Passive Investing In Private Real Estate Lending With Edward E. Brown

 

 

When the FED increases interest rates by 75 basis points, the stock market is predicted to face turmoil and disarray. But since commercial real estate is not too volatile, passive investing is still a strong option in these trying times. Ava Benesocky and August Biniaz talk to Edward E. Brown of Pacific Private Money to discuss flexibility and versatility as the markets change. He presents alternative debt lending options when banks deny you and how to get the best rates during the height of inflation. Edward also discusses how their company adjusts to unpredictable market trends. He talks about setting their rates, getting their equity, and building strong investor relations.

 

Get in touch with Edward E. Brown:

LinkedIn: https://www.linkedin.com/in/edward-brown-16883832/

Website: https://www.pacificprivatemoney.com/

Podcast: https://podcasts.apple.com/us/podcast/the-best-of-investing/id1150160195

If you are interested in learning more about passively investing in multifamily and Build-to-Rent properties, click here to schedule a call with the CPI Capital Team or contact us at info@cpicapital.ca. If you like to Co-Syndicate and close on larger deal as a General Partner click here. You can read more about CPI Capital at https://www.cpicapital.ca. #avabenesocky #augustbiniaz #cpicapital

—

Watch the episode here

 

Listen to the podcast here

 

Important Links

• Pacific Private Money
• Why Don’t Bank Banks Make Conservative Loans? – article
• YouTube – Real Estate Investing Demystified
• LinkedIn – CPI Capital – Real Estate Private Equity
• Rich Dad Poor Dad
• Cash Flow Quadrant
• Edward@PacificPrivateMoney.com
• Investor.Relations@PacificPrivate.com

 

About Edward E. Brown

For over 20 years Edward E. Brown was CEO of a $40 million alternative lending company based in Marin County. Today he assists Pacific Private Money with capital raising and investor presentations. Edward is also the host of two radio shows —The Best of Investing with Mark Hanf and Sports Econ 101, a national sports and business show. Edward earned his B.S. in Accounting and M.S. in Taxation from Golden Gate University and has held licenses and certifications including Real Estate Salesperson, Insurance License, Series 7 Securities License, Tax Preparation License, and Certified Fund Specialist.

 

Passive Investing In Private Real Estate Lending With Edward E. Brown

We are in some turbulent times. As we are doing this show at 11:30 AM PST on November 2, 2022, the Fed increased the interest rates by 75 basis points. BlackRock, the largest money manager in the world and economists were wrong. They believe it was going to be 50 basis points. It’s an interesting time. It’s a very hackish approach. It’s going to create turmoil in the equities and real estate market. Looking at what’s been happening with the equities market, it’s insane how sensitive their stock market is. It is unbelievable.

In real estate, when something like this happens, it has a long-term effect. Look at this. Apple, one of the greatest companies, is down 15%. Tesla is down 75%. Amazon is down 41% and Google, 36%. It’s insane. Imagine as a multifamily operator and the market goes through one of these cycles because there are multiple cycles within the market, but now you’re down 40%, and your investor is going to be at your house knocking on a door. A great thing about commercial real estate is that’s not the case. It’s not as volatile as the stock market.

That’s why I always tell investors when they show up on investor calls, and they’re a little bit devastated because their portfolios and stock market are down, “You got to diversify a little bit of your funds into real estate.”

Passive real estate, which you don’t have to do any work on it. It’s not about rates. You’re not paying those high fees.

I always say, “Backed by a tangible asset.”

 

 

Everything always works out in a certain way in our lives here at CPI. In this episode, we have a great mind when it comes to finances, debt, borrowing, lending and raising capital, all these topics within this environment. It’s the perfect guest at the perfect time. We’re excited to be talking to our guest. Before we even got on a show, when we were saying our hellos and everything else, I was asking questions as he was getting into it.

We’re going to ask his opinion about the rate increase and how that’s going to look in the future. Let’s go ahead and quickly introduce our guest. Everybody knows who we’re talking about here and why we’re excited. We have Edward E. Brown on our show. For over twenty years, he was the CEO of a $40 million alternative lending company based in Marin County. Now he assists Pacific Private Money with capital raising and investor presentations. Edward is also the host of two radio shows. It is The Best Of Investing with Mark Hanf. We’re excited to dive into things and learn more about you, Edward. Welcome to our show. Thanks for being here.

Thank you very much, August and Ava. How are you?

We’re doing fantastic and even better now.

We got a lot of good stuff to cover.

Maybe you could please go ahead and tell us about your background and your start in real estate, or more appropriately, your start in finance.

I have a Bachelor’s degree in Accounting and a Master’s degree in Tax. When I started my company when I was 23 years old, before getting into real estate, I also got my insurance license to sell life and disability insurance. A little bit later on, I got my real estate license. During these times, I also became what they call CFS or Certified Funds Specialist. I was an expert in mutual funds and that sort of thing. The reason was because I was doing a lot of financial consulting for clients. I was preparing tax returns and then investing their IRAs, etc. That was my background. In the late ‘80s and early ‘90s, I came across a company that needed to sell some loans at a discount.

I negotiated a deal with them and then I started to get into the origination. I got my real estate license and started a company with my old partner. We started originating notes, basically, the hard money loan business. Back then, we were doing primarily commercial, no owner-occupied. In 2013, I started working with Pacific Private Money, helping them start their first fund and raising money for them, being in investor relations. I had a lot of experience doing the investment side of it with the prospectus. I was and am still hired as an expert witness for various investments in real estate.

I helped Mark Hanf with Pacific Private Money with his first fund. Pacific Private Money has grown exponentially. We now have four different funds. We’ll probably do a volume close to $1 billion in 2022 if we don’t surpass it. It’s interesting because people wonder how this all works like, “How do we pay such a high return to clients? Why do people borrow from us? Why don’t they just go to the bank?” I’ve written a lot of articles on this. One thing I wanted to focus on, and this was something that we had talked about before the show started, is banks, how they work, how they create money, and the multiplier effect.

When someone goes to the bank and puts money in as a deposit, the bank gets to go to the Federal government and borrow a lot more at a big ratio. I can’t remember if it’s 18 to 1 or 16 to 1. If someone deposits $1 million in the bank, the bank gets to lend out $16 million if the ratio is 16 to 1. That’s how banks make so much money. They pay the depositors very little and they charge borrowers a fair amount, and they’re borrowing the money from the Fed at cheap rates. That’s how they make money hand over fist. The problem though, especially after the 2008 Great Recession, and I’ve been through a few of these kinds of things, is there’s what they call the reverse multiplier effect.

Banks make so much money because they pay depositors very little, charge borrowers a fair amount, and borrow money from the FED at cheap rates. Click To Tweet

Let’s say that you’re the bank and you’ve got lots of great loans to easily fund, and then someone comes to you with a loan that says, “I’m a great borrower, but my FICO score is three points under. What it needs to be for your bank?” If you’re the banker and you lend money to this person, what happens when the auditor comes by and looks at your books and suddenly says, “This loan that you made that has a little bit lower FICO score than we’re used to, we’re going to make you put that on the watch list or if it goes bad, it goes into the default list.” What that does is the Federal government then tells the bank they have to put reserves. You’ve probably heard about bank reserves.

If you think about it, every time the bank has to put money in reserves, there’s a 16 to 1 ratio of money that they can’t lend out. I wrote an article on this, Why Don’t Banks Make Conservative Loans? If there’s anything outside that box, they have to be very careful because it can come to bite them from the standpoint of dragging out $100,000 of money that they’re not allowed to lend. They put that in reserves and now they can’t lend out $1.6 million because of the 16 to 1 ratio. That’s why the banks are very careful, especially after the debacle in 2008. Now you have to have all kinds of ratios, debt service coverage ratio, and the ability to repay to make sure that you can pay those loans.

 

You eloquently described why banks are conservative and how they could possibly get audited. The foundation for our next question coming up is the alternative options people have when they get denied by banks.

Let’s discuss alternative debt lending. We usually hear about bridge lenders, mezzanines lenders and private money lenders. In Canada, we hear of the mix, which is mortgage investment corporations. Can you break it all down for us?

There are lenders who specialize in commercial, which would be multifamilies, commercial buildings, shopping centers, etc., and then you’re going to get ones who specialize like us. This isn’t the only kind of loan that we do. They’re owner-occupied consumer bridge loans, so if somebody wants to buy a house. Let’s go back to what we were talking about where if you’re a borrower and the bank says no for these various reasons, what are you going to do? Go to friends, family, mom and dad or beg on the street. Where are you going to get the money?

There are alternative lenders out there who are still regulated, but they’re not FDIC-insured regulated with regard to reserve requirements and auditors coming in. They still have to follow the law with not being predatory lenders and stuff like that. We specialize in the owner-occupied consumer bridge loan, which is for somebody who wants to buy a residence and live in it. There are a lot of lenders who will not lend like that. They will only do non-owner occupied or non-consumer loans. It has to be a business loan. This is my belief. Especially in California, we’re one of a handful of lenders licensed to do these owner-occupied consumer bridge loans. The reason is because it’s a fairly expensive barrier to entry.

You have to have the licensing, the continuing education, the legal, and the software. That upfront cost could be $80,000 to $100,000 or more. If you’re a typical fix-and-flip lender, commercial lender, etc., and you’re busy because of the reasons why the banks aren’t lending, especially if you’re a small lender, why do you want to spend $80,000 to $100,000 entering a new space when you’re already making enough money doing what you’re doing? We’re not the only game in town, but we’re one of the few licensed lenders to do this. We spent the money and we believe that we’re one of the largest in the country now in the United States who does owner-occupied consumer bridge loans.

Who do you get your equity from? How do you set your rates?

I’ll answer the second question first about how we set our rates. It’s all supply and demand. In California, there are so much money-chasing deals that the rates are lower than if you were in Cleveland, Ohio. It’s primarily because most people believe that California is a more conservative market. Real estate doesn’t go down that much. Even when it does, the upside is pretty strong. It’s considered a lot more of a conservative loan. We set our rates basically by supply and demand.

In the old days of lending, private lenders were generally charging about prime plus 5%. That was typical in the old days. In alternative financing, we used to call it the best-kept secret in investing but it’s no longer a secret. What happens is more supply of money pushes the price down. The rates came down to prime plus 3%, and now they’re even squeezed a little bit more because with the interest rates, especially now going up to 7%, the prime could be at 7%. We are pretty close to prime plus 3%.

 

Rather than prime plus 5%, we’re close to prime plus 3%. Generally, we’re going to be at a fixed rate. We’re not going to be a floating rate, but we do short-term. Someone will come to us and we’ll lend money out right now on a first mortgage somewhere between 9.5% to 10%. Eleven months is our bridge loan product. If they need a little bit longer term and it’s not a bridge loan, it will usually go out for up to two years.

The other question is, where do we get our money? It’s going to be from various investors. We have a fund that is like the granddaddy of them all. It’s called our Freedom Fund. The minimum investment is $250,000. In all our funds, you have to be an accredited investor. That $250,000 gets you a 7% rate, $500,000 gets you 8%, and $1 million or more gets you 9%. Here’s the best part. All of these funds that we have are these Reg D, 506, etc., and there’s a one-year lockup. However, we do not institute a penalty for early withdrawal from the freedom fund. All we request is a 30-day notice.

You go, “That’s almost like a money market account. You can’t write checks against it.” You’re trying to figure out, “The stock market is down? I want to maybe get back into it. I want to buy an investment property someday.” Where can you park idle money and get at least a 7% return in the market with no volatility over your principal? I’ve been in this business for 40 years, and I’ve never seen this kind of conservative product with this high return.

The magic question people will ask is, “If you’re doing eleven-month bridge loans, how can you offer a 30-day redemption period?” On that fund, we’re primarily packaging loans and selling them to big institutions. We do that roughly every 2 to 3 weeks. Imagine one borrower wants $1 million, another borrower, $500,000, etc. We’ll make these loans, package them, and sell $5 million worth to a large institution. In 2 or 3 weeks, they write us a check for $5 million.

We take that $5 million. The first question we ask is, “Has anybody requested their money back?” If they have, we write a check to them and cash them out. The rest of it, if $1 million wants to be redeemed, now we have $4 million to lend out. It’s a very conservative product because we don’t even own the loans after we fund them and sell them in two weeks.

When I described syndication and us here at CPI Capital and the services we provide for passive investors to be able to invest in commercial real estate and institutional commercial real estate passively, is it fair to say that the services you offer when it comes to your investors are an option to passively invest into capital markets?

It’s absolutely passive. We have other funds that will do more on the commercial side. There are some loans that we do and hold in this fund. We have four different funds.

What I’m saying is if somebody believes in commercial real estate. Let’s say, there’s an investor. He’s a physician, lawyer or accountant, and believes in commercial real estate, multifamily, and these large multifamily buildings. He can’t afford to manage these 100-unit buildings. He comes and partners with us, then you got another investor who believes in this concept of private lending that everybody at some point needs to borrow some money. I’ve done it. CPI Capital has done it. A lot of people go through those options. They believe in that type of investing, and then they can come and invest with you rather than going out there and privately lending it themselves to vet the applicant and the asset. You guys do all that work for them.

There are debt funds and equity funds. All of our funds right now are debt funds. The beauty of it is the fact that you don’t have to worry about tenants, toilets, repairs, that sort of thing, and whether or not people are going to be paying their rent. You’re the bank. We are the bank with all the documents that regular banks have, but the returns that we give our investors are 7% or more.

Is that meta fees?

Yes. Remember, we’re charging the borrower 9.5% plus a couple of points, and then we take our management fee. We pay the client 7%, and then the rest of it pays for the lights.

What’s your default rate?

It’s less than 1% to 2%. People think, “If people are borrowing money at 9.5%, they must be risky loans.” Not really. Some of these loans are smoking hot, but the banks just can’t fund them in time. We’ve had situations where somebody owned a house for $2 million and it was an older couple. They were on Social Security. They wanted to downsize because they didn’t want a two-story house anymore. They wanted it to be a one-story house.

A house came on the block, down the street from them. That was a one-story house. They knew the neighborhood and the purchase price was $1.2 million. They wanted to get this house quickly because they knew it was priced pretty reasonably, and they knew the street. This was a perfect situation for them.

Two reasons they used us. One is speed, so we could get this loan done very quickly for them. The second reason is that the bank wouldn’t lend them the money because they had all this equity in their house, but their income wasn’t high enough. A lot of times the banks are going to be looking at how long have you worked at your job. What we did was we lent them the entire $1.2 million to buy the house. They had to come up with the fees on their own for the points. We ended up being the first mortgage on that property and the first mortgage on their $2 million house. If you think about it in total, our loan-to-value was 36% or something like that. It was less than 40%.

What’s the highest LTV you go to?

We have pushed it to 75% cumulative if we know the area well and the property. Otherwise, we try to keep it below 70%.

Are you okay coming in at the second?

We’ll do seconds also. Generally, though, we’re not going to do $100,000 second behind $1 million first. We don’t like that ratio.

What is the ratio?

If it’s $600,000 on our first, we could do $400,000 second. On a property like that, we’d want to see the property being worth at least $1.6 million or something like that. We’re not interested in foreclosing people out and throwing them out of their houses, but if we have to, we will.

I’ve studied debt funds or mix for a long time, and I have a good understanding of them. I always suggest debt funds as part of a well-diversified portfolio if you believe in real estate in this concept. It is money lending. You hear about it in Shakespeare. It’s probably one of the oldest businesses out there. It’s this concept of money lending. It does have a bad rep, but it also has a great rep and it helps people.

 

 

We try to work with our borrowers. I’ve owned a lot of real estates and sold real estate to do the debt funds because I like coupon flipping. I don’t have to worry. It’s the borrower that has to be concerned because if the property is worth $1 million and I’m into this as a lender for $600,000, they have a lot to lose. They’re going to make sure that I get paid.

I don’t participate in the upside of the property, but with the cap rates and the way they are right now, I’d much rather get a solid 7% interest rate rather than a 4.5% rate of return on my money but hope that the property goes up in value. I don’t get the tax advantages of depreciation and all that, but I sleep at night very well knowing that I’m going to get a good interest rate. If for some reason, the borrower defaults, now I’m going to own that $1 million property because I’m the high bidder at a foreclosure sale, which has happened.

I like that you incentivize your investors to invest a little bit more and they get more of a return. It goes from 7% to 8% to 9%.

The reason we’re doing that is at any point in time, we’ve got about $15 million in our pipeline of loans that we need to fund. This fund right now is about $40 million, but it’s constantly growing because we have lots of agents who now know about us, and we don’t compete with them.

If you have an investor who you’re looking to work with and they say, “Inflation is at 8%. If I invest with you, I get 7%. By the time next year comes around, I’ve lost a percentage,” what would you say? It’s the same problem that we have. We have in one of our tiers a 10% preferred return in one of our classes of investments. That’s a question that gets asked from us as well about inflation. What is your response to that?

We have four different funds. One of our funds is a construction loan fund that pays pretty close to 10%. Why would anyone invest in this specific fund? Use it as a holding tank until you find that investment that’s going to beat inflation. This is money that you can access by giving us 30 days’ notice. In fact, we’ve had people put a request in for redemption, and they hit it at a time when we were going through a trade. They got their money back in three days. The question is, “Why do you have any money in your checking account?” It’s because you have expenses that you’re going to have to pay.

Inflation is greater than 8% as the Fed is saying. I’ve always said this. Everything is based on alternatives. The safest thing you can do with your money is put it in your hand because you know it’s there, but you don’t earn any interest on it. Someone might steal it. Now you start going up the ladder and you say, “You should then put your money in the bank.” “What am I getting in the bank, 1%? No.” You start going up the ladder and say, “How much risk am I willing to take for what reward?” I know I’m pushing this specific fund, but I’ve been in this business for a long time. I don’t know of any other loan debt fund out there that gives you this kind of liquidity for this high return. It’s usually one or the other.

The safest thing you can do with your money is put it in your hand. However, it will never earn any interest. Click To Tweet

Jumping back onto the educational side of things, you talked about prime. I’m familiar with prime here in Canada as well. Could you explain what prime is and then also compare it to SOFR or Secured Overnight Financing Rate? It is the benchmark that commercial lenders use to lend to us. They say, “Five over SOFR.” Their floating rate is relative to the SOFR where I believe on residential, you guys go by relative to prime.

There was also another one, COFI or Cost Of Funds Index. It may be similar to your SOFR. A prime rate is one of those rates that the banks come up with because they got to come up with something.

Is it floating or is it set? it’s not like a Feds rate where it now went up 75 base points and it’s consistent.

That’s how prime works. It’ll be set and fixed until they change it again.

Is the prime same as the Feds rate then?

The Feds rate is different. It’s a lot lower. I believe the Feds rate is the rate that banks get from the Federal government, which is different. Prime is going to be more for the consumer. In the old days, I used to borrow money at Prime minus three quarters. Now you got to borrow prime plus 1.5% or 2%.

Don’t bring up the old days. Everybody talks about the ‘70s or ‘80s when it was at 20%. Let’s touch briefly on the fact that the world is about to explode, and the rates are now where they’re at. It is well over 7%. We’ll see where they go now, but in the late ’70s or ’80s, rates were at 20%. My argument was the medium income compared to the medium home price, the ratio, difference and relativeness were much less than it is now. It’s much greater.

It’s supply and demand, as well as government regulation. In California, they’re always screaming about, “Affordable housing.” Where I live in Marin County, an affluent area, they put all these restrictions on you. You heard the term NIMBY or Not In My Back Yard and what Governor Ron DeSantis did in Florida, sending all these people to Martha’s Vineyard. They got these signs, “We love immigrants,” then they’re like, “You’re here? No, we don’t love you.” Forty-four hours later, they were out. The state government will say, “We want you to do all this affordable housing, but you’re going to have to pay all these permits. You’re going to have to do all these regulatory requirements to make sure you’re not imposing on the spotted owl and the watersheds.”

It gets to a point where developers and home builders look and say, “We can’t afford it. We can’t make enough of a profit. Lumber prices and labor have gone way up.” It’s a supply and demand where you get more people, people are living longer, and the population is increasing, but the housing has not exploded enough. Also, in California, a few years ago, we had some pretty major fires. We lost 5,500 homes, which is a fair amount in one area. What does that do? People are not going to live in a tent generally unless they’re homeless or something.

 

 

There are 100,000 homeless in California. We are going to switch the conversation to the investment side and the private equity side. A couple of other questions for you before we go there. Let’s talk about your mandate as an investment group. You’re raising equity from your passive investors. You put it into your fund, and then you allocate that capital to individual borrowers. Your strategy is you don’t go above 75 LTV. You assess who the borrower is and all those vetting processes that you do very astutely.

In an increasing interest rate environment that we are in where the markets are changing constantly, what happens with your mandate? Are you and your team getting together in the office and saying, “Our mandate is changing.” Does it stay the same? Talk to us about behind the veil and what happens in the mastermind situation.

It’s a supply-and-demand situation of money. In California, there’s still a fair amount of money chasing deals. It gets to a point where we cannot raise our interest rate to a new borrower above a certain threshold because he can go down the street if there’s another hard money lender who will lend it to him at a cheaper rate. That’s why you go to Ohio and your borrowing rates are going to be higher than they are in California because there aren’t as many lenders in Ohio. If you’re a borrower in Ohio, you’re not going to come to California because they’re not going to lend to you.

How do you do that research? How do you get the market research of where the market is at? Do you have other groups that you guys work with? Do you have certain software that you use? How do you know tomorrow where that number is going to be? Where is going to be your spread?

Mostly, it’s going to be driven by the brokers. We occupy an old bank building right on Main Street, but it’s rare that someone walks in our door like they would Wells Fargo bank and says, “I would like to get a loan from you guys.” Usually, the first question we ask them is, “Why are you coming to us instead of Wells Fargo? Our rates are a lot higher.”

Most of our business is going to come from referrals from other banks, mortgage brokers, realtors, and those kinds of people rather than the general public walking in. We’ve had this before. Let’s say someone has $1 million in the bank. For whatever reason, having that money in the bank, they don’t want to touch it. They only want to borrow $800,000. They’re earning a lot less or under $1 million that’s sitting in their money market account, but it makes them feel good in case there’s some emergency and they have to rehab the property, and they want to borrow $800,000.

If you push too high a limit on the rate, at some point they’re going to say, “Forget it. I don’t need your money. I will cash in my money market account.” It’s a supply-and-demand situation of that. As interest rates go up, eventually, you have to raise your rates because your investors are also banging on the door saying, “Interest rates have gone way up.” In this fund that we’re talking about, our Freedom Fund, it wasn’t too long ago that we were paying a flat 6%, no matter how much money you had in there.

Eventually, people say, “Six percent is good, but there are other companies out there that might give me a little bit of a higher rate.” They may be riskier but there’s nothing set in stone. We’ve had brokers come to us and say, “I can’t push my borrower to that rate. Maybe you can do it for a little bit less.” Sometimes what will happen is we’ll say, “If they can put down a little bit more of a down payment.” Instead of the 70% loan to value, they come in and make it a 60% loan to value. It’s almost like buying down the rate.

You’ve been in business for a long time. Have you ever been involved on the equity lending side like a pre-equity position on the stock?

Some of our debt funds have an equity piece to them from the standpoint of there being some profits in there. Some are even in our debt. As an example, on the construction loan fund, there’s a preferred return, but you get a percentage of the profits. That’s a percentage of the profits of the fund, but the fund may have a borrower who they’ve partnered with to be able to do a part loan and part equity in a project.

Let’s switch the conversation here quickly to investor relations. Ava is head of our investor relations and is also my boss. Let’s talk about that. We talked about investor memos, investor presentations, pitch decks, and communicating with investors.

I wanted to get your opinion on this. What makes the perfect investor presentation? You always get two sides. It’s too much info. Not enough info. It’s too long. It’s too short.

Less is more. If you inundate people with too much, they get confused and do nothing. Also, if there are too many choices. We have 45 different funds and that’s crazy. Prior to COVID, we had marketing to various people who were interested in what we had to say. We would have little wine and cheese party type of thing. We’d do our little presentation. A lot of it was storytelling, then we would have a picture as an example, “Here’s a house.” We would explain why this borrower came to us for a loan and what we charge them. You can’t have no slides at all because then it’s a little hard for people. Most people at least want to have something tangible to see.

I love that you said storytelling because that helps people relate to it, understand things better and so forth. You’ve been with the company since 2013. Ever since you started you were in investor relations. How do you source investors at your company?

 

 

Do you mean how do we get investors?

Yes. For example, with us at CPI Capital, this is the top of our funnel. We have our YouTube show. People watch it. They connect with us. We are very active on LinkedIn. We speak at many other stages and on other people’s YouTube shows and podcasts. We rent boots at a lot of conferences.

We do a lot of content on social media.

We do a lot of content consistently. These are all up here. People connect with us and then we go from there. With you guys, because you are somewhat institutional, do you use the services of broker-dealers or do you have these strategies that you utilize? Where are you guys at when you connect with investors?

I used to be in the investment community. I used to have seven securities licenses. I can speak one on one with a lot of investment advisors. They understand me and I understand them. Because my background is in accounting and tax, I can speak to CPAs and we can talk the same language. Trying to get into that market, we’ll be at various events where we’re promoting our funds. Most of the time, it’ll be for investors versus the loans themselves because the loans will come from various brokers. We have to get out in the community. We have email lists that we’ve compiled. I’ve written articles and thrown them on to various publications and LinkedIn once in a while.

I’m not the best marketing person. I’m a very good salesman, but I’m not great at marketing. My little pitch here is, “You put me in front of 100 people, I’ll sell to 99 of them our product.” My thing is, “How do you get 100 people in the room?” I need to work with the marketing people to do that. I do the sales part and then I’ll follow up with clients who have questions. I know inside and out so I can answer any questions that come up on that.

Just by talking to you in the last few minutes, you’ve come across as very knowledgeable and trustworthy. I’m looking forward to and have been thinking about for a long time to invest in debt funds. I’ll be in touch personally. I’ve always promoted investors, colleagues and friends to always have an allocation to debt funds. That’s my view on it.

I was going off of what you said. You mentioned that you wrote articles. Talk to us about the systems and processes that you have in place for communications with investors. Do you take that educational approach?

Our president writes a newsletter. He used to do it once a month, but he got busy that he’s been writing it once a quarter to give people a little bit of education, and then also let them know how their fund is doing. People do get their monthly checks and they get statements with them because you could either take a monthly check or reinvest for a compounded yield. It adds another roughly 35 basis points. There’s that kind of communication. On LinkedIn, every once in a while there will be some blog posts and that sort of thing. I’m an old guy. I’m used to two tin cans and a string for communication.

Can you raise from Canadians?

We can take money from anybody as long as they’re accredited investors.

I always like asking other investor relations about this question. With the current environment that we’re in, how are investors speaking to you? Do a lot of investors still sit on the sideline saying, “Now’s not the right time. I’m going to sit on the sideline.” What percentage would you give those investors that are investing?

We don’t even look at them as investors. They’re passive lenders. That’s one of the things when people say, “I’m thinking about sitting on the sidelines.” I say, “If you’ve got the money, why don’t you sit on the sidelines by parking it in our Freedom Fund getting 7%, and then give us notice when you find something better?” That’s fine. We got no problem with that. The question that I have gotten once in a while is with the market changing a bit and interest rates going up, there have been a lot of cancellations that you’ve heard about from people who wanted to buy houses. They canceled their contract because the bank raised the interest rate and now they’re not going through with it.

The interesting thing is that even though the market has slowed down a bit, we’ve become a bigger fish in a smaller pond. The reason I say that is that for a lot of mortgage companies, when interest rates have gone up the way they have, the refi market has dried up considerably. It’s only those purchases that are in real need of money. There are a lot of big mortgage companies, banks, etc., who have laid off a lot of people because they’re not seeing the demand.

 

What happens when you have a smaller pocket of potential lenders? We’re still out there lending. We’ve become larger. Obviously, we’re not as large as Wells Fargo, but we’re one of the larger alternative financing companies. We’re still extremely busy. We’re getting a lot of loan requests that maybe we wouldn’t have gotten. I’m picking Wells Fargo because everybody knows the name. I love the bank. I’ve got no problem with them. You call Wells Fargo and they say, “This is great but because we’ve laid off people and title companies are busy, we can do your loan, but it might take 45 days.”

What if someone has the opportunity to buy a property and they have to close in two and a half weeks? What are they going to do? They’ll come to us, get the loan, and then they’ll refinance with Wells Fargo or whoever because we don’t generally have owner-occupied consumer bridge loans. There is no prepayment penalty. They could pay us off. We did a loan one time. We got paid back in a week. The reason is because they were supposed to get a regular bank loan, but the timing of when they were supposed to close was getting shorter, and they didn’t want to lose their deposit and their dream home. They came to us, got the loan, and sure enough, the bank came through a week later.

When you talk about an expert witness, you’re talking about a court of law, I’m assuming. When you talk about the court of law, the question that comes in is, “What possible expert witness in a case of someone doing something unscrupulously?” Talk to us about what expert witness, and then I can ask you some more questions because it’s very interesting. In the finance world, there are obviously a lot of concerns about fraud and money not being used the right way.

Because of my background in accounting, tax, investments and real estate, I’ve been hired in a few situations. I’m bringing this out. I am not anti-gun. Forget that issue, but I was hired as an expert consultant. I was supposed to be the witness, but the opposing counsel didn’t have time to depose me. They accepted my spreadsheets, but wouldn’t put me on the witness stand. It was the largest case in history against a gun manufacturer for a gun defect. It was a $50 million judgment. I was brought in because toward the end, after the judgment that the attorney got, the defendant tried to hide all this money and go bankrupt.

My job was like forensic accounting into the financial statements and tax returns to figure out where the money goes. The spreadsheets that we worked on together got published. The judge accepted our spreadsheets. They got published in bankruptcy court and affirmed the judgment. It was nice to be hired in that case. It was an unscrupulous defendant. I’ve also had investment situations where I helped on the defense side where somebody was suing the securities broker for something that I didn’t think they should have. There was a real estate syndication where there was an anticipated loss. The plaintiff is suing the defendant being hired by the defendant to analyze what the lending deal was, and to determine whether or not it was reasonable. That’s how I’ve been hired.

Where’s the deal? We might go and buy it.

It’s out in California. It’s in the Northeast.

I’m joking around. Let’s move on. Thank you for that. We appreciate all your knowledge and wisdom. It helped out a lot. Let’s get to the more fun part of the show. If you haven’t had fun, this is going to be lots of fun.

The ten championships round to financial freedom. I’m going to ask questions, whatever comes top of mind. Here we go. First question, who is the most influential person in your life?

My father. He was an accountant. That got me interested in finance and investments when I was eleven.

The apple did not fall far. It’s like in your case, Ava. Your parents are extremely conservative and you’re an entrepreneur. Both of your parents are accountants.

Next question. What is the number one book you’d recommend?

It has to be the Bible. I don’t mean generically all the Bible. It’s amazing how much wisdom is in there specifically in Proverbs and Psalms. That is life-affirming and gives excellent advice. Besides having a Savior of Christ, which is the biggest thing in the world, forget the spiritual side of it and look at the absolute words that are in it. It’s not a book that you say, “That’s a few thousand years ago. It has no relevance.” It absolutely has relevance like, “Don’t keep company with bad people. Bad people corrupt good people,” and stuff like that. You look at stuff like that and you go, “That’s smart.” It’s a living breathing document.

We got that answer a lot, but it’s usually the purple bible though, not the regular Bible.

It is Rich Dad Poor Dad.

My wife got turned onto that book. She does not have a financial background, but somehow she got turned onto that book and it’s been very good for her.

Tell her not to follow the author on Twitter because she will burn the book after that.

She’ll have to read the Cash Flow Quadrant by Robert Kiyosaki once she’s done with that one. Next question. If you had the opportunity to travel back in time, what advice would you give your younger self?

Be more conservative. Look at what potentially could go wrong. In 1980, I made a mini killing in the stock market. You think you know everything. You’re twenty years old. You do something fantastic that even the adults say, “I can’t believe that you did that,” and then you end up making mistakes on that. Keep the ego out. Nobody makes money on ego.

What’s the best investment you’ve ever made other than that one in your twenties?

I had a friendly foreclosure on a building in Silicon Valley prior to the internet. You say, “I wish I would’ve owned that building.” Guess what? I own that building. I foreclosed in 1994. It’s funny because it went way up, then it went way down, and back to going up again.

On the deals that you talked about that you guys have a 1% to 2% default rate. When a deal does default, do you guys go and take it over as owners? Private lender individuals, if a project defaults, they now own it and they have to either sell it or continue to value add.

It is why I tell people I would not do individual lending unless you’re going to own 100% of the loan or you’re going to own more than 50%, and intimately know every single person you’re in with. I’ve had some bad experiences where if you do an individual loan and something goes wrong, now it’s like trying to herd cats and have people put in money and make decisions on stuff. You don’t want that. Versus a fund, if something goes wrong, the fund manager decides what to do. Generally speaking, we’ll make money because we’re not lending 110% loan to value.

 

 

What’s the worst investment you’ve ever made and what lessons did you learn from it?

Land deals. Unfortunately in 2006, 2007 and 2008, we did not foresee the value of land dropping even in California, but it happened. Unfortunately, that was the worst.

The big private equity firm in Canada went belly up. There were land buyers. It was huge. It was a big flop.

My old company is still in existence because some of those land deals are still out there, but we haven’t gone belly up. It’s a dormant type of company. To me, that would be the worst.

How much would you need in the bank to retire today? What’s your number?

He’s got to building in Silicon Valley. Doesn’t he?

I always tease people, “Forget millions and billions. I want to be the world’s first trillionaire.” It all depends on your standard of living. Make as much money as you can, spend as little as you can, and give to charity. Is there a magic number? I don’t know. It depends on your lifestyle. I’m not trying to be evasive, but having $1 million in the bank, unless you’re only going to live three years, that’ll cover you. The other thing is you don’t know what your longevity is.

Forget earning millions and billions. It all depends on your standard of living. Make as much money as possible and spend as little as possible. Click To Tweet

If you could have dinner with someone dead or alive, who would it be?

Off the top of my head, somebody like Ben Franklin or George Washington.

We got that a lot.

Not just that they are generally the first president, but there’s so much that a lot of people don’t know. I learned a lot in church about the founding fathers, how their relationship was with Christ, and how they foresaw. That was amazing. When you look at our Declaration of Independence, there’s so much in there that you’d say, “This was probably written yesterday. How could these guys foresee these issues? They want me to be king. Forget it.” That’s what we exited and wrote it for.

They should have clarified what they meant by arms. It would’ve caused a little bit less trouble these days.

It was Biden who says, “You weren’t allowed to own a cannon.” You were allowed to own a cannon. I’m not an anti-gun person, but someone I used to be. My attitude used to be only the police should have guns. That would make it simple, but then someone pointed out to me, the first thing guys like Hitler and Mussolini do is take the guns away.

The Mullahs in Iran. The first thing in the revolution time, there was no gun ownership in Iran.

It’s to keep the government from fascism and all that. I know we’re getting off-topic, but if you think about it, if you suddenly say, “There are no guns allowed anywhere,” do you think the bad guys are going to say, “Okay, I’ll turn in my gun.” The first thing they do is go, “Awesome. Nobody has a gun but me.” They’re going to be a lot brazen.

If you weren’t doing what you’re doing today, what would you be doing now?

I used to be a semi-professional bowler. I was not quite good enough to be like the guys on TV, which made me look and go, “I got to finish off college and do that.”

You look like a professional bowler.

I don’t know if that’s good or bad, but I would love to play professional baseball. Was I good enough? No.

Book smarts or street smarts?

Street smart. I have both because I’ve got the knowledge to get a graduate degree, but there are many people who have no common sense. It drives me crazy. When my dad was alive and had his own accounting practice, he wanted to hire an intern. He thought, “Do you see Berkeley? That is one of the most prestigious schools around.” He asked them to send somebody who was studying accounting, a senior who was almost ready to graduate.

This person comes and for whatever reason, they were taught all this ethereal stuff. They didn’t know how to balance a checkbook. It’s like, “Come on.” No offense to that person because maybe they were never taught. There’s just more ignorance and naivete, but definitely to me, it’s street smart. It’s funny because here you’re got somebody who’s got a graduate degree and you think, “The person is going to be book smart.” That’s the most important thing. Street smart is much better.

Ninety-nine percent of our guests have answered street smarts.

This is the last question. If you had $1 million cash and you had to make one investment today, what would it be?

I’m a little biased. Everything is based on alternatives. I wouldn’t put it in the stock market. It’s funny because I used to do well in the stock market, but it’s such a game nowadays. It’s manipulated. I wouldn’t do that. Would I own a piece of real estate? I know it comes with a lot of headaches. I like the lending space and I would be a lender of it. Whether or not I invest in this fund or that fund, I’ll do exactly what I’m doing.

What’s the best way for people to get ahold of you?

If they want to get ahold of me personally, it’s Edward E. Brown. My email is Edward@PacificPrivateMoney.com. You can also go to Investor.Relations@PacificPrivate.com. That’s probably the best way to get a hold of me.

When maybe we start a debt fund, I am going to coach Edward E. Brown.

Our president Mark is such a nice guy. There are many times when he’s done things where I have to almost rein him in, “Why are you giving away all our secrets?” He is like, “The way I look at it is you give and eventually, it comes back to you.” He is right. I’ve learned from that. I was like, “You call me. I’d be glad to help out.”

Thank you so much for taking the time for being with us here, sharing all your wisdom and knowledge. I wish well for you guys and your team. I might be a future client. Have a wonderful day.

I get that a lot from people who interview me. They say, “That sounds pretty good. I think I’ll check that out.” You go to PacificPrivateMoney.com. You can see all our funds there.

Have a wonderful day, everyone.

Thank you very much. It’s a pleasure.