Doug and his company Legacy capital lend to investors and they also help them look to the future and grow their businesses. They work with their clients, not only funding deals, but also setting up one and three year plans. Doug says that even successful investors will not have one or three year plans, and are instead being ran by their businesses, rather than the other way around. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!
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Doug Fath Background:
– Co-founder of Legacy Capital, a consulting and private funding company to other real estate operators
– Serial, award-winning entrepreneur and investor whose accomplishments are recognized by UN and White House
– Development projects include low income housing, student housing, mixed use projects and multi-family apartments
– Based in Philadelphia, Pennsylvania
– Say hi to him at: http://www.legacycapitalpa.com/
– Best Ever Book: Rich Dad, Poor Dad
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TRANSCRIPTION
Joe Fairless: Best Ever listeners, how are you doing? Welcome to the best real estate investing advice ever show. I’m Joe Fairless, and this is the world’s longest-running daily real estate investing podcast. We only talk about the best advice ever, we don’t get into any fluff.
With us today, Doug Fath. How are you doing, Doug?
Doug Fath: I’m doing well, Joe. Thanks for having me, it’s good to be here.
Joe Fairless: Yeah, my pleasure. Glad you’re here. A little bit about Doug – he is the co-founder of Legacy Capital, which is a consulting and private funding company to other real estate operators. He is a serial award-winning entrepreneur and investor, and he has accomplishments recognized by the UN and the White House.
His development projects include low-income housing, student housing, mixed-use projects and multifamily apartments. Based in Philly… You can say hi to him at his website, LegacyCapitalPA.com, which is also in the show notes. With that being said, Doug, do you wanna give the Best Ever listeners a little bit more about your background and which accomplishment was recognized by the UN and the White House?
Doug Fath: Yeah, I’ll start with the last part. The accomplishment I received an entrepreneurship award at the White House and the UN was for my real estate investment company. That was certainly pretty cool; I had my [unintelligible [00:03:20].19] I got to speak at the White House, and then I was published on the White House website and what not. That was a pretty cool event.
In terms of my background, as you’ve said, I started on the investment and development side of things, with low-income, student housing to multifamily. Then really about five years ago I started to pivot my role in the companies and made some changes that freed up my time, and it was really a pivotal point for me, because that freed up my time to start Legacy Capital, which is a private company where through that we get to fund experienced investors and developers that are really looking to grow and scale their businesses.
One of the fun opportunities that have come out of that is — look, certainly in that business we provide capital to our borrowers, but we also offer really consulting, and really look to help them… There are distinctions between doing deals and building businesses. So whether our borrowers are flippers, or whether they’re buy and hold people, really how do we help them in addition to the capital we lend them, how do we actually help them build solid businesses that actually have enterprise value? Through doing that in our core business, it’s led to other opportunities where we’ve been able to make other investments and other real estate operating companies… So it’s been a lot of fun.
Joe Fairless: That’s interesting. I wanna unpack all that, because there’s a lot of different questions I have on your current business with Legacy Capital. I do want just one follow-up question on the UN and the White House – why specifically did they award you an entrepreneurship award with your company?
Doug Fath: That’s a good question. One, you had to be nominated, and then there were certain qualifications or criteria that you had to meet. Certainly, part of that was impact in terms of not only on the financial side, but also on the social side. The tagline for my company that I received that award was “Make money, make a difference”, and I think that’s something for me in all of my ventures that I look to do. Certainly, we are for profit, we wanna make money, but also “How can we make a difference? How can we make an impact?”, whether it’s for the borrowers we’re lending money to, whether it’s the communities that we’re investing in. We wanna do good in addition to making money.
Joe Fairless: And that’s a perfect segue into what you’re doing now and the unique approach that you’re taking, because there’s a whole lot of private money lenders or hard money lenders out there, but this is the first time I’ve heard someone talk about helping the person receiving the funds build their business and then perhaps even do some joint ventures with that group lender and borrowers.
So I guess the first question is how do you structure it from a team standpoint after you lend money to someone, so that you’re also helping them build their business?
Doug Fath: We look at a real estate business as a triangle, and one of the three pieces that keeps that humming is deal flow, another is capital, and the third is management… Management of that business, whether you’re rehabbing, renting, whatever the case may be. So primarily they’re coming to us for capital.
A lot of times, especially even experienced investors that are looking to grow and scale, they think that their issue is they need more capital, and often times what they don’t realize is yes, they may need more capital, but at some point they’re gonna reach capacity management-wise, where they’re gonna be at their bandwidth; maybe they need to hire more people bring on more people, and do they have enough a deal flow now to have more capital to be able to take down all these projects? So within deal flow, capital and management – we could go a lot deeper in those areas, but just kind of high-level, those are high-level things that we talk about with them to really understand what their business is, where they’re looking to go, and try to identify what are some of the constraints aside from capital — but if capital is no issue, what are some other constraints that they’re gonna bump into, so that we can get those out on the table now.
When we’re talking to them about the one-year plan, the three-year plan, we can take those things into account and start to keep those in mind to try to solve for those before they arrive. Does that make sense?
Joe Fairless: It does. You mentioned earlier that you fund experienced developers and investors… Wouldn’t an experienced developer and investor already have a one-year and a three-year plan?
Doug Fath: No. You’d be surprised, they don’t. They may have, but most of time they don’t. Even at times where you come across one that does, and we dig a little deeper, one of the things that we are really interested in with our clients is not only the goals, but why? “Great, you have a one-year plan, a three-year plan, a five-year plan, but so what? What is it all for?” I know it sounds surprising, but what we’ve found is even with experienced investors and developers, a lot of the times they’ve either lost sight of why they’re doing what they’re doing, and they’re not even clear on what that is. So being able to provide clarity on that for them we found is of value to them. Then certainly when we start to have that clarity, it’s a lot easier for us to see the different ways that we can support them, once they’re clear on what they’re looking to do.
A lot of these guys and gals, they’ve had a lot of success building these businesses, but the businesses sort of run them; they’re so busy running the businesses that they’re not taking the time to take a step back, have that plan, know what their why is, and be able to move forward powerfully.
Joe Fairless: This is a more in-depth conversation than what’s typical for a lender and a borrower. Let’s pretend I am a borrower (or a potential borrower) and I’m just looking to fund my flip, and I’ve called three, four other lenders. I’m simply looking for a reliable source of money at the most competitive rate as possible, and I’m kind of pressed for getting this funding done. Are people annoyed by having to go through the process of a one three-year plan, “Let’s talk about the triangle”? All of this makes sense, I’m completely with you, Doug, but I’m just wondering, “Man, I’m just looking to fund my deal. Why are you getting it all up in my business?” Do you get that?
Doug Fath: It’s a great point. It makes total sense what you’re saying, and look, on that first conversation, are we going through all that stuff? Absolutely not. We’re just gonna talk very basic and just make the point that “Look, yes, you’ve got a specific deal on the table. At the end of the day, if you’re just coming to us to fund one or two deals, we’re not your guy. We don’t wanna waste your time. We’re really looking to build a long-term relationship that can help you grow and scale and achieve the goals that you’re looking to achieve.”
There are some people when I say that, that resonates with them, and those are the relationships that we wanna take to the next step and see if there’s a fit there. Then there’s some other people that, like you said, they want competitive rates, or they want the cheapest rate out there, and we’re upfront – we’re not the cheapest, we’re never going to be the cheapest, and if that’s someone’s number one concern, it’s not gonna be a fit. It’s helpful to be able to realize that in that first conversation, rather than going down a path, spending time, looking at them as borrowers and then it not being a fit. So we try to get that out on the table as much as possible in the first conversation, just to see if mindset-wise they look like they’ll be a fit or not.
Joe Fairless: How is this company staffed?
Doug Fath: The lending company?
Joe Fairless: Yeah, Legacy Capital. Because that’s the company we’re talking about, right?
Doug Fath: Yeah, exactly. We have four employees, and then we’ve got other vendors and 1099’s, but we have four people on the staff.
Joe Fairless: What do they do, each of them?
Doug Fath: A little bit of everything. They originate loans, underwrite loans, we have client relations manager, and then sort of our [unintelligible [00:11:17].08] bookkeeper that handles all things financial.
Joe Fairless: Okay. You’ve got someone who originates, who underwrites, who works with clients, and a bookkeeper. I’m gonna put the bookkeeper aside. Of the originator, the underwriter and the client relations person, who goes through this strategy session and this ongoing “Let’s build this business together” conversation with the client?
Doug Fath: That’s really either myself or my partner Jeff. It’s one of the two of us that are having these conversations.
Joe Fairless: Okay. None of those four people that were mentioned.
Doug Fath: No, not yet.
Joe Fairless: Okay, got it. So you and Jeff, plus your four employees, plus 1099 people.
Doug Fath: Yup.
Joe Fairless: So that’s really your and Jeff’s focus – having those business plan conversations, and then you’ve got a team that helps on the execution of the actual loans that are being underwritten and originated.
Doug Fath: Right, because at the end of the day, anytime for anyone, you always wannabe looking at and asking the question “How do I provide the most value and where do I provide the most value?”, and those are the areas where we’re able to provide the most value.
Joe Fairless: When do you and Jeff come in and have that conversation with the customer?
Doug Fath: That’s after that person has already spoken to some of our client relations manager, just more really as a qualifying — going back to the conversation that you had asked, as sort of role-playing and I responded to, typically that’s a client relations manager that’s having that conversation, just to see if they’re the right fit. She’s gonna ask them a handful of questions just to understand what is their background in terms of experience, how many deals have they done, dig into a little bit of their financials and what they’re looking to do. If there’s a fit and it makes sense, then the next step would be for Jeff or I to have a conversation with them.
Joe Fairless: And how do you measure your return on investment in terms of your time when you’re having these conversations? Do you look at how many more deals they do, or how long of a relationship you have with them, that sort of thing?
Doug Fath: Yeah, we look at it a few ways; certainly, one of those ways is client retention… Not only how many deals are we doing with them, but making sure that they keep coming back, and also, are we achieving their goals? So if they wanna go from making six deals a year to twelve deals a year, or 20 to 40 or whatever it is, that those are tangible things that you can look at and say, once we get to the end of the year, “How did we do?”
Just as an example, we had one client that wanted to add 25 apartments to their portfolio in the next (I think it was) two years. With the year coming to an end now, they’ve already achieved that goal in one year – even quicker than they were initially looking to do, and they have other businesses and they’re doing other things… But those are really some of the ways that we look to do it.
Again, going back to what I said before, at the end of the day, yes, it’s about making money, but it’s also about making a difference. So things that we as a company get most excited about is helping our clients win the games that they are playing, and one of our core values is playing a big game.
Joe Fairless: I love this approach. It’s such a smart approach that I’ve never heard anyone with this business take, and it makes a lot of sense. How involved are you with follow-up on goals? For example, you set up a one-year plan with a customer, and now it’s month six… Do you have something in your calendar that follows up with them, or is it “Okay, we’ve set the plan, now they’ve gotta go do it and I’ll hear from them when I hear from them.”
Doug Fath: It’s one of those things that we try to check in with them on a quarterly basis about, and we’re actually right now building some technology to help us sort of manage that stuff automatically, as opposed to — right now it’s a bit more manual, where it’s also been the calendar, and follow-up, and certainly now with the client relations person that I’ve spoken about that recently joined the team… She’s been great, and those are some of the things that she’s helping out with as well.
Joe Fairless: Are you purchasing a software for that?
Doug Fath: There’s a few different softwares that we use and that we’re looking at, but right now we run a variety of our businesses through Podio. So it’s really just editing and programming in Podio for some of the follow-up stuff specifically for sort of the goals and the benchmarks.
Joe Fairless: And then have you had a conversation with other people who do what you do but in different markets (so not direct competition) and asked them what their client retention rate is, and compared that to yours to see if you are achieving more results or better results than a group that is not?
Doug Fath: I have, just through some other events or sort of masterminds that I’m a part of – I know other people that do this in other markets. – and our retention definitely is better. I think that the key and the question for us is as we ourselves continue to grow and scale, being able to still deliver that same type of service and experience for our customers, and as long as we’re able to do that, I don’t think that that’s going to change.
Now, I’ve heard from a lot of people, especially on the market, “Oh, you’re gonna need to lower your rates… It’s so competitive, there’s so many other people going out there”, and so far we haven’t been able to do that. Who knows, maybe at some point we will have to, but I think the reason for that is because of what we’re able to deliver and the experience we’re able to deliver.
At the end of the day, if you think about it, it’s actually a silly conversation, like “What is your rate?” or “What are you charging?” If I can help you achieve everything that you say you wanna achieve, all the other stuff is just details that doesn’t really matter. So again, going back to context — sorry, that was a long-winded answer to your question, but yeah, we have been able to have more retention than other people doing it in other markets that we’ve checked with.
Joe Fairless: I love how you elaborated on that, especially towards the end, because you moved the conversation away from fees, as it should be, and you move it towards something higher-level, and that’s what they’re looking to accomplish. That’s what you’re ultimately delivering on.
It’s the same with any business or any service. It’s not as much about the fee, it’s what value you’re getting from that exchange, and if the value exceeds what you pay, then that fee could be anything as long as it’s less than what you pay, and then depending on what your ROI that you want from it…
Let’s just talk about the triangle that you mentioned – the deal flow, capital and management. You said you think of a real estate business as a triangle – deal flow, capital and management. If someone comes to you and says, “I’m in Boise, Idaho and I need deal flow, and I would love to work with you on capital, and I think I have the management covered”, how do you help them come up with ways to get deal flow in Boise, Idaho?
Doug Fath: Right now our focus and footprint – we’re in Philadelphia, within a 100-mile radius to Philadelphia, and our focus is Pennsylvania, being Pennsylvania’s lender. We have done loans for clients in neighboring states nearby… But yeah, if someone came to us – even if they had deal flow – and wanted us to lend them money in Boise, Idaho, we’re not gonna be their guy.
Joe Fairless: Okay, then let’s pretend that you’re in Philly and someone is in Oil City Pennsylvania, which is not anywhere close to Philadelphia, and they ask you “How do I get deal flow?” Same thing, what do you say?
Doug Fath: What you’re getting at – if someone’s [unintelligible [00:19:10].14] but not our core market and any deal flow, what would we say?
Joe Fairless: Yeah, exactly.
Doug Fath: Before I’d answer that, I’d ask some questions to them. “So what are your current sources for deals?”, and checking with them, why do they think they don’t have enough deal flow. There isn’t sort of an off-the-shelf answer for it; based on what they say, there’s probably usually maybe a couple suggestions or things that we can make, but the reality of it is… If it’s somewhere outside of our market and they don’t have deal flow, and if we don’t have a presence or no other people in that market, there’s not really much value we can add there… Whereas if it is in our market or in Philly or in the surrounding areas, we can introduce them to wholesalers. Depending on where they’re looking to do it and what they’re looking for, we can make recommendations to them, whether it’s wholesalers, realtors, whatever the case may be, to try to help them increase their deal flow.
Joe Fairless: I think the capital answer is pretty obvious, because you all provide capital, so we’ll skip to management… What about if they have a management issue, which I imagine a lot of them don’t even think to talk about with you?
Doug Fath: Right, they don’t. Usually, the management issue comes up based on what their goals are. Again, if someone says, “Hey, I did ten flips last year, and I wanna get to twelve next years”, you probably don’t even really need to check in for a management conversation, because if they do ten, they can probably do twelve.
If someone says “I wanna go from 10 to 25”, that’s when you wanna check in… Well, okay, with the current team you have right now, have many projects can you handle at once? If you did ten last year, how many of those were going on at the same time? Probably two or three, if they did ten; or somewhere between one and three if they did ten for the year, depending on how quick they’re exiting. So in order to do 25, maybe you’ve gotta do 4-5 deals at a time. “Your current team – how many can you manage at a time?” and they’ll say “Oh, we can only do 2-3.” Okay, well who do you need to hire, what do you need to bring on in order to do 4-5 at a time if that’s gonna get you to the 25 or whatever it is?
It’s really just kind of digging in there, and a lot of times what’s interesting too is they understand these numbers in their head real quick, but they don’t take the time to break it down and clearly see what moving from 10 deals a year to 25 deals a year is going to mean for them from a management perspective and what they’re going to bring on. And look, sometimes when we dig down into it, they’re like “You know what, I actually don’t wanna go to that next level.”
There was one client I was talking to, they do about 30 deals a year, and we were talking about growing the business and what not, and he was like “Look, if I do one more than 30, I need to bring on another person to handle that. If I’m doing 30, until I do about 35 deals, I’m not making any more money with that extra person that I’m bringing on.” So yeah, which all goes back to the goals, and what do they really want, and why do they really want it. Bigger isn’t always better, although for us, we’re able to provide the most value for operators that are looking to grow and scale… So often times, if they’re looking to just stay where they are, they’ve got whatever resources they need for that, and that’s fine, there’s nothing wrong with that, we’re just not gonna be able to provide the most value for them.
Joe Fairless: Based on your experience as a real estate entrepreneur, what is your best real estate investing advice ever?
Doug Fath: Create a margin of safety when you structure a deal. I think you wanna think about everything that can go wrong, and make sure that a deal has buffer room so that if one, two, three or a handful of those things go wrong, can you still make money or can you at least break even?
I think most of the time when investors get into trouble is because of one of two things – it’s either poor management, or poor structure of how they’re structuring the deal and not creating a margin of safety for themselves.
Joe Fairless: Are you ready for the Best Ever Lightning Round?
Doug Fath: Sure.
Joe Fairless: Alright, let’s do it. First, a quick word from our Best Ever partners.
Break: [00:23:10].07] to [00:24:05].27]
Joe Fairless: Best ever book you’ve read?
Doug Fath: Rich Dad, Poor Dad.
Joe Fairless: Best ever deal you’ve done or participated in or been a part of?
Doug Fath: Oh, man… We’ve just finished a really cool warehouse conversion last year, which was a lot of fun and unique.
Joe Fairless: What type of joint venture or partnership have you done in the past with your clients after going through the triangle process with them?
Doug Fath: We’ve done a couple. One, that client had a niche of acquiring properties at tax sales, and has just done an amazing job with that, so we ended up investing and helping him grow and scale that business, and that has just gone phenomenally well and we have really enjoyed that business so far.
Joe Fairless: What’s a mistake you’ve made in business?
Doug Fath: My goodness, where do I start? I think real estate-wise, for me personally – on the investment and development side, we’ve managed our portfolio in-house for about ten years, and at the end of the day that’s not what I’m best at, that’s not my unique ability, and I didn’t realize the opportunity cost of that, and it wasn’t until I actually ended up outsourcing that and restructuring the company… That really freed up my time, that allowed me to start a private lending company and do these other things and really put myself in roles where I get to spend most of my time within my unique ability. It has made all the difference.
So the biggest mistake is just not figuring out what I’m best at, and putting myself in those roles.
Joe Fairless: Best ever way you like to give back?
Doug Fath: I love mentoring. I’m super passionate in particular about financial education; we donate money to financial education companies, and then just speaking about it, talking about it… I love empowering people from a financial standpoint.
Joe Fairless: How can the Best Ever listeners get in touch with you?
Doug Fath: I think the best way would be check out the website, LegacyCapitalPA.com, or just shoot me an e-mail, which is Doug@LegacyCapitalPA.com.
Joe Fairless: Doug, bravo on your approach! You don’t have to have me tell you this, you already know it, but it’s a really smart approach and I’m impressed with how you all are structuring your relationships with your clients and how you’re playing above the fray, the blue ocean strategy. You have a business that is a hard money private lending company, so that’s not recreating the wheel, but you’ve put a spin on it that builds long-term value relationships and has repeat customers, and then helps others along the way. Really smart, and I’m grateful that we had you on this show.
Thanks for being on the show. I hope you have a best ever day, and we’ll talk to you soon.
Doug Fath: Awesome. Thank you, Joe.