Podcast Episode 326: Richard C. Wilson, CEO Family Office Club
The Family Office in Real Estate Investing
WHITE BOARD WORKSHOP
The Investor Acquisition System
Richard C. Wilson is the founder and head of the Family Office Club, which boasts the most impressive membership numbers of any similar family office association.
Over 1,750 family office members are currently registered with the Family Office Club.
So if you want to know a single thing about family offices or their role in real estate investment, Richard is your guy.
Wilson is also a prolific author and speaker, with multiple #1 bestselling publications on the topic of family offices under his belt and over 225 conference speaking engagements in 17 countries behind him.
Today, Richard sits down with me to chat about the ultra-wealthy world of family offices and how their unique vantage point on real estate investment holds a wealth of insight and opportunity.
What You're Going to Learn
* How NOT to pitch your deals to ultra-wealthy investors
* The difference between Old Money and New Money investors
* How ultra-wealthy families view real estate for wealth preservation
* The difference between Family Office Investing and Institutional Investing
* How much debt is too much for the ultra-wealthy
* How YOU can invest with a Family Office
* Why you should describe your deal in a single sentence
* How consistency and social proof attracts
And much, much more.
Listen To or Watch the Full Podcast Here
How NOT to Pitch Your Deals to Ultra-Wealthy Investors
Adam: What do they look for when they invest? What's the mentality, and what can we learn from that kind of investing? What can mortals learn from that kind of investing is what I'm asking.
Richard: The number-one thing they look for is how do they get high conviction, which usually means how do they get high trust in the team, the opportunity, the industry? Is it local to them? Is it related to the space where they created their wealth?
If the family's based in Singapore, and they made their money and manufacturing out of Malaysia, it's going to be hard for them to invest maybe in data centers based in Texas. But, if they're based in Dallas, Texas, and they made their money in selling a company to Amazon, then investing in a data center in Texas might be relatively straightforward- or even a multifamily property that's in their own backyard.
Local to an asset, or they understand the industry, or they could gain trust in the team at a very high level. Those are three really important things they look for, more than high returns because they know that those things are what protects their returns.
Adam: Familiarity with the asset class, you're talking about?
Richard: Yeah, and the team; and trust with the team. A lot of people go around and they say, "Oh, we've got the lowest-risk investment. You're going to see; we have the best returns. We have all these things ..." that are just metrics. Until the family gets to know you, they don't care at all.
If you think that what's going to make the difference is your sky-high promised returns, it makes you look like an amateur in their eyes, because you look like someone who's over-promising and is okay with under-delivering. They want to work with people that over-deliver and under-promise. Saying something is low risk, or no risk, or the best returns you'll ever see, just kind of reeks of amateurism, and they'll just go dark on you instantly.
Why Old-Money and New-Money Families Invest Differently
Adam: Richard, what is the difference, in your experience, between the way old money invests and new money? You've kind of alluded to it, but let's talk about somebody who's third generation, for example [cross talk]
Richard: Yeah, even the third, and fourth generation, almost always, it's about diversification. Many times, people like to claim to be part of a family, when that family is worth hundreds of millions of dollars, for obvious reasons. Even if you just have two kids, and they have two kids, and they have two kids, et cetera, you have a lot of people now that have a claim to part of the money.
Even $100 million - you divide that by 12 or 16, there's not that much to go into an investment portfolio, once you pay for college, and residences, and medical emergencies, and taxation along the way at different life events. If the family doesn't really inspire and carry on the values of entrepreneurism, and there's not another wealth creation event, the wealth really dissipates by that time, unless it is $500 million or $1 billion dollars in net worth.
It's usually a very strong diversification game; just diversifying assets all over the place for the long term, versus being aggressive, or entrepreneurial. Where, a first-/ second-generation family usually will spend more money. They might have two to four private jets instead of no private jet, or one. They might be traveling the world more often and doing things that they think are fun, like buying businesses, and trying to build ...
A father/son client of mine is a $200 million family. They just had a big exit, and they're looking to buy a couple companies that are around $10-$20 million and build another $100 million revenue company and sell it again. It's what they enjoy doing and how they're passing on value. So, that's very different than what a third-/fourth-generation family would do.
Family Office Investing Vs. Institutional Investing
Adam: How do they differ then, in terms of their investment philosophy to an institution? Can you describe them as being similar in investment strategy to institute-
Richard: I think they're usually very different, because, one, they have the ability in part of their portfolio to be very active and have direct control; where most institutions go through fund managers or maybe a co-investment group of some type, where the family could go direct, if they want, to own an asset and just work with the property manager. Most institutions don't do that.
Family offices can be more patient than most institutions. If something's not working out, as long as the principal believes in it, then they don't worry about getting fired. The CIO at an endowment fund can always get fired. Even the president of the university could get fired over the endowment fund going poorly. But a principal, it's his own money. It's never their own money at an institution.
You're always on the block to get fired, so you want to do very conservative things and follow the herd. Family offices want to be in front of the herd, and they want to sell into the herd and buy the straggler who couldn't keep up with the herd or get ahead of it. Family offices can be more agile or more patient, and they can't be fired by themselves. The CIO could, but the principal can't.
I think that, many times, they like to be more creative in their structures, like a joint venture or getting in on a deal on superior terms, because they can help strategically on the deal. So, I think they're more entrepreneurial, for sure.
How Do Ultra-Wealthy Families View Real Estate for Wealth Preservation?
Adam: What are the actual strategies that a family will employ to ensure wealth preservation or to reinforce wealth preservation over the generations?
Richard: One is obviously good trust estate tax planning. Another one is having true diversification across funds, and commodities, and stock market, et cetera. Another one is getting cash-flowing, hard-asset real estate in place that is in good quality locations.
Doesn't have to be downtown San Francisco, or New York, but locations that are not overpriced, but not in the middle of nowhere, next to some field in Nebraska, either, and have it be so that it is cash-flowing from the start, so you don't do some crazy condo conversion for a big percentage of your wealth ...
Instead, you're going into things that, even in the worst economy, multifamily properties typically were leased up at 70-percent-plus; and self-storage, and senior living did decently well. Going into some things that are in areas where you're high conviction that, in the worst-case scenario, it's still going to meet its debt service, plus a nice buffer.
I think it's something that allows people to sleep at night. Many families have million-dollar-a-month income goals, and different income-related goals. they don't even have to sell the asset to produce the return; Just the income coming off the assets pays for their lifestyle and their family.
How Much Debt Is Too Much for the Ultra-Wealthy?
Adam: Tell me about how families do view debt and the relationship between having wealth, cash wealth, and taking on debt.
Richard: A lot of families love to be the provider of debt with good collateral behind it, so they might be okay, as an investor, with a 60-, or 65-percent LTV, but they may not like going into something that's 70-, 75-, 80-percent, especially if they don't have control over what happens, and if a bad situation comes up.
I've dealt with many clients that lend out money, like hard money lenders, or bridge loans for multifamily, or other types of real estate projects. They, too, like to be at that 60-percent, or 65-percent rate, when they're lending out money, as well; just so, in a worst-case scenario, they could break even, even if things went down by 35 percent, and it was a messy process.
I think that family offices typically do use debt, but they have the ability to maybe come in close in 10 days using cash, and then worry about debt the next month, and work through shopping, and finding the best debt deal. But if they need to, they can close using cash and not have to use the debt.
How You Can Invest in a Family Office (Even If You're Not Ultra-Wealthy)
Adam: Here's my question - what opportunities are there, typically, to invest with a family office? Not the other way around; not to say, "Invest with me." For me to say, "You're a billion-dollar, or hundred-million-dollar family office; you've got all these strategies and all these teams that are helping you preserve wealth and maintain it. How do I invest with you?" Have you ever seen that?
Richard: Yeah, for sure. For sure, I've seen that. With real estate families, it seems to happen naturally that people want access to their deals. Even without trying, they'll have some people come in with them on deals. They might have a little fund for friends and family; even if it's not something that's really a PNL they're excited about growing.
Others in the real estate space became family offices because they were so good at syndicating deals. Their now-billion-dollar-plus CRE firm has a family office, but they made their money off being an independent sponsor. I've got a client such as that that I'm doing some work with, right now. Yeah, I definitely have seen that.
I think that the trick to being able to do that would be to figure out how you can add strategic value. Can you source a deal for them? Can you introduce them to another family or two? Can you help them save money? Can you help them in one of their other operating businesses? Can you co-locate and sublease office space from them? Can you employ their daughter at your firm, because she is genuinely a good team member to have around? Finding a way to add value first is the right way to go with family offices; either direction you want things to go.
Adam: That's really interesting. So, in those cases, what kind of minimums do you expect to see an outsider expected to invest with the family?
Richard: A lot of family offices, people are surprised to hear, even if they're worth $50 million or $100 million, they might test out an investment at $100,000, $250,000, to just see how they get treated and see how it works, if it's possible to do so. Because of that mentality, if the family is at the $50 million, or $100 million level, they might be totally fine with somebody coming in just with $100,000, or $250,000.
If You Can't Describe Your Deal in a Unique Way in a Single Sentence...
Adam: When a family office - again, a family- first considers investing with somebody, a real estate sponsor, what's the first thing that they do in their research? Really, literally, the first thing? They hear your name, what's the first thing they're going to do?
Richard: Honestly, in the first three to five seconds, they've already cut out 90 percent of those that interact with them as someone they'll never do business with, probably. Usually in the first five to 10 seconds, somebody comes off as either stressed out, or rushing them, or rude or unkept, or comes off as amateur by saying their deal has no risk. For some reason, it just seems like not the type of person they want to deal with. That eliminates most people right off the bat.
So, the very first thing that they'll do is look at whether they've heard this a hundred times before, and if it sounds like, "Okay, you buy C-Class apartment buildings and do a $10K renovation and then raise rents and sell it four years later," that's what 800 other people do in the US, as well. If you can't say what you do in a unique way, in a single sentence, I think you're pretty much dead because a lot of these families see a good amount of deal flow. If it doesn't sound unique instantly, and they don't lean forward and say, "Oh, well, how do you do that? That's interesting," then they just move on. That's the second quick test.
Then, I think a lot of family offices won't take something more serious than the founder takes it for themselves. If the founder has a company, and they didn't bother to get a logo put together, or they don't bother to have a website, or they can't clearly say what they do in a way that's meaningful and unique, then the family office says, "Well, why should I waste my time, if you really don't care about your own business much?".
We just find a good rule of thumb is that no one's going to take your real estate firm more seriously than you take it yourself. So, if you're too lazy to put together a website these days, or business cards, or a professional email address, just get out of the industry [cross talk]
Adam: -still got a Hotmail account!
Richard: Yeah, exactly. It's laughable to even have to say that, right?
Richard: It's like, we get it, your expertise is real estate, but if you don't care to take one day and $5K to $10K to make it professional, then you shouldn't be in front of me," is what the family office is-
How Consistency and Social Proof Will Attract Ultra-Wealthy Investors
Adam: What else does a family look for? Online, what they're doing is they're running - I'm just going to put words into your mouth - Google search. "Here, I met this guy, or I've heard his name. I'm interested in finding out more." What are they looking for online?
Richard: I think they're looking for social proof, authority, credibility, professionalism, consistence, commitment. If it looks like, last year, you were doing blockchain, and this year, you're doing multifamily, and now you're talking about doing Opportunity Zones, and it seems to always be changing, that's bad. If they find nothing on you anywhere, that's bad. If they go on LinkedIn, you have no picture on your profile thing, then that's bad.
I think that people want to see someone who is consistent, and they're generous with their thought leadership, and their ideas, because they're not limited. You always have more ideas and insights. You're not scared that someone's going to take your one golden idea and run away with it. Now, if you go out of business because someone hears one idea that you say, then you've got to [cross talk]
Adam: We're in the wrong business.
Richard: -come up with some more ideas. Yeah, exactly. I think they want to see that, and I think social proof of ... One individual today asked if I wanted to buy his digital asset related to his venture capital angel investor network.. I'm like, "Oh, that's aninteresting idea. I'll take a look," but it only had 138 subscribers on the channel. No problem ... I only had 138 at one time, as well. It's not like I'm king of the world of how to do all this stuff. But, if someone has a YouTube channel, and they have two views on it, or they have a blog, and there's only one blog post that was written in 2014 ...
It is showing that you're active in the business, consistent, professional and your ... When someone stops and actually reads your book, or listens to the podcasts, or some actual content there, and it's not just knocked-out stuff that doesn't mean anything, I think all that stuff is pretty important.
WHITE BOARD WORKSHOP
The Investor Acquisition System
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