Today we get to hear personal, real life stories from Danny’s own experiences with finding partners. As everyone knows, real estate success is definitely a team effort, and who you choose to partner with or team with can have a tremendous impact on your investing business. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!
Best Ever Tweet:
Danny Randazzo Real Estate Background:
- Controls $6.5M of commercial, multifamily, and single family investment properties
- Multiple focuses like commercial offices, multifamily apartments, airbnb’s, short sales, and foreclosures
- Uses creative strategies like joint ventures, syndications, and partnerships to close deals
- Based in Charleston, SC
- Say hi to him at https://www.randazzocapital.com
- Listen to his Best Ever Advice here: https://joefairless.com/podcast/jf961-house-hacking-bay-area-to-a-1mm-commercial-building/
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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 of that fluffy stuff.
I hope you’re having a best ever weekend, first and foremost. Because today is Sunday, we’ve got a special segment for you, it’s called Skillset Sunday. You’re gonna come away from this conversation with a new skill, or a skill that you can hone based on what you learned here. That skill that we’re gonna be talking about today is what to look for when partnering with investors on your deals, who are bringing funds to help you close the deal, and maybe what are some red flags that you should be on the lookout for, too.
So what are some things that you look for for good partners, and what are some things that would be an indicator that perhaps they wouldn’t be the best partner for you. With us today to talk about his experiences and to walks us through his thoughts, Danny Randazzo. How are you doing, Danny?
Danny Randazzo: I am doing well, Joe. Thank you so much for having me on. I’m looking forward to shedding some light to my experiences and probably some of my pitfalls with the Best Ever listeners, to help them get ahead of the game when raising funds and putting deals together with investors.
Joe Fairless: I love that it’s gonna be based on your experiences, versus us talking theory… Because it’s one thing to kind of talk about hypothetic situations, but we’re gonna be talking about specific examples based on your experiences.
A little bit about Danny… You probably recognize his name if you’re a loyal Best Ever listener, because he was interviewed in episode 961, titled “House-hacking Bay Area to a one-million dollar commercial building.” Yes, his first investment property was a one-million dollar commercial building; he now controls 6.5 million dollars worth of commercial, multifamily and single-family investment properties.
He has multiple focuses with both commercial offices, multifamily apartments, he does Airbnb, short sales and foreclosures… And he does most – if not all; I’ll have to get clarification on that – where he lives, in Charleston, South Carolina, a place where my wife very much wants to go, but we have not been yet… And you can say hi to him at his company’s website, RandazzoCapital.com, which is in the show notes link.
How about we’ll start off, Danny, if you can give a refresher, and just let us know a little bit about your background and where you’re coming from, just so we have some context?
Joe Fairless: Yeah, Joe. My background is in financial consulting, and I kind of got started in real estate through reading Rich Dad, Poor Dad and understanding that time is one of our most precious resources, and having a corporate financial consulting job, your time is not always your own. You have to travel, you have to be in meetings, and you have other things and duties to report to… So that lifestyle and that mindset shift through Rich Dad, Poor Dad led me down the path to real estate and really building a portfolio of passive income, and having places for friends and family and investors to invest alongside, to help grow their passive income and achieve their financial freedom, goal, as well. It’s something that I’m truly passionate about.
And like you said in the intro, all of my real estate holdings are now in the Charleston, South Carolina market… So I invest where I live, and what I like about the market there is we’ve got great economic indicators. Population growth and job growth are really driving the market demand for all types of real estate, and in the area, Joe, when you and your wife come down to visit, you will see the growth that’s taking place and the buildings that are going up, and the people that are constantly moving in, and also the tourists that are coming in to visit.
Joe Fairless: How many deals have you partnered with investors on?
Danny Randazzo: I have partnered on five different deals with investors, and learned unique things with each of those.
Joe Fairless: So when you now have an assessment of the lessons learned, and for the purposes of our conversation we’re focused on what to look for in the quality of investors, and then what are some red flags… I imagine, first — well, I was gonna have a leading question; I’m not gonna do it. So how do you approach it? What are some things that you look for?
Danny Randazzo: Well, having gone through the process a few times, and learned along the way, one of the things that I probably failed at form the beginning was not having all of the details sorted out in the operating agreement.
All of the structures that I use, I have the investor be an active member in the LLC. And there’s pros and cons to doing it that way, but based on the friends and family and the investors that I had, everyone felt more comfortable becoming an active member in the LLC, and having decision-making power in that. However, as good of a relationship as you have with people, I think things can potentially change when you are pooling your money together and buying and investing in real estate. I think that’s the first thing that is important for the Best Ever listeners to understand – you should have everything in writing as far as the decision-making, how it’s gonna work, and really think through tricky or difficult scenarios, because as well as you know that person, their mindset may change when their money is actually in the deal and you guys are trying to execute a business plan.
Or if someone maybe is a stubborn individual and can’t be persuaded to go along with the vision that the rest of the investors have, it can cause problems within that structure, so it’s definitely a con to that structure as well.
Joe Fairless: And taking a step back, you mentioned it but I just wanna reiterate that basically it’s a joint venture, it’s not a syndication. You’re doing a joint venture where you’re business partners with the investors. Compare that to a syndication or a security, where the investors expect a return based on your performance, not the group’s performance. That’s a rough definition of a security… And I’m not a securities attorney, but that’s basically what it is.
So you don’t do that. You have a joint venture… So you’ve got a lot of cooks in the kitchen. How do you take control of the decisions, if you can, so that people who might not be as actively engaged or knowledgeable about what needs to be done don’t overrule the individuals who have more experience and are more actively engaged?
Danny Randazzo: One caveat before we get into that answer… The structure of having business partners, like you said, that you joint-venture with – I think it works well for smaller deals, maybe under that kind of million-dollar purchase price threshold where you are raising a smaller amount of capital and you’re really partnering with maybe 3-4 different people… So that multi-member LLC would have 3-4 members at most, so there’s not as many cooks in the kitchen.
Once you are in the kitchen together and you’ve got those 3-4 people and you’ve got your deal going, your question was how do you avoid making slow decisions or inefficiencies in the decision-making process, and it’s something that you certainly have to manage.
One thing that I struggled to do – I don’t think I did a good job of having everything in writing from the beginning as to what requires a vote, and what types of decisions should be made to the person on the ground, and really managing the day-to-day and overseeing the asset.
One thing I’ve learned through some research is that other folks have used this similar process before, and they’ve had a set dollar threshold, like you would with a property manager, where if an improvement or a change is made for $1,000 or less, you don’t need to have the conversation with the rest of your business partners, but you as the person on the ground close to the asset can go ahead and make that decision and keep the building in great condition, and everything is fixed up on time, and that kind of streamlines the process.
So I would say that would be one thing – that you and your business partners would wanna have a discussion about a document in your operating agreement that says “If a decision needs to be made, is it above a certain dollar threshold?” That way, if you are the day-to-day manager, you can seamlessly make some of these decisions and not get bogged down in some of the details of which color trash can to buy for the apartments, or what type of paint should we get, so we can save a few hundred dollars on a lower-quality paint versus getting a high-quality paint that lasts a little bit longer.
Joe Fairless: I love it. That is really helpful to significantly decrease the amount of decisions. Is there a dollar amount? I know you’re not an attorney, but I imagine being the savvy guy that you are, you probably asked the attorney “Hey, can I have a dollar amount of, say, $500,000?” and the whole group would agree on this, so it’s not like you’re saying this just so you can go full-speed ahead without anyone’s consent… But if they’re not wanting to be involved and do all these votes and phone calls, they’re like “Hey, Danny, we trust you. Run with it!”, from a paperwork standpoint, can you have a really high dollar amount so that you basically don’t have to go to them at all?
Danny Randazzo: Every deal is different. As I am not an attorney, I would suggest the Best Ever listener reach out to their local attorney that they work with to get that figured out. From my experience, what I think I have learned is that yes, you can have some sort of agreed-upon dollar amount, and it seems like it needs to be relative to the types of normal expenses that a property would have.
So if you are buying a one million dollar commercial building, you may have furniture expenses that are a few thousand dollars, so maybe for that property it makes sense to have $10,000 thresholds where you can make decisions on behald of all of your business partners up to that amount… But if it exceeds $10,000, then you wanna have a vote on it.
Now, on the other hand, if it’s a $200,000 Airbnb property, that $10,000 may be a little bit too high. You might need to bring that down to maybe $5,000 or $1,000, because your expenses are not gonna be as significant.
Again, it’s really up to the business partners and what they are all comfortable with in terms of decision-making and what should require a vote and what doesn’t require a vote.
Joe Fairless: Okay, so we’ve talked about how to set it up for success and mitigate the chance of having some disagreements, but we haven’t talked aboout what I mentioned early on in the show, and that is what to look for in an investor, and then what are some red flags… So how do we wanna transition into that?
Danny Randazzo: We can jump right into what to look for in an investor. From what I’ve seen, an investor that you would wanna have in this type of joint venture business structure is someone who has some sort of investing background where they are knowledgeable of the decisions that they’re making; they understand investing, they understand return, and they can understand a business plan for that strategy.
Another thing to look for from a solid investor standpoint is that they bring a unique skillset to the table. Maybe they have a background in the mortgage industry and they can shed light on getting a better loan or a rate… So I would look for a different skillset that you may not have. Maybe you have an attorney who is very busy with their dayjob, but also bring a unique skillset to the table to help with some of the contracts or help with due diligence, or researching market analysis, or things like that.
So I would look for an investor who knows what investing is at a high level, and they’re comfortable with investing dollars and having available funds. You’re not taking every last dollar that they have available to pay their bills… So they have some sort of savings and reserves… And then that they bring a skillset to the table, because again, at the end of the day you are business partners with them and you all need to make decisions together, so you wouldn’t wanna have someone who is inexperienced or very unsure of what investing is, and that may require a lot of your time.
Joe Fairless: What about communication style? Do you look at that at all, or do you consider that? I think that is a definite lesson learned for me as far as what to maybe avoid from having an investor become a partner, and that could be their communication… So are they timely in reviewing materials and quick to respond on urgent matters. You don’t wanna delay your property progress if you’re waiting on outstanding decisions and people can’t be reached.
The other component to communication that I think is really important is the style in which you are going to work together. Could this business partner be a negative drain on the overall business itself because they are very bogged down in irrelevant details or cant get focused on the bigger picture and are very concerned about minor items? Or they may have a different vision for the property, so I think you need to be very careful and really vet your investors and future business partners around their communication.
The second piece to that is around their goals – their personal goals and their investing goals. If you have a misalignment of goals, it can negatively impact that property’s progress, and at the end of the day, your business partner — you’re almost marrier to them and it’s very tough to work together if your goals are not aligned… Whereas your goal may be to maximize the revenue for the project, and another investor/business partner’s goal may be to minimize every single line item expense at the property, and rather than focusing on generating more revenue, they’re focused on saving a minor amount on the expense side.
So I think you need to, again, understand what the goals are of those persons, and really balance that with what your goal is and what the vision is for that property, and do they align… Sometimes at the end of the day you may see that it’s not the best fit for a certain type of investor, or an investor with a certain shorter-term goal, as opposed to a longer-term goal to work with you on that project.
Joe Fairless: You mentioned at the beginning that you’ve done five deals with the investors… This information is based on your experience, so can you give us a specific story about any of these points that you just mentioned?
Danny Randazzo: Yeah. On one of the deals we’ve got four total partners that are investors in a property, and we definitely had a misalignment of goals. At the end of the day, it was for an Airbnb type of property where some of the investors were looking to minimize the expense of the cleaning fees for the property, and going to a cheaper alternative cleaner, while trying to maintain the same level of experience for the guest – I think that was a misalignment of goals to reduce that cost and maybe potentially negatively impact that guest’s stay. In the longer-term picture, if you have great stays and great reviews from your guests, that positively impacts your long-term success with ratings and reviews for your Airbnb properties; and ultimately having a higher rating and review could allow you to increase your cost or rent per night that you’re getting, as opposed to trying to cut down on some of the expenses.
So it’s definitely a learning curve to get through that, and you have to manage personalities and opinions, and then at the end of the day come together still and do what’s best for the business. I think you can quickly realize the difference between individual’s goals and vision when you have some sort of disagreements that you need to work through, and then again, you still need to be cordial and have a professional relationship with them to have a successful and profitable business running, all while looking forward to your potential next deal, and do you wanna work with these individuals again or not. That’s up to you.
Joe Fairless: Clearly, in that example you wanted the more expensive service because you saw long-term gain from positive reviews, and someone else or other people wanted the cheaper service, perhaps sacrificed some experience… So which one did you all end up going with and how did you arrive at that conclusion?
Danny Randazzo: We ended up going with the cheaper service, and we were able to work through that and get several bids to come to the agreement that we can ideally strive for the same level of service and give the guest the same experience hopefully… So we’re really running a trial period now to make sure that we’re not losing any guest experience on that… But what that really did – it caused a lot of disagreement and hardship between each individual involved in the process, and at the end of the day it wasn’t a significant amount of savings on a per month basis… But again, kind of that short-term mindset that some people can have negatively impacts the greater good of the whole.
Joe Fairless: Anything else that we should talk about as it relates to identifying characteristics of good joint venture partners, versus partners that wouldn’t be the best?
Danny Randazzo: I would say if you’re gonna have active investors, make sure you understand their goals and how they operate as a person. Then number two – get everything in writing. For all of these different scenarios – we talked about a few, but just think through every decision that you make with your property and what that input would look like of having another partner involved in the decision-making process with you, and just document everything and every decision that you need to think through and make in writing, so that way there’s no confusion about who knows what and how the property will function. That should alleviate some undue stress on some of these harder conversations that could come up down the line.
Joe Fairless: How can the Best Ever listeners get in touch with you?
Danny Randazzo: They can get in touch with me at InvestWithDanny.com.
Joe Fairless: Danny, thank you again for spending time with us… It sounds like there’s first some prep work that needs to be done before even speaking to investors, and that is knowing what the operating agreement will be, some things in there regardless of the partners, to help smooth out the process of a joint venture, because there could be a lot of cooks in the kitchen…
One of those tips that you had is to set a dollar threshold that needs to be voted on if it’s above that threshold. And anything below that, then one of the individuals, just like a property management company, can go ahead and exercise their judgment and use those funds to do whatever needs to be done at the property; that way you don’t have to have 1,000 decisions being made by a group. Also, you mentioned having everything in writing.
Then a couple things to look for that I wrote down that you said for potential investors – one is someone who knows real estate and is savvy-enough to provde input and know what’s going o… But then also ideally brings a unique skillset that is complementary to the group and that can be leveraged to have even better returns for the investment, like someone who knows mortgages, or maybe property management, or something else.
Then from a red flag standpoint, two things – one is communication; if they are timely in communicating with you leading up to the deal, then it’s reasonable to assume they’ll continue to be timely afterwards. There are exceptions, but at least you will qualify them in some way that way. But if they’re not timely, it’s gonna be very hard, I imagine, to get in touch with them regularly after you close. So if they’re not timely in getting back to you before, afterwards it’s tough.
I can tell you, with my business partners, that is the — not number one; trust is number one, but holy cow, number two is responsiveness. I can pick up the phone right now and get a hold of Frank, my business partner… And if he doesn’t answer, he’s on a call and he’ll text me he’s on a call, and viceversa, and then we’ll just get in touch immediately after that.
So communication and timeliness of communication is right up there, like number two for me… So I hear you on that. Then also, the second thing is investing goals – personal investing goals and their style.
Thanks so much for being on the show. I hope you have a best ever day, and we’ll talk to you soon.
Danny Randazzo: Thank you, Joe.
