Podcast – Episode 101 – Investing in Real Estate Funds with Doug Smith
Allen: All right, Passive Traders. Welcome to another edition of the Option Genius Podcast, we got a real treat for you today. I have one of my long, long time friends with me today and we’re actually doing something special, we’re going to do a video as well as audio on the Podcast, we will be having some slides, but when we show the slides will describe to you what’s going on in the slide so those of you who are listening will not be missing out. And the video will also be on our media channels and YouTube channel. So you can catch it there if you need. I want to introduce my guest today He is Mr. Doug Smith of Hawthorne Funds. Doug and I go back, man, we go back, like over what over a decade or so. But yeah.
Doug: 15 years.
Allen: So Doug is Mr. Moneybags himself, Mr. Real Estate, you know, he’s been doing real estate for years and years, he launched a very successful company called MyHouseDeals.com where if you are a real estate investor, you can go and find all the deals that are not on the MLS. So it’s pretty cool. And that site has made a lot of people a lot of money. But today, we’re gonna be talking about Doug’s newest venture, this is something that he’s been doing for a few years now. And you know, whenever you get together with friends, you talk and “Hey, what’s up?” “What are you doing?” And we would share stories of what we were doing and, and Doug A few years ago, came up to me, and he’s like, yeah, you know, I’m doing all this stuff with land and doing this and doing that. And I was like, Wow, man, you’re making a killing. And he made such a big killing that he just like, he just has to get out. And he’s like, Alright, we need to do this on a bigger scale. And so Doug went and figured out how to do a investment fund. And so that’s what we’re going to be talking about today. I know back in Episode 94, it’s called “How I Invest”. I shared that one of my investments is in a real estate fund. And that is Doug’s fund. And so I asked Doug, to come on and answer some questions and give us some highlights about what investment funds are, how they work, what to look for, when you’re choosing one, making sure that your investment is safe, and all that stuff. So Doug, hopefully, I covered everything. If you anything you want to add, please go ahead.
Doug: More or less, you covered all the stuff that makes me look good. So we’ll just skip all the other stuff.
Allen: Yeah, I didn’t want to tell all your dirty secrets.
Doug: It’s good to see you again, Allen. And thank you so much for having me here on the call. I’m really looking forward to sharing everything I can to educate people help you out.
Allen: Yeah, I appreciate it. Appreciate it. Thank you for having us. So tell us what are you doing at Hawthorne?
Doug: Oh, my gosh, well, I work all the time, which was so funny, because when you and I met, I was like a lifestyle guy. But yeah, for those considering starting up a private equity firm, just know that it will consume you. We buy and sell land outside of Houston, Texas. And so we’re buying about a million dollars a month worth of land, sometimes more. And we’re selling maybe $2 million a month worth of land, it really just depends on the month. But that requires a lot of people and a lot of emails, a lot of phone calls, a lot of Excel spreadsheets, there’s just a lot going on, there’s 20 or 30 of us that make all of this happen. So there’s always something kind of vying for my attention as it pertains to mining selling land and raising people’s money and investing that money properly.
Allen: Yep. And so one of the things I do want to point out that Doug, you are doing this for yourself before you started the fund?
Doug: Yes, that’s right. So not only that, I have my house deals calm going on, I was buying and selling houses, I was selling those on owner financing. And then my business partner and I switched over to land in 2016 started buying that and selling on owner financing. And it was just, it was very profitable, requiring a lot of my capital. And sometimes that capital would take a year and a half or two years to come back. And I was wanting to do more deals as opposed to just sit on sidelines, right and wait for money to come back. So that’s when I started the fund around 2018 or so started taking other people’s money on as well.
Allen: Okay, so you had one iteration, and then now you’re in the second iteration, right? Or the second fund?
Doug: Yes, there’s the first time that was an equity fund. And then we formed a debt fund, I guess a few weeks ago at this point, maybe a month or two ago and took on 5 or $6 million into that second fund. We’ve taken out about the same amount into the first one, but there’s, they’re structured differently, but they The end result is pretty similar for the investors and for us.
Allen: So can you give us a difference between debt versus private equity?
Doug: Yeah, sure so that’s one thing you said we’re gonna talk about on the call is like, what would you want to look for if you’re looking at investing in a private equity fund, and the majority of those funds out there are equity funds, and so that means that they’re probably buying one or more assets like multi multifamily apartment complex. For example, and they are going to leverage up with maybe 75 or 80% bank money. So that’s debt. And then you as an investor, you’re a limited partner in these deals. So you’re now you’re the equity portion, the 25% equity, and whatever it appreciates, you know, force appreciation or just natural appreciation over time, you benefit from that. But that can be a little bit risky. If there’s a downturn in the market, or the property’s not managed properly, because equity holders can get wiped out, or at least have a lot of their money, kind of like, you know, wiped away. So a debt fund is when you invest in a fund, and that fund becomes the lender against something. So they are now in the bank’s position in that first example. So let’s say you, Allen, or your friend is wanting to buy a house for $100,000. And you lend him $50,000. Well, he totally mismanaged the project, and you have to foreclose on him, he’s not paying you, well, you’re gonna become the owner, you’re foreclosing become the owner of that house and be able to resell it on the open market, and, and almost certainly recuperate your $50,000, because the house would sell is worth more than that. So that’s kind of like a simple way to explain the difference between an equity and a debt fund.
Allen: Okay, so now on the first one, the equity fund, you said that they go out and they borrow 75% of it. And they in the investment funds are 25%?
Doug: I think there’s a fairly typical kind of split, right, equity funds. There are some equity funds that don’t take on debt, but the majority do, and that’s why they’re able to pay out at, well, sometimes the ends up being maybe 15%, internal rate of return over time. But there’s, you know, there’s some risks, there’s some negatives, those are projections, you never quite know how it’s going to shake out. Yeah. And your money would be locked up for usually about three, five or seven years, depending on the fund.
Okay. And what if you wanted to get out sooner than that? What would you Is there any recourse?
For most funds, you can’t.
Allen: No, just you can’t give it to somebody else, or they won’t help you facilitate it change or..
Doug: It might help you, but they’re not obligated to do so. The latest fund that we set up, there was finalized one or two months ago, you can get it out. It’s an evergreen fund, it is a lot more liquid. So that’s one of the advantages of it.
Allen: Okay, so now you said yours is a debt fund, right, then and so you are using the funds money to go out and buy the land?
Doug: Yeah, so let’s say like, let’s say we’re about to buy some land, and it’s gonna cost a million dollars, we’re able to borrow from the fund and the fund be a lender on that deal. So my entity that I own – Hawthorne land LLC will borrow. And it’s all at the courthouse. It’s documented from Hawthorne Income Fund, LLC, which is where all the investors are as members.
Allen: Okay, so, okay, so basically, you created your own bank?
Doug: Yeah. Here’s the deal. Most banks, they do not like to lend on anything that is slightly outside of this cookie cutter box. And what we’re doing buying raw land outside of the city, subdividing it and proving it and selling on honor on owner financing there, they’ve never heard of that most of them. And they’re like, we don’t know which box to check here on this form. So maybe you can go talk to this or that banker, but we did find bankers, and we saw bankers that will mind on it, but they’re a huge pain to deal with. They take weeks to process alone. And there’s all these requirements. It’s just very, very bureaucratic, so much red tape. So yes, we created our own bank.
Allen: Okay so basically, you borrow the money from the fund, and then the fund gets a set percentage.
Doug: Yes, it doesn’t get any of the profits or anything. No, it’s just the lender. It’s very clean. So it’s kind of like, it’s kind of like a lot of people all they know is about investing in some sort of index fund. And then maybe they’ll put some of their money in bonds. And so this is like a lot of people that invest with us there. They’re familiar with other strategies, like they might invest in other private equity funds that are a little riskier and maybe they’re an equity fund, and they will treat us as if we’re like, the bonds. So we’re the lower stable like steady investment that they feel like if all the crap hits the fan that we’re standing
Allen: And so say you’re paying 10% and that’s paid out every month
Doug: It’s every month or people can check a box and have it automatically reinvested in compound.
Allen: Awesome, sweet. Okay, yeah, cuz I know the first time we had it, we had a, that wasn’t a possibility. So actually into our investors who wanted that. Yeah. So you’re actually growing and learning at the same time. So that’s awesome.
Allen: Awesome. So who is able to invest in your fund anybody or accredited or how’s that work?
Doug: Accredited investors, and the minimum is 100,000. So who knows? Maybe 95% or more of American population can invest unfortunately. But those who can enjoy it.
Allen: So now accredited, that means what 200, I think it’s 200.
Doug: If you’re an individual, you need to be making 200,000 a year or more if it’s a married couple 300 or you need to have a net worth of a million dollars, not counting the equity in your house that you’re living in,
Allen: Okay. And the minimum to put in is 100. And there’s like you said, there’s no tie up phase. So somebody come in, and then if they need it six months down the road, they’d be like, hey, I need to get out.
Doug: That’s correct. So we have provisions that if anybody’s trying to get their money back at the same time, there’s a slow process of giving it to everybody. But in general, people get their money back fairly quickly, if they need it. We’ve not even had our first requests yet, everybody, they’re putting their money with us, because they want it to be with us not because they want to pull it, pull it out. But it would take a few days to, who knows a week or two to get someone’s money back to them on a typical scenario.
Allen: Right. And I mean, this is real estate. So people understand that this is not liquid, you know, most times you go buy a house, it’s going to take you two months to sell it anyway. This is putting it in a fund that’s invested in real estate. So that when if they need to, it takes time. So..
Doug: Yes, but with a structure, it is pretty liquid.
Allen: Okay. Okay.
Doug: Like it could be the next day, we get their money back to them, but I cannot go.
Allen: So, I mean, I wanted to go over some of the reasons for our listeners, why, you know, why I invested in Doug in the first place. And, you know, this was one of the first investments that I actually made in a fund. And, you know, he came to me and said, hey, look, I’ve been doing this, and I’m starting a fund. And if you’d like to invest, you know, go ahead, these are the parameters, and this is how much we’re gonna pay out. And there’s risk involved. Of course, there’s risk involved all assets, and all investing and trading and whatnot.
Doug: My attorney made me say that.
Allen: Oh, yeah, there is. So you know, you don’t want to have somebody come in and be like, Oh, man, I’m gonna get rich. And then, you know, it doesn’t happen.
Doug: We do sell for about double what we buy for. So it’s just like, with the margins like that, it’s kind of hard to mess up.
Allen: So I came up with some criteria, I was like, Alright, so number one, you know, who is actually doing or leading this fund, righ? And in this case, it was Doug. And I’ve known Doug for 10 years, and those of you guys know him, you don’t know this, and you can’t tell because he, you know, he looks like a really nice guy and everything on the in the video. That guy is I mean, he’s a stickler, he, I mean, I only know this because I’ve known him for so long. But he tracks his net worth on a regular basis, he accounts for every single penny, in his business man, every single point 001% he knows what’s happening and where it’s going. And this guy is meticulous on his numbers. And he was not somebody that plays loose and fast, you know, he’s got every dotted eye, every T is crossed. And so that was really something that gave me a lot of confidence. Like, you know, this guy, he knows what he’s talking about. And he’s been doing it on his own for a while. And the numbers just make sense. And so, you know, a lot of times people get attracted to these investments, the only thing they know about is Oh, I can make 10%, I can make 50%, I can make 25% in maybe some cases where, you know, it’s, it’s, it’s more of a scam than anything else.
There was like a lot of people investing in this crypto stuff. You know, there are crypto funds that I’ve seen that are like, oh, we’ll pay you 30% a month, a month. Wow. And so you get money for a month or two, and then it folds and it goes out of business because it was a big Ponzi scheme. But in this case, you know, I knew Doug, and I trusted him. And that’s what one of the things that led me to it. The other thing was, you know, his experience was there. And then the second part was, does the investment makes sense, is like, What is he doing? Or what is the investment. And in this case, it was something I had never heard about, it was pretty unique, where he’s buying hundreds of acres of land, and then he’s subdividing them into smaller pieces. And then when you subdivide it, and you smell a smaller piece, you get to sell it for a lot more money. So I think some of the numbers were you were buying it for four or $5 a square foot, selling it for $10-$12 a square foot originally. And like you said, it’s pretty hard to go wrong with those kind of numbers. This was not like a apartment complex in some other country that we’re going to Airbnb it and hopefully people want to go there and stay there. And maybe maybe it’s run properly. This is something that he was already doing.
The third thing was, what is my risk? You know, I’m going to put my money into this thing. I want to own that land. As an investor, what’s my risk? And I was looking at, I think, well, this is raw land. It’s been there for hundreds of years, it’s not going to go anywhere. If it’s not going to burn down, it’s not going to go out of business. You know, he can’t take it and run away with it. The only thing that might happen is it doesn’t sell, you know, he’ll buy it, it doesn’t sell it’ll sit there and maybe 5-10 years from now we’ll sell it. To me that was like the only risk is like if the lead doesn’t fill. It’s just gonna sit there. No, I don’t get my return but leaves my money is still safe. And so all those aspects, I was like alright, let’s go. Let’s do it, you know, and so that’s why I feel comfortable. And those are the three aspects, I would look for investing in any other fund. Is there anything, Doug that you want to add? Like, you know, what are the things people should look for when there’s questions I should ask?
Doug: I can go into that a little bit. So one of the main problems with a lot of private equity funds that they have this projected internal rate of return. And the majority of funds do not meet their projection, really don’t say like 15 to 20%, or whatever, but you can, but here’s, here’s what you do. So that’ll be based on a certain amount of appreciation of whatever asset they’re holding, you like reduce that appreciation by just .5% per year or something, and that projection all goes to crap. And the reason that it’s so effective is that there is some debt ahead of you. And so you’re just dealing with that little thin equity margin. So you play with that a little bit and that’s a high percentage of your potential return that can be taken away from you. So that’s kind of like the main problem. But yes, I do invest in other funds. And you know, private equity funds can be a good way to invest your money, right? Probably just a mix of right, different things like that.
You could be doing Options Trading, like maybe you’ve got some like long term, like buying hopes, maybe you’ve got one or 2% of your money in crypto, whatever. But it can certainly be part of your strategy. So that’s like the main problem I see with certain private equity funds, the less common one is that they’re a scam. You’ll see that maybe more like if there’s like a crypto fund, okay, maybe like that could kind of like maybe be a scam. Oil and gas is kind of notorious for some guys that come and go with a little scam. They’re gonna go drill some wells here and there on the wells and of dry or maybe they run off with your money, but pretty notorious. But for the most part, people running private equity funds do not want to go to prison. Like they’re not super incentivized to run a scam. But I’m more than happy to tell you about a story where I was scammed recently in a private equity fund.
Allen: No way.
Doug: Yeah, I mean, if you want me to go into it.
Allen: Yeah, yeah let’s go. I’m sure people will be excited to hear about that. How the Mr. Smart Guy got scammed.
Doug: Yeah, that’s crazy. Well, looking back, I can see like, now I can see how the scam and where I went wrong. So like I said, I like to kind of diversify a little bit of my money away from these land deals, not because I’m worried about the land deals, but it is nice to dabble in other stuff. I think we’re a bunch of like business people, entrepreneurs on this call, right? So like, when somebody comes to us with something, it seems like “Oh, just plop 100 grand, or whatever it is, and your fund, and you’re gonna pay me. Sounds great”. So there was this guy, I was at this competition where veterans were pitching their business ideas, and we’re all investing in some of their businesses. And there was a guy in the audience, and he actually ran a private equity firm himself, which he was on his maybe 6th fund, and each fund was like only a year. So that’s kind of a shorter duration than his normal. So that was a little bit atypical from the beginning. And then his first fund got a return of 63% in a year. And so it’s like, of course, like, my eyes lit up. “Oh, my God. Wow, that’s awesome”. Like, well, what about your second one? Oh, that was 45%. What about these other ones? And and it was I talked to one of the person who had invested with him, and they were, like, fairly happy at the time. And so I went out and I..
Allen: What was he doing?
Doug: Yeah, that’s a good question. Well, I’ll tell you what he said he was doing. He said that he and his team are going out there and buying mineral rights from individuals and then aggregating those, and selling them to companies that were looking to buy larger chunks of minerals into like, they like direct mail and stuff. So that like, you know, old Sue, she’s like eight years old, and heritage minerals, she didn’t even know about it. And she gets a little direct mail piece from his company saying that they’ll buy her minerals, I’m sure at a discount. doing that for a lot of people aggregating them and then selling them in a package. So it kind of made sense, you know, aggregate and sell for a higher price. And so but here’s the deal, I’m not an oil and gas guy. And so I was not able to properly vet the investment. I was just sort of going off these other investors seeing kind of happy to seems legit. I went out to his office, and I met with him and his staff out there. He’s got like, all these people with firm handshakes and strong like backslaps, you know, like, and I’m just like, maybe a team of 15 or 20 people there are a lot of them were rice, MBA, Rice University MBA graduates, and it just seemed, it seemed kind of legit, you know, the, and here’s the deal. They’re all almost all veterans. It was a veteran owned and operated business. So like, wow, you go in there. And there’s like all these like, swords on the walls and stuff like, you know, and flags. And just like, this guy seemed like Miss Captain America. Like, I was like, you know, 15 years ago, I was running an internet business and this guy was out there like killing terrorists or something. It’s like, okay, I was like really looking up to this guy and a lot of other people were too and so over time, he took on maybe 60 million from people over the course of five years or something like that.
And ultimately, we found out through an email from him like two months ago that he had squandered almost all of our money and that he was basically using fun money to pay a staff which you cannot you cannot do that the fund money has this very designated purpose, which is to invest in whatever asset you’re investing in and had just basically raped and pillaged the the bank account for the fund. And it’s very hard for like 30 or $60 million, because I think ultimately the losses were 30 million. But for me, it was like, almost all of my money. The early like first two funds, they mostly got their money back. But beyond that it was it was scam time.
Allen: Oh, wow
Doug: And so yeah, so like he was holding this managing the funds. And we still don’t know if he ran off with some of them on his own. Or if he was just trying to pay his employees and save his company and make desperate business moves to sort of save things or salvage things. And the oil and gas has been going downhill. It’s been in a, I guess, a trough over the last year or two. Maybe it’s doing better lately? I think it is. But that really hit him. Just, I guess maybe when the pandemic was starting and maybe..
Allen: Yeah it was, you know, oil went in the toilet pretty much.
Doug: Yeah. So I kind of like, we’re like, he’ll go to prison, which I don’t know why in the heck, you’d want to do something that would lead him to prison. That’s crazy. Like any sane private equity fund manager, their main goal is not to go to prison. So then what do you? How do you not go to prison? You don’t do anything illegal? Yeah. Tell that to made off? Yeah, it’s crazy. So anyway, so but looking back, I’ve got some insights as to why I kind of got scammed there. I understand it more now.
Allen: Okay, tell us tell us.
Doug: Basically, if anybody’s really like his disguise themselves, it’s like a Veteran Business or Christian business or something like that. That’s usually a little bit of a red flag, because they’re trying to make themselves seem like a very reputable, or moral and principled, and all that, it’s like an overreach.
Allen: And they’re taking credibility from another organization kind of thing. You know, they’re tying themselves to something else.
Doug: Yeah. So that’s one. I mean, there’s many things that came together, when you go on his website, which are websites probably even not even there anymore. A lot of his team members, they had various positions, but their background on LinkedIn, and all ends up being sales. Like they were all in sales before, like the Geologists was in sales. So that was kind of a red flag. He had a huge overhead, like, he’s, obviously all these MBAs, I was like, maybe this is a red flag, but I wasn’t so sure. And here’s what I messed up doing too, is like, I know, his professor at Rice, or that was his professor. He is one of our fellow members. And I could have asked that guy because I asked him later and he said, “You didn’t know that was a scam? It was pretty obvious”. He came in here. And every time they were raising money for something, he was dropping $20-$30,000 at a time, everybody else was dropping, maybe 1000s. So I thought, well, he’s probably just dropping all the investors money. You see what I’m saying? I was like “Oh I got it”.
And he was, uh, yeah, he seems like he’s maybe trying to compensate for something, make himself look a little bit better than he is. And then I got to know another investor in the oil and gas business later. He’s like, “Oh, we’ve known that was a scam for the last 12 months”, just the types of returns he’s been paying out are not feasible in this industry. It doesn’t make any sense.
Allen: Oh wow.
Doug: And so basically, I mess up by not asking those two guys before I invested, I just asked that the the satisfied investor that I knew. And actually when I asked him right before I invested, he said he was less satisfied with the fund, and that he would not recommend it. But I went against his advice, because he could not give me a firm reason as to why I should not invest. It was more like a gut feel that he had. My own brother who ended up investing had a negative gut feel about it, too. So basically, in the future, if I get some of these red or yellow flags, I’m just gonna sit on the sidelines, and I’m gonna sit out of that deal. Another problem is like he was, I’m 40 now and he was my same age. And so like, I’m thinking, Okay, this is a guy, like, I’ve had, like, 20 years of business experience at and so but I’m not sitting across from another guy with that amount of experience, even though it’s just it kind of felt like it because he was in the military 13 or 15 years.
And so that’s life experience, for sure. But like, as far as like business, this guy was green. I’m throwing a bunch of money at this guy that’s green and so as everybody else so that’s a red flag especially in oil and gas. I think they need to be in the industry for like decades because that’s that can it’s very tricky, complicated industry and, and very volatile. And a lot of fortunes have been made and loss. I don’t want the guy that’s like new to the industry. Right? Yeah. So yeah. And also I messed up. I should not necessarily be investing in stuff that I don’t understand very well like oil and gas. Unless I’m willing to put the time into that. So the outrageous returns were red flag. Anybody saying we’re gonna get you 60 something or he didn’t guarantee that but right. I don’t know. It’s just like, that’s not super realistic. I mean, it can be done, I guess. But red flag.
Allen: Yeah, I mean, our traders they can get it but We don’t run a fun doing that, you know, they can do it on their own. They hear the trades, he learned how to do it and go for it and do it. And some markets, you do it in some markets, you don’t in some markets you lose. But when you have a fund, you obviously have all these expenses, like you said, you know, the staff and the work involved and all that information, all the lawyers that you paid, I remember you telling me, you know how much you paid to the lawyers to make all the documents and the accounting and the photos and all the auditing. And that’s done on a regular basis and all that stuff. Yeah. So it takes a lot of money to put this stuff together and actually run it.
Doug: Yeah, totally. Oh, here’s the company. Here’s a couple more things about him. Like, he didn’t let his investors mix and mingle. So I never really met any other investors besides that one guy like, there’s other guys that run funds, they’ll like even sometimes do lunches and dinners or like a group events for the investors because they have nothing to hide, let the investors check.
Allen: This, I mean, if you’re legit, if you’re legit, you want that, you know, you want the happy people to mix with the new people. So the new people are like, Oh, yeah, are you doing it? They’re like, Yeah, I do. It is great. You want that to happen if you’re legit.
Doug: Yes, totally. And we never got any documentation like showing which minerals we owned and what was sold. Like, I want to see like legitimate notarized documents, stuff that was filed somewhere like, so that’s the problem with some funds, too, is like they’re not obligated to show you all that stuff. Like, who regulates all this stuff? sec. sec. That’s not I was thinking that may see that maybe needs to be something that maybe at some point becomes regulated. I hate to like, I don’t I’m not like a fan of more regulation. That might be actually kind of handy. You know, like, it’s crazy like the if you want to be a scammer with a private equity fund, you can. It does not end well, though. So you’re not incentivized in that. That’s when I shocking to some people would want to do it. You go to freakin jail.
Allen: Yeah, Oh, I mean, you take the money and run to another country and live in it.
Doug: There’s like international police now. They’ll get you anywhere.
Allen: You can’t go to like some island that doesn’t have extradition or something?
Doug: You’ll be like the only white guy or whatever. Yeah.
Allen: Head on down to Cuba and you’ll be the king.
Doug: It baffles me that anybody would want to do what he did. But I again, I don’t think that’s the norm. I asked a couple of attorneys. I said, How often do you see this? And they said not very often?
Allen: No, because I mean, I know with your stuff ever since we’d invested with you. It’s like, we get regular emails, we get regular update, since like hey this, look, we bought this land and hey, we bought this property. And here’s the address. And here’s the photo. And and before we before we even invested, I mean, you took us on a tour, like, you know,
Doug: Yeah, we were actually on the land.
Allen: Yeah, we saw the land we saw where it was subdivided. We saw, you know, people that were there, you know, that purchased other plots already. And they were building stuff. So I mean, it was everything was on the up and up, and it’s still on the open up still, you know, if you want access, you call Doug up, and he’ll explain everything. And if you want to go see it, he’ll give you all the details and you go take a look and check the deeds are whatever you want to do.
Doug: Yeah we’ll send our statements or deeds, whatever. Also, some people if they are hesitant about investing in a fund, like for us, we’re willing to sell people the notes that we generate. So like, they can get about a 10% return if they just own the notes, but it’s a little bit more volatile. Because every now and then you might have a borrower that defaults, and you have to foreclose and then resell, so like investing the fun is just simpler. But if you’re one of those people that just like I don’t trust like somebody else having control over my money, there’s other ways to get the same return with what we’ve got going on. That’s why we changed our name from Hawthorne funds, the Hawthorne capital, because we sell notes, and you can lend against notes or you can invest in the fund, the fund is just the easiest. Awesome, cool, cool. How do people find out about you or talk to you about this? shoot me an email at Doug@HawthorneCapital.com
That’s D-O-U-G Doug@HawthorneCapital.com
Allen: Alright, I’ll put that in the show notes as well. And you know, one of the questions that I got after I did that episode 94 was like, you know, if you’re making so much money in the stock market in an options, why are you investing in real estate or something else. And right now, at least in this market in this economy that we’ve had, you know, the stock market is doing amazing, it’s doing great. I mean, this year, not so much. It’s kind of, you know, going up a little bit last year was really good. But still as Options Traders, were making a killing. And I see my investments in my accounts in there, you know, just increasing and getting bigger and bigger and bigger. We’re at the point now where I mean, it’s got to end sometime, you know, and it’s time for if you have a bunch of gains in your accounts, it’s time to be diversified, especially with you know what they’re saying with inflation coming down the road that’s gonna be coming pretty hard. Land is a good thing to invest in when you have inflation because you can automatically just raise the price. Things lost more when you have inflation so.
Doug: Well for us you know what the way that’s affected is land has gone up in value. Big time over the last year, which a lot of us didn’t see coming. We thought just you know, in a recession with our heading into a big recession, that would just decrease the value of a lot of stuff. We used to, we used to buy land for about four, or $5,000 per acre. And now we’re buying it for eight to $10,000 per acre. Wow, no, we sell it for a lot more to so we’re kind of in the flipping game we buy. And then a few months later, or sometimes it’s maybe a year, we sell the little pieces because we buy a bunch and we chop it up a little pieces. So we’ll sell those, but then we sell them on owner financing. So we collect on my income income stream over about 15 years. But we’ve seen that the market moving inland for sure.
Allen: So who’s buying these little pieces from you?
Doug: Blue collar individuals who live in the city and want to be able to go out to the country on the weekends and enjoy time with their family and their dogs. And maybe they want some get some animals out there and maybe have a little swimming pool or something like that. They want to be on the country and there was already such a demand for that pre-pandemic, but it just exploded here with the pandemic. But our model works like pre pandemic during pandemic post. It doesn’t really matter for us. It just, it changes some of the numbers a little bit like if we have to buy for more than we sell for more. Right, the demand is there. And we just we do a lot of advertising on Facebook to sell our ranchettes. And we also are on MLS and all these other places. But with Facebook ads, we’re able to we spend about $2 per lead, and we’re able to ramp that budget up or down and get as many ranchette buyers as we want.
So it’s just a matter of the sales team handling all those leads.
Doug: That was that was true before the pandemic, we didn’t need the pandemic to make our business work.
Allen: And what about the land, finding the land?
Doug: We look on the MLS, there’s a website called lands of Texas, there’s one of those for just about every state. So we look at a bunch of land, and we try to get a deal on when we can but usually maybe the best we can do is about a 10% discount. No, we’re looking for land that has access to roads on a couple of sides that we can chop it up into where each little ranchette it will have access to a road. So normally we’ll buy one or 200 acres at a time, for example. And these are all over different parts. It’s not like one all together, it’s the subdivision. And yeah, so then we’ll chop it up. And we need to give each of those little pieces access to road because it costs a lot of money to build roads. And that would make our deals a lot less profitable. If we had to do that.
Allen: Ah, I see. So you buy the properties that already have roads, and you add the utilities or?
Doug: Yes, we bring in we’ll put in a water well, that costs about $6,000, maybe seven, and they will put in fencing usually cost about 5000 put in a gate for maybe another 1000 culvert driveway. Every now and then a pond that we bring we bring in power can cost one or 2000 per ranchette. So like the typical like 10 acre ranchette, we will have bought for about $80,000. And we will put about 20,000 and improvements into it. So now we’re in it for 100. And they will sell it for maybe 180.
Allen: Hmm, okay.
Doug: And the fund lens as we do these things, it lands on the land, and then it lands on the note that we generate. So that’s kind of the margins we’re dealing with lately actually are probably selling for more than 180. Actually on that scenario.
Allen: And how long do you think this will last? This will run?
Doug: I don’t see how it would end.
Allen:There’s plenty of land out there?
Doug: Yeah, there’s plenty land, plenty of buyers. I’ve got a lot of investors investing with us. And once a..
Allen: So you’re not closed or you’re not you’re not full, you’re still taking investors..
Doug: Okay yeah, that’s good question. Fund to opens and closes as needed as so we took on about five or 6 million last month. And we close it because we have to deploy capital for new purchases, because as soon as we take it on, we have to start paying our investors. So we’re not going to take on like 10 million when we can only deploy five. So as we’re about to buy more land, so we’ll open it up, temporarily take all that money and then close it. And we’ll just accept a certain amount of money, whatever we need at that time, whether that’s 2 million, 5 million, whatever it is, then we’ll close it.
Allen: So you have basically like a waiting list.
Allen: Awesome. Cool. Cool. Cool. All right. Okay, I think we’ve covered everything I had all my questions. Is there anything else that you wanted to share anything else our listeners and our watchers need to know before they go out and invest funds? Because there’s a lot of funds on now that you know, with the crowdfunding and all that stuff? What do you think about that?
Doug: I think some of the inferior funds are going that route because if you’ve got a solid fund, you really pull a lot from your own network. And so you don’t have to go like I don’t have to go like list my fund on some sort of like fundrise or realty mogul or whatever. Because I get all my money just from my like word of mouth. Everyone just talks right. And that’s how most like well operated funds are because they will take a cut of whatever you raise and so you get sometimes like slightly newer operators or they don’t have. They don’t have a network, or maybe there’s not as good of word of mouth or something. So I’m not like a fan necessarily of investing in that kind of stuff. There is a cool website that came out called Vera Vest. It’s fairly new, and they research, they do this sort of a background check on certain private equity funds. And so you can kind of go and make sure that they’re, you can ever be fully sure, right, but make sure they’re probably not a scam. But those operators are paying very best a fee. I don’t know if it’s like a monthly fee or what, for them to be like gold verified, or whatever it is on that website. And then so if they are, they’re showing up high on that website, and they get a lot of new business from investors, or even a new investor capital.
I say it’s kind of like the BBB, you know, the Better Business Bureau where you have to pay them for drinking. To get the young people, people still believe in it. They’re like, Oh, well, I mean, not too much anymore. I don’t hear about it anymore. But people before were like, Oh, yeah, yeah, I’m gonna go check the BBB. I’m like, okay, but, you know, if we pay them, they’ll say good stuff about us.
That’s kind of on my other business My House Deals with, we had had 42,000 something paying subscribers at the time, and we had five complaints in the BBB, that’s five out of like, 42,000 something. And these are people that had never even raised the issue with us. First, they just went straight to BBB, because they wanted to refund or whatever. And the BBB gave us a D or F rating. And yeah, we went in there. And they basically said that we were like, poorly operating our company, I said, five, I’d like for you to say here’s our list, I printed out like this huge stack, here’s all of our customers, by people complained. And they said that basically, we need to pay them some more money. And then we would be like A-Rated. That’s like, this is a racket. It is a racket!
Allen: It is, it is.
Doug: So luckily, nowadays, people can just look at Google Reviews. And those can be manipulated a little bit too. Like if the company is like sending all their customers to leave reviews or..
Allen: For something free. Like they’re giving away a free service or something.
Doug: Yes, they do that on Amazon too. Like..
Allen: Oh, Amazon full of fake reviews. I mean, they buy the reviews, they don’t even give you know, it’s like they’ll there are companies out there you can hire and they’ll just go out and give you like, Yo you want 20 fake reviews, okay, pay us. And we’ll go and our people will go and, you know, they have all these fake accounts and everything. And they just yeah, Amazon. I don’t I don’t trust anything on Amazon like I have. It’s super hard to know if the reviews are good.
Doug: Yeah, they need to do some coding to kind of look for that. But there are certain plugins you can install. Like if you use Chrome as your browser, like a fake spotter review, and they’ll analyze, see whether that they think that Amazon review is legit or fake, and I’ll give it they’ll give it a rating. That’s pretty cool.
Doug: Yeah, at least we have that we don’t have to depend on the BBB anymore.
Allen: Yeah.Yep. Cool. All right, Doug, I appreciate everything you’ve shared with us. Again, Doug’s email is Doug@HawthorneCapital.com
Doug: ..or email my assistant Ellen@HawthorneCapital.com.
Doug: We’ll put you on the email list. So like maybe every, every four, six weeks or so you’ll get an update that shows what we’re doing. So if you even if you’re not looking to invest now, it’s fine. Like maybe three years from now, you’ve been getting our updates, and you’ve been getting educated and seeing what we do. Then if you felt like investing you could.
Allen: Yup and full disclosure, I am an investor. I was in the first fund and we were over the money into the second fund. But yeah, so you know if you’re, if you’re interested in getting into a fund, do your due diligence, please, you know, this is you turning over your money to someone else, hopefully, they have experienced hopefully, they have a track record and they know what they’re doing. And they’d like, you know, most of them most of these funds are not scams, because they do take a bunch of money to put together and investment to start up and they have something to show for it. I think the bigger fear is, you know, if the investment goes south, you know, how much of your investment Can you lose? Can you lose all of it, etc?
Doug: Yeah, that’s gonna be case by case each fund is going to have a different risk reward profile. So you really got to look at that.
Allen: Yeah, yeah. How would you know?
Doug: Well, ideally, either you’re in that industry kind of like sort of like or you have a friend who is okay, you people that you want to run it by people and really get to know the operator, maybe talk to a couple different people who run you know, similar types of funds if it’s more it’s pretty common as multifamily apartments. Of course there’s some commercials there’s some office buildings and stuff that has been beat the heck yeah, I was talking to somebody at the gym that he put a put a bunch of money in a fund that invested in hotels. He put in his money and right before the recession. He got hammered.
Allen: Oh, boy. Yeah. So do they like do those funds, then they go out of business and then they everything gets foreclosed? Hmm.
Doug: The lender forecloses on the fund because the fund has borrowed money.
Allen: Okay, so what can the individual investors do and when that happens?
Doug: They get whatever’s left over after the bank gets paid.
Allen: So they can’t sue,they can’t do anything?
Doug: Well, if there was like fraud committed, yes, but a lot. Some of that there was no fraud. It was just gonna be a poor investment.
Allen: Oh okay, yeah if you guys do your due diligence. Make sure you know. Alright, Doug I appreciate your time. Thank you so much. We’re gonna put this up to everybody and you know, at least my recommendation is that Doug is a stand-up on his guy, most of the time and again, I’ve known him for years so yeah. Thanks Doug again and talk to you soon!
Doug: Thanks Allen!
Allen: Alrighty, bye bye
Doug: Alright, bye
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