REI INK

Company Spotlight

Q&A With Strategy Investment Group

Mike Jordan takes a practical approach to profitable investing, focusing on strategy and diversification.  When Mike Jordan, founder and president of Detroit-based Strategy Investment Group thinks about his greatest successes, the first thing that springs to mind has nothing to do with real estate. It has to do with kidneys. “My father is still around at 83 because I donated my kidney to him in 2011,” Jordan said. “Idid it for myself. I love having him around.” That type of practical, forthright action is typical of Jordan, who has been active in real estate since 1999. He started Strategy Investment Group, a private investment company specializing in the purchase, renovation and resale of single-family residential (SFR) homes in Detroit and the surrounding suburbs, in 2001. During that time, he has had plenty of chances to apply his no-nonsense approach to the industry and to develop a real estate investment philosophy that stresses diversification. “I love real estate, but I know you have to diversify in order to really have the stability and security in your portfolio that most real estate investors are seeking,” Jordan said. “Fortunately, there are a lot of ways to diversify within this industry and keep the advantages that come with owning and optimizing real estate and real estate-related assets.” REI-INK sat down with Jordan to talk about his investment strategy, his business philosophy and his longtime dedication to doing business in his hometown of Detroit, Michigan. How have you diversified your own investments and those of your clients while staying in the real estate sector? A lot of my clients are passive investors, so they really rely on Strategy Investment Group to present them with good investments that are reliable, predictable and will generate good returns. For that reason, we focus on acquiring properties at deep discounts, identifying the right strategy for that property during the acquisition process, and then immediately deploying the strategy to create a good asset for our investors. This is a diverse process in itself, since we might renovate a property and then place a tenant, “wholetail” the property—which means fixing some very basic things and then reselling at a discount once again—or renovate the property for a long-term strategic hold of some other nature. While we are known for our work on the SFR side of the business, we also purchase and renovate multifamily properties, purchase nonperforming mortgage notes and work with private lenders to help them deploy their capital in a very secure, predictable environment. To my way of thinking, you can have an extremely diverse, economically insulated portfolio without ever diverging significantly from this industry. In my case, Strategy Investment Group has also diversified by expanding, at our clients’ request, into property management as well via Strategy Properties. As both a borrower and a lender, what do you think is the most important quality of a borrower in this industry? I tend to think along the lines of “The 5 C’s of Lending.” If a borrower meets all five of these requirements to my satisfaction, then I would expect to qualify for the loan. My 5 C’s of lending are: Character. Will the borrower pay? Capacity. Is the borrower able to pay? Cash Flow. Does the borrower have (or will the borrower have) cash flow to pay principal and interest when the project is done? Creditworthiness. Does the borrower have a history of paying? Collateral. How viable is the asset being used to secure the loan? When I make loans, I also ask the sometimes uncomfortable, but very important, question: If the borrower gets hit by a bus, what happens to my capital? If the answer is unclear or unacceptable to me, then I don’t make the loan. What do you wish every real estate investor knew before getting into a passive real estate investment? I wish that more passive investors had a better understanding of the importance of capacity. Most real estate investing companies like mine have a certain amount of bandwidth. When that capacity is reached, we cannot do any more deals until we finish the ones we started. A company that will admit it has a waiting list and tell you what types of properties it absolutely must acquire in order to make investors’ capital work as promised is a far better bet for a passive real estate investor than one that operates on the premise that the sky is the limit. In most cases, the limit is much lower than the company has indicated, and the passive investors pay the price when that too-ambitious attempt to scale backfires. For example, if I tell you that I have just purchased 4,000 houses and that I plan to do so every month from here on out, you probably should not invest with me. There is not a solid reason to believe I have the capacity to handle that rate of acquisition because last month, and the month before that, and the month before that, and so on, I was doing between 20 and 50 deals a month. On the other hand, if I tell you I need a loan so I can acquire 25 more houses, then you absolutely can feel confident making that loan because you already know I have the capacity. What is your strategy going into the next 12-18 months? We are going to continue to concentrate on the city of Detroit and the suburban areas around Detroit. We have been in this market for years, and we expect it to keep expanding. This area of the country is extremely downturn resistant, especially in the rental sector, so we buy “defensively” by purchasing homes at steep discounts and then either wholetailing them or renovating them and placing tenants in them. These properties are in areas where people want to live, with good schools, low crime and high rental demand, so we feel confident that our strategy of persistent growth and having about 60 purchase agreements in the pipeline at any given time is

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Q&A With Colonial Funding Group LLC & NoteSchool

Eddie Speed’s creative real estate strategies stand the test of time. Eddie Speed, founder of the educational company NoteSchool and owner and president of Colonial Funding Group LLC, has been a leader in the real estate-secured note business for nearly 40 years. Throughout those decades, he has become known for his take-no-prisoners honesty and relentless strategic creativity. He leverages both on behalf of students and investors who are focused on creating wealth and securing their financial future by creating or funding private mortgage notes. “The cornerstone of NoteSchool is using real estate to generate secure investment income, but with more cash flow and without having the headaches that come with some of the more ‘traditional’ strategies, like landlording,” Speed said. “It’s more than just creating private notes. Every transaction, I am crafting a deal, and I teach my students to do the same thing.” REI INK sat down with Speed to discuss how the note industry and note education has evolved since he got started in the early 1980s. Q: Today’s real estate market is extremely competitive. Are notes a good real estate strategy in this environment? A: We are dealing today with one of the most competitive real estate investing markets anyone has ever seen. As an investor, you are in the biggest knife fight in the world when you are trying to acquire properties at a discount. When you make a cash offer on a house, it’s you and a dozen other people at least. My colleagues who rely on the “buy low/sell high” model tell me that today they are only getting about one in every 25 offers they make accepted. Things are getting really tight. That competition makes this market perfect for investors who are able to structure creative financing for their deals. Imagine being able to say to your seller, “I’ll happily pay retail for that property. You just need to work with me on how to finance it.” Knowing that you can pay retail and make competitive offers in this market while still generating reliable, attractive returns on your investment is one of the best things about note investing and makes it one of the most effective real estate strategies in use today. Q: What are some examples of how this might work in the “real world” for real estate investors? A: There are probably more than 50 ways that you can buy a house and pay the seller back using creative note strategies. When I teach my three-day advanced classes on this topic, I break them all down on a huge whiteboard. Here are some examples: The seller carries the financing and you pay the loan back [in a lump sum] in the future. The seller carries the financing and you make recurring payments over time. You make a down payment to the seller; then the seller carries the remainder of the financing and you pay the seller back in the future. You take over the existing mortgage. And on, and on and on. The details on the deal will change depending on what you, the investor, need from the seller and what the seller needs from you. You are the deal architect. I find that once real estate investors really grasp the concept that they are in charge of the deal when they use note investing strategies, their note businesses really take off. Q: But what about building up equity? A: You know, I hear this question a lot from new note investors. They tell me that they are afraid to stop landlording because then they won’t have any equity to work with. When I hear that question, I stop and do a little math for them. Here is one of my favorite examples: Say you pay $80,000 for a 20-year note on which the borrower owes $100,000. That means you just bought 20 years of payments totaling $100,000 for a discount of 20%. That’s great! Two decades of income purchased at a fantastic discount. However, in this hypothetical situation, you need some investment capital today. To get that capital, you sell the first half of the note (the first 10 years of payments) to a passive investor for $79,500. They would receive the next 120 payments. Let’s say the payments are $825.00 per month, then that would be equal to $99,000. Now you have more investment capital to work with in the present, and in 10 years the payments on that note will start coming to you instead of the investor who just bought the first half of your note. You just generated $79,500 in investment capital and 10 years of passive income for an investment that cost you a net $500. That type of scenario is not just relatively simple to achieve over and over again, it is also commonplace in the note investing industry. You are generating long-term wealth and immediate capital at the same time, which is a win-win. Q: What are the most important lessons you have learned from your 30+ years in real estate? A: There are three things every real estate investor should know before they get started investing: You don’t have to just look at price as value. You can look at creative financing terms as equal in value to price. Don’t think that wholesaling will last forever. A lot of wholesalers (who tend to be new investors) get into real estate in order to escape their previous job and ultimately create a new job for themselves with wholesaling. You have to remember that wholesaling produces transactional income that cannot last forever. Real estate investors should be focused on building wealth, not just making money. Learn strategy from people who learned it and lived it themselves. When you invest in real estate education, invest with someone who understands what they are teaching from a personal standpoint. They should have experience in what they are telling you to do. I like to compare real estate education to professional football. There are a lot of

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Q&A With Toorak Capital Partners

Toorak is building new spaces in the real estate lending sector. Just a few years ago, there were very few options for real estate investors seeking to finance single-family rental properties, obtain single- family and multifamily bridge loans, or renovate single- or multifamily properties on an individual versus institutional scale. But in 2016, John Beacham, CEO and founder of Toorak Capital Partners and founder and former president of B2R Finance (now Finance of America Commercial), decided the time had come to change that. “Before Toorak arrived on the scene, there really was very little institutional participation in this space. Capital was limited. Interest rates were really high. Loan terms were not particularly good for borrowers,” Beacham recalled. “Just over three-and-a-half years ago, we saw a massive opportunity to institutionalize this space, and we took it.” Led by Beacham and backed by capital from KKR, one of the biggest private equity funds in the country, Toorak has partnered with more than four dozen loan originators around the U.S. to date. “As a result of our entry into the small-balance, business-purpose, residential, multifamily and mixed-use lending space and our active acquisition of loans, the market has changed radically and for the better,” Beacham said. “Capital is available for deals. Lending capital is more plentiful now. Interest rates have come down by more than 200 basis points over the past three years, and the market has standardized and modernized. This has benefited borrowers and lenders dramatically, and we are proud to have been a driver in this process.” REI INK sat down with Beacham to learn more about how Toorak first entered the real estate lending scene and what he envisions for the company in the coming year. Q: Who has benefited most from Toorak’s presence in the marketplace? A: Real estate investors borrowing money and doing deals have benefited the most from our presence, even though most of them may never have heard of our company. We do not make loans directly, but we provide the capital to the lenders who do. We have invested in more than 10,000 loans totaling more than $3 billion to date. If you work with an institutional lender or a local lender in your market who is making loans on your deals, many of those deals are likely to end up being funded by Toorak.  We work with private lenders around the country, many of which are regionally focused. They are the lenders who provide loans to local real estate investors, and those deals are powered by capital from Toorak. Q: From your position “behind the scenes,” what trends are you seeing in real estate that real estate investors should know about? A: We are currently seeing a natural evolution among the borrower base. Many investors that were doing deals on single-family homes are now doing two- and four-unit properties and multifamily properties instead. We responded to that increased demand for this type of multifamily capital by dedicating $1 billion in capital in 2020 solely to multifamily loans. Q: That’s exciting! Why did you decide to allocate that $1 billion? A: Our customer base and our lenders have been asking for this, so we are allocating that capital to their needs along with a significant amount of staff and internal resources. This commitment will provide the level of service our lenders require so that they can make the loans investors need. We kept hearing from our lending partners that they were getting massive amounts of demand for small- balance, multifamily bridge loans. There just is not a lot of high-quality capital with good terms and solid backing to finance those types of assets. We reverse engineer questions that we get from our lending partners about the types of capital available to figure out what is happening in the market. Then, we develop products to meet those demands. For example, as a country we have massively underinvested in our housing stock for more than a decade. The amount of new housing being built in this country has not kept up with population growth over the past decade. With the rising difficulty of acquiring well-positioned land and more difficult permitting processes in many areas, new housing has become really hard to build. A lot of the deals we finance directly solve that problem by taking existing properties and adding units to those properties. For example, investors may take a single-family home and turn it into a three- or four-family property or tear down that single-family home and replace it with a multifamily building. There is also a demand for smaller and denser housing units closer to where people live and work. We take information like this and look at what the borrowers are looking to accomplish on the deal to make sure a deal makes sense. If the core transaction works for both the borrower and the lender, then we (via our lending partners) are willing to support those deals financially. Q: What is the best thing about working in the lending space that Toorak occupies? A: We love the fact that we partner with lenders across the country to help them grow their businesses. What is really satisfying is seeing them start off doing $3 million or $5 million of volume each month, and then by working with Toorak and having access to regular, consistent capital, seeing them build up their business over a period of years. In many cases, they may grow to three or four times what the business was before. They are able to responsibly grow their business while maintaining high credit standards, low default rates and very low loss rates across their portfolios. That is what gives us the most satisfaction here at Toorak. Toorak Capital Partners is an investment manager formed in 2016 and headquartered in Summit, New Jersey.  Learn more about the company at ToorakCapital.com or reach John Beacham at jbeacham@toorakcapital.com.

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