Episode 52: How to Diversify Your Real Estate Portfolio with Vanessa Peters

Acquania Escarne 0:03

You are listening to the Purpose of Money podcast, a podcast where we talk about ways to build wealth and create more freedom in your life today. I am your host Acquania Escarne.

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Hey guys, welcome back to the Purpose of Money podcast today. I'm super excited to happen. Vanessa Peters

, who is an MD and the founder of VMD investing. She has been investing in real estate for 12 years in single family homes, commercial real estate, apartment communities, short term rentals, self storage, land entitlements, and manufactured home parks. She has invested in over 2500 units across 11 properties and four funds. She's passionate about helping busy professionals build wealth through passive income producing real estate that provides attractive returns and a proven roadmap to financial freedom. She's also the author of the Busy Professionals Guide to Passive Real Estate Investing a Physicians Path to Building Wealth, Creating Financial Freedom and Leaving a Legacy.

Welcome Vanessa, to the podcast. How you doing today?

Vanessa Peters 1:22

Good. Thank you so much for having me. I'm so excited to be here.

Acquania Escarne 1:26

My pleasure. I'm super excited, because one of my former guests on the show Tanya Salseth

is actually who connected us. I told her that I was really shocked that you would even able to find any multifamily syndication investment opportunities because they're so rare these days. And that's when she connected us because she knew I had an interest in that as well. So I'm gonna make sure to include in the show notes, the episode where I had Tanya on the show, she's a realtor who helps people invest and buy their homes, and is our mutual friend. So I want to learn more about you. Most people are not aware that multifamily syndication is a way to be invested in commercial real estate without having to deal with the day to day. But one thing that really interested me about you was your new venture where you're getting into land investments. So tell us a little bit more about that and what that means.

Vanessa Peters 2:25

Yeah, absolutely. I found out about syndications about, well, four or five years ago, when I was just absolutely determined that I was going to make some money in real estate. I was a little late to the party. I did attend the party in 2008, when I purchased a single family home in Riverside County, which is just north of San Diego here. And that was at the advice of a realtor friend of mine. He said this is a great place to buy. And it was right at the beginning of the downturn, if you recall 2008. And so it was a short sale and I bought it for 225k I think nice big house. And then the values kept going down. I got a little scared, I didn't really know what I was doing. I just watched them kept going. It went down for a couple more years before it started turning around. And I put some renters in there that were great folks. And then I forgot about it, had good cash flow, but didn't know that at that time, I should have been picking up more rentals if I wanted to be an active real estate investor.

So I got married I had a child I got busy with work totally forgot about real estate really. And then around the mid teens of the 2000s. I got like this itch to increase my net worth because I had been working and saving so hard to increase my net worth sitting more than half of my income as a physician. And after eight years of being on that treadmill, I looked up and I looked at my net worth I graphed it out. And I saw this straight line. And I was like what but they told me that the money would compound where's the compounding? And I was disappointed. I was frustrated. I was now in my 40. I was like a wake up call. Geez, if I keep saving and investing the way I am in the stock market. I don't see getting to where I want to be quick enough. And I had a realization that the compounding doesn't happen in eight years. It happens in 25 years and I was like, Oh, I started too late for that. So this isn't gonna work for me. I need to find something else. And I said okay, real estate's the way to go. I know real estate's good because I did it. And now that house is doing great. So I'm going to do it again. Went back to Riverside County. Oh, everything's so expensive. Nothing's going to cash flow in California. I scoured the whole place, even little condos in the middle of nowhere. And with HOA fees, it wouldn't cash flow at all. And realtor would tell me you should feed it a little bit and I'm like, I don't want to feed anything. I want to make some money on this. So I'm not going to buy for appreciation I'm going to buy for cash flow.

I realized that buying more active properties like rental properties just wasn't going to work. So I kept looking and went to Meetups met other real estate investors found out that most people in California are investing out of state in single family homes called turnkey investing. So you buy a renovated property, you get the cash flow from it. But I was like, I don't know anybody in Memphis, I don't know anybody in Kansas, I don't really feel comfortable putting my name on the loan and then having some property manager put the tenants in, I don't know them and being responsible for it. So also, the the worry to me was like, what if something goes wrong with a house, and it has a $5,000 bill for, say, a furnace or an HVAC and then my profits are literally wiped out for a couple of years. I thought that's not going to move the needle in what I was looking for. I kept looking, I was determined to find something in real estate that would work for me. And then I started hearing about syndication. So I think it was on bigger pockets. And I kept hearing this word pop up. And I was like, what is that, like us? Like? Seinfeld reruns? What are they talking about? And I ignored it for a while. And then I saw a doctor post about syndication. And I was like, okay, maybe I should check this out. So I looked into it. And I was like, Oh, this is interesting. You invest. You get a little slice of a building, mid multifamily and and put your money in. And then you get this cash flow back. I was like, Okay, I'm intrigued. How much cash flow are we talking about? So I called a couple people got some numbers, and some do looked at some old deals. And I was floored. I was like, Oh, my gosh, I can make really good returns on this. And I literally don't have to do anything. This is weird. This can't be right. So for my first deal in Dallas Fort Worth, a multifamily apartment building, I flew out there, I met the property manager, the operator, I did criminal background checks on everybody wanted to make sure that I wasn't getting swindled and wired my $50,000. And then I was nervous. But then once the check started flowing, and I started learning other deals, I was completely hooked, and so started investing a lot in multifamily, but not only multifamily, also mobile home parks and self storage too.

And really went all in on that I took as much money out of my 401k as I could get out of the stock market and put it into all kinds of investments. Then about a year ago. Now to answer your question, the roundabout way, I realized that I was a little bit heavy in one asset class, and so that would be multifamily. And multifamily is great. And there's so many reasons why I love it. And I do. I'm a GP on I think, like 12 multifamily deals, and so I do love multifamily, but I joined a group of investment advisor, investment advisory group, and they counseled me on my asset allocation. And whenever I would hear that word in the past like rebalancing and asset allocation made me like want to go to sleep like almost immediately. So I was like, Oh, what is that, but it sounds so boring. And then they started showing me all the different types of real estate that I had no exposure to at all. And that might include hospitality, that might seem like a bad thing to invest in during COVID. But it might actually be good if you get the ideal skilled nursing, assisted living. And there's a couple other types of like niche real estates that you could get involved in, of course, then there's industrial, the more commercial retail, commercial office building and cold storage, there's a whole bunch of stuff. So I thought, Okay, I'm going to start spreading things out a little bit in with my own money, not with my investors, but with my own money into these other asset classes. And then I came across one called land entitlement. And I've heard of raw land, I've listened to a couple talks on it this podcast, raw land didn't appeal to me, because it's like, high turnover, lots of deals for small dollars. And that sounded to me a little bit active. Because if you have to keep churning to get the money that you want, that's like, not what I'm looking for. I'd rather do a big deal that lasts for a couple of years and gives me some cash. So this land entitlement, though, is a totally different thing.

So I listened to the the folks who were operating this deal, and you purchase a plot of land really good size, and you get it ready to build single family homes on. And so that involves getting all the permits, you need to entitle the land to get it shovel ready, which includes environmental surveys, engineering proposals, they have to look at the electricity, they have to talk to the city and the county to get the permits to allow it to be built. And the folks that I talked to actually were they were full on development. And that's another asset class I didn't mention is just ground up development, which I hadn't intended to invest in. So these folks would buy the land and build single family homes and sell them. This is in the Carolinas, South Carolina. So when they were doing this, they started to be approached by the large national home builders to buy the land when it was entitled when it was shovel ready, when they could actually start moving dirt. And the amount that they were offering was staggering to the folks that were doing this. Like they run the numbers and realize that if they sold the land shovel ready, they would make more than if they ran it through and sold the homes being smart guys that they are they started to focus on land entitlements. And a recent deal, which is just a short takes about 12 months to entitle a big plot of land and get it all ready to go. And we provided our investors a really handsome return of about 18% for 12 months and it was structured as a syndication which as your listeners might know, makes it tax advantaged, versus a hard money loan, which it could have also been structured as, which is more short term, ordinary income or capital gains. So that's just a little bit about land entitlement and how I got into that.

Acquania Escarne 10:12

Wow. Okay, so I'm gonna take it back a little bit, and just for a moment, define a couple things for listeners. So for those who have no idea what real estate investing is, when she said, I'm investing for cash flow and not appreciation, she's basically saying, I want to make sure that whatever I put my money into, it yields profits after all the expenses are paid. And so you want to make sure that you have money, whereas some investors, they're in urban cities, where real estate's really expensive, like California, New York, and even in Washington, DC, where I am, some investors are willing to say, I'll buy this home, because I know it'll be worth more in the future. And I might even be willing to contribute some of the dollars to the expenses if the rent can't cover it all. So that's the difference between investing for appreciation versus investing for cash flow.

But in Vanessa's case, she really wanted to increase the amount of money that she was building off of her own money. And so investing for cash flow and looking for investments where she could double or increase her return was what she was looking for. So that's really awesome. And thanks for sharing that. Because not everyone talks about that some people just assume investing in real estate is profitable. investing in real estate is how you build wealth. But there's two different ways to do it. And when you invest for appreciation, you really don't get that money or the returns until you sell the home or you refinance it. So that's where you have that delayed gratification. Whereas if you're investing for cash flow, you get the cash flow either on a monthly basis or when it comes to syndications. Most the time, it's a quarterly basis. So that's another thing to talk about.

I love the fact that you got into a new way of diversifying your interest in real estate, so many people assume it's about flips. And so many people think it's about rentals. And you've just shared so many other ways hospitality, that'd be me. I'm a new hotel owner, and I got involved in the hotel industry, because of COVID deep discount on hotels right now, great opportunity to get those returns once people really ramp up traveling again. And even in the last couple of months, we've owned the Hilton in El Reno, Oklahoma, we've seen an increase in customers as well as revenue. So that's also something that's definitely on a rise. Mobile homes is something I've seen a lot of people getting into. And it's the untapped industry for some people, because they're not thinking about it. But mobile homes are affordable housing for a lot of Americans, and a great way for them to have some type of ownership and their own space in place. So that's awesome. And then self storage. So many people do not want to get rid of their excess stuff. And there is a market for those who are willing to invest in self storage facilities, because you really get to make income in several ways.

First, you're making income on the rented lots, right. And if you're lucky, you're at a 90% or better occupancy rate, which means tons of people are storing their stuff. But then if they fail to pay the bill, you can also sell their stuff. And then as a person involved in a syndication, you don't have to deal with the day to day with that either. You're just in it for the dividends that are paid out to investors either on a quarterly basis in most cases, or monthly, depending on the deal. That's just giving you some insight into how Vanessa has not only diversified how she makes money, but she's diversified how she makes money in real estate. And I want you guys to understand that is powerful, because she knew she was putting all her eggs in one basket, multifamily syndication, and then start, let me expand my money and my risk. So the more you spread out, the better you are when it comes to risk. So thanks so much for sharing that. And now that you are exploring land entitlements, are you going to potentially invest in more opportunities? Or are you looking to be a general partner on another land entitlement deal?

And for those who don't know, the general partner on a syndication is someone who is involved in the details of sourcing the real estate opportunity, but also advertising it to those they know, or that are on their email list that would like to be a part of the investment opportunity. So there is a little bit more work in the beginning as you find investors, but then just like your passive investors, you get some profits from the opportunity, correct?

Vanessa Peters 14:27

Yeah, yeah, absolutely. Yeah. I'm a general partner on about 13 deals. Now, and my next deal is a land entitlement fund. And it's a 506 C. So the syndications are regulated by the Securities and Exchange Commission. And they can either be Regulation D 506, B as in boy, or 506. C as in Charlie. And so B requires that you have a prior relationship with the investor, you need to know them, you need to have had a conversation, a couple of emails, at least, what exactly a prior relationship is big. And that's the way the SEC has left it. But nevertheless, the 506 C, Charlie is can be advertised. Yeah, so there's a little bit more flexibility there. However, there is no room for non accredited investors. And so I'm not sure if your audience knows what they are. But non accredited investors can go into the 506 B deals up to 35 people at the discretion of the operator, they don't always allow that. But an accredited investor is somebody who has either an earnings based you can reach the status to being your earnings of $200,000 or more per year as an individual, or $300,000 per year as a couple, or you can have $1 million in your net worth not including your primary home.

For those of us in DC and California, that's a big deal, because a lot of people's net worth is tied up in their home. Those are two different ways that you can meet the status and you don't I get this question from investors a lot, what do I have to do to prove that I'm accredited. So in a 506 B deal, it's really an honor system. It's a checkbox, when you read over the final legal document called the private placement memorandum, or ppm. It's a checkbox saying, I am accredited, or I'm not accredited. And then they'll ask you, how are you accredited? Is it through your net worth? Or is it through your income for a 506 C deal, you do need to prove that you are accredited, either with your W2, which you would upload to a third party software, or your 1099. Or you could get a letter from your CPA CPA letter is usually the easiest thing to do. And you don't have to share a whole lot of personal information that way. So that's a little bit about the deals.

So this deal that's coming up for me, I will be a quarter general partner in the deal of raising $50 million for a land entitlement fund. This will be in South Carolina as well. The one that we did last year was just a taster to see how it went. And it's going great. So we're going to expand to a much larger amount of land. And the beauty of land entitlement right now is that single family homes are in massive demand. They are flying off the shelves, no matter where you look in the country, people want to buy homes. And is it a COVID effect. I think that's part of it. People do want homes because they're say like moving out of the urban inner core because they don't want to get sick. They don't want to be sharing buildings with people where there's elevators and mailboxes and stuff like that, of course, as COVID resolves, which I believe it will, that's going to go away. And people might be like, You know what I really prefer living in the inner city. But the other issue is that a lot of people have realized that they can work from home. And they didn't know that they could work from home and their employer wouldn't let them work from home. And Okay, guess what now everybody can. And so you can you can move to a place with a little more space, which maybe they always wanted to do. So maybe those are a few of the reasons. But I know that inventory is at an all time low. And so the beauty of land entitlement is that it's fast. So where multifamily syndication takes about five years to run its full course. So if you're going to turn over a building with 250 units, and you do it slowly, it's going to take a couple of years to stabilize that property. And then you might want to take the cash flow for two years and then sell. So we're looking at a five year turnaround to double your money. Okay, that's the point. That's the plan. But things can happen in five years, you can have another COVID you can who knows we can have a weird recession of some sort. Hopefully not another pandemic, but the thing about the land is that it only takes 12 months or less to do it. And so the chances of things changing a lot, whether it's interest rates, or the economy probably isn't going to change a lot in 12 months. So that gives you some security.

The other good thing about a fund like this is that the sources of income that are coming from it are not just from selling land. This company also has an arm of development to single family homes, which I mentioned before, some of those homes will be kept as rentals, some will be sold to investors, and some will be sold on the MLS. So there's a variety of incomes that allows a preferred return to be given on a quarterly basis or a monthly basis. I'm not sure what but also profit sharing quarterly from the sale of the land. Now the big difference is that with syndications, you get your preferred return which right now, the market is about 7% preferred return, which is wonderful. So if I put in $100,000, you're going to get $7,000 a year in your distributions, which is awesome. Some operators give that no matter what others say, You know what the first couple of years are going to be lien because we're doing a lot of construction. And maybe you'll only get two or 3% for the first two years but we owe it to you and you'll get it eventually. Usually you have to wait to get caught up on a refinance or a sale, you have some pretty reasonable cash flow, which is tax leveraged, as we mentioned before, because you get a K1. But the thing about the land fund is that you will be getting your money that year, because it's so fast. So in the fund, you'll have your preferred return, I think it'll be 8%. And then you'll also get profit sharing quarterly distributions to equal approximately 16 to 17% per year of cash. So that's obviously a great return on your investment. And the beauty is that you get it now.

So with a syndication, you have to look at the cash on cash, which is your your actual income per year, looking backwards after the sale, which, if you double your money in five years, that's 20% 20% per year. But you can't say that your returns are 20%, because of the time value of money is worth less in the future than it is right now, if you wanted to give me $100 now, or if you want to give me $100, a year from now, or two years from now, I would take the money now, because it's worth more. So you have to look at the internal rate of return of any syndication. And so while you might double your money in five years, the IRR might be 15%, it might be 16%, something like that, not 20%. But if you're getting your money every year that obviously your IRR is truly what you're getting. So those are just some of the benefits of land that I like

Acquania Escarne 21:17

I love that. And that's a really good thing for people to understand. I'm constantly telling people about inflation, it takes your value away from your money secretly and slowly, and you don't even notice it. But everyone knows that the amount of things you could buy with $5, when you were a kid is definitely not the same amount of stuff you can buy today. So the fact that people are only looking at, if my money doubles, at the end of this investment is not enough, right, you want to make sure you're looking at each year and how much you're getting. So those are great. And I love the way you really broke down the returns and how you can look for those preferred return opportunities. So I definitely want to just briefly talk about your book, because I love when I have authors on the show, what inspired you to write your book on real estate investing, and who is your ideal reader?

Vanessa Peters 22:09

I started writing the book because a couple of reasons. One was with every new investor, I would repeat the same thing over and over again and explain to them what syndication is, the basics of it, the primer. So then I wrote a few articles like blogs, and then I thought I'd like to write a book. Another reason is because I went to a personal development conference and like half the people that were writing a book, and there was an author on stage speaking, and he's his business is telling people how to write books. And so I'm like, This is awesome. I did my little outline in 30 minutes, and I got excited about it. And it seemed to be the thing to do. But I did, I did do the book, I wrote it in about three to four months and self published, I know, I saw that you have a podcast on how to self publish. So it's fun. And it's pretty easy, and I enjoyed it. So it also is something that I can just hand to people and be like Here, read this and we can talk and then you'll have like my whole spiel, but you'll be able to digest it at your own pace, instead of me rattling off and talking too fast, like I tend to do. So

Acquania Escarne 23:11

I love that. And I think it's so true. And I'll make sure to link to episode on self publishing, with Michelle Loves Money because she did a really good job of breaking down how you can just write and you can write on whatever topics you want. And then cater to your target audience, which in your case, is a investor who's interested in working with you but doesn't know the basics. So that's awesome.

Vanessa Peters 23:33

Also, it's the, as it says in the title, it's the busy professional who wants I always forget the actual title. But the Busy Professionals Guide to Passive Real Estate Investing. And so that was the key is I went online to look at books that I could refer people to. And I couldn't find anything on truly passive real estate investing, because everything was about flips and buying single family homes. And I was like that's not passive. So I need to teach people. And the first two chapters are what is and what isn't passive. So it really dives into understanding how much work you're going to be doing. Because you don't want to get yourself into a situation where you're unhappy because you're spending so much time on your investment.

Acquania Escarne 24:16

Thank you so much. This podcast is all about wealth building strategies. And I tell people all the time, I was a landlord and I got tired of toilets and tenants. And that's why I got into hotel investing and I am looking forward to another syndication opportunity in the future. So before we say goodbye, I'd love for you to tell my listeners how can they find you. Please plug your website in anywhere you're on social media.

Vanessa Peters 24:42

Sure, my website is VMDinvesting.com. And there you will find a couple of links. You can get the first few chapters in my book. You can also get access to a spreadsheet that I created to help you map out how much you could save and increase your net worth by if you Investing in syndications. So it's called the Roadmap to Financial Freedom. And you can find me on LinkedIn and Facebook at VMD Investing or at Vanessa Peters.

Acquania Escarne 25:10

I love it. Thank you so much guys, make sure to check out Vanessa Peters website. Definitely look at this spreadsheet and figure out how much more because you level up your finances if you saved money and invested money into real estate opportunities versus a bank account. I love it. Love it. Love it. Thank you for sharing your story. I look forward to what's new and next for you. And definitely we'll share any updates that I learned with my list.

Thank you for listening to the Purpose of Money podcast. For more resources and information check out my website, the PurposeofMoney.com and while you're there, please sign up for our newsletter so you have the latest information on new episodes and blog posts. Until next time, keep creating freedom in your life today.

Transcribed by https://otter.ai