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Real estate investment expert and podcast host Bryan Hancock examines the interplay between limited partners and sponsors for private real estate offerings, empowering passive investors to invest wisely
How to Become an Advantage Player with Joel Block
Bryan Hancock (00:25):
Well hey, everyone. Welcome to the Wealth Investment Podcast. I've got a guest here, Joel Block from Bullseye Capital. Thanks for joining us today, Joel.
Joel Block (00:33):
Hey Bryan. Long time, how are you?
Bryan Hancock (00:36):
Things are going well, man. It has been a long time. It's been too long. Congratulations on the move out to Colorado.
Joel Block (00:41):
Well, thanks. People have asked if I miss anything about California and the answer is no. I really don't. Really don't miss much about it at all.
Bryan Hancock (00:52):
Yeah. Yeah. Okay. Well I've been curious about this new Advantage Player's concept that you have. I don't know if it's a concept or if it's more than that. Can you tell us a little bit about what an Advantage Player is?
Joel Block (01:05):
Yeah, of course. One of the things that you probably know, well maybe you know about this, maybe you don't, but people don't know about this in general, I started my career, they think my career started when I was at Pricewaterhouse doing taxes. But actually, before that in college I actually learned to be a professional blackjack player. And I was really in the top echelon of the game in the world. And I played on one of the top teams in the world. We'd go into Las Vegas. I'd play solo, I'd play on teams. And we took money out of those casinos. And then the rest of my career I've spent on that giant casino on Wall Street, which is kind of fun. But here's the thing about Advantage Play is the casinos actually call people who can beat their unbeatable games, they call them Advantage Players. And I was referred to as an Advantage Player, because I played at the top of the game and I could beat those casinos, which they don't like, as you know from movies and other kinds of things.
(02:01):
So for me, an Advantage Player is somebody who plays at the top of their game. They do what others don't do. They see what others don't see. They know what others don't know. And for limited partners, for sure, they want to associate themselves with Advantage Players, people who really are at the top of the game. Aaron. And just by way of example, you got seven people sitting at a blackjack table. Six of the people don't know what day of the week it is, what time of the day, what they had for dinner, what they're doing for lunch. They don't know anything that's happening around them. And one guy sitting at the table knows so much about what's happening that he knows what card is coming next. And think about the situational awareness that most people have, most people are more like the six people. They don't know what time the day it is. They don't know anything happening around them. They just float through life and they're lucky to get from point A to point B.
(02:53):
But Advantage Players really understand the game. They really slide through life. They glide and understand the rules of the game. And those are the kind of people you want to affiliate with. So to me, Advantage Player is really somebody who plays at the top of the game and those are the guys you want to be with.
Bryan Hancock (03:10):
So if I'm a limited partner trying to seek out one of those Advantage Players, how would I go about doing that? How do I know? Is there some sort of track record or success leaving clues? Or how would you go about trying to figure out who those folks are?
Joel Block (03:24):
Well, I think that's really what the whole discussion we're going to have for the show is. I mean, I think that's really what we need to discuss, is that first of all, the limited partner has to have a sense about what it is that he or she wants to accomplish. And listen, some people like certain kind of asset classes better than others. So they might like multifamily, they might development, they might like institutional type of investing where margins are smaller and returns are less, but there's less risk. So the first thing that you have to do is you have to have a really good sense about who you are and what your own risk tolerances are. I mean, you have to have some really good insight about who you are. You can't evaluate another person until you really know what works for you. And once you do, then you can put yourself on the track to thinking about is this person an Advantage Player who can deliver for me what matters to me?
Bryan Hancock (04:19):
Okay. Yeah. I know we've talked about this a lot in the past, but entrepreneurs tend to be kind of stupid in a lot of ways. They want to be lone wolves, they want to be out there doing everything on their own. How does some of that tie into what an Advantage Player would do? Are they able to recruit a better team? Or how do they organize themselves to be able to out-compete other people that are after the same opportunities that they are?
Joel Block (04:44):
Well, first of all, Advantage Players have a certain amount of clarity. They operate with a variety of strategies that other people may or may not operate with. So let's say for example that you know that you want to operate in the multi-family space, or you want to operate in the fix and flip space, or wherever it is that you operate, you have to have a very clear business plan about what it is that you want to do. And here's a really big difference between professional investors that make their living by picking investments and retail investors, which is everybody else, and that's about 2% of the people are professional people and 98% of the people are not, the difference is that retail investors buy things and they hope that it goes up.
(05:30):
Advantage Players and professional investors know when they buy something, exactly what they're buying and exactly what's going to happen if they execute a certain business plan against it. And that's really what you have to be looking for when you're evaluating a professional investor is how crystal clear is this person? Can they explain it to you in a way that makes sense? Can they explain it to you clearly so that you catch on to what's going on so you could ask them questions? And all of that to me makes a very big difference and it really creates the kind of relationship that you want to have with a promoter. And if you can't have that kind of relationship, then I'd be wary about the relationship going forward, because if you don't catch on to how they operate now, you're certainly not going to get how they work in the future.
Bryan Hancock (06:17):
Right. A lot of that ties into a value add strategy. So being able to identify something that's underperforming, or mismanaged, or is not being executed the right way, they can purchase it hopefully at a discount, and then be able to add some value to it and be able to generate some up sum.
Joel Block (06:34):
And there's other value add strategies beside those. I mean, so one thing is you find things that are under managed and you bring them up to speed. But the other thing is that let's say for example, what's really become popular are these roll up strategies, and it's called the creative value, where you're adding value in a different way. So let's say for example you buy a mobile home park and it's under managed or it's not professionally managed. Well, the larger private equity outfits aren't buying those because they just don't have the energy to turn those things around. But if you're a small operator, you might think about putting those deals together, and then you bundle up a bunch of these non-professionally managed deals and you professionalize them.
(07:17):
And by the time you get your package together, that package is worth a lot more than it would've been before. That's true for laundromats. That's true for dry cleaners. It's true for car washes. The Wall Street Journal just did a report on car washes recently. The private equity companies are buying them because they want the cash flow, and these are big cash flowing assets. So it's not limited only, Bryan, to value added fix and flip on houses or raising the rents of an apartment building. There are many strategies. And the trick is Advantage Players are articulate their strategy, they know exactly what they're doing, why they're doing it, and they can describe it with great clarity and ease. And if your promoter can't do that, then you need to think about whether that's the right person for you to affiliate with or not.
Bryan Hancock (08:04):
Yeah. So what do sponsors or promoters normally get wrong in this process in their path to trying to be an Advantage Player?
Joel Block (08:11):
Well, first of all, they try to be everything to everybody. I mean, that by itself is a terrible mistake. I mean, if you say we're going to buy whatever we find, wherever we find it anywhere in the United States, I mean that's not a success formula. And investors typically get turned off by that sort of thing. A lot of investors, they really want to do what they understand. Listen, I understand multi-family, I understand Los Angeles, I understand Austin, I understand whatever city you're in, let's work on those cities. And if you're describing some kind of an opportunity that is too broad, that is too unwieldy, then people just won't say yes. And the goal of course is to get them say yes. And so you have to really think through that and be clear about it.
Bryan Hancock (08:58):
Yeah. And I know this is a constant struggle for syndicators or sponsors too when they're putting together their offering is they want to have it be as flexible as it can be to be able to take advantages of opportunities as they see them, but they want to leave it confined enough where they're really specializing the things that they're good at so it allows them to track capital. How should people that are limited partners think about those sorts of arrangements, the capital arrangements as they're evaluating opportunities?
Joel Block (09:30):
Well, those two things are not mutually exclusive. Saying that this is the asset class that we're going after and this is the type of property. We're looking for B class properties that meet these kinds of criteria in these kinds of areas. And the geography can be a little bigger than a city. It can be a state, it can be a region. As long as the asset class is well defined and as long as you have both knowledge of the area where you're buying, and also the wherewithal to manage the properties in those areas, because that's part of the problem. If you don't have a footprint in a territory, it's very difficult to successfully manage a property. Now you can hire third party management, but we all know what third party management is and it's frequently not all that great. So you really have to be very clear. I would define your asset class first, your geography second. But if you don't have a footprint, be wary.
Bryan Hancock (10:24):
So how does this normally show up in the capital cost for sponsors? If I'm a limited partner and somebody's offering me some really high preferred return or something that seems a little out of the ordinary, how should I think about that when I'm evaluating opportunities?
Joel Block (10:43):
Well, first of all, like anything in life, if it looks too good to be true, then it probably is. And if the preferred return is much below seven and much above nine, that's probably an indication the promoter is maybe a junior person who doesn't know an awful lot about what they're doing because they're offering more so they can attract some capital, or they just are in a funny position for whatever reason. So number one, I would say that there's a bracket that works. Below seven, investors don't need guys like us, they don't need private promoters because they can go to safer investments with larger companies. But when you start getting into the seven, eight, nine category, you really need to have some exposure to real estate and some alternative assets that you just can't get in some of these institutional deals. And then as far as profit sharing, I mean, the amount of the split should really be determined by the amount of work that the promoter's doing.
(11:39):
So if the promoter's managing a AAA apartment building, then maybe 5 or 10% is enough for the promoter. But if the promoter is doing a rehab or doing a development deal, it's not uncommon for the promoter to split 50/50 with the investors, because if it weren't for that promoter, the deal wouldn't get done at all. But the aggregate amount of return rarely exceeds 15% between the preferred and the split. It rarely exceeds 15%. And if somebody's telling you it's more than 15%, be very wary. I find that to be very suspicious. It's not to say that there couldn't be in a regular situation one time where you get a windfall, but you cannot count on a windfall over and over and over again. And greed has gotten the best of a lot of well-healed people, and that's what enables people like Bernie Madoff and other people to be successful is that they prey on greed and other things.
(12:35):
So to me, seven to nine is a preferred, is a really good number. And you'll never see more than 15 being offered, and even that's a high number. So to me, those are the brackets where you ought be thinking.
Bryan Hancock (12:48):
Yeah. As people are evaluating sponsors or trying to figure out are these true Advantage Players for a given asset class, what are the types of things that they should do when they're evaluating sponsors? Should they do background checks? Should they look through the proformas in detail? I mean, a lot of people probably aren't sophisticated enough to see where all of the skeletons might lie in a deal. Should they talk to professionals? Or what is your recommendation for investors?
Joel Block (13:16):
Yeah. This is a tough area, because I'm not a big fan of proformas, because promoters are well known to doctor proformas to make them look the way they want them to look. So that's not really necessarily a great benchmark. Because these are private deals, you don't really have visibility into what the reality is of all the deals that a person's done going backwards. They only share their better deals or the best ones that they've done. So that's problematic. To me, the best way to get connected to these kinds of people is by referral, either referral of one of their clients or of a professional person who probably knows them. To me, those are always the best ways to create these kinds of relationships.
Bryan Hancock (13:55):
Right. And I know there's definitely work involved in valuating the sponsors. What is your recommendation to folks as they're growing a relationship? Do you recommend limited partners to maybe start small with a smaller investment and ratchet that up over time? Or how do you think about that?
Joel Block (14:12):
Well, I think it depends on the total size of your investment pool. You're going to put some percentage of your assets into liquid assets. You're going to put some of it into stock market assets. You're going to probably put some into bond assets. You might put some of it into alternative assets, like real estate. And you really have to think carefully. And it's not for me to tell a person how to do their allocation or how to think through that sort of thing. But I would say that you want to be very careful and you want to do what's in the best interest of your family, and you probably need some professional assistance to think through that. Just remember, I will tell you to remember this though, people who are licensed to deal in the stock market have a natural predisposition that leans away from real estate, because real estate is considered an alternative asset. And an alternative asset is not stocks, bonds, or mutual funds. It's anything that's not a stock bond or mutual fund.
(15:07):
And the reason that that's important is because stockbrokers get compensated on stocks, bonds and mutual funds. They don't necessarily get compensated when you buy something that is outside of that bucket. So if you say to somebody, listen, why don't you move 20% of all your assets out of your brokerage firm and into a real estate transaction? They're going to call their broker and say, you know what? I'm thinking about moving 20% of my assets out of our brokerage firm. Well, that broker secretly is thinking, wait a second, I get paid based on the total value of the assets that are under my control, under my management. And if you take 20% away, that's less for my family. So you really have to be aware of the hidden agenda that they have or what they might be thinking.
(15:52):
And I'm not saying that all financial advisors are self-serving, but plenty enough are that you need to at least think might they be thinking about themself or might they be thinking about me?
Bryan Hancock (16:03):
Yeah, and that's a definite thing. I mean, we had Scott Hendricks on as our first guest on this podcast, and to get anything private through so he's able to sell it as a registered investment advisor, it has to go through a whole compliance check, and a back office, and a this and a that. And the inherent bias there is to not allow sponsors, or allow brokers who are potentially representing sponsors, or helping to assisting to sell securities from sponsors to allow him to be able to do that. So that's something that listeners definitely should think about.
(16:37):
And my experience has tended to be that some of those private opportunities are offered because enough people are asking for them, but it tends to be the people that are really, really seasoned and have big funds, and back to the earlier part of our conversation, a lot of the juices sort of squeezed out of the deal for the opportunities that are allowed to pass through that filter. So I don't know how you think about that.
Joel Block (17:01):
I was talking to an alum of the symposium, the syndication hedge fund symposium program that I run that you've been to many times. And this guy actually went to work for a pretty large syndicator. So he actually runs a pretty big area. And these guys, they raise about $250 million a month. They're a machine and they just got all these broker dealers all over the country raising money for them. But their load, you won't believe this, their load is approaching 15%, because they're paying 10 or 12% to the broker dealers for raising the money and they've got their other costs, whatever those costs are. Individual guys like us, we don't typically have those expenses, and consequently our load tends to be somewhere between 2 and 5%. So it's a very small load.
(17:49):
The load being the commissions on the front end for somebody to come in, it's very, very small because we don't really pay commissions. But these other broker dealer guys, so when you start dealing with these large institutional broker dealers and these large institutional outfits, it may appear safer, but they're part of the reason that the returns are so much lower is because in order for them to raise their capital, they're paying broker dealers enormous sums of money to do it for them. And that really just eats into the profits. And unless you're doing a substantial value add deal, it's very difficult to make up 15 points. Very, very difficult to make up that kind of load. And most of the deals they're doing are not really value-add deals, so they just linger and they hope there's some appreciation in the economy. But if there's not, you're going to come out upside down and that's not going to work out well for anyone.
Bryan Hancock (18:40):
Right. Well thanks, Joel. You want to tell our listeners a little bit about what you've got going on and how they can get in touch with you?
Joel Block (18:46):
Yeah. Listen, a big part of what we do is we educate promoters on how to be great promoters, on how to put deals together that are investor friendly and that are really fair and work for everyone. And I've spent my career in the venture capital and the hedge fund businesses, and I'm available to chat if somebody needs something. And they can go to bullseyecap.com and they can find me. And that's probably the best place.
Bryan Hancock (19:12):
Okay. Well thanks again for your time today and coming on. And we'll have to get together for another one of these.
Joel Block (19:18):
Will do it.
Bryan Hancock (19:19):
All right. Thanks so much.