Adam Hooper (02:26):
And then I just started to grow my practice and ended up doing some brokerage at the national level on some single tenant net lease products, I worked with some FedEx, preferred developers, some Walgreens preferred developers, and then got into the equity placement side of the business, so helping those developers raise capital for those development projects, mostly from institutional investors.

Adam Hooper (02:43):
From there, went and joined a firm down in Northern California, where I helped start their joint venture equity placement teams, spent a couple of years there, and this was in early 2010, so 2011, 2012, right around the time when a regulatory exchange came about called the JOBS Act. And that was a pretty transformational change in how people can access the capital markets, both from the investor side and also from the manager side, from the capital raiser side.

Adam Hooper (03:05):
And we saw a really interesting opportunity afforded by that regulation that effectively made private investments able to be publicly advertised. For 80 years, prior to this change in regulation, you couldn’t offer someone an investment if you didn’t have a preexisting relationship with them. And this regulation changed that such that you can now advertise publicly these historically private investments.

Adam Hooper (03:23):
And so we saw the opportunity to basically create a technology platform around this new distribution channel. And this was the time when Kickstarter and Indiegogo and all the rewards-based crowdfunding platforms were starting to really take hold. And we thought, “Well, why couldn’t we do that for real estate investments? Why couldn’t we build a distribution platform in a marketplace centered around this ability to now use the internet as a distribution channel for these private capital raises?”

Adam Hooper (03:45):
And so we did, early 2013 officially started the company down in Bay Area, some early seed money from some real estate investors and from technology investors. And eight years later, here we are on this podcast today. So it’s been a pretty wild run since then.

Robert Leonard (03:57):
Part of your bio says that you are a pioneer in democratizing real estate and that you continue to push the boundaries. What exactly does it mean to democratize real estate?

Adam Hooper (04:07):
I think it’s an extension of what we just talked about. So for the 80 years, based on the regulatory environment, these private placements were only available to people that you knew somebody, you knew someone that was either running the investment themselves or country club money or friends and family money. So there’s definitely a limited set of ambassadors that could ever access these private investment deals. And so with that regulatory change, it really opened up the door for access on both sides of the capital markets. And that’s something that we saw as a pretty big change. I mean, I’d spent my career making institutions a lot of money in these private real estate deals that only they had access to because of how the regulations were restructured.

Adam Hooper (04:42):
And so when this change came about, real estate was certainly not the intended beneficiary of this regulation. It was for small businesses. If you had a café or a small consumer product company, you have a long user base, this was a way for them to access capital markets from a non-traditional sense, not necessarily from the bank or getting an SBA loan, but to be able to turn more regular people into investors and enterprises.

Adam Hooper (05:02):
And so being able to do that same thing with real estate, which as a real estate guy, I think it’s one of the greatest wealth creation tools out there, it has been forever, but people just haven’t had access to it. And so I think that’s at the core of what we’re trying to do, is bring access to this asset class for people that historically either didn’t know how to do it, now that they have access to it, a lot of educational material that we put out, how can we help them make sense of these new investment opportunities, and really try to level that playing field so that everybody has equal access to these investment opportunities as possible, again, under the current regulatory environment?

Robert Leonard (05:32):
We’re going to spend most of our conversation today talking about real estate. But for those who haven’t heard of it yet, tell us a bit about what Y Combinator is and how it relates to you and your story.

Adam Hooper (05:44):
Y Combinator is a very, at least in the technology world, a very well-known accelerator in the Bay Area, started by a guy named Paul Graham, companies like Dropbox, Stripe, Airbnb, there’s been, I don’t know how many companies now, thousands of companies, I think, have been through it. But it’s a three-month program where they give you some seed money in exchange for this, you’re getting in this network and go into weekly dinners, and going through this program, it culminates at the end with a demo day.

Adam Hooper (06:06):
So you get on stage and you pitch to 400 VCs, and you tell them your story and hopefully raise some money from them. And I will tell you, real estate transactions and timing don’t really care about a demo day date. So there was definitely a scramble on our end to try to have something to show by that demo day. And again, the regulations worked out a couple of days before we went down on stage at the end of this three-month period. The full rules were enabled from this regulatory change, and so real pretty quickly, we raised $750,000, overnight for an office building that was acquired down in San Francisco, so we had something good to show for demo day.

Adam Hooper (06:35):
But it was huge for us in the sense that building your technology company coming from the real estate space to be able to immerse ourselves in that world and to be able to have that stamp of approval from someone like Y Combinator, for us to go out raise money to capitalize our venture to attract talent to tap into that pool of wealth, I mean, we were in that early phase of “crowdfunding,” and there’s a lot of press around that. So to be able to leverage both the exposure within Y Combinator technology space and access a lot of investors that were so concentrated in their tech stocks and their wealth is very dependent on the health of the technology industry, to give them an avenue to diversify outside of that, which we’ll talk a little bit more about later, for us, it was a huge start to our business, and to be able to still then tap into that knowledge base and that network has been just huge for us throughout the years.

Robert Leonard (07:18):
You mentioned that Y Combinator is an accelerator. For those who don’t know, what exactly is an accelerator?

Adam Hooper (07:24):
It’s basically a way for young startup companies to get some mentorship to build a network within the industry to learn from other people’s mistakes as you’re starting up these companies and really share in the early days of a startup. While everybody’s working on a different problem, a lot of those problems have some commonality. And so, it’s just a way to be completely immersed in building your company. For us, I think one of the most important parts was the sense of discipline.

Adam Hooper (07:47):
But it instilled with this forcing function of a three-month timeline and a demo day that we had to present something, at any point a company’s lifecycle, there are 100 different things that you can work on that are all super interesting and shiny objects that you can work on. But to be able to have the discipline to distill that down to the two or three things that are really going to move the needle.

Adam Hooper (08:03):
Culturally, that’s something that stuck with us from the beginning of going through that accelerator program with Y Combinator. And I think, again, that’s just a culture thing that’s evolved since then and has been core to how we run our business. I really think accelerator is an opportunity to just get in a room with a bunch of people that are all working on really interesting problems, have that network where you can bounce ideas off of each other, and then work towards that goal of having some meaningful progress that you can show and hopefully raise capital around at the end of that accelerator program.

Robert Leonard (08:29):
How exactly do you do that? How do you focus on what is the most important thing that you should be doing today, whether it’s in your business, in your life? What did you learn from this program, and how can people get better at that?

Adam Hooper (08:41):
I think it’s having to be really clear about your goals. We’ve shifted now, and again, maybe we’re getting a bit in the weeds here from the technology space, but we use a system called OKRs, objectives and key results. Being able to clearly communicate amongst your team to have a common set, that Northstar that everyone has to working towards, having that clarity makes it really easy to use that as a filter when you make decisions strategically about what to do and what initiatives to undertake.

Adam Hooper (09:08):
A lot of businesses and companies maybe aren’t as clear in what those directives are or what that overall guideposts is in terms of what are they really trying to achieve. And so for us, it’s quarterly reviews of what these OKRs are, it’s sending that down to the individual teams, letting them have input and creating their own OKRs, any objectives, key results, and then using that, again, as a filter for that decision making process.

Adam Hooper (09:29):
If you don’t have a process through which you make those decisions, it’s really easy to get distracted by something that seems interesting or seems it could be a meaningful project. But if it doesn’t move you towards that goal, then maybe it’s not the right thing to do with your time. And so I think it’s just being relentlessly focused on defining what those stages are, defining what those key metrics are, and then using that as guideposts of how you make those decisions is what you work on. That’s how we’ve been most effective through our company history and I think something that people can research. Again, just Google OKRs, and I think Google was one of the first ones that really made that popular framework through which to make these decisions, but it’s been super effective for us and something that we rely on pretty heavily.

Robert Leonard (10:06):
OKRs, I’m not sure if they come from this book, but they’re talked about very heavily in a book called Measure What Matters from John Doerr. So if anybody’s interested in learning a lot more about OKRs and how you can implement them in your business life, anything like that, check out the book Measure What Matters from John Doerr?

Robert Leonard (10:21):
Do you use OKRs in your personal life at all? Do you do anything maybe like OKRs in your personal life, keep those things in order?

Adam Hooper (10:29):
I wish I could say that I did, but no. With a startup and three kiddos, my time is pretty well consumed. But I could certainly see how that would be certainly effective, maybe something I should think about here outside of the work life too.

Robert Leonard (10:40):
How do you think things for you and your business would have been different if you hadn’t gone through the accelerator program?

Adam Hooper (10:47):
I think it was pretty helpful to set us off on a path for success, primarily coming from outside of the technology industry, coming from the real estate industry and not having a ton of deep connections in the technology world, certainly from the fundraising side, from venture capitals, angels. I think from that perspective, it definitely opened up a whole network of opportunities that wouldn’t have been there otherwise, certainly with the Y Combinator affiliation.

Adam Hooper (11:11):
And I think, again, it just instilled, at the early stages of a company, to me, one of the most reassuring things was we would do these Tuesday night dinners, and everything is off the record, everything is confidential. But we have some very major founders of these really, really large companies, and to be able to hear and relate to them of the struggles that they go through behind the scenes, while everything looks polished and wonderful on the outside, behind the scenes, it’s this constant problem solving, of trying to figure out, again, what are those things that you’re trying to solve? What are those metrics that you’re working for?

Adam Hooper (11:37):
And to be able to have that clarity and that permission that it’s okay to not know exactly how things are going to turn out, but just to be persistent enough to not give up on it and to keep figuring out those problems, I think that was a really interesting exposure that we probably wouldn’t have had otherwise going through that. I think we would felt a lot more alone in our journey. But yeah, realizing that everybody that’s going through a startup phase, while the specifics of their problems might be a little bit different, a lot of those challenges are common across a lot of these different companies.

Adam Hooper (12:04):
And so I think that was just super helpful, to have that insight and have that network and that camaraderie amongst those people that, again, those relationships, even eight years on are still pretty strong. So I think that was the network part of it, and just the exposure to what it actually looks like behind the scenes of a startup, that was super reassuring for us, certainly.

Robert Leonard (12:21):
Diving a bit more specifically into real estate, what are some of the storylines that you’re following with office, retail, industrial and multifamily?

Adam Hooper (12:31):
It’s been a really interesting last two years, 18 months, whatever, since the beginning of the pandemic. Some asset classes have held up really, really well, some have had challenges, and we can get into that. One of the biggest things that we saw through the pandemic, though, it was an accelerant of a lot of these trends that were already underway.

Adam Hooper (12:47):
So, looking at migration out of major cities into some secondary markets, looking at the migration into sunbelt states and some of the lifestyle cities that were attracting people already, a lot of those trends just got accelerated by the pandemic and health crisis. Industrial and retail, the interplay between how we use retail space and the reliance more on e-commerce, that continues to grow that a huge spike throughout the crisis, and that will maybe not continue at as much of the pace as we get further into the recovery here, but the interplay between industrial and retail, I think, has been an interesting one as well.

Adam Hooper (13:19):
So, if we break it down asset class by asset class, to me, one of the most interesting ones that we’re still watching is office. And with this whole work-from-home concept, with the remote work and less of a reliance and being in the office on a day-to-day basis, that’s something we really don’t yet have a clear picture on how that recovery looks in terms of how companies are going to plan their space usage. You got some competing narratives, you’ve got working from home and you’ve got remote work and maybe hoteling common areas in the workspace, which would maybe indicate that you need less square footage, but when we come back to the office, there’s probably going to be some social distancing guidelines, how people are using the space and maybe need a little bit more square footage per employee. So, how those balance out I think is going to be interesting to see.

Adam Hooper (14:02):
And then whether or not the remote work and work-from-home will stick we’re seeing more and more companies make this work-from-home and remote work policy permanent. I’m in the office today here recording this podcast, but we’re still a remote-first company. So how we use the space for office I think is going to change. Not sure how the footprint is going to change necessarily, but I do think there will be some changes in terms of how the space is configured, maybe the focus work is still done remote and the office is more of a collaboration zone for group work or projects where you need to come and share a whiteboard space together. So, I think office is a really interesting one that we don’t really yet have a clear picture of how that recovery looks, but one that we’re definitely watching closely. And I know investors are trying to figure that out as well.

Robert Leonard (14:41):
I get to talk to a lot of investors here on the podcast and also on social media. So I get to hear some things about investor sentiment, but I’m curious what you’re hearing. Tell us a bit about what you’re hearing or seeing from your data from investors about their sentiment on real estate markets.

Adam Hooper (14:58):
Again, it gets back down to an asset-by-asset class. Generally, though, as an asset class broadly, I think real estate is certainly in favor right now. Any time you have volatility in the stock market, [it] doesn’t matter whether it’s going up or down, volatility is going to cause people to look for something that’s more stable. Real estate is certainly far less volatile, private real estate, direct ownership real estate. We’re not talking about REITs, that’s a different conversation. But private real estate ownership of the underlying assets [is] certainly far less volatile than what you see in the public stock markets.

Adam Hooper (15:24):
So I think any time that we see volatility in the stock market, we see generally a desire to get into real estate. It’s a real asset. When you have inflationary concerns, real estate is a great hedging against inflation, and certainly in the multifamily space. You can move your rents much quicker with inflation to help, again, hedge what a lot of people are assuming we’re going to be going into an inflationary environment here before not too long.

Adam Hooper (15:46):
And the other benefit of real estate, it generates yield. Right now, we’re doing a lot of work on the ReAllocate platform with financial advisors and their clients. And a lot of these portfolio models that these advisors have built over the last 10, 15 years, either they’re not delivering the returns that they planned on. And so where do you find the yield to support these retirement goals and these wealth creation goals? And so we think real estate is a really great fit for a place to get yield in this current environment right now, and again with wealth, we talk about that tax benefits. There’s, I’m sure, a lot of stuff that you’ve already talked about on the podcast as to why we love real estate.

Adam Hooper (16:18):
So generally I would say real estate is an attractive asset class for most investors right now. Breaking that down a little bit more between the asset classes, there’s a little bit of a question mark, retail took a lot of heat in the news from headline risks of retail is dead and malls are going to be shutting down everywhere, power centers, they’re going out of business. I think there’s some truth to that in terms of some of the types of retail, one that we’ve been paying attention to, though, is your smaller neighborhood well-located service retail, so think of your smaller strip centers, maybe it’s got a couple of restaurants, your dry cleaner, or it’s got a nail salon, or it’s got some medical use right now, we’re seeing a lot of medical uses doctors going to go into these traditional retail spaces.

Adam Hooper (16:54):
So we think that’s an interesting segment of the retail market that’s maybe not immune to the pandemic and the crisis that we’re going through, but has certainly held up better than some of the other retail asset classes, industrial, it’s been great. I think it’ll continue to be great as certainly as we look at e-commerce and, and the need for distribution centers and warehouse space to solve that last mile problem and then multifamily, that’s held up exceptionally well. I think there’s a lot of interest in multifamily from investors right now as well.

Robert Leonard (17:20):
You talked about volatility in the stock market driving investors to real estate. What about the interest rate environment? How are you seeing interest rates impact the real estate markets as a whole and investor sentiment?

Adam Hooper (17:32):
We’re still in a historically exceptionally low-interest-rate environment. We were seeing some financing on properties that was just, you had to scratch your head. And the debt is still really cheap right now. At some point, I mean, we’ve been saying it for the last five, six years, that it’s going to go up. It hasn’t really yet, so I’m not going to try to predict the future, but I think there’s certainly some sensitivity to interest rate risk. A lot of the deals that we’re seeing right now, the managers are underwriting some cap rate expansion, so they’re assuming that they’re going to sell the property in five, six, seven years at a higher cap rate than what they’re buying it today. And remember cap rates are inverse of value, so the higher the cap rate, the lower the value of the asset. So they’re starting to build in some expansion of these cap rates in terms of their underwriting and maybe trying to anticipate a little bit of that interest rate rise.

Adam Hooper (18:21):
By and large, though, we haven’t really seen that play out. Like I said, we’ve been saying it for a number of years, industries can’t remain this low forever, and then they would go down and they would maybe come back up 50 basis points or 25 basis points. But I think it’s definitely a concern. I think prudent managers and prudent investors should try to build in some assumptions that there’s going to be higher interest rates when they exit their property three to five years from now. What will those rates look like? Not really sure, but again, that’s one of the benefits of the fungibility of these rents, certainly within multifamily spaces where we spend a lot of our time, is to be able to absorb some of those different external pressures through being able to reprice your rents on a more frequent basis to hedge against some of those inflationary measures that we think are probably going to be coming before not too long.

Robert Leonard (19:07):
There’s a saying or an analogy in business that when there’s a major trend or maybe a frenzy, that you can either participate in the trend itself, such as during the gold rush, you could be a gold miner, or you could provide those people a product or service such as axes or gold mines. How do you think about this dynamic with RealCrowd versus actually investing in the real estate itself?

Adam Hooper (19:31):
They’re very different businesses. And that’s something that we very early on set out and identified our ability to connect an investor to a manager. As a technology company, as a marketplace, it’s a very different business than owning and managing the real estate ourselves. So the professional real estate managers that are on one side of our marketplace, that’s all they do. That’s what they do all day every day. They’re out finding opportunities, they’re outsourcing that, they’re sourcing the equity, they’re doing the construction. If it’s a development project, they’re doing the architectural work, they’re doing the day-to-day tenant management, they’re doing the leasing. They’re going to figure out when the optimal time to sell is. It’s a very different discipline than building a technology company, building a marketplace, building an access point for those investments to be made.

Adam Hooper (20:13):
So, we’ve always looked at it as our place in this industry is really as creating that access point, and helping people understand from an educational perspective and some of the risk work that we’re doing on the ReAllocate side, understand how to make sense of some of these investments now that they have the access to it, because owning and managing real estate is a completely different business than what we are in. And we’ve even seen the flip side of that. We’ve seen a number of real estate companies that we’ve worked within the past think, “Oh, wow, this is super easy. We’ll just go build our own website and we’ll create a crowdfunding portal.” And they’ll spend hundreds of thousands or millions of dollars in trying to spin up an online investment portal and just fail miserably because that’s a very different business than what they’re used to doing, which is owning and managing real estate.

Adam Hooper (20:53):
So I think the ability for what we’re providing in terms of this access to these real estate investments gives people that exposure to this asset class and gives them the ability to partner directly with those underlying real estate managers and own those assets, whereas we see ourselves as the platform that can help make that happen. We haven’t ever had desires to own our own real estate, to build our own portfolio real estate that we own as a principle, it’s just a very different business and a completely different operating model than what we were looking to get into when we started the company.

Robert Leonard (21:20):
When an investor goes to a platform like RealCrowd, and they’re looking to make an investment, why shouldn’t they pick the investment that just has the highest IRR, or the highest cash-on-cash, or whatever the return metric they’re looking at? Why shouldn’t they just pick the one that has the highest expected return?

Adam Hooper (21:37):
Because, generally, picking investments solely on a target return is not the best investment philosophy. Most can agree with that. We started eight years ago. It was either the first or second ebook that we wrote that was called Start With Risk. And that’s just something that’s been core to our philosophy of how the asset class we think should be viewed. With any investment, there are risks, certainly, when you’re looking at private real estate, there are risks involved in that as well. And that’s something, again, as we talk a little bit more about, we’ve been doing on the ReAllocate side with our registered investment advisor hat on, really narrowing in on those risks.

Adam Hooper (22:09):
And I think it’s also important to understand that those metrics, and the main three that we see, are going to be a target IRR, a target cash-on-cash return, and a target equity multiple. They’re just that, targets. So those are assumptions on the financial model, based on the information that the sponsor knows and the conditions of the market and the rental role, and they’re a projection of what you might earn in that asset. And I think there’s maybe an overreliance on those as gospel when investors look at those, whether it’s on our platform or on others. So really understanding those are a target, it’s not a guarantee, certainly, good managers will hopefully have a little higher tolerance around their ability to deliver what those targets are, but we think there’s a lot more that should go into investment decision from the lens of risk than just looking at those targets when you look at investment.

Robert Leonard (22:54):
When I look at some of these offerings, I see the minimum investment is between 25,000, 30,000, and 50,000. Talk to us about how the JOBS Act makes these crowdfunding investments more accessible to everyday people. Do you think it’s really accessible to everyday people with minimum investments of, say, $25,000? Do you see enough people being able to access it with such a high minimum?

Adam Hooper (23:19):
Yes. There are a couple of facets of that. There are a couple of different regulatory structures under which platforms like ours and the managers that are raising capital can operate. So, on our platform, you have to be an accredited investor, first of all. So you have to have a minimum net worth and a minimum income threshold. Once you hit that, then you can access these private placement offerings. Historically, minimum investments were 250,000, half a million, to get into these deals. So relative to what they used to be, yes, investments down to $10,000. I think we even had one a while ago that was down to 5,000. That is far more accessible than what it was before, but there still is that accreditation barrier on our platform.

Adam Hooper (23:55):
There are some other avenues and some other platforms out there that operate under a different regulatory environment, where non-accredited investors can participate as well. And I think those are down even to maybe a couple of hundred dollars to get access to those. So, as part of that same regulatory shift with the JOBS Act, there were a couple of different avenues, I guess you can say, how these investments can be offered and who’s eligible to participate in them. It is something that we would love to have more opportunities for non-accredited investors on our platform, but the nature of the managers that we work with, not everybody’s willing to go through that work basically to open those up to these different regulatory complexities, because it is, it’s quite complex.

Adam Hooper (24:30):
So if you’re going to do…it’s called Regulation A or A+ offering for nonaccredited investors, it’s probably a $300,000 to $500,000 legal lift to get those documents approved through legal and through the SEC. It’s maybe a six to nine-month period to get that through the SEC. And then once you have that, you can then go sell it to non-accredited investors all around the country.

Adam Hooper (24:51):
So there’s a pretty high bar of people that are willing to go do that work to get those kinds of offerings out there in the market. A lot of the managers that we work with, though, they’re used to doing in a more traditional sense. And so for us to be able to get those minimum investments down to 10% of what they used to be, that’s a pretty big shift of how that used to work. But I do agree, there is certainly more that can be done. We’re keeping an eye on regulations. We’re very much trying to work towards where we can have an offering for non-accredited investors on our platform as well at some point in the future.

Robert Leonard (25:22):
On the surface, it seems like it might still have a bit of a barrier with such a high minimum, but when you look at it relative to what it used to be, it makes complete sense how it’s a lot more accessible today than it was prior to the JOBS Act.

Robert Leonard (25:35):
I want to dive through some of the most common key terms, I think, that you need to know, that investors who are listening to the show might not know yet that you should understand before making any investments like this. And there are a handful of them, five or six of them, that I want to run through. What is a real estate sponsor?

Adam Hooper (25:54):
A real estate sponsor, they’re the one that’s running the investment. So they’re the ones that are out there, they’re finding the deals, they’re putting together all the investment documentation, they’re the ones that are actually running the investment. So they’re the operating company that’s going to be in charge of that investment.

Adam Hooper (26:10):
Typically, when we talk about a real estate sponsor, investors are going to be investing in a passive manner. So there’s not going to be any expectation for these investors coming through a platform like ours to be involved in any active management. So they’re pretty passive investors.

Adam Hooper (26:22):
And the manager-sponsor and those terms are interchangeably manager or sponsor, again, they’re the one actually executing the business and the strategy. So if it’s development, they’re the ones that are going to be hiring the general contractor, because they’re going to be overseeing the development of it. If it’s in an apartment building, they’re going to be doing the leasing, they’re going to hire a property manager to do the onsite work. They’re the ones that are going to be making the decisions at the day-to-day level for the property, and then again, ultimately, determining when is the optimal time to sell, that’s what you’re partnering with that sponsor to run the investment.

Adam Hooper (26:51):
And we think one of the most important parts of investing in these private deals is really making sure that you have trust that you’re working with a manager that you’re comfortable with is going to make those decisions in the best interest of the investment and of your money that you’re investing with them.

Robert Leonard (27:05):
What is an IRR? I hear this thrown around a lot as a return metric, and I think a lot of new investors might be not completely sure as to what this is, whether they’re doing a crowdfunding investment, whether they’re making their own investment, whether they’re analyzing a deal, whatever the case is, IRRs show up a lot in real estate analysis. So walk us through exactly what IRR is.

Adam Hooper (27:29):
An IRR, it’s effectively the annual return of your money over the lifetime of an investment. And it takes into consideration the return on your money and a return of your money. So, it’s a very complex calculation. Again, if anybody’s using Excel out there, you can use IRR, you can use XIR, but basically what you can take away from that is it’s the annual rate of return, and it’s internal because it’s not taking into consideration any external factors. It’s not taking into consideration an external reinvestment rate. It’s not taking into consideration anything outside of the investment, purely looking at the timing of cash flows from that investment.

Adam Hooper (27:58):
So you invest your 100,000 in day one you’re going to get…or 25,000 or 10,000 in day one, you’re going to get at some a cash return, hopefully throughout the period of that investment. And then when the asset sells, you’re going to get hopefully your money back and plus some appreciation. And so the IRR is effectively your compound rate of return over that entire period on your money and including the timing of [the] return of your money at the end.

Robert Leonard (28:19):
What is an equity multiple?

Adam Hooper (28:22):
Equity multiple’s a little bit easier to understand. It’s really a measure of wealth creation, that’s how we look at it. And equity multiples, simply what is the total amount of money that you get back divided by the total amount of money that you put in over the like of that investment? So, again, using round numbers, you invest $100,000, over a five-year period, you’re going to get that, maybe $50,000 of cash flow return from that asset, and then you’re going to get $150,000 at the end when the asset sells. You get your money back plus the return. In total, you’ve received $200,000 of return back from that investment divided by the 100,000 you invested at the initial period, and you have a 2.0 equity multiple. So it’s really more of a total return metric that we look at, and it’s just easy to conceptualize. If I put in X, I’m targeted to get back some multiple of that, and that’s, again, a benchmark that you can look at to look at more of wealth creation.

Adam Hooper (29:08):
And I think it’s interesting to note also the IRR and the equity multiple could be opposed at times, because IRR is so focused on the timing of those cash flows, rather than just the gross amount of those cash flows. If you have a really high IRR on a really short-term deal, you might not have such a high equity multiple. And conversely, if you have a 10-year hold that’s generating a lot of cash flow, you’re going to have a really high equity multiple, but your annual IRR might be a little bit lower. So I think it’s important to note just the interplay between those two numbers somewhat working in opposition, but both, again, standard financial metrics that you going to see on most investment opportunities, again, as a target for what the sponsor is projecting within that investment.

Robert Leonard (29:47):
And there’s one more return metric I want to look at, and that is preferred return. What exactly is it? How is it different than IRR and equity multiple?

Adam Hooper (29:55):
Yeah. Preferred return is more of a structure metric. So it’s not necessarily a return metric. When you look at the structure of investment, it basically governs the partnership structure, governs who gets paid what, when. A preferred return, again, one of the challenges of our industry is every document set is going to be a little bit different. So there are some nuances to how preferred returns function, but generally, if the amount of money that the investors are going to receive as a return on their money prior to the sponsor receiving any “promote” or “carry interest” in the investment.

Adam Hooper (30:24):
So, say you have a preferred return of 9%. What that means typically is that the investors are going to receive 9% of their cash flow, so say there’s a deal that’s going to gross 15% IRR. With a 9% preferred return, the investors are going to get up to a 9% return, they’re going to get all the money up to the 9% return, and then anything over 9%, the sponsor is typically going to get a “promote,” or in the venture world it’s called a “carry interest.” They’re going to get a promotion beyond that. So they’re going to get an outsized portion of returns beyond that preferred return rate, generally where from 20% to 30%, depending on how the waterfall structure.

Adam Hooper (30:58):
So you can think of that as investors generally will get up that percentage of a return, usually, it’s an IRR target, and then anything beyond that, the sponsor’s going to participate in those returns beyond what they would’ve just, again, compared [inaudible 00:31:11]. Again, some jargon here. So that’s a way to benchmark the structure of an investment, but not necessarily a return projection. We’ll see those vary anywhere from 7% on the low end, most are going to be 8% to 10%. Anything in the double digits, depending on the strategy is a little bit outside of the norm. So generally we’ll see this in 7% to 9% range as a preferred return, then anything beyond that is where the sponsor’s going to participate in those returns at a higher level than they would before that.

Robert Leonard (31:37):
One of the most common questions I get from people who are interested in investing in other real estate deals, whether it’s through crowdfund or through their own deal source is how do distributions work?

Adam Hooper (31:50):
We’ll talk in generalities because every investment is unique. These are all things that you’ll find in the PPM. And without question, 100%, we recommend you read the PPM. That’s the document that has all the risk factors, that’s a document that it explains exactly how this preferred return is going to work, it will explain how distributions are going to be handled when they’re going to be made. And again, that’s a document that covers who’s making what decisions and who gets paid what, when.

Adam Hooper (32:14):
So distributions, most investments, if they’re cash flowing, they’re going to make a quarterly distribution of those cash flows, getting super-simplified, at the asset level, tenants pay rent, there are expenses at the property of operating it, there’s a mortgage that’s usually owed if they any debt against the property. And then whatever’s leftover is generally going to be distributed out for cash flow to the investors based on your percentage ownership and the investment.

Adam Hooper (32:39):
Again, most of the time we see those coming as quarterly distributions, some of the managers we work with, they’ll distribute it monthly, maybe over the 300 plus or minus deals that we’ve done we’ve seen one that does annual distributions, a couple that maybe do annual distributions, but generally you’re going to get a cash return quarterly, assuming that there’s enough cash flow to distribute to the project, depending on the strategy and the investment.

Robert Leonard (33:01):
The last term I want to talk about is real estate fracking. What exactly is that?

Adam Hooper (33:08):
That was a concept friend Steve Weikal at MIT, and maybe we can throw a link to one of our podcasts and the show notes that we talked about that. It was the concept, again, I think we’ve seen, he was about this long before the pandemic, we’ve seen accelerate during the pandemic, and it’s effectively, how are you using this space? What is the most optimal use for this space? So coworking, WeWork, taking what used to be a 10,000 square foot office and breaking that down into desks, looking at some Airbnb, taking a home and breaking that down into a couch that you can rent or a room that you can rent, looking at parking and some of the Ubers of the world and ride-sharing services and rental car companies that now you can rent by the hour.

Adam Hooper (33:55):
It’s the idea of taking a historic use of an asset and then breaking that down into a much more fragmented piece. And again, it’s something WeWork has been a fascinating story to watch over the last couple of years, we’ll see how that plays out. But I think what they covered is, again, this change in how we use our space and getting more granular in terms of the units in which you can use that space and how you can monetize that from the landlord or from the operator’s perspective. So it’s an interesting concept of, again, this change that was already underfoot before the pandemic and the crisis, but I think we definitely saw an accelerant more of that.

Adam Hooper (34:31):
And I think we’ll see more of that going forward, certainly when we talk about office space usage, the conversation we had before of how do you plan to use your space? I think we’ll see more of that hoteling, we’ll see more of a coworking space being the norm. We’ll see more work with more of a collaborative environment for the office use versus the typical cubes in a corner office that we would see before being more granular in how we use the space and being hopefully more efficient in what we can do with the space, that’s what the concept behind the real estate fracking concept that the Steve Weikal was sharing with us.

Robert Leonard (35:04):
Break down each of the risk factors you consider when you’re looking at risk, and then tell us which ones you are focusing on.

Adam Hooper (35:11):
Yeah. So this is a lot of the work that we’ve been doing on the ReAllocate side. So a handful of years ago, we saw that there was a need to help people understand risk more than what the information that we were doing before. We’ve got our e-books, we’ve got our podcast, we do a lot of educational content on the marketplace side, but there was still a need to help people understand risk through a different lens. And so we started down a path of trying to figure out how can we actually quantify the risk in real estate investments? And I always thought it was funny that in our industry, we talked about a risk-adjusted return, but there’s no way to measure the amount of risk that you’re taking to have a conversation about risk-adjusted return.

Adam Hooper (35:44):
We set out to see if we could quantify the risk of these different real estate investments, understand where on the X access of risk you are, and then you can determine if this is a reasonable return or not for that project. And in doing so, again it’s a lot of time canvassing all these different areas of risk. And we’ve narrowed it down to five main areas of risk that we focus on again for building out this quantitative model, thus far being the market, the manager, the physical asset itself, how the investment’s capitalized, and the partnership structure. And we talk a little bit about some of those different components and we can dig into each of those individually.

Adam Hooper (36:15):
But really our focus is how quantitatively distill these risks down into something that we can understand and communicate to investors and their financial advisors, and then use that classification of risk to build a portfolio strategy around it? And so there’s a couple of different components there, but ultimately at the end of the day, our goal with ReAllocate and our registration is an investment advisor ourselves is to help people make a better risk-informed decision and build a portfolio of appropriate risk, getting back to what we were talking about earlier, focusing on building that portfolio risk, rather than just focusing on the rate of return component, which we think, again, it’s a more foundationally sound way of looking at these investments, rather than just focusing on our target return metric.

Robert Leonard (36:54):
As we get towards the end of the show, we have a segment called the action plan, where we find out three things for everybody listening to the show to go ahead and implement in their life and actually take action on from this episode. So the first thing is what is a habit or principle that you do in your life that has had a big impact on your success, whether it be in the real estate world that you did before, whether it be as an entrepreneur, whatever it is, what is a habit of principle that you have in your life that not enough people to do but should?

Adam Hooper (37:27):
I think we can get that back to what we were talking about before with goal setting and OKRs, and having the discipline to stick with that process. It can be challenging, no doubt. It can take a lot of time and can feel like it’s not actually doing the work. I think that’s something that I’ve struggled with, is the planning side of things isn’t necessarily as exciting as the doing side of things. But I continue to come back to the realization that the planning is the work. As a leader of a company, that is my job, is to set the strategy and to set the goals that we need to try to achieve. So that’s definitely something I would say is a huge aspect of how we run our company, I highly would recommend doing some research on OKRs and looking at that as a framework.

Adam Hooper (38:04):
And beyond that, not being afraid to make hard decisions. Every day, you’re faced with hard decisions. And it’s very easy to kick the can and not address those head on. But when you’re running a startup, you often don’t have the luxury of kicking the can. You have to address those hard decisions. Quick decisive of action to me is far more effective than a long-drawn-out maybe. So I think combining that framework to set the bounds of what those decisions can be looked at through, and then not being afraid to take action when necessary. I think those are two pretty effective keys of how we’ve run our business, and I think that have helped us get to the success that we’ve had.

Robert Leonard (38:41):
What has been the most influential book in your life?

Adam Hooper (38:45):
That’s a really good one. From a business perspective, I would say is probably the E-Myth by Gerber, which again, gets back into what we’re just talking about, the difference of working on your business versus working in your business. I think that was a very influential book early on for me. Outside of that, I’m a big golfer, and so Golf Is Not a Game of Perfect by Bob Rotella. Can’t recommend that book enough to anybody that’s interested in any kind of sports psychology side of things, which again, you can also use in business. Great book.

Robert Leonard (39:13):
When this episode is over, what is one action anybody listening to the show can take to help improve their life, career, or business?

Adam Hooper (39:21):
I think as it relates to looking at what we’ve been talking about, real estate investing, really defining around some of those risks that we’ve discussed, getting an action plan of what you’re looking for, and being really clear with where your risk tolerance is and being able to identify those as you go forward, using that as a framework to ask the questions, that’s the other side of it too, is don’t be afraid to ask questions. If there’s something that you’re not comfortable with, if there’s something that you’re not necessarily understanding, don’t be afraid to ask that question, because it’s important. And I think a lot of people get intimidated by asking questions, certainly, in our space that we see when they’re working with a real estate manager that’s buying a $25 million building, a lot of people get intimidated to ask them what they might feel is a simple question, but ask the question, be curious and never stop trying to continue learning and expanding your toolset that you have to make these decisions with.

Robert Leonard (40:12):
Speaking of asking questions, I always wrap up the show by turning the tables and letting the guest ask me a question. So, Adam, what question do you have for me?

Adam Hooper (40:24):
I’m just curious. You get to talk to a lot of real estate folks. What are you seeing in terms of where the industry is going? What are you getting from your listenership in terms of their interest in the asset class? We’re always interested in investor sentiment as well. So I’m curious from your seat, what are you seeing out there? What are you hearing on the streets from how investors are looking at the asset class now?

Robert Leonard (40:45):
From my audience and the people that I talk to, whether it’s from people who listen to the podcast or follow on social media or anything like that, so basically anybody that’s in my community or ecosystem typically is interested in how to get their very first couple deals, whether it’s their first deal, their first few deals. And so typically those people are interested in those either single-family or small multifamily type properties, not so much office or large multifamily or apartment buildings or anything like that. I do have some people who are interested in crowdfunding. I do get some people that reach out and are interested in that. But for the most part, I think most people are interested in house hacking and really getting their first rentals.

Robert Leonard (41:25):
And in terms of sentiment, I do have quite a few people who reach out and ask whether now is the right time to invest, how they should consider market conditions, timing, whether I’m investing, things like that. And so that is a common question that I get. It doesn’t seem to be uniform across everybody. I think some people are willing to invest right now, some people are waiting, some people see other opportunities as better. So they like real estate, but they think Bitcoin might be better or they think NFTs might be better or something else out there has caught their interest. And so, while they’re interested in real estate and it’s on the back burner for them, they’re going to look at other things for now. It’s honestly really spread out in my community and ecosystem.

Adam Hooper (42:07):
Crypto has certainly captured a lot of attention and captivated a lot of folks right now. To me, though, again, I think, again, a lot of what we’ve been working on, getting more into the financial advisor space with ReAllocate and acting as a subadvisor to other financial advisors, you’re changing our perspective of looking at a portfolio in its totality. How does real estate fit into an overall investment strategy? How does crypto or NFTs, how does that fit into an overall investment strategy? Looking at things from a more holistic perspective, I think is something that we’ve really been focused on lately. And again, I think there’s room in portfolios for all these different asset classes.

Adam Hooper (42:43):
And I think that’s what’s so great about what we’ve been doing. A lot of other really interesting platforms out there and other verticals are getting back to that beginning message of access, to be able to have access to all these different investment strategies, I think is just a really, really good time right now, as an investor. And we see a lot of innovation out there and a lot of new ways to access things that you couldn’t before, and I think as an investor, the more options you have, the better you’ll be at the end of the day.

Robert Leonard (43:06):
Yeah. I completely agree. And that’s one message that I try to share is real estate’s great and so is the stock market and so is crypto. I don’t think you have to be necessarily all in on any of them. I think there’s room in pretty much everybody’s portfolio for a little bit of all of it. So, I completely agree.

Robert Leonard (43:21):
Adam, I’ve appreciated your time, enjoyed the conversation. For anyone in the audience that’s looking to learn more about RealCrowd or connect with you, where is the best place for them to go?

Adam Hooper (43:32):
Easiest place is just go to realcrowd.com. You can follow us on all of our social media channels at the RealCrowd. If you want to listen to our podcast, whatever your favorite listening service is, it’s the Real Estate Investing For Your Future podcast. Then also, if you want to dig in on any of the specifics of some of the educational pieces we talked about, you can head to realcrowduniversity.com, and that’s a smattering of all the best content that we’ve done through our podcast and e-books and just a really good educational course over six weeks. It’s going to get you up to speed on the fundamentals of investing in real estate.

Robert Leonard (44:03):
I’ll be sure to put a link to all your resources. And also, we talked about that Measure What Matters book. I’ll put that in the show notes below as well for anybody that’s interested in checking any of that out.

Robert Leonard (44:13):
Adam, thanks so much for joining me.

Adam Hooper (44:15):
Thank you, Robert. Thanks for having me on.

Robert Leonard (44:17):
All right, guys. That’s all I had for this week’s episode of Real Estate Investing. I’ll see you again next week.

Outro (44:23):
Thank you for listening to TIP. Make sure to subscribe to We Study Billionaires by The Investor’s Podcast Network. Every Wednesday, we teach you about Bitcoin, and every Saturday we study billionaires and the financial markets. To access our show notes, transcripts, or courses, go to theinvestorspodcast.com. This show is for entertainment purposes only. Before making any decision, consult a professional. This show is copyrighted by The Investor’s Podcast Network. Written permission must be granted before syndication or rebroadcasting.