082. Balancing Your Portfolio through Diversified Funds with Brian Head

Connect with the host:

LinkedIn: https://www.linkedin.com/in/brandon-e-jenkins/
Website: https://www.birchprosper.com/

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About the guest:

Brian Head is the Founder of Head Start Equity, a real estate private equity firm that provides passive investment opportunities in primarily value-add multifamily properties. Brian has 20+ years of experience investing in real estate and is currently invested both passively and actively in 1,994 total units across 19 different properties with an aggregate value at closing of $338M. He earned his BBA degree in Finance from the University of Texas at San Antonio and worked in the financial services industry for 25 years, 10 of which were as a licensed investment advisor and stockbroker.

Connect with Brian Head: 

Email: brian@headstartequity.com
Website: https://headstartequity.com/
LinkedIn: https://www.linkedin.com/in/brian-head-headstartequity/

Episode Highlights:

✔️ Having a balanced portfolio

✔️ Understanding a diversified multi-family fund 

✔️ Vetting sponsors in multi-family deals

✔️ What makes Texas a great market for real estate investing?

✔️ Knowing when to launch your fund

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Transcript

SPEAKER_03 0:05

Is your real estate investment portfolio balanced? Diversification is an essential strategy that every investor needs to protect them against the potential downside risk of any deal. Today we're speaking with Brian Head, the founder of Head Start Equity, a diversified multifamily real estate investment firm that offers strategic diversification to its clients. You don't want to miss this discussion because we dive deep into key topics like vetting sponsorship teams and real estate fund mechanics. Too many investors jumped into funds without really comprehending the things we're going to talk about in this episode. So I'm here to help you navigate the investment landscape, and so is Brian Head. Here he is from Head Start Edward.

SPEAKER_00 0:53

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SPEAKER_03 2:01

What would you do if you had the freedom to pursue the things you enjoy the most? How incredible would it feel to have the resources to pursue your passions fully and live life on your terms? This is Brandon Jenkins, host of the Capital Stack Podcast and principal of Birch Prosper. You might have heard that 90% of the world's wealthiest people attribute their wealth to real estate investing. Well, guess what? It's true. Investing in real property continues to be the greatest generator of wealth all over the world. So join us each week on the Capital Stack Podcast to hear about how commercial real estate group investment opportunities can help you reach true financial freedom and give you your time back. Hello everyone, what's up, and welcome back to the Capital Stack. We have another very exciting and a very informative show for you guys today. So we're going to talk a bit about funds, right? I mean, they're a hot topic in the marketplace. And so we'll talk about why it's an excellent option for investors if you get into the right fund. We'll talk a bit about what goes into launching a fund, the things that you have to pay attention to. You know, it's it's something that represents sort of kind of the next phase typically in someone's journey. If you start off as a, or if you're a syndicator or an investor, active investor. And so, but there's a lot that goes into it. It's it's uh, you know, it's something to be very, very cautious about building. But then once you have it launched and established, um, you tend to offer some convenience and some other things that we'll talk about to your investors. So I guess for today to give us the the 101 and and maybe even the intermediate and advanced detail on launching a fund is Brian Head. So, Brian, how are you doing today? Good. How are you? I'm doing well. I'm doing well. So Brian is the founder of Head Start Equity. It's a real estate private equity firm that provides passive investment opportunities in primarily value at multifamily properties. We know something about that here. He has over 20 years of experience investing in real estate, has a portfolio of about 19 uh 19, I'm sorry, 1,994 units across 19 deals as both a passive and an active investor. Represents a portfolio value of about $338 million. Very impressive. Brian brings his background of about 25 years in the financial services industry to the business, and it has clearly served him well. So, Brian, um, with that, why don't you kind of share some some of the details of your journey and what got you uh to this point?

SPEAKER_01 4:22

Yeah, yeah. Thanks for thanks for having me on. It's uh an honor to be on. So um, yeah, you know, I uh I started out uh with uh with an interest in investing primarily in kind of the traditional path of you know stocks and bonds, mutual funds, things like that. That's kind of where I I guess cut my teeth in in investing a little bit. Uh started out uh as a stockbroker uh and financial advisor, did that for about 10 years at a at a larger company here in San Antonio. Um so that was kind of my first foray into investing and learned a learned a ton uh in in that space and uh some of it that has carried over into real estate. Um and so I know we'll probably get into some of that, but uh, but that's that's kind of where I kind of started my investing journey. But uh to to back up a little bit more, I'm I'm born and raised here in San Antonio, Texas, uh married, have two kiddos, uh five-year-old daughter and a 12-year-old daughter. The 12-year-old's actually at uh away camp for the very first time. Um so that was that was a little hard. So she's been gone. Pick her up tomorrow, she's been gone for a week. So uh, but uh um so yeah, that's that's kind of how I got started. And you know, my journey in real estate is similar to a lot of folks. Uh started in you know, single family. Um, bought uh my dad suggested that I buy a buy a foreclosure fixer upper um to move into, get out of the house. And uh so that was my that was my first step, bought a HUD foreclosure, uh kind of house hacked from day one. I I rented one of my rooms out to one of my coworkers, and so that was awesome. And uh kind of realized the the value there and uh then started flipping, you know, flipped about a dozen homes, uh, and then got into some single-family rentals, smaller multifamily, duplex, triplex, uh Airbnb as well. Um, so kind of ventured out into some different things. And then a few years ago is when I started getting into the larger multifamily space.

SPEAKER_03 6:17

All right, all right. Thank you so much for sharing that that background, that journey. It's um that's interesting. So um had your had your father had experience with um kind of real estate investing, or is it just to get you out, just to get you out?

SPEAKER_01 6:29

It's probably yeah, probably just to give me out. But uh yeah, no, so my dad, my dad is a uh he he lays floor tile for a living. Um he's been doing it since he was 16, so he was around and he's still doing it in his 70s. Um, but he's he's uh been around a lot of construction sites and houses and stuff his whole life. And so I think he probably, if I had to guess, I never, you know, I never really directly asked him, but I think it probably had a lot to do with being around developers and builders and all this stuff and seeing how successful they were. Um, you know, he probably saw the value there. Um and so yeah, he he kind of was the first one to kind of nudge me into the real estate space.

SPEAKER_03 7:07

Yeah, that is that is very interesting. I mean, because it's like, you know, so on one hand, it's like, hey, why why don't you find something to fix up and go ahead and move out? But it's also like a it's a the one of the biggest gifts I'm sure that he's probably given you, right? I mean, it's like now now kind of launched you into this um very successful career that you that you've um you know taken on and had success with. And you know, I think um so I think it's kind of interesting that I've found is um uh you know, it sounds counterintuitive, but in this business, I I've seen about maybe 50-50 in terms of people who are sort of professionally trained um going into you know launching a fund or the syndication business, but then maybe the other half is not, you know, like myself, I came from an engineering background, something completely different, and then ended up um, you know, through uh various decisions and and uh changes in path, ended up uh here, which I'm really glad that I did. But you come from the professional and sort of the real, you know, uh regimented training. So I'm I'm kind of curious, uh, what what are some of the things that you carry with you? Because I'd imagine much of it would translate directly into this space. But what are some of the things that you that you carry with you from your professional background that you still use?

SPEAKER_01 8:14

Yeah, I think um, you know, especially from the uh from the investing side of things, um, you know, I think one of the one of the biggest things that that I've carried with me is a kind of a diversification um component to investing. So um, and I and I think, you know, and and I know we'll get a little bit more into the to the fun details and and that'll kind of tie into that as well. But I think diversification is just super important. And I think, you know, uh enough there's not enough people that that honestly think about that. Um, and so, and I don't mean just diversification within real estate, right? Um, there's so many different kinds of real estate, so there's a lot of opportunities to diversify within real estate, but even really, I think it's important to diversify your overall portfolio even outside of real estate. Now, I I have a very strong conviction and believe that real estate should be a part of everybody's portfolio in some form or fashion, right? And I don't just mean your primary residents, I mean you should be investing in real estate and other aspects as well. But I think it's also important to because I'm not I'm not one of the, you know, I know, I know some some syndicators that that will, you know, get up and talk about you know, stocks are the worst thing ever. And I'm not one of those. Um, not just because of my background, I just don't believe that's the case. I mean, I think it's just important to be diversified. I don't think you should put everything, all your eggs in one basket. I know that's a um a cliche that people say, but I really do believe that. And it really comes to the forefront when things go south, right? When everything is going great, everybody's like, oh no, I'm fine, I'm gonna put everything in this. Um, just I was just listening to a podcast yesterday about Bitcoin and stuff, right? Yeah, I was gonna say that. Yeah, they had their they had their conference. Um, I guess they had their their big conference uh a few weeks ago or something, and um, you know there was somebody on there that was talking about no, that's that's what they believe in is Bitcoin, and they're putting everything, every every dollar they have they put into Bitcoin, and I'm just like, damn. You know, it it it's it's just it's I I have personally put some money in Bitcoin too, but honestly, only what I'm comfortable losing everything in. If I lose it all, it's not gonna hurt me. Um, and and I that's just my personal philosophy on on Bitcoin. Um, but I I I you know going back to my financial background, I think, you know, also, you know, five like five percent is kind of roughly what people would say to put in gold or some of those alternative type assets. And um, I I think I would I would never recommend that anybody put more than that in Bitcoin personally, but I know plenty of people that do. So um I think diversification is kind of the one of the biggest things I I I carry over from from that uh experience.

SPEAKER_03 10:50

And no, that's that's very important. It's it's funny too. On well, or interesting on the topic of uh Bitcoin and cryptocurrency. It's um, you know, I it's one thing for me that the underlying technology is something that at the very least will will certainly last, um, you know, that will stick around for sure. I think I think all of it will, but just the blockchain is something that has direct implications or and applications um to any number of of fields. But um, but no, that is that is fascinating. You're right. It's it's diversification is is super important. And um, you know, although I for me on the same, it's like I do, I believe that real estate for me is the is the best vehicle, but I definitely don't go around kind of beating up um other vehicles because it they fill different objectives, you know, it depends on what what you're looking for, you know, it depends on kind of what how much the level of knowledge that you have in different areas. And so, you know, I I think it's important to stay diversified that way. You you mitigate risk by doing that. I mean, that's just kind of the truth of it.

SPEAKER_02 11:49

Right.

SPEAKER_03 11:49

Um, so uh, so okay, so let's let's let's kind of uh talk a bit then about about that journey. I'm just curious, right? So so you started off, uh you know, you flipped some properties, you kind of you went you went through that really nice progression, right? Of the single family, then into the larger scale assets. One thing that I find that is uh a challenge though for people, like because I started off on the single family side as well, and I face this challenge is being okay with um not wearing all the hats, you know. So if you when you're on the single family side, especially when you're flipping properties, you know, I mean you're you're you're the guy, you know, unless you have a team already formed, but usually it's like you know, you can kind of pretty well get into it yourself and do and have success by yourself. But when you when you say, okay, let me switch over to multifamily or different asset class, you kind of have to be all right with with uh spreading the load a bit. And although it's it may sound easy, sometimes it's not that easy. Like, was that a challenge for you at all, or were you able to say, you know what, let's do it? Like, how did that go for you?

SPEAKER_01 12:46

Yeah, it was it was a little bit of a challenge. I mean, uh, in and I actually still have a handful of single family properties, and um, you know, I I'm I'm actually two of them are being rehabbed right now, and I'm going through that process of do I want to keep it? Do I want to, you know, but then but then you know, there's that again, that component of diversification, you know, it's kind of nice having some single family properties too, honestly. Um, but because they, you know, that's how I started and it it went really well. But um, yeah, giving up giving up some of that control is definitely a a factor. And I think that's where, you know, and I know we may get into this a little bit more later, but you know, really vetting your team and um, you know, if as long as you feel very comfortable with the the folks that you're working with, the partners you're working with, I think it's it's it's okay, right? And I think in a lot of ways, in a lot of ways, as an entrepreneur, in order to grow, you have to be comfortable with letting go of some of that stuff, right? You just have to be. You can't do everything, it's just impossible. As much as I want to, right? Um, and I still struggle with that, man. I still struggle with, you know, uh, even you know, even my my newsletters to my investors, I still do myself. Like there's a lot of people that use VAs to do that stuff, and that's cool. You know, I I I tried it actually on one. Um, I never sent it out because I was like, no, this is just this something's getting lost here in translation. It's not this is not the the type of quality of a of a newsletter that I'm trying to put out to my investors. And so I had to just, I was like, nope, I'm just gonna continue to do it myself for now. So um, but you know, it's uh I think it just goes back to making sure that you know you're you're comfortable with that team and and you've you've vetted them properly. I mean, I've had you know complete transparency. I've had more than one partnership that didn't work out, and I've learned a ton from from all those from those different partnerships that didn't work out. Um, and you know, it's uh it's it's a learning, it's a thing about this. It's a learning process, but you a lot of this stuff you can't learn unless you do it, right? Um you can read the books, you can hear, you know, you can listen to podcasts and hear about hey, this is what you should do, this is what you shouldn't do. The reality of it is until you get into it, that that's where the real learning is, uh, in in my opinion.

SPEAKER_03 14:55

So I I would agree, you know, and I think you're right, you know, they say that all all partnerships end is just about having a soft landing, kind of right. I mean, so um, yeah, no, I I I definitely agree with with that. And um, and you know, so you you're right. Let's let uh let's kind of dig into because we have a lot to discuss around around funds, you know, and and so so we'll kind of dig dig into that a bit. This is very fascinating, um, you know, side of kind of your experience in the business. So uh right off the bat, kind of what what is a diversified multifamily fund?

SPEAKER_01 15:28

Yeah, so you know, and I'll use my my fund as a as an example. Um, you know, so my fund is uh it's all investing in the hundred plus unit uh apartment complexes, value add in the state of Texas. Uh very, very hyper focused on the type of assets that I that I'm investing in. Um and investing in other folks' uh deals. Um and you know, I uh that that was actually so that was actually something I struggled with a little bit because my original plan in the fund was to uh only I was gonna be a partner uh on the deals that that I was investing in through my fund. However, what I kind of pivoted um with everything going on in the economy and and and realized, you know what, I don't want to limit myself to only investing in deals that I can be a co-GP on, is kind of the bottom line. And I feel like, you know, there's a lot of really good quality operators and deals that are out there that they don't need me. And so I don't want to limit myself to only deals where people need me because you know, and that's not to say those can't be good deals, but I I don't want to limit, I didn't want to limit it that way. And so I decided to structure my fund in a way that my fund is basically participating as a passive investor in other people's apartment complex deals. And so what it does is it allows me to really cherry pick the the deals that that I invest in. Um and so my fund is set up to where anybody that invests in the fund, uh, like you mentioned, is is diversified across multiple apartment complexes. So my goal is to have five to ten apartment complexes within the fund that's that are invested in. Uh right to date, uh we launched about a month ago. I've got two so far. Uh one is a 360 unit in Dallas, and another one is a 114 unit here in San Antonio. Uh my goal is to focus on some of the larger metropolitan areas, San Antonio, Dallas, Houston, Austin, you know, and then some there's some tertiary markets around those as well. Um, but you know, that's really the crux of it. It, you know, allowing people to kind of invest in a fund that is diversified. And, you know, the minimum on my fund is 50,000, which is generally the minimum on a lot of these types of syndication apartment deals. And so this allows somebody to put in 50,000 and spread out their risk across multiple properties, but also even more important than that, maybe not more important, but equally as important, diversify it across different sponsors because most of the funds that are out there today are funds that are put together by a sponsorship team for their own deals, right? And that's fine. There's nothing wrong with that. The only thing is when you invest in that, yes, you may be spread across a portfolio of their deals, but there's also some value in being spread across a portfolio of other sponsors' deals too, because other sponsors underwrite deals differently. There may be some may be more aggressive than others in the way they project out the rent increases and things like that. And so I think that you're kind of spreading out your risk from a sponsorship team as well. And that's the other component that my fund is able to bring. So I don't know if that helps kind of answer kind of what you were talking about, but it definitely does.

SPEAKER_03 18:41

That's um, and that's an excellent point that you made there right at the end, is that um it's something that we we don't talk about enough. There's sort of sort of when you diversify across sponsors, um, you what you get is not only you get sort of the strategic diversification um a little bit, right? Because um unless you peel back the curtain a bit, it is difficult sometimes to know who's the the conservative, uh who's projecting conservatively and aggressively, unless in the aggressive case, you know, unless it's like, I don't know, they're saying that we're gonna you know triple the rent revenue on an annual basis, you know, unless it's something that's so extreme. Yeah, but it's it can be difficult to see that. But but um I just think it's very important to to make that point, like you did, right? Is is diversification even within the asset class, if you can have it across sponsorship teams, you sort of protect your downside risk and you can you know maximize the upside as well, because you have certain rock star operators out there and why not be exposed um to their to their deals as well. And oh, by the way, you know, if we decide to take down a deal, we can do so. So I'm kind of curious though, um, so you come in as as an as an LP in the fund. And since you're coming in with um presumably a larger check, are you kind of negotiating with sponsors to say, hey, listen, you know, you know, we're coming in with the larger check, so we need to have a conversation maybe about where we want to fit in the deal. And are you are you coming in as kind of the pref equity over common equity, or are you just coming in with the negotiated terms, but still common equity? What's what's your approach?

SPEAKER_01 20:09

Yeah, the goal is to primarily come in with the preferential terms of the of the deal. So, you know, maybe a little bit, you know, maybe another, and this is just an example, it's not always going to be like this, but maybe an additional percent on the preferred equity, uh preferred return. Um, maybe uh you know, an 80-20 equity split versus a 70-30 equity split at the syndication level. Um, so yeah, that that's one of the advantages of also having the fund is that you can try to pull this money together where where an investor, an investor could put $50,000 into this, and I'll just use this Dallas deal as an example. This 360-unit Dallas deal, they could put $50,000 into that deal, get a certain class of shares, but because they're only putting $50,000 in, they're not getting the same class of shares that I could potentially get with writing a half a million dollar check to the deal. So there they could potentially actually get better returns in my fund and be diversified than investing directly in the deal, which is really not something you typically hear in the industry. One of the one of the big reasons, and we haven't quite touched on it yet, but one of the big reasons that's possible is really because of how I've structured my fund from a fee standpoint. So the way my fund is structured, I've only got a a 1% capped at 1% administration fee. So that's really simply just to cover costs of having my fund because there are costs from an accounting standpoint, compliance standpoint, having a portal for the investors, all those things that comes with the cost. And so what I've done is I've capped my my um administration fee at 1%. So if my cost for having the fund go over 1%, I'm gonna pay for that myself. If it ends up being half a percent, three quarters of a percent of assets under management, then that's all I'm gonna charge. It's not meant to be a profit center for me. There is no promote, there is no equity split at the fund level, uh, no management fees. The only money that I'm making as a fund manager on this fund is the money that I've invested alongside my investors. So There is no the my incentive is to do, and some people ask me, well, then what's your incentive, right? My incentive is to do well because I've got money invested in it, and also because I'm trying to build up more of a track record so that I can launch my next fund, which with complete transparency will have probably a management fee and things like that. So um that that's kind of why, because my my fund is structured with with fees in mind as well. That helps not only being able to get that better class of shares, but my fees are so low, that's why it's still possible for people to actually get a better return in the fund than they would get directly in a deal and be diversified. It's pretty awesome vehicle. I don't know of anybody else doing this. I mean, the other funds that I'm familiar with, you know, they have a 95.5 equity split in the fund, you know, 2% management fee, placement fees, all these different fees, which dilute your return so much because at the deal level, you know, they've got their own splits and things like that. Um and there are some funds, right? That the again going back to what we're talking about earlier, the operators have their own fund. And you might avoid some of those fees, um, but you won't be diversified from an operator standpoint, going back to that point, right? So uh I think that's you know, that's where some of the value lies.

SPEAKER_03 23:14

Yeah, that's incredible. Because so that that basically means that your investors, they're getting the benefit of you vetting sponsors, you having the know-how, and and but without being, you know, in a fee-heavy type of instrument. Um, and I like the point that you make there about having access to sort of a class of shares they wouldn't otherwise have access to. Um, because now you could you negotiate terms a little bit. So they can get a, you know, if it's a prep, they get maybe if it's a seven prep for the deal, they can get an eight pref, they have access to that, which they wouldn't if they just went straight into the deal. I think that's incredible. And you all you also touched on something that I'd like to ask you about. Um, and that's around investor alignment, right? So one of the values at Head Start Equity Fund, which is just um awesome, is having that aligned interest with your investors. So you just you just talked about that. Um, you know, and maybe just kind of kind of what what does that mean uh outside of what you just mentioned, right? Having your capital and the deal as well, but how how does that um how does that sort of look like in in the business? And and uh, you know, just maybe just expound on that a little bit, further.

SPEAKER_01 24:12

Yeah, I mean, you know, it's this this is the way I've structured the fund, it is definitely very much aligned with my investors' interests um from multiple ways, right? Because I have money invested in the fund, because I'm trying to build up that track record, uh, because I'm capping the fee charges that I can actually even charge on the fund, right? That's an incentive for me to keep the fees low as well. So there's a lot of different aspects of it that that that alignment comes into place. Um, you know, one of the cool things too about the fund is the the obviously it's providing another level of due diligence for investors as well, right? So on these syndication deals, these sponsorship teams are doing their own due diligence, right? Which which is more than one more than one general partner doing this, like the whole team is probably should be doing the due diligence on it. But then you've also got the bank who's doing the due diligence on the deal to make sure that you know lending on this deal makes sense. And so you've got another level of due diligence there. And then in my fund, now you've got another level of due diligence. And because, you know, and I know we were uh we haven't touched on it a whole lot, but vetting sponsors is is you know that's one of the biggest and most important things that that I think a lot of passive investors struggle with. Um, and you know, as you know, it comes down to a lot of no-like interest, right? That that that's really what a lot of this comes down to. And investors have to be comfortable with the person they're investing with. I would argue in some cases, or some investors aren't even as concerned about the deal level, you know, underwriting and stuff. They're more concerned about what are you like as a person? Do I click with you? Do you answer my calls when I call? How how responsive are you? Right. Um, and so those are all things I take pride in. I mean, honestly, when I'm, you know, when I'm networking at events, when I'm meeting new people, when I'm prospect prospecting with potential investors, you know, honestly, and I'm not just saying this as a sales pitch, I look at every opportunity as as a potential new friendship, right? And yeah, I don't, I don't look at I don't look at folks like, oh, you know, bring me the money, right? And just as an investor, I really do look at them as a as a potential friend. And um so I think that that extra level of due diligence is really really critical. And you know, these first two deals that I put in my fund, these are sponsors I've personally passively invested with myself. And one of the things that I'm looking for is a track record, right? I I want to invest in deals with sponsors that have gone full cycle on deals. I want them to be able to show me their track record. What is your what are your returns look like? Um, going back to the underwriting, right? I I'm I'm looking for some conservative underwriting. You know, I don't want to go in and invest in a deal with a sponsor that's projecting, like you said, triple, you know, triple returns and stuff like that on revenue and you know, um uh, you know, and so the cool thing is is like on these first two deals, the investments I've had with these sponsors, they've and these were made a couple of years ago, they've continued to pay out distributions, right? I'm sure I'm involved in other deals where we had to pause, right? And it's it's it's valid. There's no, I'm not, I'm not knocking, you know, people that have paused because I'm one of them. Um, but but they didn't have to pause their distributions. I'm still getting my monthly distributions from them. Um, they didn't do any capital calls, right? Again, I I know that's that's a part of what that's part of business, and you know that happens. But since I'm personally invested with them, I'm able to see these things and and I know these folks, I've I've met with these folks in person, right? Um, and so it it just it adds another level of comfort for me and and due diligence to be able to say, look, I've invested with these people. Um, that that's the level of comfort that I have with them. Um and so that, you know, it's not to say that every deal that goes into my fund will necessarily be somebody that I've invested with in the past. Um, but those are the kind of things that I'm looking for. You know, they're conservative underwriting and what are they putting aside for reserves and things like that, right? Like in this Dallas deal, you know, they've they've put over a million dollars aside in just reserves to cover what ifs, right? Yeah. Um, the San Antonio deal, you know, that sponsor's putting in half a million dollars of his own money into the deal. That's how much confidence he has in it. So these are all different factors that I'm looking at when I'm deciding, hey, do I want to invest this in this deal in my fund?

SPEAKER_03 28:33

That's this is all, I mean, we're we're getting into some really good stuff here because, you know, I think that um the conversation has certainly shifted to risk mitigation much more than it was, I would, I would argue, you know, over the past uh couple of years, only because you know the marketplace was the market was just so strong, you know, and and deals were really just performing really well. Almost uh I won't say regardless of the sponsor, but I'll say that it was a lot easier um to perform. And certainly now in this current you know market that we're in now, deals are a little bit tighter. And so the quality of the operator is going to be the thing that will stand out now. So the conversation is now around risk mitigation. And I like that that everything you're saying here, you know, is it's just checking off the boxes of saying, you know, as an investor, um, it's like, okay, well, you know, how do I know that this this operator is solid? And then you could say, well, I've invested in a couple of the deals, so I can tell you directly how they okay, cool. What about communication style? Well, I've invested with them, so I can tell exactly how they communicate and and you know, the things that they share and and uh how open and transparent they are. Sounds great. You know, so all these things. What what about their, you know, their um their their business plan, the ability to execute? I can tell exactly how they so to me, these are all all things that are very important just in general, they'll be important much more uh going forward. And so I think I think that's um that's that's essential. You know, vetting sponsors and everything that you just listed out there is something that as a passive investor, um, especially for newer passive investors, it can be difficult to do. So having someone that is kind of leading the fund or that just launched the fund that says, hey, listen, I can I've done all this, you know, let's talk and I can tell you exactly what uh what to look out for is a huge value add. And the other thing is um I I like that you mentioned with your investors that you are looking to build a relationship because I that's one approach that I take as well, and I think it's very important is to not have sort of this transactional view of things. You know, if you you know, being you know, to be in the business for a long time and to have that long-term view is much more important to really focus in on who who is this, you know, this partner and this investor, and what are they looking for? What are their goals? Do they align with you? I just think that's important, makes it easier over the long term to really have someone that you like, they like you, you get along really well. Um just makes it easier, I think. Um, you know, for all parties and and they feel right and the investors feel confident. They know that, okay, well, you know, Brian has my best interest at heart. And so I think that's um vitally important.

SPEAKER_01 31:08

Yeah, I think it, I think it really, I think it really comes down to kind of core core values, right? And I know for for me personally, you know, I was I'm fortunate to have a father that just instilled those kind of values in me. Um, and you know, I can honestly tell you he's the best person I've ever met in my life, right? I mean, he's just an amazing individual who would do anything for anybody. I mean, he was one of those guys back in the day that you know used to pick up hitchhikers and stuff, right? Fortunately, he doesn't do that anymore. Um, but you know, he he just he'll you know, he'll go above and beyond to to help somebody drop whatever he's doing to help a complete stranger type thing. And uh that that's kind of so horrible businessman, but just the greatest, the greatest person in the world. So uh, you know, I've I've learned I've learned a ton from him. And uh yeah, and to your point, I think, you know, really I would sum it up like this for my fund. My the whole thesis and goal of my fund is diversification of flight to quality. That that's really what what I'm trying to provide with that fund. Um, and I think you know, to this point, it's it's accomplishing that. Uh, we haven't done our first distributions, but they'll probably start this month. Um, and so uh I'm I'm excited, I'm really excited about the fund, the the thesis of the fund, and I think it's gonna do amazing. Um, and so I think I really do think that it's a great opportunity, and there aren't many opportunities out there like it right now.

SPEAKER_03 32:28

So no, that's that's that's incredible. Um, that's incredible. And and so uh I'm gonna talk really quickly about the market, right? And so um, you know, it's I've I've mentioned it many times that some of the reasons why I invest in certain areas and things that I look out for criteria-wise, but wanted to get your take on it, right? So it's a Texas fund and um why the Sunbelt, why Texas? What what what about that market um is is attractive to you?

SPEAKER_01 32:56

Yeah, so a couple things. So starting with, I guess one of the first things is I'm born and raised in Texas and San Antonio. So I know I know the market, I know the state, I know the different cities really well. Um and so I think that that's one of the things that gives me that that comfort level. You know, I'm the primary decision maker on this fund, and so I'm sticking to what the areas that I that I know well. Uh in the future and future funds, I I plan to probably go outside of Texas a little bit, even outside of multifamily and things like that. But again, staying hyper-focused here. Uh, you know, I just I'm a firm, you know, Texas is it's just an amazing state from a business standpoint, uh, you know, very business friendly. Um, you know, I think we have of all the states, we have the most Fortune 500 companies here. Um uh if if Texas, you know, this this is an interesting stat that a lot of people don't know, but if if Texas was its own country, it would be the eighth largest from a GDP standpoint in the world, yeah. Uh bigger than Russia, bigger than Canada. Um, what I think the last number I saw was $2.4 trillion uh GDP. So I mean it's it's just it's just an amazing state, you know, uh over roughly, and obviously this is just a rough number, a thousand people a day moving to the state. Um again, that goes back to being business friendly and people needing to move here um for employment reasons. And and so, you know, I just I feel that it's just such a strong, such a strong state from a migration standpoint. Um, and you know, the we have a housing shortage nationally, but we definitely have a housing shortage here. Uh, and it's something that, you know, has has just been obviously 2000, 2008 contributed to that. Um, you know, and then COVID contributed to that with the slowdown and and houses being built. Um, interest rates have now contributed to that because people don't want to, people that have an existing home don't want to sell their home because they're gonna have to then go find something else and pay a higher rate, you know. And so we had we had such low rates for so long that most people that owned a home had an opportunity to refinance into these low rates. And they're you know, they're gonna they're gonna have to make a sacrifice and buy a lesser house if they move right now. And so they don't, they don't, there are just not as many houses on the market right now. And so that that's you know, that's that's great for builders right now, um, but they're not gonna be able to keep up with the the demand and the shortage that we already have just in building new homes. Um, it that's gonna be a struggle. So that's where multifamily will come in and provide that additional uh housing for those folks that are looking for a place to stay.

SPEAKER_03 35:29

Yeah, I you know, I had a conversation about this just the other day, is that the fundamentals are very, very strong in Texas. I mean, because it you you know it's you're you have the the fundamentals kind of propping you up on all sides. So you have a landlord-friendly and a business-friendly um state and market, you have tons of jobs, you have tons, the net migration is is strongly positive. Um, and then on the other side, you have this supply shortage. You know, you have, I mean, so you have high interest rates, like you said, which is causing a further slowdown. I mean, there's already like you just mentioned the 2008 COVID, it's all these things that impacted it now, interest rates. So you have both both sides of it that are just propping up this this market that even in the absence of um the slowdown would be a strong market. But now you put that into it, it's like, well, gosh, I mean, this it's just the jobs and a population growth powerhouse. So um yeah, it really, you know, you know, it doesn't take very long, but to take a quick, a quick look into and say, okay, yeah, I understand. I mean, this is why we love we love you know Texas as a multifamily, you know, uh if the asset class is strong. And then of course it also supports the other ones. I don't I don't talk about it much on the show here, but self-storage, you know, things like that that are supported by by that asset class. So um, yeah, and I just uh really appreciate you, you know, kind of kind of leaning in a bit and expounding on that. Um, so let me ask you something now. And this is around, you know, so someone's listening and well, actually here, two questions. One is for someone who's interested in in uh uh connecting with you. So if I'm a sponsor, you know, at what point do you tend to want to get involved? You know, is it is it when I have a deal that I need to close in a week? Or is it or is it more like, you know, hey, let's build this relationship? What's what's your approach?

SPEAKER_01 37:08

Yeah, I mean, so you know, I'm being I'm being very picky, like I said earlier. And so it's it's really, you know, I don't so I need to probably have met these folks before, had some conversations before. Um, I and and quite honestly, they need to have some deals they've gone full cycle on, right? They need to be able to show me a track record. Um so it's it's difficult, I would say, to to come in and you know, somebody comes to me and they're like, hey, I've got a deal, we've got two weeks left. You know, it's like that that would be a little bit tough for me, especially if I don't know. Now, if I know the person, maybe, right? Um, because then it's not so much, okay, do I need to vet the sponsor as much as much as it is do I need to vet the deal? And and you can do that in a couple of weeks. The the the problem is is that um, you know, if I don't know the folks and I haven't worked with them before and stuff, it it gets a little bit more challenging there. Um, so I I think, you know, really obviously it's got to be a Texas deal. Uh, they they have to have gone full cycle on multiple deals, they have to be able to show me their track record. Um, and there's that no like and trust piece, right? That that I have to develop with them. And that's not, it's hard to put a timeline on that, you know. That that honestly could be, you know, I go meet with somebody, I have lunch with them, I look at their properties, I look at their their portfolio, and I look at their deal. And that, you know, maybe it could be two, three, four weeks, you know, and I'm like, yeah, let's do something. Uh it it it could, you know, it could be it takes a couple of months, right? I I don't know. So um from that standpoint, I mean, it's got to be super high quality. Um, and and to that point, I think what we're experiencing right now is because of some of those. You mentioned earlier how, and I won't go as far as to say that my 12-year-old daughter could have done a syndication a couple years ago and been successful, right? Um, but but you know, there are there are deals coming on the market now because of cap rates expiring, you know, which is basically just an insurance policy on interest rates going up on your on your um your loan, right? Um, and so and and there are there are there are deals right now in the market because people need to sell sell. There's distressed sellers. That Dallas deal I mentioned was from a distressed seller who had a cap rate expiring, they need to get out of the deal. Um, so there's definitely deals to be had right now, and I think that's gonna continue for a little bit. I I it's gonna be interesting to see what happens with the with interest rates. I don't uh I'm not I'm not of the school of thought that they're gonna start coming back down this year. I could be totally wrong. These could go really south in the economy, but I just I I don't I don't see that happening. Um could be wrong, but uh, but that's kind of kind of my my thought on that. So uh from a sponsor standpoint, that's kind of what I'm looking for.

SPEAKER_03 39:52

Outstanding, outstanding. And um, yeah, I think I think that's that's very important, you know, to have that that that time to kind of build it up. And you know, any anyone can look um uh can wax brilliantly and look sharp in a week, you know, over lunch or something like that. But it takes a little time to kind of fully understand what's going on. And so so that now the second question I wanted to ask was around um the the timing of kind of launching a fund. Like at what at what point um do you think someone should say, you know, maybe I should launch a fund? I know now I I know that it sometimes depends on uh you know what the investors need, but just out of curiosity, on average, when do you think someone should consider maybe I need to launch a fund?

SPEAKER_01 40:35

Um yeah, I mean, you know, I I think it really it is it is a tough question to answer. Um, you know, I think, you know, for me, it it it took, you know, it took several years of experience in the space to realize the the value. So I've been I've been working on this fund for for a year. Um so this wasn't something that you know I decided, you know, in a month, I was like, hey, let's let's launch a fund next month, right? Plus the the just the the due diligence and the the paperwork and legal stuff required to get this thing up and running is is a little bit daunting as well. Um, but I I think you really need to have some experience in the space um that you're launching a fund in. Uh and that that I think that really just depends on how quickly you jump into deals and how quickly, you know, I was I was pretty aggressive when I started becoming a co-GP on these different syndication deals that I got in. Um, you know, I've been a I've been a co-GP on eight deals, and so I did that in a relatively quick period of time. Uh and you know, I learned a ton. And with with with everything going on in the economy and some of the issues that we've run into as a sponsorship team on some of those deals, it just kind of reinforced my whole thesis on the fund and being diversified. And um so, you know, if I had to, if I had to put a number to it on average, I would, I would say you need a couple of years, three years experience in the in the space before you should even consider it. And then, you know, and I and I think you want to look for that before you invest in a fund with somebody as well. And I think it it's really important that I've been a general partner on the type of deals I'm investing in as well. So um, you know, anybody can go and and and launch a fund. Um, but you know, have they done have they done deals? Have they been a partner on deals? Do they know what it's like? Do they know what it's like to struggle and have to tell your investors, hey, we have to pause distributions? And you know, that's that's part of why I went to the flight, flight to quality and with the fund, right? So um I think it really just depends on the person, but you know, I I think you need several years of experience before before you should even even consider it. And then the other piece of it is the expenses involved with starting a fund that are not, you know. I I mentioned earlier that, you know, um I'm capping my my administration fees at 1%. I'm eating all of the costs that that it took, legal paperwork, thousands and thousands of dollars to set up the fund. Um, I'm not even including that in that one percent cost. Like that's just eaten. I've I'm covering that myself. I'm um that that one percent is just to cover ongoing expenses. So I ate that cost. And so, you know, not everybody can be fortunate to be in a financial position to be able to do that and offer the type of fund. And I know that I'm fortunate in that I'm able to offer that as well. Um, and so I I think you you have to have the financial means. You know, I I also decided that from day one, I wanted to have a fund administrator, a third-party fund administrator that's helping me with the fund for multiple reasons. One, it is time consuming to have a fund. And two, it provides investors with another level of comfort knowing that there's a third party outside of Brian that is administering this fund with him and and from a compliance and accounting standpoint and everything, that the you know, the distributions from the investments come into. The fund, they're going to be the ones sending out those distributions and based on the cap tables and all that stuff. It's not Brian going in and saying, hey, this person gets this amount, this person gets this amount, right? It's a third party helping with that administrative task from a compliance standpoint to make sure that everything's kind of being done above board and you know, not just what Brian says goes, like they're they're there to help with that piece as well. Um, but there's costs associated with that, right? And so I knew that, you know, I'm really going into this. And I, you know, honestly, talking to you right now, I know I'm gonna have more money out of my pocket every month to do this than I'm gonna be making in fees. I know that. Um, but I I'm also looking at a bigger picture and scaling and building those, again, going back to relationships. Relationships are huge to me. And I'm building those relationships with my fund administrator, knowing that my goal is to have a $25 million fund after this and then a hundred million dollar fund after that. Right. And so that'll more than be made up in those, you know, with the way the structure is on those funds, the cost of having this fund administrator. But I'm building that relationship now. I'd I'd rather make sure I've got everything kind of in place and ready to go and smooth as I'm starting out. Uh, and that way when I go to the bigger deal, bigger funds, I've kind of got all that laid out.

SPEAKER_03 45:14

So that's incredible. Listen for the people who are listening to this on the podcast, you can't see me. I'm over here nodding my head up and down because you're just you're just saying some stuff that I think is very important. That that that piece about you know having kind of third-party a fund administrator, um, that that you're right, that gives your investors even more. I mean, we've already talked so much about risk mitigation and and vetting, you know, going through and vetting the deal vetting sponsors, all this protection. Um, that that piece right there gives an added layer of confidence um to your investors to say, well, everything else just checks out, you know. And then the last question for you, Brian, is you know, how do I be what's your infrastructure like? And then there you go. You know, so I just um yeah, I I think that that's a powerful point. And and it's something that to me, you're you're right. It will it will be one of the things that allows you to court us to sort of springboard and to grow into the larger funds, um, is is to have that handled. It also gives you time then to focus on the relationship building, you know, vetting the sponsors, vetting the deal, that kind of thing, right? So it's all incredible. Um I think that's just outstanding. And so, so let me um let me ask you really quickly because we're almost getting close to to wrapping. Um, but I wanted to ask you, so you know, you know, for someone who's kind of listening to this and they want to understand kind of as a passive investor how to how to best maybe engage with with you and and you know when to engage with you, how how would they best uh best do that?

SPEAKER_01 46:40

Yeah, so they can they can send me an email uh to Brian at headstarted.com. Uh you can go to my website, headstarted.com. There's there's ways to reach out to me there. Uh only social media I'm on is LinkedIn, so they could hit me up there as well. Uh in terms of when, uh, you know, I would say now. Um, you know, I don't, I don't, um I I think different investors have a different time frame and and comfort level and when they feel comfortable investing, right? Some um, and this was true for me, you know, some some investors just need to see deals come through and and be a part of a distribution list to see what their new what the newsletter looks like, get educated a little bit, see what these different deals look like. And so I I think that the time is now, you know, the funny thing is you ask you ask pretty much any real estate investor what's the one thing they would do differently, and 90 plus percent of them are gonna say they would have say they would have started. Yes, exactly. Right. So so I would say, you know, reach out to me now. Um, you know, and I and I'm not, I'm not so my minimum on my fund is fifty thousand dollars. Um, and and that's the minimum for for most deals, but I really do uh consider myself an educator. Um, and I love that that's why I'm doing what I'm doing. That's another reason why I'm doing a fund, is because what I enjoy the most is educating investors on these types of deals and and what opportunities are out there. And my fund is not necessarily the only avenue that people can invest with me to. You know, I'll probably still partner on some deals. Uh I'm I'm looking at some other types of commercial investments in Houston as well, not just multifamily. Um, and so there's other types of investments that I'm looking at as well. So if people are needing to diversify outside of multifamily, I might be able to help them out there. Um, but you know, I I would say I'm at a point, you know, in my in my career right now where you know I've got the time and I'm more than happy to help educate folks. And so if people want to jump on a call and and just learn, and you know, and I'm even happy to share my single family experiences and any tips that I can give people there. You know, I I I don't I don't tell people that, you know, you need to start in multifamily, that's the only way to do it. You know, single family was great for me. Uh I it allowed me to springboard into multifamily in some ways. And so um I'm more than happy to share my knowledge that I have there and my experiences there as well with a potential investor. Um, but I think, you know, now is the time to reach out and and don't, you know, don't hesitate, don't, don't be afraid that, well, I don't know where to start. I think that's what stops a lot of real estate investors is I don't know where to start. Um don't let that stop you. I mean, all of us need mentors, all of us need somebody that can help educate us on where to how where and how to start. Um, and there's not a one one uh you know, one thing that fits everybody. So uh yeah, I would say just reach out to me and I'll uh you know, and if I don't, if I don't know something, I'm more than happy to try to connect them with somebody else, you know. If they're looking to get into self-storage, which is not something I offer now, you know, I'd more than happy to make a connection if there's one there. I mean, going back to the whole friendship thing, I mean, I really do, I don't just say it, I do consider investors friends. Like I had one investor not that long ago reach him out, reach out to me, and he was like, I'm not looking at getting any more multifamily, but I was thinking about buying a laundromat. And I'm like, well, that's something I don't know anything about, but I do know a business broker that might be able to help you with that. So the three of us met for lunch and and uh I made that connection and I learned something, they learned something. And so, you know, I'm I'm all about trying to help help people connect with other types of folks as well. If there's something out there that they're looking for uh that you know, I don't offer like some of the areas that you invest in as well, right? Those aren't areas that I invest in now. But if I know somebody that's looking to do something like that, I'd be happy to send them, send them your way.

SPEAKER_03 50:26

So absolutely, absolutely. I really appreciate that. And I think that um you're right, it's it's important that we kind of educate uh our investors and and to serve in that capacity. Um, you know, and and I like that you said that, you know, the advice would be start wherever you're at. You know, it's a don't don't wait until you have everything lined up because for unfortunately, you this is the marketplace changes, and so by the time you have everything ready to go, you'll be in a new market. And then you'll, you know, so so just I like I like that. Just get started. I think that's awesome. Um so uh listen, you know, Brian, you know, I really appreciate everything that you've uh added here, just tons and tons of value. Um, and I think you've really uh the the case has already been made, but I think you certainly made it an even more impactful case for a fund for the convenience that it offers um investors. And so um just once again, thank you so much for your time today. I think this has been incredible.

SPEAKER_01 51:18

Of course. Yeah, thank you so much for having me. And it's been, like I said, it's been an honor and a pleasure to be on. So I appreciate it. Thank you. Absolutely.

SPEAKER_03 51:26

As always, thank you so much for tuning in to the show today, brought to you by Bridge Prosper. If you enjoyed today's episode and you'd like to learn more about commercial real estate investing, please like, subscribe, and share. And we'll see you again next week. I'm Brandon Jenkins, and this is the Capital Stack, where we help you learn, apply, and prosper.