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Crowdfunding Real Estate Investments with Salvatore Buscemi

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Jason Hartman hosts Salvatore Buscemi, Managing Director of Dandrew Partners New York. Buscemi gives us his experience in non-performing residential mortgages and explains why the real estate market crashed. He talks about crowdfunding and his group’s experience with first-time investors. He explains that most crowdfunded deals are dealing with a less experienced investor who might not be able to bring a lot to the table in terms of money or knowledge.

Announcer 0:04
Welcome to the heroic investing show. As first responders we risk our lives every day our financial security is under attack. Our pensions are in a state of emergency. A single on duty incident can alter or erase our earning potential instantly and forever. We are the heroes of society. We are self reliant and we need to take care of our own financial future. The heroic investing show is our toolkit of business and investing tactics on our mission to financial freedom.

Gary Pinkerton 0:39
Hello, and welcome to Episode 167 of the heroic investing show. This is a podcast for first responders, members of the military, veterans and anyone looking to improve their financial future and gain some freedom with their time. We teach America’s heroes how to build passive income, build their startup business, and safely grow wealth through real estate and other time tested alternative investments. My name is Gary Pinkerton, and I co host the show with Jason Hartman. And today you get to hear Jason talking with Salvador Buscemi, and Salvatore is an expert with pooling assets syndications, putting funds together, and he dives down into he’s written, you know, some books on the impact and the recent recession and real estate correction from people raising money and being a private lender being a hard money lender, in a situation where they didn’t know what they were doing, lending money inappropriately to mortgage brokers and individuals that also didn’t know what they’re doing. He brings up some really good points, I thought of things to look out for when you’re considering lending money in alternative investment arena. So you know, one of the things about, you know, I’m not a fan of securities, I’m not a fan of the SEC, and the oversight that comes with that. It certainly has suppressed some of the fraud that happens on Wall Street. But that is just an area when it’s so easy to move money, liquid money, and when it’s a an environment where they have they’ve convinced the investor that, you know, just don’t ask questions, send us your money, you’re in it for the long haul. You know, we’re the professionals will take care of the money, right? So it certainly is a place that’s ripe for for that kind of fraud of Ponzi schemes of just misappropriating and misusing money. But I guess my point there is that the SEC is really needed, right. So when you go to alternative investments, when you’re provided the opportunity to invest in somebody’s apartment building in their land development in their, their business, or you know, something that that’s what I call alternative things that are alternatives to investing with funds, hedge funds, things like that on Wall Street paper assets. So when you get into the alternatives, you buy into an oil and gas exploration, syndication, you don’t have that same kind of protection from an oversight committee with the mountains of paperwork that does exist with paper asset investing. So it is certainly incumbent on you, I’ve made mistakes there. I’ve lost all my money in some investments. And so I pay very close attention to who I’m investing with, what their experience level is, talk with, you know, just do a lot of due diligence talk with previous investors. And, you know, there’s just a lot of people out there doing this. So if there’s any indication at all that you have concerns, any spidey sense at all, Tingley sense, you know, you know, pairs in the back of your neck, and just step on to the next one, no matter how good it looks. Another one just as good is going to come along. But if your guts telling you anything at all about negative about an investment, walk away from it, that’s my biggest and best and investment advice for you. So anyway, so in this one, Salvatore, he comes up with some, you know, some really useful and helpful things, some, you know, excerpts from his book that I think will also probably apply to crowdfunding for future things. This article or this interview was over a year ago. And I’m actually surprised that, that we haven’t had more problems already with crowdfunding, that more abuses, you know, in the main, it has been fairly timid, at least as far as I’ve seen in the media. And what I know of personally that, you know, that has gone on with crowdfunding in the real estate space. So maybe it is a little bit more protected and controlled. Maybe people are more savvy than I gave him credit for at the beginning, but Jason makes a comment that he sees a lot of litigation and fraud happening. And I haven’t seen that come to fruition yet. And I was like mind of that when I first heard this come out over a year ago. So I think you’ll appreciate what you hear from Salvador. This is really some good nuggets in here, that you should keep in mind before you kind of go into what is the Wild West, which is investing in alternative type things, you know, direct buy Hold we in the direct investor certainly has an advantage when it comes to getting taken on a scam by investing in somebody else’s business. But please don’t misunderstand that I think all syndications are poor use or risky use of your money. I don’t think that, you know, I have 20 properties now 30 units, I can tell you that it the complexity builds very quickly when you’re direct buy and hold investor. So am I done with single families? I don’t think so. But I’m not going to have 300 the next time we talk. So I am looking into larger properties, maybe direct ownership, maybe a mobile home park or self storage facility or an apartment building. But I’m also not opposed to participate in syndications. I’ve done it before, I’ve learned some lessons, and I’m still doing it. So I think a good balance exists. And Salvador has some great recommendations here. So please do enjoy. And we’ll be back with an original episode. Next on 168. Thanks so much. And let’s listen in with Jason getting some great advice from Salvador. But Jeremy,

Jason Hartman 6:02
it’s my pleasure to welcome Salvador Buscemi to the show. He is managing director of vandrie partners, and co founder and CFO of a wasteless fractionalized real estate equity. He’s author of making the yield real estate hard money lending uncovered.

Salvatore Buscemi 6:17
So welcome. How are you? Thank you very much for having me. I’m very happy to be here. Thank you give our listeners a sense of geography. Where are you located? Right now? I’m in New York City. And is that where you’re based? Yeah, we’re based in New York, we also have the Oasis fund is based actually out in Las Vegas.

Jason Hartman 6:31
So hard money lending uncovered? It sounds like is there a scandal there hard money lending on uncovered?

Salvatore Buscemi 6:40
It is, you know, and it’s the, you know, back during the past, you know, housing boom that we had, there were a lot of people who were getting involved into deals, or they were pulling money to, to invest in what we call private loans. And what happened was, is that a lot of these people did not know who they were dealing with. And as a result, they wind up losing a lot of money, because essentially, they were lending money to people who they didn’t know who didn’t have an alignment of interest with them. And also, lastly, they didn’t really know that the person who was borrowing the money, the operator actually had any experience. And so we’re starting to see this happen again, and certain other parts of the industry, you and I spoke about crowdfunding. And you we people have a strong interest right now. People are very, they’re desperate for yield.

Jason Hartman 7:25
It’s sort of the hot new thing, you know, I’m sure there will be many problems in the world of crowdfunding, many lawsuits, many frauds Get ready, and they’re coming.

Salvatore Buscemi 7:35
I, you know, it’s, you know, I’d love to discuss this. And and really, what’s happening is that you can take someone $1,000 $2,000, and so on, and really place that capital meaningfully before we go into the crowdfunding thing. And I really do want to dive into that. Let’s just finish on the hard money lending issue. So you talked about that the housing the last housing boom and bust? Were you talking about people who were making direct loans, or pooling money into a fund that was making a graduate which one that’s different? These are people who are making direct loans. So they would have a brother in law, who was a mortgage broker, if you’re in Southern California, or, you know, in the southwest, and the reason why we have the Oasis fund out there, everybody was a mortgage broker, and then people are saying, Hey, you know what, I have a few bucks, why don’t I give you $100,000? And it’s asymmetric. So the broker is going to be great, I’m going to take my five points off the top. And if anything goes wrong with the loan, it’s not my problem. So you know, a lot of these people were brokers who thought that they were becoming money managers. There is a lot of interest in this because yields are low, right, rates return are very low. So this is attractive, where people are getting a, quote, guaranteed coupon each month of 12 to 15%. The problem is, is that that only works if you’re lending to a qualified operator or borrower right and operator meaning Now usually this borrower was who they were someone who was flipping houses. In the best case scenario, yes, at worst, they were owner occupants facing foreclosure, which opened a whole new other set of you know, a whole other Pandora’s box of problems. Okay,

Jason Hartman 9:09
so these mortgage brokers were out there saying to people, hey, look, you know, I’ve got all these borrowers that I can’t get a conventional Fannie Mae, Freddie Mac type agency loan for, but you know, would you be interested in loaning the money? And they would just say that to a regular person, right, just a just an individual that they knew a friend or family member, maybe, or a client, and then they would loan someone in pre foreclosure hard money to get out of foreclosure on what are these usually those were usually second trustees, or even third position mortgages. Yeah. Which

Salvatore Buscemi 9:45
is even scarier. But yes, you’re dead on with that. That is correct.

Jason Hartman 9:48
So what kind of rates were they promising? They were promising 15 they were favorable as high as 15. They would go as high as the law would allow them to, you know, usury laws but so will A lot of these do I mean, they were just lending at the peak of the market, they were, you know, not enough equity. What was the problem here are the, the if they were a home flipper, when you say, operator, that’s probably what you meant. And they were a home flipper and they got, you know, caught with their pants down, so to speak, right?

Salvatore Buscemi 10:15
Here’s what happened, when subprime, that when the subprime loan machines stopped issuing loans, that’s where the House of Cards fell, because there was no exit strategy for these investors, or private lenders to get out. And that’s what caused the problems. Phoenix Las Vegas, so it’s very hot markets, people who are marginal buyers, were getting 125% loan to value using a sublime a subprime loan. However, when those loans dried up, guess what people were holding the bag, and that’s what caused prices to drop, you can’t give someone 125% loan to value in a hot market not expect something bad to happen. And that’s what happened to a lot of these hard money lenders is that oftentimes, the the appraisals were inflated, so that it would justify more money, meaning more fees into the pocket of the mortgage broker. Does that make sense? Yeah, yeah. Okay. Okay. So certainly, you know, many people have been burned. But these were direct loans. They weren’t sons, right. They were, it’s interesting, you bring that up. The reason why we have the, the Oasis fund out in Las Vegas is because that was a triage fund, that we set up to buy out hard money funds facing receivership, fraud, all sorts of other issues. Okay, so these are these are fun. So you set up a fund to buy other funds. Yes, facing distress. That’s correct. And this is the nest that we saw. And it is terrible. You know, there people are that, you know, you as the private lender, some of them were direct loans. Some of them were it through a fund through a fund structure, a typical LP or LLC structure. And what happened was, is that sometimes you would be told that they’re lending on a single family home, but now they’re doing development deals. And you know, that person doesn’t really have the experience to be doing a development deal. And these loans would be made outside of the core brokers, you know, areas of expertise is what he specializes in, in the, in the sub asset category for real estate. Right, right.

Jason Hartman 12:14
Yeah. Okay. All right. So, so that’s what happened, you know, I’m just not a fan of funds. Because the, you know, these fund managers, they can just do whatever they want, like, you know, there one day, they say they’re gonna do, you know, lending on single family homes, then they’re suddenly doing a development deal, as you described.

Salvatore Buscemi 12:34
It’s terrible. It’s, and that’s the novice, I mean, institutionally in New York, and people who I grew up with on Wall Street at Goldman Sachs, they’re very good fund managers, but you have to be careful of the people who tell you that they’ll do anything and give them what we call 100% discretion, when you’re giving them a blank check, and they can do anything they want. That’s where the problems come in. And a lot of these fund managers are come in. And they were, you know, promising all sorts of returns and fees, but they just didn’t have the dexterity or the experience to do that. And so you wind up, you know, these guys feel as though that they can take the risk they want to be next, Donald Trump swinging for the fences. And that’s where all the problems happen. It’s easy to swing for the fences, when you have someone else’s money with which to do it. And you know, worse yet worse than everything you mentioned is a lot of times the fund managers are just crooks. They’re just greedy crooks, you know, they’re just basically ripping people off. It is true. But even worse than that, and I’m starting, and I’m sorry to go back to the crowdfunding, but you’re starting to see this happen is that real estate sellers, a wealth creation tool relies on the fact that it’s very inefficient, right. And it’s inefficient because it has a human element to it. And if that human element cannot perform, that asset is going to not perform correctly. And so now you’re starting to see people who want to get into real estate, they see that there’s a lot of money out there. People don’t trust the stock market, they don’t understand it, but they also need coupons, they need monthly cash flow coming in. And so they’re going to real estate fund managers who really have no experience whatsoever in the space. Just because someone worked for 10 years at PepsiCo doesn’t necessarily mean the real estate entrepreneur, you know, they’ve always had top cover from the parent, they probably have no real estate experience. They’ve never had to manage a p&l and worship, they’ve never had to lay in a pool of their own sweat. And so that’s why it’s so important that when you do qualify these one liners, and there’s there’s many of them that are very, very, they’re very adept and very sophisticated, is that you have to look at their track record. Have they done this before? Are they a computer software engineer, who said, Hey, this is a great time to get into buying apartments right now. Yeah, right.

Jason Hartman 14:38
So unbelievable.

Salvatore Buscemi 14:39
Yeah, I know. I know. That’s what you’re talking about them. They’re not just, they’re not all them are crooks. They’re inexperienced. And they prey upon their friends like Hey, he’s a good guy. He’s, uh, I’ve known him for a while. He’s great. I, I go to church with him. I’m in the coladas club with him or something. But that doesn’t, you know, people are investing in a person. They’re not investing in the deal because the investors don’t know anything about how to value a deal or what it looks like. And a lot of times these syndicators would go out there. And they would just bid up because they were making fees, but they would just bid up the asset. And that’s where a lot of them came into problems, because they were overpaying for stuff that they didn’t know what they were doing. I’ll give you a quick example where there is a, in our fun, we had to bail out a team of you’re not gonna believe this plastic surgeons from Southern California who bought an apartment complex in Texas, and they bought it at a one cap, they overpaid for it, because the broker told him that pretty soon, you know, Texas is Texas, you know, apartments are going fast. And they’re going to be priced the same as in they are in California, of course, location, location, location, is really what dictates, you know, supply demand and pricing of this housing stuff. And they will end up overpaying because they got hoodwinked by someone who did not have an alignment of interest with them, someone who was going to make a fee on the sale, not necessarily be there and be a good manager. And that’s what happens is that people just don’t understand what they’re buying. And then they mismanaged it. And then they fired the they, they fired the management company. So now the Indians are in charge of the reservation. There’s no chiefs around. And and that’s really where you see the distress, it all comes down to the human component to it, which is why I love real estate, because somebody’s always screwing up.

Jason Hartman 16:23
Yeah, right. And that’s what that is. What’s great about real estate, why I love it, too. It’s an imperfect market. And that imperfection is what breeds opportunity. And yeah, no question about it. So, you know, one of the things I say is that I have this 10 commandments of successful investing, and commandment number three is thou shalt maintain control. Because when you, when you when you’re not a direct investor, when you don’t maintain control, you leave yourself susceptible to three major problems. Number one, you might be investing with a crook. Number two, you might be investing with an idiot. And number three, assuming they’re honest and competent, they take a huge management fee off the top for managing the deal. So you made the comparison, which was a good one, you know, about the people on Wall Street, who could be good fund managers that Goldman Sachs, etc. And, you know, they may be good, but they take such huge management fees off the top of the deal. You know, it’s Is there any way to win here with these funds?

Salvatore Buscemi 17:20
Um, you know, it’s, you have to read the docs, you know, you have to know, but

Jason Hartman 17:25
even if you read the docs, they don’t have to follow the docs, right?

Salvatore Buscemi 17:29
Well, they do they move when things go problematic. They all go back. I mean, the operating agreement is really a prenuptial agreement. That’s really what it is. Yeah, it nobody reads it until the divorce happens, or something blows up. But you know, not everybody in these funds pay what I call rack rate, there’s a lot of people in these in these limited partnerships, for example, and they are, you know, but you know, their alert is, is that they’re able to get you into deals and invest alongside qualified people and other sophisticated investors who you would never be able to invest with. Anyway, wait, explain

Jason Hartman 18:00
the rat race wreck racing, you didn’t, you didn’t really explain what you meant there.

Salvatore Buscemi 18:04
So you know, think about it, you’re flying from Phoenix to New York, the guy next to you bought his ticket on Orbitz for 280 bucks, you paid 580 bucks. And the person, you know, in the aisles, sorry, you paid 900 bucks, he bought it yesterday, all these investors sometimes don’t pay the same, they don’t pay the same fees. And their incentives are different. And that’s the secret that nobody really knows. And these management in these fun in these funds is that not just because the doctor the terms are what they’re offering isn’t necessarily what is going to happen. And that’s negotiable.

Jason Hartman 18:35
So in other words, just I want to make sure you really, people really get what you’re saying there. So if a fund comes to you and says, Hey, you know, I’ve got this LLC we’ve set up and, you know, we were, you know, we’re taking on investors to do this deal, whatever the deal is, okay? You know, they do that. And they say the minimum to invest is $25,000 or $50,000. And, and that’ll buy you one share, okay? But you know, and then they pull out a list or they drop the name, you know, hey, I’ve got so and so and so and so has also invested, and suddenly, you know, there’s that social proof element. So you think, Oh, well, if you know, so and so is in this must be a good deal. Here’s my money, right? But what you don’t hear is that so and so that name that they just dropped on you. That person maybe got a free share, or they just got their share for half price? Oh, it because because what what they did is that, you know, that wealthy guy in town that everybody knows, you know, they just wanted to get his name on board. That’s basically like a celebrity endorsement, if you will, you know, maybe it’s a small local celebrity, but it’s someone you know, and respect, right?

Salvatore Buscemi 19:47
Well, let’s put it let’s put it a different way. If Warren Buffett, if Warren Buffett invested in your fund, but you weren’t going to make any money off of his investment as a fund manager, would you take his money? Yeah, because that would be great for my brand. Right, absolutely. Because you’d be screaming down the street that Warren Buffett’s in your fun. And now everybody’s got a dog pile into it. So you’re absolutely correct there. Absolutely. Okay. So that’s the rack rate issue. Any anything more you want to elaborate on that? That’s very interesting. I’d like to hit on the experience. And I am very scared today, what I’m seeing with crowdfunding is that people have, you know, embellished resumes or something, the guy who’s doing knocking 10. Putting together houses does not have experience to manage an asset, a multifamily asset overseas, the operator should always be local to the assets, always or the unless it’s some sophisticated huge management team like a, like a Goldman Sachs or something like that. But you know, if you’re dealing with these mom and pop retail, you know, the the rehabbers, the retail investors, the retail guys we call non institutional, I would be very scared. They say I got a great apartment complex. It’s 90% occupied, and it’s in Columbus, Ohio, but we’re in Phoenix, Arizona say, that’s a problem, because that’s a very difficult problem to manage. That’s very important, right?

Jason Hartman 21:02
Yeah. Yeah, I agree. I agree. And especially when they’re doing, you know, intricate rehab, I mean, almost every apartment deal, every multifamily deal includes rehabbing the units, increasing rents, as the as the units turn, I just did one myself, I just closed on an apartment complex that I went in on with a client of ours, you know, 125 units, owned it for like three and a half years, rehabbed. But see there, we had a general manager and my partner and I now say, you know, we never want to do a deal with a general manager again, like that, because they were just doubled. You know, at least we thought, of course, we had arguments about it, but we just felt they were like double dipping everywhere you looked,

Salvatore Buscemi 21:44
you know, yeah, they were. But here’s the other thing, too. Is that do they know what they’re doing? You know, when you when you bring a great point on, they didn’t

Jason Hartman 21:50
then they learned a lot on our dime. So we gave them an education, you

Salvatore Buscemi 21:53
became the research and develop

Jason Hartman 21:55
the r&d. Yeah, right.

Salvatore Buscemi 21:57
Yeah. So so this is funny. So you know, we see these deals all the time. And I’ll ask them, you know, what’s the what are the sources and uses for and they’ll say, sources, danger, uses by apartment, okay, but what kind of repairs are you going to be doing, there’s real value added repairs, and then there’s repairs that don’t add any value. Everybody who lives in an apartment automatically assumes that they’re going to have a light bulb and a toilet seat, right? That’s not value added. That is maintenance, that general maintenance. But what they don’t expect is maybe to have like a part time concierge in the lobby, or a newly paved parking lot, or two and a half horsepower, Whirlpool, whirlpool tubs and the bathrooms. That’s real value added that’s attractive to the tenant. So when you talk to these guys, they’re too busy dealing with like the muck, they don’t know where to start first. And sometimes, you know, a lot of these value added deals would blow up because they didn’t know what they were doing. They were doing things that were more maintenance rather than value added. And by the time they get to the value added stuff. They’re already out of their slush fund,

Jason Hartman 22:57
right? Yeah, absolutely. Okay. What else?

Salvatore Buscemi 23:00
I’d be very worried of crowdfunding. I if we can talk about this now. Okay.

Jason Hartman 23:06
Okay. So now make the distinction, though. We talked, we started with the hard money lending. And we do and then we sort of went into, like, we talked a little bit about direct hard money lending, then we went into funds and how you rescued funds? And also, you know, funds to just buy deals? Or LLCs? You know, I don’t know, it’s sort of all one in the same really, you know, it’s kind of like, yeah, I mean, make make the distinction for the listener, if you would, as to what if there’s any difference there? And then why is crowdfunding different? You know, it’s basically the same kind of legal vehicle, you know, the structure is not

Salvatore Buscemi 23:42
different it is, but the problem is, is that you’ve the crowdfunding today in real estate is, you know, what we were talking about with these funds, where minimum investment $50,000 you have to be accredited. Okay, whatever that means accredited today. That’s, you know, that definition changes got a little tougher after Bernie Madoff. But, you know, now all of a sudden, because of the JOBS Act, people now can get in who maybe aren’t accredited, and so you don’t know if they’re dealing with their last thousand dollars or not. So they don’t have the sophistication. So now you’re dealing with investors for as little as $1,000 can get into this multi family deal. If you’ve done any sort of partnership whatsoever, you know, that just a paper the deal and do the accounting cost about $1,000 in investor do that. So how is that money actually going to be used to provide value for you as an investment? That’s number one. Number two is anyone with that kind of small money generally does not is not sophisticated. And that means that the fund managers who are now taking are now trying to crowdsource or crowdfund a lot of these real estate. Real estate deals to buy are dealing with a less sophisticated investor who doesn’t understand it and probably thinks that they can just redeem their shares, you know, their thousand dollar investment for face value $1,000 Any given win, and so that’s going to put a foot that’s going to challenge the entire partnership because now this fund manager is getting calls from this guy’s annulus chasing attorney saying I want my thousand dollars back. And he’s not doing what he should be doing, which is operating the asset managing the investment. That’s what I see. A lot of problems come in people with short money always have, you know, they don’t they don’t bring any value to the deal. They actually take value from the deal. Does that make sense?

Jason Hartman 25:27
Just a reminder, you’re listening to flashback Friday, our new episodes are published every Monday and every Wednesday. People with short money you said yes. It’s a term people who don’t have a lot of might people with small balance investors like this microbalance investors that those are the people who, who you do not want to be partners with an investment. Okay. You like if you’re the bigger investor, or if you’re any investor, you know, maybe you’re a crowdfunding investor that put in $1,000. Also, I mean, I can’t imagine though it cost $1,000 per investor, like, say someone’s raising $300,000 to invest in a deal. Can they take on 300 investors at 1000 bucks each? Do you? I mean,

Salvatore Buscemi 26:14
that’s way too many. Yeah,

Jason Hartman 26:15
well, no, no, no, no, I know, that’s a lot to manage investors relation problem, Investor Relations problem, which is what I want to ask you about. But I don’t even know if it’s legal under the crowdfunding laws to have that many, you know, they just changed again. And now I haven’t, I’m not totally up to date on the new, the new change, because now you can do non accredited investors.

Salvatore Buscemi 26:32
Correct. So and that makes it even worse now. So you know, when you’re in it for me when I’ve done this when we’ve had at one time, and one anyone dealies had 32, LPs limited partners or investors, you have to do the K ones, and everything would take, you know, it costs money to do that. Yeah,

Jason Hartman 26:49
there’s a lot of accounting and compliance. I agree.

Salvatore Buscemi 26:52
Oh, absolutely. But that that is, you know, that at the smaller investment increments, it doesn’t make sense to do that.

Jason Hartman 27:00
So you don’t want to be partners with the small investors, you’re saying, and what do you consider small, I mean, you know, a lot of these crowdfunding sites will say, well, you got to put in $5,000 per person,

Salvatore Buscemi 27:13
that’s, that’s still too small, I would say, 50,000. If you’re investing alongside other people who don’t have the same financial strength as you, that’s the problem, that’s going to be a problem. And you know, one of the things that our investors who again, are a little more sophisticated will say, you know, for one of our latest offerings is that we don’t want anyone coming in for less than $250,000. Otherwise, I’m in violation of the operating agreement. And I can get sued for that. So you know, the Smart Money knows how to pull the strings, because they don’t want me having the burden. With dealing with so many investors, it could become a nightmare, like you said before. And that’s the problem. When you’re dealing with sophisticated investors, they know that it’s real estate, you can’t sell it. And they’re also not buying a lottery ticket to which I think, unfortunately, a lot of these crowd investors do is that they just go out there and they start, you know, dreaming that you know that that is more like a shark tank episode, that they’re going to hit the lottery. And it’s not a steady Eddy, coupon clipping type of investment. Yes.

Jason Hartman 28:16
And I agree with you, I think some of these funds, and some of the people taking advantage of all of these crowdfunding laws, they’re basically like a version of the modern casino, you know, where they’re just going to take money, they’re just going to be ripping off small investors, you know, people be it’s, it’s so desperate, you go to these casinos. And I mean, I can’t believe this crap is legal. They’re just destroying people’s lives. It’s so sad. You know, all these poor people sitting there at slot machines, a lot of them elderly, you know, I mean, I just, you know, this is just disgusting. What these companies are allowed to do,

Salvatore Buscemi 28:52
you know, it really is Well, I mean, you can thank the Fed reserve for this because they’re actually had the zero rate interest rate policies, Europe nerve negative interest rate policy, banks in Australia, now, we’re going to be charging you money to hope for the printing in Germany. And it happened in Germany

Jason Hartman 29:09
already an interest rate.

Salvatore Buscemi 29:10
Yeah. So people are desperate. People are just and that’s the drive. You know, the set is desperate to have people take risks. I’m

Jason Hartman 29:17
glad you said that and recognized it and let me just elaborate on that. And you can you can finish my thought here for the listeners. But what what he’s saying listeners, is that because of this environment, because we have these, you know, greedy, disgusting central banking scams, okay. What they’ve done is they’ve created this no yield environment, and older people, specifically, you know, they get burned the most, because they’re the people who did the right thing. They save money all their life, they were prudent, they didn’t, you know, they delayed gratification, and then they retire, they’ve got a few bucks, and they think they can just live off their money by putting it in a really conservative bond, or you know, a savings account or a CD and they can ladder, those CDs. And, and you know, they can live decently. Now granted, that’s not a very good investment plan, obviously. But you know, this is what a lot of the world planned on. And because there’s no yield out there to get from these really safe things, all these people have been pushed into the risk arena, at least shouldn’t be taking risk.

Salvatore Buscemi 30:21
You know? So is that what you meant to say? Absolutely. 100%. You hit the nail on the head? Yes. No, you didn’t. And you know what? I being a money manager, being the cynical guy that I am,

Jason Hartman 30:33
I think you’re an honest guy. I like what you say.

Salvatore Buscemi 30:37
No, but I look at everything cynically. And that’s how you as an investor, you can’t, you know, look at everything through rose colored glasses, you have to see what the risk isn’t structured away. But this money managers view is that rates will not increase anytime soon. Probably not in your lifestyle lifetime. Jason Right. Yeah.

Jason Hartman 30:53
Wow. So you think we are just in a low rate environment for for the duration?

Salvatore Buscemi 30:59
Huh? Exactly. Because there’s no catalyst for rates to drive for rates to go up?

Jason Hartman 31:03
Come on You kidding, with all the with all this debt we have, you don’t think inflation

Salvatore Buscemi 31:08
is gonna come? You know, wow, I could be wrong. But it’s not just my view, but a lot of people. And if you see how these bonds trade and everything, they have the same view, too, as well. The problem is that people are keep buying treasuries, and as long as they can, because there’s an implied safety of the United States, and you have all this money just going into treasuries, because there’s no real place for it to go, America is still a great place for rich people to invest politically stable, all of that. But, you know, when you start seeing the yields, I mean, the two year drop below it, you know, a to a, you know, you know, to handle at one point, I mean, this is just really ridiculous. And so that is what’s happening. And I think, the market mechanism, as you knew it doesn’t exist anymore. For price discovery, everything is manipulated. And everything is really a function of someone governing the markets, not the markets governing themselves, if that makes sense.

Jason Hartman 32:01
Right? In See that’s what happened during the last crisis. We we couldn’t have and we, I would argue that we still don’t have price discovery. Because everything, you know, when you’ve got all this, everybody’s trying to make predictions, but you can’t make predictions. In an era of massive intervention by governments and central banks, they completely screw up the market. And it’s just very hard to predict anything, you know, the I don’t think the economy itself is really, you know, like, incredibly hard to predict the business cycle, things like that. But when you get all this intervention, you can’t predict the thing. You know, you can’t and that’s the problem. And you know, and now, you know, different capital sources have different needs, you know, my apartment in my apartment was so I, we sold my condo in New York, I wanted to buy a new one, the guy who bought it when someone from Brazil didn’t speak a lick of English, he just showed up with a briefcase literally full of cash. And he offered up over asking price, because for him, he’s using real estate as a wealth protection vehicle. He doesn’t care. He doesn’t care if he overpaid or not. He’s hiding money. And that’s a whole other conversation we can have. I’m glad that’s happening, though, because that does show you that much of the world is messed up as America is still looks at America is what’s called the Brinks truck, you know, it’s the it’s the safe place to put your money. Because, you know, we do to some extent have rule of law, you know, except when it comes to government and lobbyists and central banks, they don’t put on Wall Street doesn’t obey the law, either. Because they basically own the government. See, I’m pretty cynical, too.

Salvatore Buscemi 33:42
Yeah. And that’s it. That’s the mindset you need to have today to be a successful investor. And that’s what people don’t understand.

Jason Hartman 33:47
Okay, so what else about crowdfunding? Other thoughts on

Salvatore Buscemi 33:50
that? I think I think it’s, I think we’ll see what happens with it. But I think when people you know, you got to check the bios of these people what, you know, the first thing I always ask if somebody is looking for money for me, we’re discretionary. Right? We’re not a bank. So we don’t make people we don’t care about their credit, we care about the asset. And that’s what that’s what a you know, a discretionary capital provider does. You know, you want to buy a retail center, do you have experience, and you know, you can show a bio and a deal sheet of stuff you’ve done, it’s almost certain that you’re going to get a loan from us. But if you don’t have any experience, you’re not going to get a loan from us because, you know, we are not in the, in the in the business of teaching you and become the research and development for you to learn how to piece together a retail deal, or a value added multifamily deal. So I would look if any, there are some, I’m sure there’s some good crowdfunding things that are working, but the two things I would check is what’s the minimum investment, how many of those investors are in on that floor, that threshold? You know, the smaller money that’s what you want to move away from, because that means that the operator is desperate. And you know, because no, the smart money’s turning him down but the stupid money which is always a unfortunately then sophisticated money, With the with the less dollars the shorter money that we talked about before he’s opening the floodgates for the masses to come in and that’s where the problem is. But but the smart the smart money will be glad to be in on that deal as long as they don’t pay the rack rate that the stupid money is paying. So again, like you said, and that was so well put that you know, they’re they’re using this this smart money as a it’s a head fake, you know, because it makes you think that Oh, well this deals been vetted. All the smart people are in it. So I’m gonna go into

Jason Hartman 35:32
I mean, look at Bernie Madoff did that for decades. He made a career out of that. And you know what blows my mind though, is haylock and I got it. I’m gonna call you out for a second here. You know, feel free to debate me. But you’re saying check the guy’s resumes, right? You got to be kidding me though. Because look at the resumes of Bernie Madoff. Bernie Madoff was president of NASDAQ. I mean, he was networked in every country club in all the highest level circles. But wait, there’s more. Look at john corizon. He was frickin Governor of New Jersey.

Salvatore Buscemi 36:10
Okay, often my ex boss too. I know.

Jason Hartman 36:13
Yeah. And he ripped a bunch of people off and nothing’s gonna happen to him probably

Salvatore Buscemi 36:16
right. Yeah, they’re invisible. You’re right. But I think that when you’re talking about john corizon, you’re talking about like these bond trading funds, these hedge real hedge funds. I know that word is abused today. And what he did was he took a lot of risk with other people’s money that was supposed to be segregated. You’re right, with the experience. You’re absolutely right. But I think you’re gonna see a lot of fraud because people are just so desperate pensioners and savers need need to put money they need to return. They’re desperate for yield. That’s why I named the book and making the yield is for someone who wants to get into this business, and learn to make direct loans. This is your, you know, your your gateway drug to do that. And to do that efficiently. And it’s basically off of all my years experience, seeing everything that’s gone bad. But you know, there are some people, and that’s just the way the money management industry is. But the SEC, though, is not in a hurry to prosecute a lot of these people. I think they’re underfunded, I don’t think they have the sophistication. You know, they’re just not going to be chasing after a lot of people, I think I think they choose their fights. And they choose them, you know, the lowest hanging fruit, when you see the more sophisticated frauds sort of like the john corizon. You know, he’s still free. He’s still out there, you know, he got a hand flat, maybe. But, you know, nothing really is going to happen to that guy, because, well, he’s very politically correct. Collect connected to, which is something that, you know, we forgot to mention,

Jason Hartman 37:40
oh, yeah, no, of course. I mean, you know, it’s all political. I mean, all of this stuff gets political. And that’s the problem. The little guy doesn’t have any political power. So he’s gonna get nailed, we’ll have a big guy, it’s like too big to fail. You know, if you rip a lot of people off, and you do it on a really big scale. Or if you have connections in some way, you’re probably you know, there’s a good chance you’re gonna get a pass. Okay? So you can go out and commit your frauds with impunity, you know, or your indiscretions. And another thing that just blows my mind is the way that like these funds, they’re all set up in Delaware, you know, in Delaware, you know, for its share. I mean, it has good business practices and business friendly. That’s why all the businesses are there. Right. And there are other business havens, too. But one of the things in Delaware that you can do, is you can contract away your fiduciary obligation. So you can just say, Hey, you know, I don’t know anything as an investor. You know, I mean, that doesn’t seem right

Salvatore Buscemi 38:38
to me. Yeah. I mean, you’re, you’re more sophisticated than the rest of the guys, but you’re hitting the nail on the head. Exactly. And that’s usually what happened.

Jason Hartman 38:44
I learned that because there was this company in Phoenix called caliber. And, you know, they’re they got a bunch of funds out there now. And we’ve done some deals with them didn’t have very good experiences at all. The first thing he says is, oh, well, you know, we put them in Delaware, because then you know, we don’t have to be liable. think, Oh, wonderful. You know, I’m really gonna rush to invest with you guys again.

Salvatore Buscemi 39:05
I mean, that’s not blazingly honest, they brag about this stuff. It blows my mind. You know, I think really what we’re reaching I think right now, the golden age for if people really do want to pool money to invest in real estate, this is the time to do it. This is the Golden Age. for that.

Jason Hartman 39:26
Well, I I kind of thought you were just saying it wasn’t? Isn’t that the crux of this conversation? Okay.

Salvatore Buscemi 39:31
No, it is the golden puppet. No, and it is if you do it correctly, if you do it correctly, if you’re pulling thousand dollar $500 chunks from smaller investors, that’s not going to work. But as far as people like you, the more sophisticated guys and you have a good track record. You have good ethics. You’re going to be very successful. And we’re seeing that happen right now people, people are buying apartment complexes, these little wreaths are popping up all over the place. And they’re just people who, you know, they don’t have to go to the bank anymore. They’d rather go, you know, to the guy down the street who had a self directed IRA with 500,000, you know, to fund this deal, that’s where you’re starting to see it right now is that it’s taking on more. And really what people want. And the alert of this is that people will want more intimate money management, you know, people who invest with you know, you, they have your cell phone number, they see the asset, they can kick it, they can, you know, touch it, feel it, spit on it. But conversely, and you got to put yourself in the mind of the investor. Now, the saver the pensioner, who’s a loser, not morally or ethically, but they’re just losing money. We haven’t even talked about inflation with that, but they’re just losing money by sitting having a sit in the bank. They’re like, well, I’m going to invest with this guy, rather than put it into Martha Stewart on the media. If I buy 200 shares of Martha Stewart, guess what happens if she does something stupid, again, insider trading goes to jail, that stock will drop probably 50%. But they have no control over the investment. And that’s what people really want today is that they want control over the investment. Good luck calling Martha on her cell phone and asking her why your 200 shares dropped 50%, there’s not a chance in hell, you’re gonna get her on the phone. But when people’s main attraction to is I want something that I can see, touch, feel and understand, I don’t understand the stock market for my part,

Jason Hartman 41:15
and I listen, I agree with you, and that is good, that it’s more intimate, and it’s getting closer to the investor and the man, they can really talk to the management. And that’s, that’s good. That’s an improvement for sure. But for my part, you know, I say for most people just buy some single family homes and rent them out and you’ll she’ll make money. And that’s your retirement. I mean, you know, that may be really your big wealth greater, you know, you can move up, you can move up and buy your own apartment building or buy it with a partner, rather than, you know, having some fun manager that’s skimming the profits off the

Salvatore Buscemi 41:46
top of the deal. Oh, no, absolutely. But you know, there are people who think that there’s an alert, and I’m one of them, and I can’t, you know, I, you know, I don’t want to cut my nose off to spite my face. But you know, I’m wearing two hats here. And, you know, the point is, is I’ve seen some funds that are very well managed, I’ve seen some that are not there was a company in Phoenix, I can’t remember what they, they blew up because they overpaid for everything. And then the banks called the loans do, you know, so

Jason Hartman 42:11
see, that’s the thing, you know, when it’s, what I’d like to see is the fund manager having a lot of their own money in the deal. But you always

Salvatore Buscemi 42:18
have to do that if you always have to ask, and that’s what it comes down to the alignment of interest. And in the institutional world, it goes like this, well, if I get hurt, I want to make sure you get hurt, too. And that’s really what it is. And so, you know, I’ve been in some tenuous conversations and some institutions here in New York, which, you know, people are noticing, okay, what are you putting in? You know, I’m putting in a fresh one, you know, fresh million or something, you know? And where’s that money coming from? Is it coming from you? Or is it coming from your brother in law? Or from people who you don’t know? And when, and not all equity is the same? And, you know, people sometimes will say, Oh, well, it’s my money, is it really your money? Or is that your mother in law’s money, that could be considered your money, because you never want to lose your mother in law’s money. But if it’s being pulled from people who you have no idea who they are, you have absolutely no alignment of interest with your investors. And that makes it so that you can walk away. That’s the hard questions that you have to ask. And that’s what investors don’t ask is that they never ask the hard questions. But you’re absolutely right. You got to have this the proverbial skin in the game, because they want to know that you have your feet to the fire. And that’s how grown up deals are done. Now, it’s not bad to raise money and syndicate money for bigger deals like that. But, you know, again, putting on my investor hat, this is what I would want to see is okay, I’m gonna invest in this guy. So once he got into it, and Where’s it coming from? But But here’s the thing, I just want to point this out, because so you brought this up before when you talked about the rack rate issue, right? A lot of these guys, they’re in the deal, and what what the investors, it’s so hard to sort through and really understand the capital structure on these deals, and the alignments of interest because, you know, they’re in the deal. But, you know, they don’t pay the rack rate. Oh, yeah. I mean, that’s a whole other story. I mean, the syndication sometimes, you know, that blew up, and this is what we, you know, we would fund these you know, we provide to triage financing for this is not all, not all equity, the same. So, some of you guys remember one time some guy came to me, and he had a deal. I’m like, so where are you in the capital structure? Where are you in the cap set? Well, I’m common, but I’m treated like preferred said, No, no, no, that’s not how it works. That’s not how it works. There’s remedies for different parts of the capital structure. And, you know, this guy saying, Well, you know, that they, you know, they treat me like preferred, but I’m common, I say, No, that’s like the what the girlfriend’s saying at a rich boyfriend’s funeral, when they’re reading the will that she deserves to get the millions of dollars and not the wife sitting next to her because he called me his wife he or something. It’s totally different. And that’s why people you know, we actually wrote a book on this, that I’m finishing up, but it’s important to know where you are in the capital structure. What are your rights Some remedies. And people don’t ask that question. They don’t. Sometimes they don’t even know what they’re getting. Sometimes there’s a, they have what, you know, I’ve seen investors offer what’s called a cash flow certificate. I don’t, that means nothing to me, because there’s no, there’s no recourse and no remedies. But you hit the nail on the head right there. Yeah, yeah, good stuff.

Jason Hartman 45:18
So this is really informative. And, you know, in this world in which you operate every day, and you see all this stuff, I want to just thank you for sharing this with our listeners, because there are just so many scams, and, you know, they, some of them don’t rise to the level of being a true scam. They’re just, you know, people who have their hand in the cookie jar, they’re acid aggregators, and they make money by sitting on assets, that’s what they do. They make money on sitting on assets, that’s what they do. And they make money because, you know, they got the management deal over here, and they got the rehabber, you know, the contractor company over here, and, you know, they’re like triple dipping, and although they all have these, you know, they’re referring the business to themselves. It’s self referential, you know, so once they get control of that money in control of that deal, they say, hey, well, you know, my contracting company will just rehab the apartment building, and then my management company will manage it. But all the investors got to pay for management on site to, that’s what we found this caliber company doing. When confronted with it, they just made kind of excuses, you know, sort of says, that’s the way it is tough, you know?

Salvatore Buscemi 46:24
Yeah. And I, you know, because the uneducated investor, they’re like, oh, cool, he’s fully integrated, you know, oh, this is great. He can take care of everything. Not so fast. Not so fast. You’re absolutely right. Always read the fee agreements, too. And if anybody’s thinking about getting into these things, what are the fee agreements, there should be a 1% flat rate in most real estate deals, that’s, that’s acceptable, that’s fine. And the reason for that is because, you know, the investors want to make sure that you’re keeping the lights on, they don’t want you to have to go outside of investing in managing their money to make money to keep the lights on, you know, anything more. I’ve seen it as high as 5% 10%. Why? Why, you know, I don’t, and that just shouts inexperience to me. You know, they show their true colors. Yeah,

Jason Hartman 47:06
wow, just five and 10% versus 1%. That’s, that’s, you know, realize that that’s not a four or a 9% increase. That’s a 500 or 1,000% increase. It’s a multiple of five or 10 times. It’s insanity.

Salvatore Buscemi 47:26
But people pay it because they’re desperate.

Jason Hartman 47:29
They’re desperate, they’re desperate, and they’re busy, and they don’t have the skills or the ability to evaluate all these things, you know. So it says it’s a sad story, it goes back to that casino analogy. And I agree with pretty much everything you’ve shared with us today. So give out your website.

Salvatore Buscemi 47:46
Yeah, we’re for people who are listening on this, we’re giving away we have 20 books that we’re going to give away for free print copies of the book, and they can go to making the yield calm. And there’s a little video there. And I talked a little bit that you can go to making the yield calm, and we’re one of the first 20 will ship the book out. All we ask is a couple bucks for shipping and handling. I think it’s like three bucks or four bucks or something like that. But there’s also a lot of other cool stuff on there, too, like infographics and you know, how these funds should work and all sorts of other things that will really open your eyes as to whether or not you’re, you know, whether or not you’re being played or not, you know, sort of like that old adage that the if you’re playing poker, and you can’t tell who the fool is at the table, it’s probably you. Yeah.

Jason Hartman 48:29
It’s, you know, this to get people smart, we call it intellectual capital. And, you know, that’s the sexy term in the industry and Wall Street, they’ll say, you know, this guy had the intellectual capital to do to pull this deal off. That’s really what it comes down to. But if you go to making the yield calm first when you get a copy of the book, okay, so so get a free book at making the yield.com and salvadore. Thank you so much for joining us today. This was very, very enlightening. So

Salvatore Buscemi 48:56
my pleasure anytime I really enjoyed this. Thank you.

Jason Hartman 49:00
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