Investing is a fickle business. There is so much in line that when you fail to do your dues, you could end up in a bad position easily. While the world has become so advanced and giving (opportunity-wise), especially in the private investment world, it still helps to gain a better understanding of what you’re facing ahead. Patrick Donohoe brings in Mauricio Rauld of Premier Law Group. With more than a decade in the business, Mauricio has seen the good, the bad, and the ugly when it comes to deals. He shares his perspective with us, along with questions and insights, that will help improve the way we ask questions and do our due diligence on private investments. Mauricio guides us to understand the accountability structure, value proposition, and the principles of the business at a high level. Don’t miss out on this great conversation, and remember that good business equals good investment.
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Private Investment: Ask Better Questions, Do Better Due Diligence With Mauricio Rauld
This is going to be a fun episode. It’s a little bit shorter but packed with good information around how to ask good questions, how to do good due diligence on the private investments that you make. I’m intrigued by the private investment world. Our culture is going quickly and it’s amazing. The innovation that’s taking place is beyond our comprehension sometimes. It’s continuing to go faster and faster, which is awesome. It makes things faster, easier and cheaper especially from a business perspective. I’ve been able to reduce costs, especially in software, over the last several years because of innovation. It’s becoming a part of our culture. It’s also easier these days to raise money to do deals, to put companies together, to put projects together, to put investment together and those opportunities are going to continue to increase.
My perspective of private investment is based on the experience that I’ve had, but how do you convey that perspective to the typical investor out there that may have some knowledge but not as comprehensive of a knowledge? I brought in an individual that I’ve known for several years. His name is Mauricio Rauld with Premier Law Group. Mauricio has seen hundreds, probably over 1,000 deals, maybe even more than that in his practice over more than a decade that he has been in business. He mainly specializes in the real estate space. He’s done business in other sectors as well as far as raising capital for startups or for technology and so forth. He is agnostic essentially to the actual details of the deal itself.
He is putting together the documents and the structure so that those that are spearheading this project are doing it legally. He’s not getting into the logistics and the credibility or the legitimacy of the actual value proposition itself. It’s more of the legal documents and ensuring that money’s being raised the right way. He’s been able to see good deals, but he’s also seen a lot of bad deals, things that have gone sideways. I’m hoping that his perspective gives you some questions, some insight and things that you can do to improve your due diligence, so that when you are taking your money and you are expecting somebody else to be a good steward of it, that you do as much as possible so that you leverage them, not just delegate the responsibility to them getting you a rate of return.
It’s understanding the accountability structure, understanding the value proposition at a high level, understanding the principles of the business. Remember this season we’ve been talking about good business equals good investment. If you have bad business principles and acumen, you’re most likely going to have a failed investment at some point in the future. You want to be aware of all of that upfront as well as get the appropriate financial education in order to ask the right questions, the best questions, those quality questions. Mauricio is going to give you that perspective. It’s going to be awesome. You’re going to love this episode.
I have a good buddy on with me, Mauricio Rauld of Premier Law Group. Mauricio, thanks for taking a little bit of time. You’ve been on before. We’ve known each other for the better part of a decade. I look at your position as far as what you do professionally. It’s very unique because you get to see investments from a vantage point that nobody else gets. You get to see a lot of it. Would you talk specifically about what your specialty is when it comes to private investments and then we can get into the experiences you’ve had over the years?
The short of it is I’m a syndication attorney. I’m an SEC lawyer, which means I help primarily real estate investors raise capital to then placed into real estate investments. Those are multifamily deals. They might be single-family, self-storage, mobile home parks. It’s all kinds of variety of investments. I’ve seen the gambit over the last several years now, primarily multifamily let’s be honest. That’s been the hot asset class, but that’s not exclusive. People raise money to invest in all kinds of things. I’ve had the privilege of seeing all types of little different asset classes, how people have been structuring and how successful they have been in acquiring that capital.If you want better answers, you've got to ask better questions. Click To Tweet
This is the novice person that doesn’t understand the legality of it all, but someone can’t go out and say, “Give me your money and I’m going to invest it for you.” That’s not legal. You can’t do that. There’s the public world, which most people are familiar with where you have high levels of accountability. You’ve very liquid capital markets. The barrier to entry is high, but you have private investment. It’s been around forever and it’s massive. You don’t hear much about those types of investments. At the same time, there’s a legal way of doing it and an illegal way of doing it.
The illegal way of doing it gets a lot of people in trouble. You’ve seen that and you write about it quite often, but there’s the right way of doing it. You ensure that the right way is taken when a person raises money to make sure that they do it the right way. You’re agnostic to the type of investment. You specialize in real estate, but you’re agnostic to where the project is. Who’s the principal? Who are the investors? You’re on the sidelines putting the paperwork, the legalities together and a lot more than that. I’m summarizing, but I know there were a lot more than that. In a nutshell, what else comes to mind as far as your position and what you do?
That’s exactly what I always tell people. There are two things you’re doing. One is you’re raising the capital and number two, you’re deploying it in whatever you’re doing. I handled the raising capital. I’m totally agnostic. We do non-real estate deals. We’ve done a couple of cryptocurrency funds. That’s been a hot thing, so some people put together cryptocurrency funds. I’ve also done startup tech companies that are software companies. They are putting a fund around to raise. By and large, 100% of my clients are real estate investors. They happen to sometimes venture off in other things.
Let’s get into the topic at hand. The outcome that I wanted to help the audience with is to ask other questions, do better due diligence, look for things inside of an investment or a business. What they’re putting money into, which will make them a better steward of their investment so that they’re not blindly handing money over to somebody and crossing their fingers that it will work out. Your vantage point is that you’re able to see all of these different types of investments and meet a lot of different syndicators those that have been doing it for decades. Not to say that those who have been doing it for decades are going to be successful.
They equally get stuck in their ways and ultimately make bad decisions based on the modern economy and not end up well. For those that you’ve seen consistently do well by their clients, those that have succeeded with raising money and deploying it in a way where they not only return the investment but a return on the investment. Ultimately most private investments fine print in a nutshell like, “You can lose all your money and we’re not legally responsible if that happened.” That’s ultimately what it says. What are the things that you see consistently that are done the right way and done the wrong way conversely?
I like the way you framed that. It’s one of my favorite things. If you want better answers, you’ve got to ask better questions. What are the right questions that investors should be asking or at least looking at? One of the things clearly that I see people are doing successfully is they’ve got a track record. The track record is huge. Anybody can put together a fancy business plan, anybody can throw numbers in a spreadsheet and make it seem like the investments are out of this world. Somebody has to execute on that plan and make it happen. That’s a lot of times easier said than done. One thing is to raise money. You can get people who are great at marketing and great communicators, but somebody has to do the work. Having a track record is very important. It doesn’t necessarily need to be a track record in syndication. This might be somebody’s first-ever syndication, but at least they’ve got a track record of doing that themselves. They’ve had a successful track record where whatever thesis they’re putting forward, they’ve tested it and they’re doing well.
They hit a wall like everybody does, which is you’ve run out of your own money, you’ve run out of your own resources or you want to scale. If you suddenly find an investment that’s working well and you’re limited by your resources, syndication is a great way to pool other people’s resources, whether it’s cash or credit or relationships or experience or whatever those resources are. It’s a great way to scale. A track record/execution because if you’ve got a terrible track record, that doesn’t work. A good consistent track record of executing is important. You and I know a lot of syndicators who’ve been doing this for a long time who are able to raise tens of millions of dollars on one email or one quick webinar or something because of the track record as opposed to if this is your first time, it’s a little bit harder to raise the money. To me, the track record is the first thing you want to look at for sure.
What are maybe some other things there? Obviously, track record, you want to make sure that this isn’t the person’s first rodeo or maybe if it is, I came across an investment where it’s the first time this guy was syndicating. It took me about six months to put money into it, but I did it. It was a private investment in the energy and startup sector. I did it because he had a partner and his partner had 25 years of experience and had done these massive billion-dollar deals. Sometimes if a person doesn’t have a track record, it doesn’t mean that it’s not going to be a good investment. Essentially looking at the principles involved, which is usually the case, different partners, a board potentially like the team involved, that’s also an important element. What else do you commonly see that frustrates investors or investors end up losing because of?
The only one that’s sometimes frustrating for me is understanding the assumptions that the sponsor or the person raising the money and doing the investment is relying upon. That’s important because if they’re wrong on their assumptions or thesis or maybe more importantly if their assumption is not aligned with your assumptions. I’ll give you a great example. In the multifamily space, there’s an argument to be made. A lot of people are arguing that we’re at the end of the cycle or at the top of the cycle. If that’s your belief that we’re at the top of the cycle, you probably shouldn’t be matching up with somebody who thinks we’ve got five more years to go.
I see that specifically in the underwriting. One of the things you want to be doing is looking carefully at the business plan, all the docs and the underwriting, which is essentially the assumptions they’re making and look out for some red flags. Based on my personal beliefs, but some of the red flags, for example, if you believe that we’re a little bit frothy on the cycle, that there might be some headwinds coming in the next few years, having somebody put a short-term bridge loan or a short-term debt in place to get you to the permanent financing a few years later, that’s a little bit risky if you think that something’s going to happen.
In a scenario like that, you only have one exit strategy, which is to refinance into a permanent loan. If you cannot do that for whatever reason, then now what? You’d probably have to sell the property and now what happens? Probably you’re having an issue getting financing because we’re in a recession and that was probably the worst time to sell. That’s one example of assumptions you want to look at. The other one that I see a lot, and again my job is not to question them. As the attorney, my job is to make sure I understand what the assumptions are and that we make sure the investors understand, so we disclose all those assumptions.When things go tough, that's when You find out a lot about the person, their character, and their work ethic when things go tough. Click To Tweet
The other big assumption is rent growth. If you’re looking especially on a real estate deal, rent growth is important because that at least on an underwriting will show you an increase in revenue year over year because rents are going up 2%, 3%, 4%, 5%. There’s an assumption being made that because rents have been going up a certain percentage over the last several years in a particular market or submarket, that rent growth is going to continue. That’s an assumption. Whether you’re right or wrong, I don’t know, but that’s an assumption. It could be an aggressive assumption where you might be assuming it’s been 5% increase for the past several years so we’re going to assume 5% every year or maybe 2% or 3%. What people forget is it’s possible there would be no rent growth or even negative rent growth. You need to make sure that your personal investment philosophy or your assumptions are matching up with what the assumptions are of that particular operator.
It would be interesting to look at if those assumptions ended up being the worst-case scenario, negative growth or zero growth or occupancy not going up or what is the minimum occupancy, especially in a multifamily deal. See if the deal makes sense. Sometimes assumptions can layer risk onto the underlying investment. That’s the importance of going through the business plan, understanding what’s been done in the past. That’s where you’re going to start to differentiate the true value proposition and where you’re going to get your return.
Here’s a great question for investors to ask, have you stress tested this model? How low can our occupancy be so that we can still sustain our debt? You’ve got a requirement that typically you have a debt coverage service ratio of probably 1.25 or something. If it drops below that, your lender is not going to be happy. How much can the occupancy drop and still maintain those levels so you’re still good? You can cover your mortgage even though maybe your investors won’t be getting money, but at least, you’re not at risk of losing the property. How much can rents drop and still cover it? You want to stress test. Most of my clients do a stress test, but it’s not just stress testing, it’s finding out what that stress test is. The first one you should look at is how low can we go for us to break even. At what point are we having problems? Stress testing all of these is important.
This has been super helpful because it comes down to the statement you made. The quality of an investment you could even say is a corollary to the quality of the questions that you ask. That leads to your understanding of what the value proposition is, what the syndicator is doing, and how your money is going to be put to work. Without that knowledge, it’s a gamble. What else do you see as far as things to look for that you see when investors go crazy in a bad way. They do a suit. What happens between the time money is raised and the time that return started to be paid out, the investment comes to fruition. What are some other things that frustrate investors that you can identify upfront?
One of the ones that are critical and it goes both ways. I’ll give you an example of how this particular topic goes both ways. It’s something that investors don’t like and will result in them not coming back a second and third time is a lack of communication with the investors or lack of transparency. One of the things that a good operator will do not only be consistently communicating with their investors in good times but especially when bad times come, that’s when they continue to communicate. Sometimes, the operators that I know that are doing it well, they over-communicate when things aren’t going well.
One of our mutual friends likes to say that builds trust. Not only respect but trust because it’s a lot harder to get on the phone call and tell people, “You’re losing money or you’re not going to get distribution,” but people understand it. In general, most people understand, especially if it’s not your fault. Things happen. Things never go according to plan. Having that communication level goes a long way for investors. The flip side is the same too. I’ve got clients who will pick up the phone and have a one-on-one phone call with all their investors when the distributions are made because nobody’s happier in the deal as the day they get a check in the mail or an ACH in their bank.
Giving them a call and say, “Patrick, it’s payday.” That creates that rapport with the investors when it’s a happy time. This particular client of mine does this. He is very successful in raising capital over and over again because he is building that level of trust and communication. Our buddy, Ken McElroy, does this a lot too. He puts together events with his investors so he can get to know them well and try to provide more and more value. The old adage is we do business with people we know, like and trust. The more you can get to know them better and had them trust you, communication goes a long way with that trust factor.
Transparency is involving and it’s enrolling because this is money that people have worked for and have earned. They’re handing it over to somebody that didn’t earn it. Looking at how they place their expectations is vital. I look at the track record. Sometimes I try to find out when things didn’t go right when things went sideways, what did they do? That shows the character. It’s not a guarantee, but it shows you what they will likely do if things don’t go according to plan in the future, which is huge.
Another good example that triggered is a lot of clients will forego some of their fees when things aren’t going well. You may have an ongoing asset management fee, for example, as the manager, as the operator to keep the lights on and maybe that’s 2% or 3% of the gross. If the investors aren’t getting their money, even though legally you’re entitled to take that, you don’t want to be in a situation where you’re getting paid and the investors are not or getting paid less. A lot of my clients will forego the asset management fee. I also have clients who, if things are going south and a cash call is required, a lot of operators will step in and not do a cash call, but come out of pocket themselves and try and avoid that at all costs. That goes back to the track record and the reputation of that operator and those who do that tend to do well the second and third time, especially when you get these referrals. When you’re asking somebody else, “Patrick, I know you’ve invested with this operator before, what can you tell me?” When you say, “The last one wasn’t great, but this is what they did during those tough times.” That goes a long way.
This has been super helpful. They’re simple things. Usually, it’s those simple things that make the biggest difference. It’s like a game between a gold medal and fourth place. Gold metal is known throughout history. The fourth-place could have been second behind. Nobody remembers it. It’s those marginal things, those details are what usually makes the biggest difference because, in the end, there’s always going to be an opportunity. There are always market cycles. There are black swans. There are many things that come out of the woodworks that people can’t anticipate. At the same time, when that happens, you have two ways of reacting. You have your gut and your chemicals, which pretty much leads to your bad decision or your principles and your values that you could identify upfront in people, especially experienced people and that’s what’s likely to happen when things go sideways.
When things go tough, that’s when you find out a lot about the person, their character and their work ethic. Are they people who bail on you or are they the ones that stick around until the end and beyond?
For those who are exploring SEC attorneys, those that help businesses, help an opportunity to raise money legitimately the legal way. How can people get a hold of you, learn about your firm and ultimately do business with you?
The website is a good one, PremierLawGroup.net. I put a lot of content and I’m starting to upload those more and more into my YouTube channel. If you go to YouTube and put in, Mauricio Rauld, my YouTube channel should pop up there. I try and add as much value as I can. I do some educational videos on there. I’m on LinkedIn, Facebook, it’s hard to miss me.
That might be great for the majority of the audience because if you go to YouTube and you see how Mauricio is educating those syndicators/investors that are raising capital and doing different private investments, you can see what he’s teaching them. That can help you be more informed in the ways in which capital is being raised, especially with private investment to help you become a better investor. That might be a great thing for you to do is subscribe to his channel. You can visit us at TheWealthStandard.com and access all of the things we’ve talked about. I’ll give you the final word. You’ve got any words of wisdom for us?Be a good steward of your money. Don't hand over your money to anybody without doing some due diligence. Click To Tweet
Be a good steward of your money. Don’t hand over your money to anybody without doing some due diligence. The due diligence is on the frontend. It’s not that long, but do it once and sleep better at night knowing that you’ve done everything you can as opposed to blindly handing over your money to somebody else.
It’s good to have you on. I appreciate your time, Mauricio. We’ll have you on again for sure.
Thanks for having me.
- Premier Law Group
- Mauricio Rauld – YouTube Channel
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About Mauricio Rauld
Mauricio Rauld is one of the premier syndication attorneys in the country helping real estate syndicators raise hundreds of millions of dollars to pursue their dreams of financial independence.
Mauricio is the founder and CEO of Premier Law Group and spends 100% of his practice on syndications for real estate investors. With over 20 years of securities experience, Mauricio specializes in Reg D exempt offerings and educates investors from around the world on how to navigate the complex world of securities laws.
Named as one of the Top attorneys under 40 by Super Lawyers magazine, Mauricio regularly shares the stage with The Real Estate Guys and the likes of Robert Kiyosaki, Ken McElroy, Brad Sumrok, Peter Schiff, and others.
An educator at heart, Mauricio regularly travels around the country speaking to real estate investors and entrepreneurs, educating them about how the syndication legal piece fits into the overall syndication puzzle.
He is also a constant on the real estate investing podcast circuit, regularly contributing to The Real Estate Guys Radio show (consistently one of the most downloaded podcasts on real estate investing) where Mauricio is Robert Helms’ personal attorney. He has also been featured on The Lifetime Cashflow through Real Estate (Rod Khleif), The Ken McElroy Podcast, and The Best Real Estate Show Ever (Joe Fairless) among countless others.
A graduate of The University of California at Berkeley, Mauricio obtained his Juris Doctorate degree from Loyola Law School in Los Angeles and lives in Southern California with his wife Heidi, and children, Adelina and Alessandra.
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