Episode #4 Syndications with Cody Laughlin and John Batey
Cody Laughlin is a Managing Partner at Blue Oak Capital. -a Texas-based real estate investment company focused on acquisitions of multifamily assets
He is the proud husband and father to 3 beautiful children
Cody has been investing in real estate since 2010 when he began investing in SF rentals after becoming an accidental landlord and is now both an active and passive investor in
multifamily real estate.
He is the host of the “Prosperity Through Multifamily Real Estate Investing” podcast and
the co-host of the South Texas Multifamily and More-Houston Chapter Meetup.
John is a Commodity Trader and real estate, entrepreneur. He has over 10 years of experience managing physical and financial risks in the Petrochemical business. John received both Bachelor’s and Master’s degrees in Mechanical Engineering from Tennessee Technological University, and his MBA in Finance from the University of Tennessee.
As active real estate investors since 2015, John is an investor in 2000+ multifamily units.
Tune in as Cody and John explain the fundamentals to syndications!
Welcome to The Real Estate Investing Made Simple podcast, the show empowering and educating people on how they can grow, manage, and protect their wealth through real estate investing. Now, here’s your host, Bailey Kramer
Bailey Kramer 00:23
Hello and welcome back to the real estate investing Made Simple podcast. The goal of this show is to break down complex real estate investing strategies that you can use to grow, manage and protect your wealth. I’m your host Bailey Kramer and today we are joined by our very special guest, Cody Laughlin and John Batey to talk with us about syndication. Cody Loughlin is a managing partner at Blue oaks capital, a Texas-based real estate investing company focused on acquisitions of multifamily assets. He’s the proud father and the husband to three beautiful children. Cody has been investing in real estate since 2010. When he began investing in single family rentals after becoming an accidental landlord and is now both an active and passive investor in multifamily real estate. He is the host of the prosperity through multifamily real estate investing podcast and the co-host of the South Texas multifamily and more Houston chapter meetup. John Batey is a commodity trader and real estate entrepreneur. He has over 10 years experience managing physical and financial risks in the petrochemical business. John received both bachelor’s and master’s degrees in mechanical engineering from Tennessee Technological University and his MBA in finance from University of Tennessee, as active real estate investors since 2015. John is an investor in 2000 plus multifamily units. Welcome to the show, Cody and John. Thanks for having us. Absolutely. It’s a pleasure to have you both on today. So why don’t you guys go ahead and start giving a little bit of a background about yourselves?
Cody Laughlin 01:59
Yeah, sure. Get Started. I always like to get started for John because John’s bio sounds much more impressive than mine. So, actually, but, but now, man, you know, you know, first off again, thank you so much for having us on the show Bailey, really appreciate it. It’s an honor to be asked to be on the show and, you know, look forward to having this conversation but a little bit about me. You know, I have a very similar upbringing to probably most people in the space. You know, I grew up in a family that was very big on education. You know, my both my parents were high school dropouts, and they worked their tail off to make sure that we had everything we needed, but they were very big on us, myself and my brothers go into school, getting that education, getting a good job, and, you know, not having to work as hard as they did, if you will. So I did just that, you know, I studied hard in school, made good grades, graduated with my bachelor’s degree in 2008. And the intent was to start my career. You’re to work for a couple years, go back, get my masters, and continue to advance my career that way. And to make a very long story short, in 2010 I became an accidental landlord when I tried selling my very first house, and that was during the time of the Great Recession. And right around that time, you know, I was observing people that had been working for 30 or 40 years that had just had their entire retirement wiped out. I mean, they were, you know, again, Great Recession, everything was just falling off the rails, if you will. So, I was like, Man, this just doesn’t make sense. So I began studying how to invest in stocks, how to invest in retirement accounts, and then somebody around that time introduced me to the rich dad poor dad book, and forever changed my path and my career. And that’s what really got me interested in real estate investing. And so fast forward. You know, today, I still maintain a W two, I am still working full time. But, you know, we are focused on all things multifamily real estate. And trying to build our portfolio there had the fortunate pleasure of meeting John last year. And, you know, we’ve been collaborating with one another and building a great relationship. And we launched blow capital earlier this year. And now we’re trying to set the world on fire. So
John Batey 04:29
Alright, so John Batey. My profiles grew up on a pig farm in Middle Tennessee. So that’s kind of my background. So I really liked repairing things and fixing tractors. I knew I didn’t want to become a farmer per se. But our farms have been in our family for like 206 years. So I’m like the first guy to leave the state. But I wanted to become an engineer and that’s what I did. So I’m an engineer by training Matt. bachelor’s and master’s in mechanical engineering, but also wanted to pivot because I realized quickly that I didn’t actually want to become a real mechanical engineer, and do drawings all day. So I shifted my focus to finance. And that’s how I wound up in the oil and gas industry, specifically chemicals business to manage physical and financial risks through derivatives and trading strategies. And along that path in finance, we had a real estate course. And I was like, wow, this is really cool. Corey, this is commercial real estate, right? So I never really bothered much with single family housing other than some hard money loans. And so that’s how I kind of got into it. And then at the same time, and this is, I guess, five years ago, some of the crowdfunding stuff started bubbling up and I was like, oh, man, I didn’t. That’s when it started clicking with me. You can get involved in commercial real estate through some, you know, something called crowdfunding and so that That leads into the syndication business. I’m like, oh, okay, normal people can get their money together. And we’ll talk about the 506 beaver 506 c delineations later, but you can pull your money together, go and purchase large commercial properties and operate my business. So specifically apartments is what Cody and I are focused on. But you can do that with self storage, retail office, basically anything that you put your mind to, you can put offering memorandum ppm, all these items together and go out and raise money to buy real estate. So it’s amazing. So that was the big click in my mind when the crowdfunding platform started coming out. I was like, oh, normal people can do this. And let’s figure out how to do it.
Bailey Kramer 06:48
Right. So syndication is kind of like the tool or the method to actually pull people’s money together and be able to purchase assets that you wouldn’t be able to buy just on your own.
John Batey 07:00
You, you will always run out of your own money. I don’t care how much money you have, I mean, for the most part unless you’re unless we’re Buffett, but for the most part, you’re going to run out of your own money. And that’s where that’s where the world of private equity comes in. Effectively, you got managers, these are the guys that are finding and doing all the work to find the deal, close the deal, operate the deal, and their effort is rewarded by and they’re also trying to bring money into the deal. So those are the investors if you will, and I’m talking about the syndication model right now. But you could also be doing this with a JV like, Okay, I get five other folks. They each pitch money in and they each actually have some operational responsibility for the deal. And there you go. So yeah, just it certainly leverages your scale versus a single family.
Bailey Kramer 07:52
Yeah, definitely. Go ahead, Cody.
Cody Laughlin 07:55
Yeah, no, I was just gonna piggyback off and say, you know, one of the things that attracted us to the syndication model was the ability for us to scale. Right? You know, you know, as John mentioned, you’re always going to run out of your own money and you know, that’s going to be a barrier that you’re going to have to overcome. But for us in particular well, as well, you know, being fathers and husbands to our families, and still maintaining a W two, we needed something that we were able to go bigger and faster, you know, to kind of build a portfolio that was going to allow us to, you know, make some pivots in our lives, if you will, to, you know, based on the cash flow that we were getting from our investments. So, so, syndication allows you that opportunity to go bigger, faster. Like I said, you take down opportunities that normally you wouldn’t be able to do on your own. So
Bailey Kramer 08:44
let’s walk through a maybe a syndication Yes, you guys have done and we’ll kind of walk through the different aspects that involves
John Batey 08:51
Sure. Yeah, so I’ve got about 2000 or so doors as a passive investor. And so I look at a lot of deals, right? But basically the structure of the manager goes out. And there are two pipelines that you need to be concerned with deals and dollars deals and dollars. So there’s only two big things. So, number one you’re trying to find, where are where do deals come from? What is the deal? How do I find opportunities in this space? And a fun fact for your viewers, you know, around three, four or 5% a year of Commercial Real Estate’s usually transacted, like of the total pie, you know, so there’s always something coming on or coming off the market. And so number one, you know, you can find these get brokers or commercial real estate brokers. Number two, a lot of people do direct marketing for some, and that works reasonably well for some things that are smaller. So if you’re looking from you know, 50 units and under I’m talking multifamily right now, that’s a reasonable strategy, just actually, you know, pick the phone up and be like, Hey, Mr. Mom and Pop Are you interested but all the large stuff that’s 50 Plus is effectively going to be owned by a broker, or not owned by broker, but it’s going to go through a broker. So those are the primary primary avenues to find deals. And then on the flip side of that is okay, well how do I attract people into this, this pool and that’s where we get into, okay, how to how to qualify people, as investors to stay sec compliant. And that’s where the 506 B and C regs come in, which we’ll talk about later. But that structure, those two funnels are extremely important. And effectively, you have some legal agreements you get with your find a deal. And then once you find a deal, you put the letter of intent and Li so for your listeners, and then you know, go back and forth and hopefully ultimately reach a PSA that’s a purchase sales agreement. And it’s got all the key terms on you know, basically from Price. And then you know, but as soon as you’re kind of talking in between that Li, you’re reasonably confident that PSA is going to get executed, you need to be out actively talking to your existing network of investors, which you have already talked to on the backside for a free deal. And we’ll talk about why that’s important later but then you’ve got an offering memorandum. That’s what people call that to me. And you also have a ppm private placement memorandum. And so the LM is kind of like your pitch deck, you know, what’s your business plan? What do you think’s gonna happen once you show investors ppm is kind of the private placement memorandum. It’s got, it’s the document you really want to read because it’s basically how the deal is structured and split the splits of investors to sponsor rates. And yeah, so that’s when you go legal Heavy activity right then and then you effectively wire your money. And if you’re an investor, you’re like, Hey, here’s 50. Here’s $100,000. And what I really want to stress to people right now is like once you buy that ticket, you’re on the roller coaster, you cannot get off the roller coaster. Okay? There’s this this, this this is an illiquid asset class but there’s a look liquidity premium built in. And that’s usually higher returns, but you can’t, you know, you can’t get off the ride. You can’t, you’re not, you’re not gonna be at the top of the roller coaster. You’re like, you know what, I need to get off now? No, no, no, you’re you’re going to go through the loop de loop. So anyway, once you put your winter put your money in and wire it in, basically, you’re now a passive investor into the ownership of the LLC that LLC owns the property. And then from there, they’re on your roller coaster. The managers are operating the business and the property. And you’re kind of sitting back on the sidelines. But But and as a sponsor, I mean, you’re basically that’s weekly calls with a property manager. Or if you’re doing your own property management, you’ve got to manage that. So it’s definitely work for sure. So don’t think that this business is not the people who aren’t operating these deals or just sitting back and collecting, you know, mailbox money. The only buddy, the only person who’s collecting mailbox money or the passive investors if the deals operate smoothly, but for the operators, I mean, it’s, it’s, I mean, it’s it’s real job.
Bailey Kramer 13:32
Right. And that was a great overview of kind of the whole syndication process. We’re going to now take a step back and kind of go into the specifics. So in a syndication, there’s kind of two distinctions or titles that you can have either a GP which stands for general partner, or an LP, which stands for limited partner. He has a mind going into the differences between the two.
Cody Laughlin 13:54
Yeah, yeah. So as John kind of alluded to a second ago, so your general your GP or general partners are the partnership that are actively going out finding the deal, negotiating the deal, you know, finding the debt, securing the debt, finding the investors raising the money, basically getting the deal from sourcing to close, right. And then you have the limited partners, those are your passive investors. So those are people that are injecting their capital into the deal in exchange for equity ownership in the deal, but not having any operational control or very limited operational control in most cases, as how to manage the deal, if you will. So, those are the two distinct differences,
Bailey Kramer 14:39
right? As far as the pay actually goes, you know, how, how did these two different the GP and the LP how did they both get paid?
John Batey 14:48
Yeah, so you get paid a couple different ways and I’ve seen it there. As with anything, you’re starting from a blank piece of paper. Traditionally, the model is at 20 80% of the cash flow and the the accretive value at sale, the cash proceeds go towards the limited partners that’s 80% of the cash flow. And the remaining is 20% that goes to the GP, aka to sponsor so for all those folks listening there, people throw around a lot of different terms, you’ll hear a sponsor, you’ll, you’ll hear GP same thing, okay? So don’t don’t let these definitions get you astray. But basically, the GP or the sponsor will take 20% of the cash flow and equity and also have an asset management fee usually, and sometimes an acquisition fee. So you really need to read when I when I tell you to read the ppm it’s extremely important because it’s got all these fee structures in there. And some of these fee structures make incense have different incentives. So be careful on incentives because some incentive Are front loaded, what you want as an investor and this is what I look for, because I have a lot of investments where other people operate for me, I want them incented to operate the deal well, and so I want them to get paid on the backside, not up front, because we get paid up front that incentivizes them to do volume of deals, not quality deals. I want them to get paid on the backside because that incense them to properly operate the deal. And, you know, try to raise the noi as much as possible. If they’re invented on the front side, well, let’s just do 30 bad deals. We’re going to get paid either way versus I’m going to do four deals, and they’re going to be slam home runs.
Bailey Kramer 16:46
Right so let’s break down the three main fees that the GPS and the general partners usually charge which are the acquisition fee, the asset management fee and the disposition fee.
Cody Laughlin 16:57
Yeah, yeah. So as John mention You know, as the general partnership, most of their compensation is based on that fee structure. And so you have an acquisition fee, which is usually a percentage of the acquisition price, the purchase price, you know, and, you know, typically, yeah, you know, one to 3% is probably pretty typical. I’ve seen 3% I think that’s extremely high, but it really depends on the dollar size or deal. So if somebody is rolling in, I mean, always think in absolute dollars,
John Batey 17:28
percent, if it’s a small deal, and they’re taking one or 3% it that might actually be just about it’s, but it’s a $50 million deal. And somebody, you know, getting 3% of that for just signing their name. I’ve never been paid that much money for signing my name to anything, and I don’t think it’s right. So just, you gotta use some absolute dollar cents versus the percentage base.
Cody Laughlin 17:52
Yeah, yeah, absolutely. I think part of that to John and we’ve talked about as part of that is, I think you have to look at the track record of who you’re working with as well. You know, If you’re a new operator syndicator, and you’re going out slapping a 3% acquisition fee on your first deal, you know, that’s, that’s a big red flag. It’s a big question mark. So, but, but moving along, you know, going into the asset management fee, the asset management fee is a ongoing fee that the sponsorship team receives for managing the deal executing the business plan making sure that you know, the business plan is being carried out and that the investors are getting their returns as projected, right. And then at the end, you have the disposition fee. And the disposition fee, again, is another fee based on when an asset gets either refinanced and capital is redistributed back to investors or at the back end when it gets traded, or sold, if you will. And so you get a percentage of that, you know, and so, again, the fee structure is dependent on the general partnership, they can decide how they do that. But again, as John mentioned, you know, you really want to be cognizant of that. And as a passive investor, you really want to pay attention to How heavy those fees are. You know, if you see a deal that’s very heavy in the fee structure, that would definitely, I would, I would definitely argue to start questioning. The reason why now, not to say it’s bad. I mean, you know, you may have somebody who has an amazing track record and who’s, you know, done this, whatever, but you want to kind of understand why they’re, why they feel like those fees are necessary. So if the sponsor is good, has a track record and their experience commands a premium. That’s fair to understand. Just understand the structure. Sure. Sure. And I would argue that I don’t, I don’t know that there’s one right or wrong way to do the film, the fee structure, if you will, you know, I know John and I, we have our own philosophy on how we would carry that out. But, you know, just just as he mentioned, just pay very close attention to that.
John Batey 19:55
Yeah, I mean, but if you’re gonna ask me what’s the norm at 20 split. That’s pretty good. That’s the split with, you know, 1% acquisition fee. No, no disposition fee and asset management fee. You know, anywhere
Cody Laughlin 20:18
to under 2%. Yeah.
John Batey 20:23
That’s that’s probably what’s what’s common that most people will be wheezing somewhere in that ballpark.
Bailey Kramer 20:29
And then on the LP side, the limited partners, the passive investors, can you kind of walk through the preferred return and kind of explain what that means and a little bit of the hurdles that they can jump up on. So preferred return, some people call this like a hurdle rate.
John Batey 20:47
So it’s the minimum threshold that an LP must receive before the GP can receive their carried interest. So basically, until they hit that seven or 8% people call it a pref right, so then we’ll call it preferred return, we’ll just say preference, the common lingo. So like, hey, this has got a 7% pref. And so nobody gets paid until the LP actually meets that first hurdle or that pref. So, let’s just say in this case, 7%. And that preferred return usually is expressed as a percentage return per year. And so usually that’s, you know, seven 8%. I mean, I’ve seen 12% 10% it really just depends on the flavor of the day, but I would say 50% of everything I’ve seen is usually in that seven or 8% range as a prep.
Bailey Kramer 21:39
Right. So once the GP manages to give the prep for the preferred return back to the lpd at limited partners, can you explain kind of what happens if they exceed that limit?
John Batey 21:51
Yeah, and then the splits start going into effect. So whatever hurdle that whatever split, there was after the prep, that was agreed. Then the sponsor starts getting they’re getting paid out based on that ratio. So it feels at 20 after the seven or 8% pref, that splits start happening. And what a lot of some complicated, more complicated structures, you might have multiple splits. So as you go further up, they return here. The sponsor gets paid more. So for instance, if you cross the 12% barrier, you might be at a 5050 split. So the sponsor is getting more as a percentage than they were at 8%. Right. So you’re ramping them up. And so they’re incented naturally, to want to get that 5050 split. So this is why when, when you’re looking at these structures, you always think, okay, kind of follow the money. And you’re like, what is the incentive? Right, so if they’ve got a 5050 split, but it’s after You know, 12% Okay, they’re like they definitely want to hit 13% because that’s that’s when their extra payouts get really juiced up for them. So that’s, that’s a positive incentive structure for me.
Bailey Kramer 23:14
And just for clarification, this percentage is the cash on cash return.
John Batey 23:20
Now that this is the this is kind of the all enter parent, it’s inclusive of the cash on cash as well, right so it’s, it’s, it’s all it’s all in for the deal. So it’s cash on cash plus any appreciation. Cash sale from the proceeds. Okay, distributed. Yeah. Yeah, so if the property doubles in value, that’s obviously that’s also factored in. Now the cash on cash, it’s just if it just if you just operate the property as if you’re going to get the LPS are going to get 80% of that cash flow. You know, they want or you know, the next quarter so if it’s If they’re doing 10% cash on cash, they’re just gonna get a 10% check. You know, annualized per quarter.
Bailey Kramer 24:09
So now we’re gonna move on and kind of touch on two things, which is the 506 B and the 506. c, if you guys want to kind of explain what those two things are and how they play a role in syndication?
Cody Laughlin 24:25
Yeah, definitely. So the first before we get into that, it’s important for everybody to understand that if you’re going to be pursuing this syndication model, you have to understand the legal aspect of raising money for real estate. The SEC does consider this type of model
John Batey 24:43
a security, right. So anytime that you’ve taken an investor’s capital, and invested in an opportunity in exchange for equity and returns, that’s considered a security and it’s real quick. You were investing In an LLC, for the for 99% of these things, so you’re investing in a company, right? They just happen to own an apartment building or an office or retail spot. So it’s just like going out and buying stock, right? You’re buying a company and will sit sec views the same thing. similar concept. So I just want to make everybody kind of aware that you’re buying a company, not not the property, you’re buying the company that owns the property.
Cody Laughlin 25:28
Exactly, exactly. So by law, you would have to register that company in that business with the SEC commission. Right. And, and for most people, have you ever even looked into that it’s very costly, it’s very time consuming, and it just doesn’t make sense as small business owners, but in recognizing that what the SEC commission is done, though, is they created these, what you call regulation d 506. b, and 506 c exemptions, which allows us to conduct our businesses in a way that is compliant with se See laws, but still operate as our small business without having to go through those very long expensive registration processes. So, now in delineating the difference between the 506 B and the 506 C, you then have to break it down into the type of investors that we are raising funds from. So you have a sophisticated investor and you have an accredited investor, okay? The sophisticated investor is an investor who has the ability to make business decisions, but may not have a certain net worth. And you know, they have either an understanding of business or they’ve been involved in business before, but they can make an informed decision with that. And then you have the accredited investors who do have a net worth of $1 million, excluding their personal residence. They have an average median household income of $200,000 or more if they’re single $300,000. If they’re married, And they, typically in general would have more means to be able to recover from an event if they, you know, if a deal went bad, or they have more advisors around them, if you will to help them make a better informed decision. So, yeah, remember, the SEC is trying to protect investors. That’s right. So they don’t want people to get wiped out. And that that’s their main, one of their main goals is to kind of,
John Batey 27:26
you know, prevent charlatans from going around and taking people’s money from mom and pop it, you know, this is my last $50,000. So those bears are there for a reason. You know, they don’t want some charlatan to come around and say, Oh, I just need your last $50,000. I can double it, trust me. And that’s why some of these thresholds are there to ensure people’s livelihood in case there is some event like that, and that’s why there’s regulation. Yeah,
Cody Laughlin 27:50
yeah, that’s right. Absolutely. Right. Now and understanding those two investors now we’ll go back to your original question, the 506 B and 506 C. So when we start Structure these deals under a 506. b, I’m appealing and now raising funds from both sophisticated and accredited investors, right. And there’s a limited amount of spots that you can raise money from. Usually it’s 35 for sophisticated investors, and then however many accredited investors after that, the difference is how I conduct my business, right? How am I going out and soliciting my deal to these investors. And so, as John mentioned, the SEC wants to make sure that we’re protecting these investors, especially these sophisticated investors. You have to have a pre existing relationship with these investors, you can’t just meet somebody shake their hand for the first time and take a $50,000 check just doesn’t work that way. You have to build an ongoing relationship with them, you have to understand, you know, their, their desire, but number two, what is their knowledge of this business? How, you know, can they really make a good business decision? And so you have to build that over time. And so there’s some great areas I feel like with the SEC on what that defines is how do you define a pre existing relationship and what that entails. But the thing that we talked about a lot is, you know, you want to make it ongoing over time, and you want to make sure that you’re documenting those conversations and you want to be intentful. In those conversations.
John Batey 29:16
Yeah. And it’s not just going out and finding anybody, you want people that match you, right? You want to vet, you’re vetting the investors as well. I mean, because honestly, you know, if you, if you have somebody’s risk profiles, not the same as your risk profile, as a sponsor, you don’t want them on board with you. They will email you a million times a day, you’re like, Hey, did you lose a penny or not? I mean, so it kind of goes both ways. Obviously, you have to vet them and have this relationship for sec compliance. But practically, you want investors that are on the same wavelength with your business plan, thought process and core values. Yeah, absolutely. Absolutely.
Cody Laughlin 29:58
So in just continuing You know, again with a 506 B, if I’m having to build those existing relationships with potential investors, I cannot go out and solicit my deal, right? So I can’t go to a networking event, I can’t go to social media and blast my opportunity out there and say, Hey, I got this great deal, come invest with me. You cannot do that. Okay? Now, when you structure a deal with a 506 C, you’re targeting accredited investors only. The SEC does allow you to to promote that deal or solicit that deal without a pre existing relationship because again, the credit investor in sec minds somebody that is in a better position to make those decisions and, and whatnot. So you can go out and you can go to a networking event and you can go to Facebook or whatever you want to do and promote this deal and try to attract those investors. You know, that way but the key is again, it has to be accredited investors. And so the way that we the way that you can verify, or credit investors, they have to go through a third party verification, which, you know, pretty much proves that they are an accredited investor and another other CPA basically. pretty much exactly, yeah. So, but it’s very important to, if you’re going to commit to that 506 C, you have to be very disciplined in that and make sure that you’re staying committed to that and understand those two delineations between a sophisticated and accredited investor.
John Batey 31:29
And I’d like to pause right now and just say, Get yourself a frickin sec attorney. Because you’re definitely not doing this on your own, your cousin, that’s a divorce attorney, not going to cut it. But just just seek out reputable folks that have done this and have structured these deals before. It’s no joke. You don’t want to mess with the SEC.
Bailey Kramer 31:52
Yeah, absolutely. That’s a great point to always count on the professionals in these cases, especially when it comes to this.
John Batey 31:59
Yes, not just Being an attorney, it’s having specific knowledge of these structures. So yeah, find yourself an experienced SEC attorney and interview a few of them.
Bailey Kramer 32:10
I’m curious to hear which structure you guys prefer to use, if you don’t mind sharing the 506 B or the 506. c.
Cody Laughlin 32:16
Yeah, so I’ll kind of have some input on this John and then I’ll let you know, piggyback off that if you want. But I personally like the 506 b structure, especially in where we’re at in the development of our portfolio. You know, just simply because I feel like when, you know, when you’re when you’re targeting 506 C, investors, these accredited investors, excuse me, if you will, you’re kind of trimming down your investor pool number one, which can make it more challenging. And despite the fact of whether you’re required to have a relationship with them or not credited investors are going to be looking for people who have a track record, right. They’re going to be looking for people that have a certain amount of experience before they’re giving you, you know, a buttload of their money, if you will. And I think any investment is that rings true, but more so for credit investors, you’re not just going to be able to go to a networking event and blast your deal out and say, Hey, you know, 10% annualized return, and then they’re gonna be like, Oh, here we go. It just doesn’t it just, that’s fantasy land, you know, and I, and you’ll hear the old saying of have a great deal and the money will come. It’s just not true. It doesn’t work that way in this business. So you know, they have to be able to like and trust you. And so I just feel like the 506 b just puts you at a disadvantage, especially if you’re earlier on in the stage or new in the stage. Because, you know, you may have people in your close network that may have the 50 or $75,000 to invest with you but may not meet that accredited investor threshold. And because you were chasing a 506 c deal, they can’t invest in your deal. So you know, so I personally prefer Five, six B, I think just general is a, there’s a bigger pool of investors that could partner with you on that. So that’s just my take. I mean,
John Batey 34:09
I agree. People need to know and trust you. And in 506 B, make sure you’re actually doing that. So you can be sec compliant. And you want to know who I wouldn’t. Honestly, I wouldn’t, I would not love advertising a deal on Facebook and getting some, I guess, random investors, I want to know, I want to know these people personally, as a sponsor, I want to know him. So doing a 506 b gives you a little bit more latitude, just in the investor funnel, if you will, and it forces you to have the rigor of kind of knowing, knowing who, who’s gonna come into the deal with you. So, but again, you know, as you get bigger, larger deals, you got a track record 506 C, I mean, you’re probably going to shift everybody’s going to get to 506 c space SoonerLater. I mean, if you’re raising, like $50 million, or something like that, you’re definitely fine.
Yeah, you have to.
Cody Laughlin 35:10
Yeah, no, that’s a great point, the size of the deals too, is going to really kind of help guide you into what kind of raise or what kind of deal structure you need to do what you want to do, like a $5 million deal. But yeah, man. Yeah, definitely.
John Batey 35:25
Are there any last things you guys want to add on on the topic of syndication, 506 b, 506. c, just get an attorney. You. I mean, when we when we talk about building your team, that’s, that’s a key one. Find some prior documents that they’ve drafted up, read the whole thing and actually get a hold of like a bunch of ppm and read the whole thing. Because in that, it’s got all the SEC compliance statements and the forward looking statements and all the risk associated with it and all the investor splits and it’s long but you got to read it. And that’ll help you understand what we talked about earlier, which is kind of splits and incentives. And also under help you understand how this 506 c structure B structure works.
Cody Laughlin 36:11
Yeah, I would add on to that John to his take a look at the sponsorship team, the people that are putting this deal together whether you know, and and really try to get an understanding of their background and their track record, you know, you may be networking or meeting people that maybe haven’t done a syndication before themselves or whatnot, but you really want to, and that’s okay, because everybody has to start somewhere. But you really want to look at the team, that they’ve assembled, the partners that they’re bringing to the general partnership, and the other professional advisors that they have on their team. So I would definitely encourage people, you know, take your time, get educated, obviously, about this business model, but whoever it is that you’re working with, definitely make sure to check out your sponsorship team and you obviously want to make sure their people have integrity, and you know, good stewards, if you will, but and that comes through relationships and whatnot, but take a look at the time. They’ve built for sure.
John Batey 37:01
Yeah, let me add one more team’s importance: do a background check, TL o XP on just Google that on like Fiverr, go to Fiverr and type in T l Oh, that’s like the premier background check. And I think 510 bucks like you can get one of these guys that have a license to do the background check. So that’s some advice from Jeremy roll. he’s a he’s like the world’s most active passive investor, I think. So anyways, just background checks are important.
Cody Laughlin 37:32
John likes to tell his story about how he did a background check. I mean, he decided to me having lunch with me, I was like,
John Batey 37:41
that’s, that’s great. He’s good.
I’m good. I’m
Bailey Kramer 37:44
good. I mean, record. Alright, so now we’re gonna move on to the next section of our show, which is the big four where we asked all of our guests the same four questions. So number one, what’s your number one habit for success?
Cody Laughlin 38:00
So for me, I think it’s plugging things into my calendar, and really operating out of my calendar. So everything that I tried to do during the day has a time slot on my calendar. And I really try to stay disciplined to that calendar, if that makes sense. So any task, whether it be a phone call, email, podcast, whatever it is, all those things are built into my calendar. And it’s an accountability tool for me, right, in my objective, even throughout the day is if I have available time slots open, how do I need to fill that time slot? Right, I shouldn’t have blank spaces in my calendar for the day. And that’s that’s how I look at it. So you know, I should be doing something every day to grow the business. And that’s one way I hold myself accountable and, and create those good habits.
John Batey 38:45
Yeah, so I’m reading a book actually, I’ve read it and I’m reading it again called the wealthy gardener. And you might not be able to see this but the wealthy gardener, it’s a great book, check it out. But let me let me read you a quote. I saw that only a few actions are tangible rewards. And so I rearranged my schedule for the best activities. And so to Cody’s point, he talks about impact hours and hollow hours, a hollow hour would be watching Netflix for an hour. An impact hour is something that’s dedicated towards moving forward and progressing a specific goal. And it’s easy to not keep track of your hours in the day, but Cody and I are both dads. Okay. So, you know, shame on us for not being extremely efficient when we didn’t have kids but having kids sharpens your focus on hours. And so we I mean, we’re like, okay, I can only work from this time to this time. This is family time. And then you know, from seven to 11 at night, you know, I’m, I’m doing a thing so planning your day out and the specific hours which Cody mentioned, are very important.
Bailey Kramer 40:00
Like that the impact hour in the hollow hour?
John Batey 40:02
Yeah, definitely think about it, I watched Netflix last night for like 30 minutes and I was like, ooh, hello.
Bailey Kramer 40:13
Alright, number two limiting beliefs, our thoughts in our heads that hold us back from realizing our potential. What is one limiting belief that you were able to crush and how did that impact your life?
Cody Laughlin 40:25
Well, for me it was that I can be successful at the syndication journey. And I’ll tell you, I was introduced to multifamily 10 years ago when I first started real estate investing. And, you know, I was seeing what people were doing. And I was just like, Man, that these guys are just on a whole nother level. I can’t do this right and then I started getting shiny object syndrome and blah, blah, blah, long story short, here I am 10 years later, you know, getting ingrained in this process. But you know, is really just getting through that mindset of if this isn’t for you or you can’t do this you don’t have the resources. Well, listen to me, this is a relationship business. It’s and it’s, it’s about leverage and whatnot. And so getting through that was key for me because, again, my, my, I want to be able to transition I think John would agree with this as well, you know, as a father and as a husband, you know, we want to give our time back to our families, we want to give our time back to our kids and not to the W two and so the only way to do that is if you scale and so you know, committing to this journey last year and really doing what it’s going to take two to get you know, that process started and just to be able to grow it’s it’s been awesome. I’ve had so much fun on this journey and met so many wonderful people. Got a great partner over there, John, and I just get really excited about the future. But I think for me, that was the big limiting mindset is believing that you know, I can do this
John Batey 41:58
Yeah, I would say something similar. It’s really just a confidence game. I mean, it’s a people business and once you kind of understand you’re like, Oh yeah, we can do this. I mean, it’s the whole Roger Bannister thing all over again. You’re like, oh, he did he did four minute mile. Oh, now everybody can do the four minute mile. It’s you’ve got to get over that hurdle in mind specifically was always like, well, I don’t think there’s enough money in the world to be able to raise, you know, for a deal and, and I got over that real quick because I started you know, you start hanging out with some different a different, different crew, and then you’re like, oh, opportunity mindset. There’s money everywhere. And you just got to get connected with it. And you’ve got to start, you know, going down the process to, you know, funnel it in, so to speak, by making relationships and developing those things, but that was it. So it was the money one for me, but we’ve certainly crushed it because I’ll tell you there’s a ton of money floating around.
Bailey Kramer 43:00
Yeah, absolutely. And number three, what advice would you give to someone who’s considering investing actively or passively in real estate for their first time?
Cody Laughlin 43:11
I would definitely encourage both. And the reason why I would do that is because number one, there is a steep learning curve that you have to go through, right? And it takes time. And you want to take your time and go through that process. Because when you’re becoming an active investor, and you’re going out there and raising money from people, you’re becoming fiduciaries of other people’s money, you want to make sure that you know what you’re doing. And so a great way to do that is becoming a passive investor and learning from others who are in the business already doing syndications, who are, have a track record, you know, not only do you you get the benefit of having ownership in their deal and into cash flow, but you’re also learning their systems and their processes. And it’s a great way to build partnerships with people, right. I mean, if you know, if you’ve invested with somebody long enough frequently enough, you know, there’s a potential for them to work with you as well. So I would definitely encourage people to do both. You know, it’s a very powerful strategy as you’re building your portfolio. So, a great way to learn.
John Batey 44:13
concur, invest. definitely invest passively. That’s, that’s how I got started. And I’m a big fan of it. And, you know, you learn a lot of things on people how to communicate with investors, business systems, you know, just all the things, you know, there’s a fire, what do you do when there’s a fire in your apartment? Like, you just learn those things, and you’re not even involved in that? You’re just, you’re hearing about it from the from the sponsor, so,
Cody Laughlin 44:39
yeah, and one last thing I’ll tack on to that too, is, you know, as you build a passive investing portfolio there that does carry some weight of experience, right? I won’t say that. It’s, you know, people look at and say, Oh, you’ve got this amazing track record, but I will say that, at least it shows that you’re in the business you have an understanding of how this model works. How guild structures work especially when you’re multiple John’s 2000 plus units so he’s across nine different deals, you know, so he’s got nine different ways of deal structures and stuff. So that does carry some weight. As far as experience goes, I feel like so, great way to build up a portfolio.
Bailey Kramer 45:18
And number four, what is your favorite real estate business or personal development related book?
Cody Laughlin 45:25
Go ahead, John, you want to talk about yours? I think
John Batey 45:27
I was gonna say the wealthy gardener The thing that I just finished last week, no doubt hands, hands down. And actually it is about real estate. Because it’s about a chiropractor who started fixing and flips on his side basically. Anyways, a fantastic book highly recommended, but it’s all about the mental practices that end up in the focus on impact hours being recommended. Yep.
Cody Laughlin 45:52
Absolutely. Yeah. I mean, you know, my favorite obviously, I think, probably for most everybody else as well as the Rich Dad Poor Dad, right. I mean, from really
John Batey 46:00
opened our eyes to see Cody.
Cody Laughlin 46:02
It is but I mean, it’s like come on man. All of us in this industry in this world have all had our lives changed because of this book, you know, but anyway, the one that I’m actually going through right now is that I’m actually a huge fan of his Hal Elrod morning Miracle Morning. And you know really big on just really developing a morning routine that sets you up for success and just absolutely love that and I’m really working on getting my morning routine back and so I would definitely definitely recommend that when that was on my top on the list right now.
Bailey Kramer 46:37
Yeah, I also read Rich Dad, Poor Dad like everybody else probably listening to this and if you haven’t definitely need to check that one out. So a great book.
John Batey 46:46
It’s everybody’s starter, starter book, for sure.
Bailey Kramer 46:52
So John, and Cody, Where can the listeners get a hold of you?
Cody Laughlin 46:56
Yeah. So if you want to learn more about us, you know, definitely check us out via email you can email us at Cody@Blueoakinvest.com or John@Blueaokinvest.com. If you want to learn more about us and what we’re doing in our company, check us out at http://www.blueoakinvest.com. And we’re very active on social media, more so on LinkedIn so you can connect with me on LinkedIn at Cody Laughlin and make sure to follow us on Instagram at Blue oak capital. So
John Batey 47:27
Bailey Kramer 47:28
Great. Well, Cody and John, it was an absolute pleasure having you guys both on the show today. Thank you so much for adding so much value to my listeners. And Dave, we’ll see you next time
Cody Laughlin 47:37
is the most appreciated man.
Thank you for listening to the real estate investing Made Simple podcast. For more resources or to connect with us further, please visit our website http://www.Baileykramer.com. We’ll see you next time.