JF2351: CPA Guiding Entrepreneurs To Wealth With Noah Rosenfarb

Noah Rosenfarb is a full-time investor who counsels entrepreneurs that are looking for ways to enhance their wealth while working less, living more, and enjoying abundance. He has 20 years of real estate investment experience and believes that owning fractional pieces in large assets is an excellent tool to create multiple passive income streams.

Noah Rosenfarb  Real Estate Background:

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“The key is having a map so you will know where you are, where you wanna be, and how you’re going to get there. ” – Noah Rosenfarb

TRANSCRIPTION

Joe Fairless: Best Ever listeners, how are you doing? Welcome to the best real estate investing advice ever show. I’m Joe Fairless. This is the world’s longest-running daily real estate investing podcast where we only talk about the best advice ever. We don’t get into any of that fluffy stuff. With us today, Noah Rosenfarb. How are you doing Noah?

Noah Rosenfarb: Awesome. Glad to be here.

Joe Fairless: Well, I’m glad to hear that, and glad that you’re here. A little bit about Noah. He’s a full-time real estate investor. He has 20 years of real estate experience. His portfolio consists of 3,500+ doors, plus half a million square feet of retail and office. Based in Parkland, Florida. So with that being said, Noah, do you want to give the Best Ever listeners a little bit more about your background and your current focus?

Noah Rosenfarb: Sure. So I’m a third-generation CPA, and I started my career in accounting, much like my father and grandfather… But I broke away and decided to start a family office. And that family office business has evolved over time where we serve really successful entrepreneurs in everything that they need to have it all in their lives. So we focus on their financial success, of course, but also on their personal success and making sure they’re living the life that they want. And a large part of that is creating predictable income. So we started investing with our clients in multi-family assets and other asset classes over 20 years ago, and it’s just been a great run, and it’s a lot of fun. The real estate portion of my business is a substantial part of our business portfolio, and expecting it to continue to grow.

Joe Fairless: To start a family office, do you have to have money?

Noah Rosenfarb: The way I started was I was really a wealth advisor, and kind of transitioned to a family office for affluent divorced women. That was the niche that I had. So I was neither divorced, nor a woman, but I built that family office. I sold it in 2014 to another registered investment advisory firm, and then I focused on creating a family office for successful entrepreneurs because they were more like me. So I’m an entrepreneur, I own other business interests, I have a large real estate portfolio, and I was really looking for what I needed for my family. I wanted somebody to help me with creating passive income and managing all my finances, but also making sure that I’m training my kids –who are now 13 and 10– about money, and our family business, and what’s important. And then in philanthropy, we have a lot of activities that my wife and I do both with time and money, and orchestrating that… So I wanted to build the team around me. And then it just made sense when friends were coming to me that I had a place to bring them as well. Now we’ve got about 50 families of entrepreneurs that we’re serving, and we invest together in real estate, we invest together in private debt, we invest together in royalties, and of course, in stocks and bonds as well.

Joe Fairless: So many interesting ways to take this conversation… And I hope we can get to a lot of them. First off, affluent divorced women, that was your focus. Why was that your focus?

Noah Rosenfarb: So prior to that, when I was a practicing accountant, one of my areas of expertise was testifying in divorce court about how much money people made, and how much their businesses were worth. And what I noticed was oftentimes, in New York, in New Jersey –which was where our practice was based– we had about 200 million a year worth of assets that were changing hands between the control of one spouse to the control of the other spouse. And the clients that I was working with that were predominantly homemakers, whose husbands were hedge fund managers and entrepreneurs in Manhattan, they really didn’t know what they were supposed to do with this newfound responsibility of managing their assets. And because I had all of the expertise and experience to help them through their divorce litigation, I recognized that there was really an opportunity post-divorce to start managing all the financial aspects of their life that they used to rely on their husband for – taxes, and bill payments, and estate planning, and insurance, and investments. And so I saw that opportunity and I left the accounting firm to build a family office geared towards affluent divorced women.

Joe Fairless: And what are some core things that you were teaching a new client right out of the gate, that perhaps they weren’t aware of? You mentioned something just now, but if you can elaborate on that, I’d love to learn more.

Noah Rosenfarb: Yeah, I think the hardest transition and the reason that we tie my experience from working with these affluent divorced women to my core focus in entrepreneurial families –especially around the time when they sell their companies– is that transition is very similar. You go from having a network of people, and a whole system in place where things are very reliable; your income seems reliable, because it’s coming from your company or it’s coming from your spouse. Your network of friends and family is pretty solid, because it’s either based around your business, or it’s based around the relationship that you have with the core family that you built. And then once that fractures, whether it’s because you’ve sold your business or because you’ve gotten divorced, you need to recreate that predictable income stream, and that’s really scary.

People like to think that when you sell a business and 25 million hits your bank account, that you go out and celebrate that night. Most people can’t sleep that night. And it’s not because they’re excited, it’s because they’re terrified. They don’t know what to do. And so we’ve developed that expertise of helping coach people, and train them, and educate them about what they could do with cash, and how to redeploy it to create predictable income, so that they can focus their attention on the other areas of life that are often more important to them… Whether it’s supporting noble causes, or creating family bonds that are unbreakable… Whatever it is that becomes important to that entrepreneurial family or that homemaker. Whatever it is, we want them to focus on what’s most important to them, and usually, it’s not figuring out how to create predictable passive income.

Joe Fairless: Going along the lines of the personal success aspect of things that you currently help your clients with, the successful entrepreneurs – you’ve just mentioned creating family bonds that are unbreakable. What is your advice for affluent parents? You’re a parent, you’ve got a couple of kids, you said… So what’s your advice to your clients when they ask you”Okay, Noah, I want to give my kids more than what I had growing up, but I don’t want to spoil them. How should I approach this? What are the best practices based off of what you’ve seen other clients do?” What is your answer to that?

Noah Rosenfarb: Yeah, it all becomes partly age-appropriate, partly culturally appropriate, and partially where you are environmentally. So families that live in affluent neighborhoods and send their kids to private schools, where other children have vacation homes and spend summers in Europe, and travel in private jets – what’s expected or reasonable in that environment is totally different than entrepreneurs that live in rural or suburban areas that aren’t affluent. And they’re driving their pickup truck, and nobody knows they have 20 million bucks. So we have to kind of match the environment with the expectations of how to educate children. Then we also have to look at a family’s core values, and understanding what’s important to that family. Why is it that they want to create wealth? Why is it that they’re driven to go out and create more, to buy more, to do more, to succeed more? And usually, what we find out when you start having those conversations is that there’s often part of someone’s childhood that’s driving them to behave in a way that wants them to accumulate wealth; that’s often kind of the fear-based that some people grew up with, which is kind of my situation… I grew up with a single mom that struggled to put food on the table and never really had enough money for us to do the fun things in life…

And on the contrary, my father who was a practicing accountant. When we’d go spend a weekend with him, if it was a rainy day, we’d go bowling in the morning, and go to the movies at night, and go out to dinner… And all of a sudden, just as a nine-year-old kid, I started to realize that having money meant having choices, and that I wanted to have those choices in my life. So that drove me in a certain direction.

For other families, it’s really their own sense of higher purpose and the noble causes that they want to support, and they want to give back to a certain area or a certain community, and that’s what’s driving them. So it’s understanding what’s motivating the family. What’s the story behind it? How do we share those stories? How do we share those values? And then what are the systems and processes we put in place to make sure that the family can act accordingly?

What I like to say is that when families make gifts to their children, they want to be able to do it with an open heart, and also with the expectation that their child is going to make them proud with how they use that gift. And unfortunately, for a lot of affluent families, they start transitioning wealth to their children because their accountants and lawyers tell them it’s efficient, and they can escape taxation, and unfortunately, that’s really a terrible motivator that creates really poor outcomes.

Joe Fairless: It makes sense. I just personally love the approach that you took. You didn’t have a direct answer, because it’s specific to the family and their situation based off of, as you said, age, culture, where you are environmentally… What do you mean by that, where you are environmentally, by the way?

Noah Rosenfarb: Like I said, if your kids are going to a private school and their friends fly in their own plane… Like, I’m hearing in South Florida there are a handful of private schools here where it’s not uncommon for parents to own a private island in the Bahamas, or to have a 100-foot yacht, or to fly on their own private planes. So if your children are in that environment, what’s expected of them and what’s expected of the parents is very different than when your kids are in a public school environment with kids of all socio-economic backgrounds, and maybe even getting an iPhone in fourth grade might be seen as somewhat flaunting your wealth.

Joe Fairless: I get it. Okay. I was taking environmentally literally, which I shouldn’t have. Alright. So I would love to learn just a couple of tactical things that you’ve seen, that have been helpful with raising kids and gifting them money or not gifting them money. So if you can just pick a family, a situation — obviously, we’re not looking for names… But just a couple of tactical things that families that you’ve worked with have done that have worked for them. It might not work for everyone listening who has kids and are affluent, but just a couple of tactics.

Noah Rosenfarb: I’d say one thing that I’ve done with my children based on the education and training that I’ve had, is I’d leave them responsible for as many expenses as I feel confident that they can make comfortably. So for example, when my son has to buy sneakers, we pay $60 and he pays whatever over that he wants. And that just makes him decide if he wants to spend $150 on sneakers, then $90 has to come out of his savings. If he wants to get sneakers for 60 bucks, it doesn’t cost him a thing. That’s a pretty simple way to help children start developing money habits where they have to value $1.

Another example might be talking with your children specifically about your family, and your family dynamics, and your family goals.  So my family does a retreat every year with a professional facilitator that comes in and helps us identify what are the strengths and weaknesses in our family, what are the opportunities and threats, how do we collaborate together to improve our family dynamics and make sure that we’re growing together as a family instead of growing apart? I encourage that for most families as well, especially — when the wealth is obvious, then there becomes a different set of expectations than when the wealth is hidden. And I think when wealth is hidden, it often also leads to unintended outcomes, because mom and dad hold on to their wealth well into their 80s or 90s and until they die, and then a pile of money gets left behind for their kids without ever having the responsibility, without ever having any insights from mom and dad as to what they wanted to do with it. And that’s what’s led to this description of shirtsleeves to shirtsleeves in three generations. That proverb exists in China, they call it rice paddy to rice paddy. In Holland they call it clogs to clogs. So this is a unique feature of humans, is that without the training and education of what it took to create the wealth, it’s going to disappear.

Joe Fairless: And just for anyone who wasn’t following along, it’s the first generation makes it, second grows it, third loses it. Is that basically it?

Noah Rosenfarb: The second kind of spends it, and by the time it gets to the third, it’s gone.

Joe Fairless: Oh, I was giving the second generation too much credit.

Noah Rosenfarb: Yeah. And unfortunately, the statistics are that 70% of people that inherit money, spend it all. And that happens for the second generation. So if you’re lucky enough to be in the 30% that transfers wealth to the next generation, to that third generation, 70% of them lose it as well. So you only have about 9% of families that are able to transfer wealth beyond their grandkids.

Joe Fairless: Family retreat – talking about a family dynamic and having a facilitator. What would you say? Less than one-tenth of a percent of Americans do that? I’ve never heard of that before.

Noah Rosenfarb: It’s very rare. But in my business, we use the entrepreneurial operating system, which is written about in a book called Traction, invented by Gino Wickman. Some people use other similar systems like Rockefeller habits, which was created by Verne Harnish… But all of these systems for business process and business process improvement are all designed around having a plan, having a strategic plan.

Early in my career, I started actually in my college fraternity by developing a strategic plan for our fraternity when I was our fraternity president. And that led to us having the largest house on campus, and we implemented the plan that we created. And when I graduated and got into the working world, I started helping small businesses create and implement their own strategic plans. I was the professional outside facilitator. And I helped these companies scale and go from 10 million to however many million, and have big exits. I did it in our accounting firm, I helped my dad grow his firm from two and a half million to 15 million before he sold it…  And the key to that process was having this map of knowing where you are now, and where you want to be, and how you’re going to get there. Oftentimes, families fail to operate on that same type of professional level.

For the families that we counsel, their family business of just running their family money – that’s a bigger business than 96% of the companies in America. Because only 4% of businesses in America ever get over a million in revenue. And when you think about these affluent families that we deal with, they all have a million dollars of revenue coming into their family. So that family business happens to be quite significant. And they need a plan for what are they going to do with that, how are they going to grow it, and a lot of that is designed around the family dynamics… Because if mom and dad aren’t really clear about how they want their wealth to impact their lifestyle and to impact the legacy they’re creating, the default setting is not a good one.

Joe Fairless: I love this conversation. I could talk to you about this a whole lot, but I know some listeners are also interested in your over 3500 unit portfolio of multi-family, so let’s talk about that. I’m on your LinkedIn profile. I see it says “We bought our first two-family home in 2000 and have slowly built our portfolio to over 3,500 units.” Okay, wow. First off, props to you for that. Those 3,500 units that we’re referring to, is that you’re the only general partner on those? Or a general partner on all of them? Or you also considering limited partner roles in that 3,500 units?

Noah Rosenfarb: Yeah. I’m going to give you two answers to that question. One’s an interesting answer. The non-interesting answer is I’m engaged in the operations and management of those 3,500 units, but we have LP investors in all those deals. This year, we’ll add 1,100 doors. I control all the equity. I have an operating partner that runs the day to day operations. But from a structure standpoint, what’s somewhat unique is we’re never the GP. Our operating partners are the GP, and then our operating partners pay a business that I own in Puerto Rico a consulting fee for helping to put the deal together. And because I’m a sophisticated tax planner, that Puerto Rico company has a 4% percent corporate tax rate, and the Puerto Rico company is owned by my Roth 401k plan. So all of my promotes and all my sponsor fees, they all get taxed at 4% and go into my Roth 401k plan, never to be taxed again. So then when I take that money in my 401k plan and I go and invest it in private debt, or other private real estate, I never pay tax on my profits, and I’ll take all that money out tax-free in my retirement as well.

Joe Fairless: That is interesting. And you are right, there’s a short and a longer version. That’s pretty cool. I won’t try to delve into that tax structure, because I’d be out of my league, and you already summarized it… But I am interested in the general partner role a little bit. So you said you are not the general partner, you have operating partners? Did I hear that right?

Noah Rosenfarb: Correct. So our platform is called Invest With Our Family, and what we do through our family office and through my individual relationships, is we gather capital that we’re going to bring to an operating partner who’s identified an asset, diligenced asset, lined up the financing, has the improvement plan, has already decided that they want to make an acquisition… And whether they’re going to come up with five or 10% of the equity, we’re going to bring the other 90 or 95% as a single check.

We make the process simpler for that general partner, because they only have to deal with us as sophisticated investors, being one point of contact. And then we do all the investor relations. We work with our investor base, we send them our quarterly updates, we send them the distributions, our operating partner just gives us one wire, and then we distribute it out, we deal with all the K1’s to our individual investors, we deal with all the questions they have that come up over time, and we leave our operating partner to focus on what they do best, which is sourcing, diligence-ing, acquiring, and managing properties.

Obviously, what happens from an economic standpoint is that in most of our deals, we’re doing heavy value-add in growth markets, and what we’re looking for are opportunities to create infinite returns where our operating partner is able to attract high loan-to-cost bridge financing at reasonable rates. We go in with the equity, they make their improvements. Hopefully, within a year to two years, we’re able to do a cash-out refinancing and return most of the principal to us as investors, and then when we get into the promote, we’re going to share that promote together. They’re going to receive 100%, they’re going to pay our Puerto Rican business half of that for the work that we’ve done to bring the capital and manage the investor base.

Joe Fairless: Got it. Getting high loan-to-cost bridge loans, and trying to get a cash-out of all your equity within a year or two is challenging, I imagine. What have been the results of the last couple of deals that have gone full cycle? Which it doesn’t sound like you take deals full-cycle, does it? Because you want the infinite returns, right?

Noah Rosenfarb: Correct. We just refinanced an asset that we acquired in Dallas, a 600 unit multifamily complex. We bought it with a large defeasance, so we took over the existing loan. It was about a seven and a half million dollar penalty if we refinance. So we got a nice discount when we acquired it. I think we paid 53 million, and the building was worth, call it 61 or 62, at the time. But we just basically got the discount for the defeasance fee… And we operated that asset for, I think it was about four years. We generated, let’s just say, about a 30% return on our invested capital through dividend distributions of cash flow. And then this year we were thinking about selling it, with COVID. We decided to do a recap. So we recapped it. We got back 170% of our initial investment. So now we’ve basically doubled our money in five years. We still own the asset; we’re going to be able to generate about a 10% return on initial invested capital each year while we continue to own it… And if we were to sell it today, we’d get another, let’s say 150% of our investment.

Joe Fairless: That’s a winner.

Noah Rosenfarb: So it’s a great investment. Yeah. That 200% return, none of that was taxable. The 10% yield that we’ll get should be tax-protected. So there’s really not a huge advantage to go and try and get that other 150% and then incur the cap gains tax. We might as well just keep owning it.

Joe Fairless: How many deals are you currently a part of? You and your group.

Noah Rosenfarb: We’ve done a total of 35 transactions. I think we’ve exited maybe nine or 10 of them. So we had an exit in Arkansas, we had a portfolio that we bought early in the cycle. It was a pretty new, class A, 300-and-something-unit building… And we generated a nice 13% or 14% IRR on that hold. It was a low-risk asset when we bought it. At the front of the cycle, we were buying more A properties, and then as we got later in the cycle we’ve done more value-add. We had an interesting value-add in Decatur, where we actually own about 1000 doors in Decatur, Georgia, right outside Atlanta. We were early there; I would say in 2015 we bought a property for $35,000 a door. We put in another 10k or 12k in the renovation, and then we recapped it, we got out all of our money plus a little bit more. We owned it another three or so years and then we sold it and made 4X our money over the hold.

Joe Fairless: What deals lost the most amount of money, if any?

Noah Rosenfarb: So we haven’t had a realized loss yet. We have two shopping centers in our portfolio, both of which are grocery-anchored. So the grocery tenants are doing fine, but the other tenants in the complexes are not doing well. One is in Texas, one’s in New York, I think. So we’re just kind of waiting to see what’s going to happen.

We also bought an asset in Chicago in 2014. We had a single tenant. So we were able to buy that building from the bank for a particular reason at the bank’s note. We got a good deal on the acquisition price. From a cash flow standpoint, we were going to be able to get back about 60% of our capital before the single-tenant would have to renew their lease. So the strategy was, if this is a massive failure, we’ll get back 60% of our money over six years, and we’ll lose whatever equity we put up. Or if the tenant renews, it’s going to be a home run and we’ll 3X to 5X our money. And if the tenant does something in between, we’ll kind of see how it shakes out. It ends up that tenant renewed two of the three floors. We have a $4 million reserve for tenant improvements and fit-out… And it remains to be seen; what’s going to happen with that asset? I don’t know. We got 60% of our money back already. It’s still a good asset in a good neighborhood. It’s a suburban office, Oak Brook, Illinois; it’s a nice, affluent suburb, right around the corner from a high-end Mall. Are we going to rent that floor out? My guess is yeah. At what price? Who knows. Are we going to have to renegotiate with the bank? We’ll see.

So I think the beauty to me of real estate is that your loss is always limited to your equity. But it’s not going to be 100% of that equity if you’re getting distributions from existing tenants and existing cash flow. So you’re always every year that you kind of survive, you’re reducing your equity exposure and your potential risk of loss. But your upside, in some ways, is infinite. So I like the risk-reward profile of these assets. As the cycles moved, we’ve transitioned where we’re focused. For the last three or four years we haven’t bought anything other than value-add workforce housing, and I don’t see that changing while interest rates are low.

Joe Fairless:  We’re going to do a lightning round, but first I’ve got to ask you the money question, and then real quick, if you can answer that… And then let’s go into lightning round. Based off of your experience, what’s your best real estate investing advice ever?

Noah Rosenfarb: Figure out what you’re good at. So I started buying these two-family houses, and I was not a good landlord, but I’m a really great aggregator of capital and great investor relations professional. So I’ve found my sweet spot, and that enabled me to scale quickly.

Joe Fairless: We’re going to do a lightning round. Are you ready for the Best Ever lightning round?

Noah Rosenfarb: Of course.

Joe Fairless: Alright. First, a quick word from our Best Ever partners.

Break: [00:28:18] – [00:29:06]

Joe Fairless: Noah, what’s the best ever way you like to give back to the community?

Noah Rosenfarb: My wife and I like to focus on three causes. It’s Jewish causes, we’re a Jewish family, and there’s this old saying, if Jews don’t support Jews, who will? We support education and food security. The most fun experience we had – my son, for his Bar Mitzvah, instead of having one of those lavish parties, he decided to pack 18,000 meals for our local food pantry.

Joe Fairless: Wow. What is the Best Ever tool that you use in your business? It could be software. You mentioned the book Traction, so we’ll remove that from the set… But what’s a tool that you use?

Noah Rosenfarb: My phone never leaves my side. It’s a blessing and a curse. But having the ability to access information and communicate with people on a real-time basis can’t be beat.

Joe Fairless: How can the Best Ever listeners learn more about what you’re doing?

Noah Rosenfarb: Probably the best is to connect with me on LinkedIn or Facebook, or visit my website freedomfamilyoffice.com or investwithourfamily.com.

Joe Fairless: Noah, I enjoyed our conversation. Thanks for being on the show talking about the family office business that you are in, how you partner with operators, the structure, and then the type of deals that you’re focused on. Appreciate you being on the show. I hope you have a Best Ever day. Talk to you again soon.

Noah Rosenfarb: Thanks so much.

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