deal you take your bumps in your bruises, but the good thing was, I was still in the Navy, I was still getting paid every two weeks.

If I was going to get my butt kicked, that was a time to get it because it really prepared me to be a business owner and to do this full time when I came out of the Navy back in 2007. So now that I'm doing it full time, I'm loving it. I've gotten a good track record. We have great performance we've done 15 deals, six and a half million and two and a quarter million in revenue, or we're overseen five amazing projects right now 12 million in investment projected at 12 million to 15 million in revenue. And so it's it's exciting. It's exciting it I'm in front of people every day and sharing what we're doing with the business. And, you know, we have two kinds of pots of people will work with. One is the sponsors and the developers and the other the investors. So you kind of balance those out. And as a syndication owner, you know, you're the person I know, you're, you're making sure that the sponsors get, you know, what they need, and you making sure the investors get what they need. And so it's a it's a great business for people who are type A personalities and like to network and talk and share. And it's really exciting. So I guess that's the best way to answer a short question.

Taylor 05:33

No, that's cool. That's cool. You have a great experience. I'd like to touch on. When we get started here. I'd like to touch on mitigating risk, especially for passive investors in real estate development. It can be a risky business, you know, if things turn south, they can go very badly. How do you think about that, especially from a passive standpoint, in terms of mitigating risk on your development investments?

John Rubino 05:59

Yeah. So before we even look at a project, ideally, we're doing our due diligence on the companies we want to work with, right. And ideally, it's a company that was referred to me or I met through a connection, which I prefer because obviously, it's a good connection there. And I did my due diligence on the company. So I talked to them, I do some background on them, I review what they've done. The most important thing to me, especially now where we are in the real estate cycle is experience, right? I want to work with people that are experienced, they're not trendsetters, they're doing what they've done for their career or for the last 10 years with a down and and upcycle. And that's to me the most important is making sure they're experienced and they know what they're doing. And it's a product they've done before so to me, that's the most important thing. If there's a good connection with us and they like us and we like them, we're a good fit for them. And they're good for us.

We'll continue the conversation will start looking at financials will start looking at projects will walk Some projects while them will meet the team will go through the executive board will make sure they know that when we call them we want to talk to the President, not somebody sitting in the back office. And the same with me is if they call me and they need information I'm all booked you're gonna get me they're going to get my information and transparency to to the to the brim. And then the second thing to me that's the most important when you're looking at an opportunity is the location. Right? Where are you going to invest? So you're going to invest in a market that has a decreased population, high tax rates, high cost of living, crappy quality of life, no jobs. Schools are terrible, you know, I don't want that market. I want Atlanta which is the fourth largest market and growing I want the Raleigh Durham I want Washington DC, and I'm just throwing these at you because those are the markets we're investing in. I want to be in markets where taxes are low, the sun's out. 300 of the 365 days a year people are smiling and we're in big cities.

We want to be around Metro. We want to be around where people Morning live work eating pie. And that's what we're looking so experience of the developer, and good tracker, a good location? And then of course, you know, the returns the returns? And are is the risk meet reward? What does the reward meet the risk? And you know, you brought up a good point, what are some of the risk things got like, Yeah, well, what are the exit strategies? If I'm going to be in a ground up development, new construction project, where the end

The end state is to sell? What happens if I can't sell? What if I have to hold because the market shifts? So we have a correction? We have to have a plan for that? Do we have to be involved in capital calls? capital calls to me is this I don't want to be involved in a capital call? Am I going to be liable for recourse if the bank comes after the dope act? Now I don't want to be in recourse. So these are the different things that I put out there from the company standpoint to the sponsors, so they're prepared for success for the investors. How do I make them sleep at night knowing their money's exposed and a second or no position? Well, I don't Don't take any fees. Okay, I put in my own money, the developers got to bring in their own money. Again, we're not doing liability for recourse, nor are we going to be responsible for any loans, capital calls totally clear of that. investors get paid first there they can a castle and the queen of the castle.

So until they get paid first I don't get paid. And my partner David and I, we set a preferred interest rate return for those investors. So on a development deal, high risk, high return, they're going to get 12% Press before the company gets paid a dime a year. So if we're doing a three year project, and the project doesn't make at least 36% investors are getting everything. The company doesn't get paid. The only way I get paid as an investor, anything over that then the company starts making some persons. So these are all the things we put in place to make sure that the investors are comfortable. I'm always worried more about protecting their money than I am getting the returns. I know I can get them returns. If we hit What we want to do, we got to make sure we protect them

Taylor 10:03

all right, I like that a lot in terms of asset classes that you've looked for in real estate developments I mean you're going after single families triple that properties you building new apartment buildings are all of the above. I mean, what are those look like now Where are the deals in in this type of market?

John Rubino 10:24

Yeah, I mean, I mean Washington DC, Amazon HTTP or HTTPS common. So retail here unless it's quality of life yems nail salons, you know massage parlors, whatever. We're staying away because triple net around here unless it's really our industrial which is good. We're sticking to what we do well and that's been development and construction of condo mixed use ground up or conversion in Washington DC. We know a lot of developers here that are doing it we know are we know our market Well, we're doing some stuff down Atlanta same thing mixed use ground up new construction condo product. for sale on the back end, but now we're also looking at, hey, maybe we can stay in the deal. Maybe we can rent the commercial space and the owners cash flowing and take advantage of that.

Three of our deals are an opportunity zones, maybe we could take advantage of the tax benefits where we take the gains from the initial investment liquidate, roll back in as deferred gains for the opportunities on tax benefits. So that's the other thing we're looking at. But you know, if it makes sense, and the returns look good, and it's a win, I hate to say Win Win mutually beneficial for both awesome and the sponsor, then we're going to take a look at I would say though, that 80 to 90% of deals I look at don't make it to my investors because it just doesn't meet our criteria or we just feel it's not a good fit. We add value to our sponsors. We know we do we have a value, we have a value add to them off the bat, we bring in a level of capital that they can't get unless they go out and make the cause I make or they hire somebody on paying them $300,000 a year to go And bring in new investors, I can do that I'm very, very easily when they say, john, can you raise me $3 million?

I say, how long do you need? When do I need to give you a commitment? And when do I see the project paperwork? That's really it. And then at that point, I go off and do my thing. Working with the investors working with the sponsor, is at that point, we're all on the same team are working together, we want everybody to see. And we're going back and forth with Vic and making sure that we get what we need. And then we put together a formal private placement memorandum package, we get that out to our investors to review and then they have the opportunity to subscribe on a deal by deal basis. So

Taylor 12:35

nice. So in your opinion, I mean, obviously, you're not getting any specific advice here. But in your opinion, these real estate developments, who is the ideal investor for this type of development or or what is the ideal, say investor criteria? I'm looking to earn this, this and this this, you know, this is maybe my profile as a busy professionality What have you found Who does this type of thing make the most sense for?

John Rubino 13:03

You know, I think someone Well, if someone's accredited, they meet the criteria to invest in private placement type opportunities. We'd like to talk to them if they have an interest in real estate. To be honest with you, I kind of reverse engineer it. I don't go out and look for investors or money. When I have the deal. I want to bring investors I want to bring the folks the businesses, whether it's self directed IRAs, whatever they want to utilize to invest. I want to bring them on board to the company before I have a deal. And I want them to get comfortable with me.

My Projects, I want them to walk some of the projects with me, I want them to see me face to face, I want them to read my literature. I want them to get on a call with me. And I want them to feel comfortable. And at that point, when they're ready to come on board and join us. We have an accredited investor questionnaire that we send out, they can fill that out on DocuSign. They send back some verification documents to us that they are credited, and then at that point, they're in Astor's in our company. And the only difference between being an investor and not being an investor is I can't share offering memorandums performance and sensitive information from our sponsors and developers with non investors in our company.

Once they sign the paperwork, which has embedded non disclosure agreements, then they get the chance to see everything we bring to them. They get to see all the past deals somebody like up becomes an investor in says, john, I'd like to see three of your completed deals. Heck, yeah, here you go. And we show them our package we let them go through we have them ask the question so that when they get the deal, all the prerequisite stuff is done, and and then we can kind of focus on those opportunities. So yeah, I mean, we have six to eight doctors that have raised $700,000 to invest with us. We have cousins and uncles that have self directed IRAs and ambassadors with us. We got people that are accredited investors out in California that have reached out to us from my website, and today I see what you guys are doing. I like what you're doing. Can I get a more information? Absolutely. And I love to beat the street meeting new investors every day organically and talking to people because I feel Taylor, I'm blessed God, the Lord's given me something that I feel has been a huge blessing. And I just want to share that. I want to share that with as many people as I can who are interested. There are people who have come across, you know what, what you guys are doing is too risky. I don't like it. You know what, no problem.

I wish you all the best. I'm going to be here. If you have questions about all the things you're looking on. I'm happy to help you. But to come on board with us just to see what we're doing is fantastic. And it gives people the opportunity to decide, hey, you know what, they're doing a cash flow deal. That's in my portfolio, I want to do cash flow, oh, they're doing development too risky. That's fine, and pass on.

Taylor 15:47

Nice. So as far as commitment or the amount of times that the amount of time that funds are invested, is that's one of the big concerns that I found with more Development type of projects, they can take a little while. There's there's risk as you execute the business plan all those things. And what have you found is like a the ideal, say be avid investor that this is their target in terms of the kind of returns that they want to make or their comfort level with their experience level as an investor from a liquidity standpoint.

John Rubino 16:30

Yeah, I mean, when you're in a development deal, it could take two years to take five years, it could take six years, it all depends on the opportunity. Our goal is again to target a return for the investors that is between about 15 to 20% a year on their money. And of course, that's deferred when you're doing a development deal because your exit strategy is going to be to sell off the condos are sell off the product, but if we tell them we're going to project to get them on 20% return over four years and the goal is to get them back first their money and then get them an 80% return on their money.

So that's the goal. Those are high yield, higher risk, higher reward. And we also have cash flow deals where they're making 789 percent cash on cash or they're getting paid quarterly. So again, it's really the appetite. You know, me personally, because I'm an investor, I take off the business hat, I put my investor hat on, I mean, I want to be diversified. I like going to the mailbox once a quarter and get the check. But at the same time, I also like having higher yield opportunities that are out there that we know are appreciating, even in a potentially down market. And, you know, when people say to me, what do you think the next correction is coming? I don't know. It could be 12 months could be two days could be three years. You know, we got an interesting election coming up again. But at the end of the day, I want to be prepared to be in an up market in a down market to be able to still get our investors or returns we project

Taylor 17:59

into Speaking of up market down market, you've been investing since 2004 2005. So 15 years, you went through one of the worst markets for real estate in century. Yeah. So what was that like? And you were investing in developments at the time, and those may not have, you know, done well in the recession. So, you know, what's your experience here? And how did that inform your current investing strategy?

John Rubino 18:27

Yeah, the sponsors that I worked with had cash and cash is king, they're on a down cycle, as you know, so they were able to get significant discount on property in Washington DC during the recession. So you know, when you're going in and buying property 20% 30% of its overall value, selling it for 60 to 80%, you're making money. And so that was really the the strategy was to do things that others couldn't do. And at the time, I was doing projects with some sponsors that were doing in like two to eight unit condo conversions where they would take a brownstone or a row house and DC that was three stories and convert it into six to eight unit condos. And you know basically tripling quadrupling the the value of that property through the sale of condos. And so DC you know, I was in DC primarily DC didn't get as hit as bad as like an Atlanta or tampered Detroit we still grew pretty good at double digit. And so yeah, having cash at the time was great.

So being liquid, I always tell people like if they say, look, I got a million dollars that I want to invest to say, Okay, keep the half a million of that in cash and keep the other 500,000 available to invest in real estate, maybe some stocks and bonds diversify yourself so that if we do have a correction, you still have a nice chunk of cash and that's what I learned is, is when you're in a down cycle, if you have cash, you get to call a lot of shots because you're helping a lot of people to get out of the water. But, but now, I mean, you look, we are probably going to see something here. You know, I would say in the next 12 to 24 months, how bad it is could be really bad it could be in. I hope it's more than what I'm starting to see more. It's going to be more. But it depends what market you're in. If you're in high taxed markets, reduce revenue headquarters are leaving those markets. Be careful, be careful, go into those markets, where populations are growing saturation is low for the product you want to invest in. And Stan, you know, fiscally conservative markets. That's my that would be my recommendation.

Taylor 20:43

Yeah, we do see a lot of companies and jobs and people leaving some of those more expensive areas, either from a taxation standpoint, or whatever you want to say, but they're leaving the coasts mainly me we see a lot of immigration to Texas, and for In other places like Georgia, specifically because it's a it's an easier regulatory environment.

John Rubino 21:09

It is. I mean, and you know, you look at the largest generation in our country right now, which is the millennials and a lot of them have student debt. And the last thing in the world they want to do is live in a house that's 20 miles from their work with a 30 year fixed rate mortgage and three cars. They want to live in this city. They want to live across the street from mass transportation or Metro transportation. They want to live across the street from their favorite restaurant and their coolest bar where their head break bands hanging out and they want to be able to eat live work, play and sleep in that same location. And that's that's where we're kind of focusing our our investing is is big cities that are close to Metro affordable, not you know, urban affordable but affordable in a way that you know, you can get in there for a reasonable price. per square foot to come in and buy and not have to worry about significant debt. It's interesting.

I was down in Atlanta about a year ago, and there's so much product down there for rent. That one, our developer who's taking his model with DC and opening it up down in Atlanta, brought that down there. It was like, holy crap. Where'd this guy come from? Because now he's selling product very affordable now, and millennials can go in and buy, you know, something for a very affordable price and have ownership, which is great. So

Taylor 22:33

yeah, I mean, I'm, I'm a millennial, but you know, I own a condo. I live in a condo, and I think it's great. Yeah, I'm not in the deepest part of town. But I like it.

John Rubino 22:43

Now. And there's nothing wrong with that. I mean, I think look, it's just, we got to adapt to that generation, because that's what they want. And if we want to offer them housing and a product that we have available to them, and we got to make sure we meet their needs, and that's their need. So yeah,

Taylor 23:00

Yeah, yeah, absolutely. So I love not milling my own yard.

John Rubino 23:05

I have three boys. So if you need one to help let me know.

Taylor 23:09

Yeah, we're just a couple hours apart from Yeah. Alright, so we're gonna take a quick break and for our sponsor, excellent. All right, john, I've got three questions I asked every guest on the show. Okay. Are you ready? Yes, sir. All right, the first one what is the best investment that you've ever made?

John Rubino 23:30

Oh man, so ground up new construction in Washington DC Northwest and supposed to be a 24 month investment. We came in for $750,000 of limited partnership equity with my one of my closest and best sponsors. The deal ended up going and an extra 10 months but we turned our 750,000 into 640,000. So that was a fantastic deal. Our investors were a little upset at first, but we ended up giving them more money in their Christmas stocking the next year. They were pretty Happy so that way so I'm missing something. Yeah missing something here.

Yeah happened can go 24 months and it was supposed to be a 24 month deal. We were doing a ground up 20 unit residential only condo new development. And our company brought in $750,000 of equity. And we were projected to make about 398,000 over the two years. Well, we ended up getting delayed about eight to 10 months. You know, you know how it is in this area, you have this crazy stuff called snow that happens to accumulate. Yeah, we had a new casino that was going on over in National Harbor that decided to steal one of the three largest construction or concrete companies in all Washington DC. We lost power Academy account, I lost count on the number of times we lost power in this in the district. And the district is a little bit tardy at times on permanent. So that took a good and months I would say and our investment went from, you know, and again This doesn't always happen disclaimer, but we ended up making 637,000 on our 750,000 and about 33 month period.

Taylor 25:09

Okay, so So originally You said you turn that 750 into the 6080, or whatever it was going down.

John Rubino 25:19

We made an additional 640 on top of our 750. So yeah, I got an 89% return project IRR, which was unbelievable.

John Rubino 25:29

Yeah, it was really good.

Taylor 25:30

On the other side of that, yes, my original interpretation of what you said might have been more appropriate for the second question.

John Rubino 25:37

Yeah. What is the worst investment you ever made? You know what happened early knock on wood on our company's history. We had a single family property in Charles County, Maryland. We brought in $200,000 of capital for a purchase of a single family renovation and unfortunately the guy who utilized our money so you We fabricated the numbers. We unfortunately gave him the entire boat of money because we had done two deals with them previously, that went really well. And it was a total bust. It was a total bust. So I had to get out there.

We did a quitclaim deed and we were able to get the attorney to turn the property over to us without having to go through a foreclosure, thank God. But then here I am, you know, the money guy now having to become a rehabber. And, you know, I basically would by the grace of God found them not the literal mayor of the town, but the figuratively mayor of the town, which was a nice older woman who owned a coffee shop down the road, and she connected me with everybody and anybody can contractors, landscapers and and about a five week period, I got the house ready, we sold it for 96% of our investment. And then you know, we just had some serious conversations with the borrower who decided you know, okay, I need to do the right thing and we've got back About 70% of our money believe or not five years later we're still work with them but didn't lose money. And we still came out on top but learned a ton learned a ton. Know your numbers, don't give them the money up front. Make sure you see the property and you're comfortable with it. And Sam was gracious enough to to learn those those life lessons sooner than later.

Taylor 27:22

Wow, that sounds like it was a tough experience even though it wasn't financially devastating necessarily. Sounds like the actual experience itself was

John Rubino 27:31

nice. Couldn't sleep, you know? Yeah, it was it was it was really, really so. So yeah, failure. Sometimes it sucks, but you learn a lot.

Taylor 27:41

Yeah. So my favorite question of all these three questions is what is the most important lesson that you've learned in businesses investing?

27:51

Wow, um,

John Rubino 27:53

surround yourself with winners. deal with people that can help you grow and You'll have a mentor, at least one mentor that you can call to talk to have a cup of coffee with, jump on the phone with my mentors, my business partner, he just happened to be my business partner, we're on the phone 567 times a day, always bouncing ideas off of him for both my personal and for the company. And, you know, that would to me be the best advice I can give someone who's investing if someone who's going to start up a business, my advice would be, hey, find your your your value. When you go and talk to somebody that you're going to bring services to. I found right away that I had something of value that I can provide to several businesses, my phone doesn't stop ringing because they know what I can offer them. So find what that value that value is. Simon Sinek calls that your Why? What's your Why? Why do people like tell or a lot of guys like john because we do something that somebody else can't and they want more of it. So that's what you need to find. As a business owner and real estate, there's so many ways to do it. And it's never ending sounds great.

Taylor 29:06

Nice. I like that a lot. JOHN, thanks for everything today think about the development investment industry. It's definitely fascinating. Where can people get in touch with you if they want to learn more about your business and you and you know the stuff you're doing?

John Rubino 29:21

Yeah, thanks for asking. So our website is www.jIDinvestments.com and you can also reach out to me anytime on LinkedIn Facebook, I'm on social media. My email address is my first initial j and my last name Rubino at j id investments calm that's probably the best place to meet me. Meet meet up with me or find me. If you're local in the DC Maryland, Virginia area. I'm happy to buy a cup of coffee and take you out on tour for each story project down and closer point hundred 10 condos mixed use right on the river there. So come on out for free tour and a cup of coffee anytime either show you around. And if I can help your listeners any way shape or form with anything they're doing. Whether it's through my company or just give them some advice. Happy to do so. Anytime.

Taylor 30:09

Nice. I'm gonna put you on the spot. I hosted meet up here in Richmond, 500. Members. Wow. Yeah, to come down sometime. Oh, man, that would be

John Rubino 30:18

awesome. I would love to come down and just be part of it, let alone and have the honor to speak. So yeah, definitely let me know. I'd be happy to come down anytime.

Taylor 30:25

Alright, we'll talk about that offline. So anybody keep an eye out for that?

30:30

Yeah, sounds good.

Taylor 30:31

Thanks for joining us today. Once again, to all the listeners out there. Thanks for tuning in. If you're enjoying the show, please leave us a rating and review on iTunes. Big help, you know anyone that could use a little bit more passive wealth in their lives, wants to invest in real estate, whatever. Please share this show with them and get them involved. I hope you have a great rest your day and a great week and we will talk to you on the next episode.