Leonard Rosen: A Pitbull in Private Lending
When Leonard Rosen held his first private lending conference almost 20 years ago, only two people attended—and they were both comped. They sat in a coffee shop for five hours, while Rosen winked at the waitress as she passed by and promised her a good tip if she let them stay. Pitbull Conference has come a long way from its meager beginnings.
Now with 600-800 attendees and more than 50 sponsors at each event, the conference is held in premier locations such as the Ritz Carlton. Rosen prides himself on the vibe his team creates.
“All of our events are premium events … cocktail parties, butler service, live music. We create a vibe, we create a culture … we treat people like they’re family,” Rosen said. “It’s obviously a business relationship, but it’s a warm business relationship. And people that go to our events know that that’s the Pitbull experience.”
Pitbull With a Purpose
His mission for the event is to bring people together and educate them on emerging opportunities available in the marketplace, which has changed dramatically in the last two decades. In fact, there wasn’t much of a marketplace for private lenders at all back then. Rosen wanted to fill this void by creating a place where all the different players in the industry could network and put deals together.
“I realized that if you have the borrower, the brokers, the real estate investors and the capital providers all in one place, good things are probably going to happen,” Rosen said.
When it comes to putting your own team together, Rosen believes in building relationships with credible people based on respect. “At the end of the day, never forget that people do business with people that they like and trust … it’s all about creating credible relationships with funding sources, appraisal companies and escrow companies. Create a team that you work with so the next deal goes just as smooth and you know what to expect.”
Rosen believes the relationship you have with yourself is even more important than your relationships with others.
“Keep in mind you’re the sum total of the five closest people that are around you,” he said. “And so I believe the most powerful conversation that you ever have is never with your team, but the most powerful conversation, the most in-depth conversation you ever have, is always with yourself. What do I need? Who do I need to be around? What kind of culture do I want to be a part of? What kind of vibe is our company? When you understand that that’s an important conversation, that’s when you see things start to change in your life.”
He credits this line of thinking for the Pitbull Conference’s employee retention rate—it hasn’t had any turnover in almost 20 years. Not one employee has ever left his company.
“We’re very careful with who we bring into our team. That’s No. 1. We have to have the same values. I’m not interested in people that are looking to make a paycheck. I’m interested in people that are looking to build a business, that are vested. Those [are the] kinds of people that I’m interested in working with. … We pay our people well. We’re careful who we hire, we give them great opportunities for growth. Nobody makes the kind of money that our people make in the industry, and we have no turnover. If you use that basic concept, you end up with a different result. I think you’re doing a disservice to yourself by just taking a job for the sake of just making a living. You take a job for the purpose of making a contribution to yourself, making a contribution to your family and making a contribution to the company you work for. It’s not about making money. It’s about making
a contribution.”
He calls it capitalism with morals. Although this mindset isn’t widespread in the business world, he insists that this can change, one company at a time.
A Changing Industry
Perhaps he believes this change is possible because of the dramatic changes he has seen in the industry since his career began. One of the biggest developments in the private lending industry since Pitbull’s inception came with the JOBS Act. Before this act, private lenders had to follow the rules put in place by the 1933 Securities Act.
“In that 1933 Securities Act, it said you could only accept capital from people that were known to you. So it was basically a friends and family clause,” Rosen said.
In September 2013, the new Securities and Exchange Commission rule went into effect allowing general solicitation and advertising for certain offerings of restricted securities, if the purchasers were accredited investors. Rosen said this changed the real estate community overnight.
“From 1933 to 2014, the real estate community worked under the premise that you could only raise capital for family and friends, and they also had to be accredited. Your investors still need to be accredited investors, but you can scream from the highest building in the land and solicit investors to deploy capital with you. When that changed, that made a significant impact, not only in the economy, but also for the private investor … who didn’t want to take all the risk of buying or lending on a piece of property. They don’t want to take all that risk because in real estate, like anything in life, things can go sideways. It allows you to be, in essence, in a mutual fund scenario where you benefit from all the loans.”
If, for example, he said, two out of a hundred loans go south, the private investor won’t feel the effects because the other 98 went well. They might earn 8.1 percent interest instead of 8.2 percent. For an investor who may have only $10,000 to invest, this is a much safer investment than taking 100 percent of the risk on one property.
Another noteworthy change in the last 5-7 years is hedge funds acting as credit sources for private lenders. For example, if a private lender has $10 million deployed in the marketplace and doesn’t have any money left to lend, a hedge fund can come in and buy their book of business. Not only will the lender have $10 million more to lend, but the hedge fund will also provide another $20-30 million line of credit.
“That’s something we’ve never seen before … there’s credit facilities now for lenders that enable the lenders to grow their business using the capital provided by hedge funds.”
Filling the Void
Private lenders have been an integral part of the real estate market for the past 50 years, but even more so since 2008. Rosen goes as far as saying that private lenders have saved the industry.
“The unique part of private lending is that it fills a void that the banks have left. The banks would love to lend on a lot of the asset classes in private lending. The problem is that the regulators, because of the 2008 real estate implosion, prevent them from [doing so].”
Although a borrower will pay higher interest rates with a private lender, they can expect a much faster closing than with a conventional bank. Once a private lender has determined the value of a property, they can close in a matter of days. A conventional bank can take up to 60 days.
This can make all the difference for investors in a fast-moving real estate market, particularly investors in the rehab niche who have come to rely on private lenders to finance their deals.
“The private lending community is making a huge contribution to small and large communities,” Rosen said.
Looking Forward
Rosen is confident the market will remain strong in 2019.
“Keep in mind that we have a big country, and that there are submarkets within that country,” he said. “I would say [in] 2019 we’re going to see a modest increase in valuations across the country. There are some areas of the country that we’re going to see less, some areas where we’re going to see more, but as an overall, I think we’re going to see a modest increase. We have a very strong real estate economy and the last I checked, there’s only so much real estate in the world. They don’t make any more, and we have a growing population.”
Rosen also noted that the political environment has a considerable impact on real estate. What happens from 2019-2022 will depend on what the current administration does, as well as who wins the 2020 election.
He is not a supporter of the current administration’s tax cuts or the new Opportunity Zone Program.
“It was good for me from a tax standpoint,” he said, “and I think it’s good for other high net worth people, [but] it did not help the middle class. If you’re going to give a big tax break, then there should be a requirement that says for every dollar that we give you a tax break for, there has to be 30 percent of that tax break that’s provided to building your business rather than buying your stock back. When you build your business, that’s when you hire more people. You give more people opportunities. You’re able to give a better wage to your workers. That was the part that was missing from the tax breaks.”
The health scare that Rosen experienced last year may play a role in shaping his perspective. Rosen, who has run 18 marathons, coached and competed in wrestling, and is a world champion in Jiu Jitsu, was ill for more than three months last year with a diseased gallbladder. He describes the experience as a “blessing.” It changed his view of the world and how he runs his business.
“Now I have a much deeper understanding [of myself and business],” he said. “The more you give, the more you provide value, the better you are as a human being. The most powerful people that I know are people that are not focused on making money, but focused on providing value. An emerging opportunity that falls in line with Rosen’s philosophy of contribution is the assisted living industry, which is fueled by the aging baby boomer population.
“This is not like the old school where when your parents got old, you took them into your home,” Rosen said.
Yet many people are hesitant to put their parents in large, impersonal facilities and prefer something smaller and warmer. As a solution, investors are purchasing 3-bedroom, 2-bathroom homes and converting them to 5-bedroom, 3-bathroom properties. Not only are investors buying the real estate, but they are investing in the businesses themselves, which provide a high return on their investment. Investors can choose to invest in the real estate, the business or both.
Rosen promises he has no plans to retire anytime soon and says he’s just getting started. When asked about his current projects, he maintained an air of mystique. He is currently working on an educational video series, but refrained from giving too many details. Instead, he says the six most dangerous words in the English language are: “We’ve always done it this way.” He hints that the series will shake up the way we look at doing business. “You’ll see,” he said.
