Finance

Eve Picker: [00:00:06] Hi there. Thanks for joining me on Rethink Real Estate. For Good. I’m Eve Picker and I’m on a mission to make real estate work for everyone. I love real estate. Real estate makes places good or bad, rich or poor, beautiful or not. In this show, I’m interviewing the disruptors, those creative thinkers and doers that are shrugging off the status quo in order to build better for everyone. And speaking of building better, I’m very excited to share that my company, Small Change, is now raising capital through a community round that is open to the public. Small Change is a leading equity crowdfunding platform for impact investment in real estate. For as little as $250, anyone 18 and over can invest in Small Change, helping to fuel our growth as we disrupt the old boys club of capital that routinely ignores so many qualified people and projects. Please visit wefunder.com/smallchange to review the full details of our raise and to make an investment if you can. And remember, investing is risky. Don’t invest more than you can afford to lose.

Eve: [00:01:44] My guest today is Adam Gower, founder of Gower Crowd. On his platform, Adam shares his decades of experience in finance and development with developers, showing them how to raise money online for real estate Crowdfunding deals. Content rich, his platform includes educational materials and training courses for both developers and investors alike. Adam also hosts a podcast show called The Real Estate Crowdfunding Show: Syndication in the Digital Age, where he speaks with the founders of crowdfunding platforms, attorneys, professors, investors and more, all on the topic of crowdfunding. And he’s written five books as well. Opinionated, straightforward, with lots of information to share, that’s what you’ll hear when you listen in. If you’d like to join me in my quest to rethink real estate, there are two simple things you can do, share this podcast and go to rethinkrealestateforgood.co, where you can subscribe to be the first to hear about my podcasts, blog posts and other goodies.

Eve: [00:03:01] Hi Adam. It’s really great to finally catch up, it’s been a while.

Adam Gower: [00:03:05] It has. It’s a pleasure to see you again. It has been far too long.

Eve: [00:03:08] Yeah, it has. So, you know, I’ve always thought you have a pretty unusual background. From Ph.D. to Universal Studios in Japan to author and then real estate crowdfunding. So, can you connect the dots for me?

Adam: [00:03:22] Oh, my goodness. Yes. Well, actually, chronologically, it wasn’t quite that order. So, I’ll try and do it. I’ll try and do it as fast as I can, which is not good, because talking about myself is my favorite topic. And I can talk for hours, you know, on that subject. But basically, I started pulling wires for an electrician 40 years ago. Oh, my goodness. Summer of 1982. And then from there I did some finance for multifamily developer in San Diego, raising money from Japanese investors. And then, yes, I ended up in Japan during the nineties and was hired by Universal Studios. I was [speaks in Japanese], which made me president and CEO of Asia Pacific for Universal Studios. It’s actually a JV with Paramount Studios. And then I came back and started doing my own developments, got a PhD, you’re quite right, in banking and banking history and risk mitigation, how to mitigate risk in the banking world. And then in around 2012, started doing seed investing, actually seed and angel investing after the global financial crisis had recovered.

Eve: [00:04:45] Oh I didn’t know you did that. That’s interesting.

Adam: [00:04:47] I did. I did a little seed investing and that’s what got me interested in digital marketing, because all these 20-something-year-olds were talking a foreign language. It was the language of digital marketing. So, when the JOBS Act passed and you and I first met, right, you are absolutely one of the first leaders of the crowd here in my [inaudible]

Eve: [00:05:09] I think I shocked you with all the regulations. I remember the conversations like you saying, you can’t do that. Why not?

Adam: [00:05:17] I tell you what, I was so blown away that you did it because I downloaded, it wasn’t the JOBS act, but I remember downloading Reg CF to see if I could figure it out. It was [inaudible], and I printed it!

Eve: [00:05:31] The first time I read it, I read 650 pages, it was like, what is this?

Adam: [00:05:39] I actually printed the thing. It was like, that was a ream of paper, 500 pages or more, and I gave up. There’s no way I’m going to get past the introduction. I’ve got no… The preamble was too long for me, so I didn’t bother. But what I did realize at that time was that there was an intersection between commercial real estate, capital formation and digital marketing. And so, that was where I started to develop expertise in helping sponsors to raise money online, as you know, primarily accredited investors for Reg D offerings. But we just, we do all the digital marketing. That’s what we do for sponsors, and platforms sometimes as well.

Eve: [00:06:23] So, on your site you say the best way to invest in real estate is by crowdfunding. So, tell me why you believe that.

Adam: [00:06:33] So, you know, during my career I’ve raised over a half a billion dollars in capital, as you know.

Eve: [00:06:41] Can you send a little bit of that my way?

Adam: [00:06:43] It’s unfortunate, most of it I did for other people. I’ve very seldom done it for myself. I usually do it as an employee or as, you know, as a whatever, anyway, as a hired gun to help them raise money. But it was always in person, Eve. It was just this painful process of having to meet people one at a time. One of the first terms that I heard when I was in San Diego doing this, I forget who said it, but I can see his face and I can hear his voice saying it’s a dog and pony show. So, we got to go and do a dog and pony show. And that’s what it was. It was, you had to know people. You had to establish a relationship. You had to meet them in person. It was just this incredibly long, painful process of networking, relationship development. As soon as crowdfunding became legal, it just allows you to now, to do that, to transition that entire process online where you can, you know, I don’t want to say literally, but you can effectively be in front of everyone all the time, everywhere. Everyone, everywhere, all the time. So, you still have to go through that attract and nurture process, but by doing it online, by crowdfunding it, it just makes your time that much more efficient. You don’t have to do it one person at a time. You know, the other thing that’s interesting about crowdfunding is that everybody, I don’t know if there’s a video podcast or audio, but I’m going to wave my phone in front…

Eve: [00:08:22] It’s not going to be a video.

Adam: [00:08:24] I’m waving my phone…

Eve: [00:08:26] He’s waving his phone.

Adam: [00:08:28] …as a prop to say what people don’t want, you know, as a sponsor, nobody, no sponsor wants to sit down through a one- or two-hour pitch meeting with one investor after another. It’s time consuming and tedious and you never know.

Eve: [00:08:44] And honestly, I think there’s very few investors who want to go through that too.

Adam: [00:08:47] And that’s the point. Investors don’t want that.

Eve: [00:08:50] And as an investor, you know, I might very well be interested, but the more you try and sell me, the more I’m going to run screaming from me.

Adam: [00:08:58] It puts you off. Investors don’t want that either. Nobody wants that in this world. Everybody wants to be able to, at the very minimum, be able to research and evaluate a sponsor and a deal anonymously. That’s the key thing they want.

Eve: [00:09:16] Anonymously and on their own time and with enough time to absorb it, right?

Adam: [00:09:20] Yes, that’s right.

Eve: [00:09:22] So, it works for both ends. So, really, crowdfunding, the JOBS act, really took investing from behind closed doors out into the open. And it stopped that miserable process. And it also gave opportunities to people who’d never been part of it before. Right?

Adam: [00:09:38] Exactly. Yeah, exactly. It opened up the world to, you know the other thing that it did, Eve, was that it opened the book of real estate syndication. It was a closed book. Closed shop. If you knew the right people and were a member of the right country club, both figuratively and literally…

Eve: [00:09:59] If you were the right gender, if you were the right race.

Adam: [00:10:02] Right gender, and the right race.

Eve: [00:10:04] Yeah. So, all of that was closed, right?

Adam: [00:10:07] You had to have the right connections. But even if you did, you had no access to information about what was fair market, what made sense. They had no basis for comparison when the guy at the country club recommended or tried to pitch you on a deal, you just didn’t know. Today, with crowdfunding, you can go online and see hundreds of deals and compare them all, apples for apples. And that way you can determine not only what fits your investment profile better, but also which of them are treating you the fairest, right at the end of the day. And so, really the world changed. It became a lot more transparent and easier to transact, better for everyone.

Eve: [00:10:55] So, do you think it’s becoming more widely accepted? Like we’ve been at this for a few years now, you and I.

Adam: [00:11:03] Yeah, most definitely. You know, we’ve talked about this a lot, and a couple of years ago, we, it just suddenly occurred to me that everybody, all the insiders in this, the industry insiders, know that the industry is growing by leaps and bounds. We just know it, right? But there were no data that quantified it. There’s one source that looks at regulation crowdfunding and analyzes that, but it’s a relatively, it’s important, but it’s a relatively small part of online syndication. So, we did some analysis of SEC data.

Adam: [00:11:48] We actually downloaded a million data points and I wrote a book. And so, two years ago we discovered, and it’s two years ago already, it’s a long time ago already. The crowdfunding, so, by crowdfunding I don’t mean regulation crowdfunding. I mean online syndication, in general, to include regulation crowdfunding. But Reg D, 506 Cs as well, and Reg As, and realized that actually it was starting, it had become, and even then, two years ago, 25% of all capital raised for all private equity deals was through online syndication. In other words, it was happening.

Eve: [00:12:27] Is this in real estate or across the board?

Adam: [00:12:30] In real estate. So, it’s rapidly becoming the dominant form of capital formation.

Eve: [00:12:37] That’s really interesting. So, what do you think holds people back, especially new investors, from investing in real estate?

Adam: [00:12:45] Yeah, I think, so, that’s a good question, actually, because that question.

Eve: [00:12:50] I only have good questions.

Adam: [00:12:53] And hopefully I can compliment them.

Eve: [00:12:56] I’m just joking.

Adam: [00:12:58] So, I think that that, I would answer that question differently today than I would have done at the beginning of the year. At the beginning of the year, I would say to you that the primary barrier to entry for a new investor, somebody who is considering investing in real estate, is education. Lack of understanding, a lack of appreciation for what real estate is, just, you know, having no experience or background, being used to stocks and bonds and just sticking with what they, you know, their comfort level. That has changed profoundly in the last six months, particularly. Because what’s happened, when we’re seeing this in the data that we gather through the work that we do in marketing offerings. But what’s happened is that you have a stock market collapse that has wiped out huge amounts of people’s net worth. You’ve got interest rates climbing, which is eroding the value of people’s homes, so they feel like their homes aren’t worth as much.

Adam: [00:14:02] And of course, inflation is also having that erosive effect on people’s savings. So, people today, versus where they were nine months ago, feel less wealthy than they did. So, they are significantly more cautious today about anything at all because they feel like if, you know, nine months ago an investor, you could say to an investor, you know, you should diversify. And an investor would think, yeah, you know what, that makes sense. I’ve made so much money in the stock market, why don’t I take some of those winnings and diversify into real estate? Today, the mentality is, wait a minute, I don’t want to sell anything at a loss, right, just to diversify into real estate.

Eve: [00:14:47] Just want to stay in there and stick it out.

Adam: [00:14:49] Yeah. It’s just made it harder. And we’ve seen this dynamic Eve, because we do, some months we spend up to $150,000 a month in Facebook ads across all of our campaigns, not just for Gower Crowd, but for our clients. And what we saw happened fairly early this year, once the inflation kicked in and interest rates went up and the stock market came down, war in the Ukraine. And all this kind of compounding effect, was that the cost of acquiring a new accredited investor lead almost doubled. In other words, it became harder for people were not reacting to the exact same messaging as they were at the beginning of the year because they’re more cautious.

Eve: [00:15:35] So, my next question would be, okay, that’s investors in general. But what holds people back from investing through crowdfunding platforms?

Adam: [00:15:43] I think, again, I think the same answer is there’s just lack of awareness.

Eve: [00:15:47] I would have argued that I think crowdfunding platforms also attract a different demographic. So, I think there are still a fair number of people who don’t trust a crowdfunding platform, who are used to investing in that old-fashioned, behind closed doors. way that… Yeah, I think, I really wonder whether that shift has really happened.

Adam: [00:16:13] It’s interesting you say that because I, we’re immersed in this industry. And so, everybody we speak to knows that for the most part, sometimes, you know, like you do, I also get sponsors coming to me to help them. We get investors coming in and, but everybody has heard of it and is interested, at the very minimum, or has engaged in online syndication and crowdfunding. So, it blows me away when I talk to people who I know are accredited investors. They ask me, what do you do for a living? And I tell them, and they’ve never heard of it. Absolutely.

Eve: [00:16:51] I know, I know. That happens. And that’s really, I feel like, I haven’t done the research on it, that really, where wealth is held hasn’t really shifted to crowdfunding platforms yet. Does that make sense?

Adam: [00:17:08] Yeah, I think so. It’s still an alternative, you know, for real estate, it’s still an alternative asset. So, for most people, it’s never going to take up a huge proportion of that portfolio. It’s not a high priority, it’s a diversion from the usual investments. The only people I know who are heavily overexposed in some cases 100% exposed to real estate are the sponsors themselves. That’s like, they have, they might have a few dollars in stocks and bonds because they feel like they should have, but for the most part, their net worth is entirely based on their commercial real estate real estate investment. But most people it’s, you know, it’s a kind of a flutter on the sign.

Eve: [00:17:57] As a real estate developer I can attest to that. That’s where my money is, in my projects. But my husband and I, together, we’re diversified.

Adam: [00:18:09] Between the two of you. I’m the same with my wife as well. It’s the same thing. She has these stocks and bonds. I have some stocks and bonds as well. I never pay any attention to them. I’ve got no idea what they are, how they work, nothing at all. Zero. And whenever I have a financial planner, he calls me, he likes to have these lengthy, he’s a super nice guy, likes to have these lengthy discussions about my portfolio because he wants to tee me up to asking my approval to do something. Should I buy this? Sell that for… I would say, before we even start, the answer is yes, whatever you want. Let’s get that out of the way for whatever you advise, yes. Can’t think in that sense. But most people don’t.

Eve: [00:18:55] Yes. Okay, so walk me through the services you provide at the Gower Crowd. What type of services do people come to you for?

Adam: [00:19:05] So, what we do primarily is we build, the easiest way to describe it is that we build tailor made crowdfunding platforms. Again, to be clear, these are not regulation CF. We’re not FINRA, SEC. None of our clients do any of that, right. So, these are typically sponsors.

Eve: [00:19:24] So, this is just basically like the old-fashioned private placement investment opportunity now on a website instead. Because it’s permitted, it’s a 506 C offering.

Adam: [00:19:36] Not just that. No, not really. Actually, we build systems that elevate a sponsor’s visibility, so that they become known and recognized as an authority in the industry, so that when an investor comes to them and does research on them, goes to their LinkedIn profile, goes to their website, looks on Facebook, goes to Twitter, goes to YouTube, wherever they are, they realize that they are a leader in the field. The websites used to be, they have no functionality, websites have no, typically they’re just a couple of pretty pictures and a contact page. Well, the websites that we build have full functionality, lead generation forms, lead generation funnels. So, when somebody comes to the website, they can sign up to get on a newsletter. They then get automated emails from the sponsor so that the entire process of finding investors and nurturing them is fully automated for the sponsor, so they can get on with the business of going out and finding deals, buying them and executing of business plans and investors literally come to them. They don’t have to go out and find investors. Investors come to them.

Eve: [00:20:59] Well they are going out to find them because you’re building a marketing campaign around them, right? It’s not about a particular project, but it’s about the sponsor.

Adam: [00:21:08] Yes, that’s right. But it works on autopilot. So, once we switch the machine on, the machine, just cast this net and investors gravitate towards it and come to the website. They do their research, they sign up. And so, the sponsor, it used to be that used to have to go out. You join a country club, or you’d go to a networking event, or you go to a conference. You remember business cards? I used to go to conferences. My primary goal was to get as many business cards as I could, and then I’d follow up with them. That’s all I did. I just, I’d collect business cards, stacks, and then I’d follow up. I’d say, it was nice to meet you at the conference. And then I realized, you know what? I don’t need to go to those conferences. All I need is a list of everybody there. I write to them, and I’ll say, it was nice to meet you at the conference, because no one remembers anyway. Everybody. No one’s got a clue. This is the same thing, essentially. You’re just casting out and people, they come to you, they find you online, they come to you, they get to know, like, and trust you, and become predisposed to investing. Those are the, that’s what we build for our clients. We build the platforms, but we also teach people how to build them themselves. So, that’s kind of the main distinction. And then we do marketing, active marketing for clients.

Eve: [00:22:32] So, what’s the biggest misconception that developers have about marketing or crowdfunding platforms when they come to you that you have to break through?

Adam: [00:22:41] Yeah, I think.

Eve: [00:22:44] That marketing support is probably the number one thing.

Adam: [00:22:47] Yeah, it’s like, moving into, I think first of all, speed, it’s one of the main things I like to emphasize is, this is not a quick fix. It does not happen quickly. I mean, you know that as well as anybody in the country, Eve. It takes a long time; you’ve got to have patience and you’ve got to work at it. So, speed of turnaround is important. And the other thing is the process of being online and being visible for some people is, some people thrive on it, relish it. Other people are hyper protective of their, overprotective of their, brand and their identity. They think it has to be perfect, has to be polished like Hollywood in every possible regard. And it doesn’t, I mean, it just doesn’t. People don’t expect perfection. In fact, if they see perfection, there’s, it creates…

Eve: [00:23:49] A fake facade.

Adam: [00:23:52] Exactly. Don’t worry about, you know.

Eve: [00:23:55] A little authenticity is good, right?

Adam: [00:23:57] Exactly. Warts and all. Don’t worry about it. It’s okay. Zoom recordings are perfectly fine for the online world. You don’t need to have a Hollywood studio and lighting and lights, camera, action to get good. People don’t care. What your investors care about is the message, not the way, not the quality, the way you deliver it. They want to be able to access it on a phone, on their computer, in their car. They just want easy access to it. They don’t care if the shirt you’ve got is the same shirt you wore yesterday, for example, or that it’s, you know, a perfectly high-quality video.

Eve: [00:24:40] I’ve got to ask you a question. What does a really bad real estate crowdfunding campaign look like to you?

Adam: [00:24:48] You know, that is also an interesting question. That is in the eye of the beholder. So, I will tell you that the really easy, the really easy answer to that is something that is, well, there’s actually a few answers. One that’s hypey, that’s just hypey. And over promises.

Eve: [00:25:14] That’s just not permitted. So, you know, no matter which rule you’re using, the SEC won’t like that, right?

Adam: [00:25:20] Doesn’t mean people don’t do it, a lot.

Eve: [00:25:22] I know, I know.

Adam: [00:25:24] So, that is one bad campaign. And investors should be very, very cautious of something that promises the earth, even if it has the CYA language, right? Like projected returns. Be very, very careful. So, that’s one thing. Overhype, too flashy, non-authentic, too polished. I see some stuff out there where I just know people are playing games. Bad. Like, you know, I’m not going to mention…

Eve: [00:25:54] No names.

Eve: [00:25:54] I’m not going to, but some really bad stuff. So, that’s the first thing. The other things that make for a bad campaign, bad copy. You still have to have good written content. Your content still has to be well-written. It doesn’t need to be hype, but it needs to be well written, you know, and there’s lots of people that just don’t know how to do that properly. So, I see a lot of badly written, badly structured campaigns. Another thing that people get wrong is the way that their website is structured. There is an optimal way to structure your website. It’s not that difficult to have a well-structured website, but a lot of people don’t know. It’s something that we teach, I actually wrote a small book on the topic because it’s such an easy thing to do well. So, that’s another thing that people make mistakes with. Yeah.

Eve: [00:26:58] So, what’s a great one look like?

Adam: [00:27:00] It’s the way it’s structured, Eve. It’s the architecture of the website. So, the key components are going to be, you’ve got to have a good catch phrase on the front page. It’s called the Big Idea. So, the big idea is a catch phrase that speaks to what is, the only thing that your prospects, the only thing that’s going, the conversation that your prospect is having in their own mind. And that conversation is always and only ever going to be what’s in it for me. So, whatever your tagline is, whatever your headline is on your home page, should speak to that, period. Because you’ve got about a half a second for somebody to land on your website, during which they will decide whether or not they want to learn more or to leave. So, you’ve got to have a good headline that is easy to understand.

Adam: [00:27:53] And if you want a pro tip, there are three terms that should be, at least two of them, ideally three of them, that should be included in that. The word you or yours. And you are speaking directly to the person that lands on your website. Second is the word real estate. So, somebody knows it’s a real estate website. And third, the word invest or investing or investment, some derivation of the word invest so that people know that you are talking to them directly about real estate investing. And ideally it should be aspirational in some way. And then the second thing, three key components. There’s more, these are the really important ones. The second thing is that underneath that you need to have a lead generation button, a button that says basically, give me your name and email so you can learn more, basically. It doesn’t say that, might say, learn more, join the waitlist, sign up, you know, get access.

Eve: [00:28:50] Right, right.

Adam: [00:28:51] But then what should pop up is something that says gain access to X, Y, Z, whatever your lead magnets is, and then ask for name, first name, email address. And then ideally, you want to ask whether or not somebody is accredited or not, and then you bifurcate them inside your automated emails that then go out once somebody submits that form. And the third thing that is critically important on a real estate sponsor’s website is content. Content is king, Content is king. You’ve got to have good content because your prospects are going to want to research you. So, don’t let them go off to somebody else’s website to learn about real estate. You have to teach them yourself. Otherwise, they’ll do research online, they’ll find somebody else’s client, probably one of my clients or yours, and they will invest with that person, not with you. So, those are the three most important things.

Eve: [00:29:48] So unfortunately, the content piece for Regulation Crowdfunding is very difficult to put in place on a funding portal, which is really only supposed to be doing the business of raising money through those offerings. And we’ve actually had to move our content off. So, yeah.

Adam: [00:30:06] You can’t have educational content.

Eve: [00:30:08] Well, yeah, you can have educational, but it’s got to be really very neutral educational content. So, blog posts and a lot of activity are very difficult because FINRA wants to track it all, makes it difficult. So, anyway, that’s an aside. It’s an interesting little wart about that particular rule.

Adam: [00:30:33] Well, that’s for regulation CF, let’s just be clear about it.

Eve: [00:30:36] Right, right, right. Let’s be absolutely clear. So, we actually have a second site. This one, Rethink Real Estate for Good. That’s where we have our content, because we can generate content there, we always need to be cognizant with the same business, but a little more freely.

Adam: [00:30:52] Yeah.

Eve: [00:30:55] So, what trajectory then, do you see for real estate crowdfunding? What’s in that crystal ball?

Adam: [00:31:02] It’s not that difficult to see what’s going to happen. And we could, I’ve been predicting this ever since the beginning. I’m not the only one. There are few of us that think similarly to what’s going to happen. But the difference between now and ever since the beginning of real estate crowdfunding or online syndication, the difference is it’s going to happen now, right? It’s like happening now. So, this, what is going to happen is that a lot of newcomers to commercial real estate and new sponsors to commercial real estate, I hate to say it, are going to lose their shirts. When they do, their investors are going to lose everything. It’s just going to happen, end of story. I mean, we’ve got interest rates have gone from sub threes to north of six. That wipes out equity, period. And as cap rates increase, that’s just going to wipe out equity across a broad range of asset classes. There are some tailwinds for certain asset classes, multifamily being one where you’ve had this incredible build up, incredible inflation of rents that will cushion some of that blow. But there are a lot of inexperienced commercial real estate sponsors who have raised a lot of money, who will lose everything and their investors will lose everything. So, it’s going to create a huge, it’s going to tarnish the industry, the reputation of the industry, because it will, you know, what do you call it? It’s a black mark that will be, that will stereotypically be applied to all sponsors and everybody that raises money online and to crowdfunding in general.

Adam: [00:32:43] So, those people who have been cautious, who have been frustrated at the excesses that some sponsors have taken online, right, the liberties that some inexperienced sponsors have taken on, we talked about this a bit earlier, the hype, the hype promises, even with the projected returns, all the hype and all that stuff, when those people lose money, that will rub off on even those who have been cautious, prudent. And so, we’re going to see that, with no doubt at all, going into 2023 is going to be a very tough year for the real estate crowdfunding industry as a whole. But those who have been conservative, prudent, careful, multi cycle sponsors who know this is, they’ve defended, have set up defenses already, because they don’t want it to happen again to them. We’ve seen it before and have been careful and held back despite the temptation to compete with the hype mongers right over the last few years. Those people will survive, and those people will prevail and they will get bigger and stronger going through this downturn and coming out the other side a much stronger than they were before. And the same will go for the platforms.

Eve: [00:34:07] So, the big thing here is stay away from the hype mongers.

Adam: [00:34:11] Yeah, I think you’d just be, you know, if it seems too good to be true, it is.

Eve: [00:34:16] It is too good to be true.

Adam: [00:34:17] Yeah, and it always has been. Yeah. But knowing what that is is difficult. You know, it’s difficult. Real estate is a high return, high risk industry. It doesn’t need to be high risk. It can be mitigated. But when it’s lower risk, the returns are going to be lower. So…

Eve: [00:34:35] Right.

Adam: [00:34:36] My advice to investors today is, you know, there’s those that have already kind of been seduced, if you like, into believing that higher returns come with no pain.

Eve: [00:34:45] Well, I think they were seduced a long time ago. I mean, I think the promise of high returns has been falling for the last few years anyway. The developers we talk to, when you hear an investor say, oh, I can get 20 to 25% internal rate of return, the developers I talked to for the last two years have been saying those days are long gone. So yeah, I think you have to be cautious.

Adam: [00:35:13] Absolutely. Yeah, exactly. And the internal rate of return is such a manipulable metric, anyway.

Eve: [00:35:22] We’re not allowed to talk about them, if we’re members of FINRA at all.

Adam: [00:35:25] Well, it’s a good thing, because it’s just so easy to manipulate the IRR, we’ve got to look way, way beyond. And probably the best thing to look at is the experience of the sponsor. How many sites.

Eve: [00:35:38] I was just going to come back to this. You said before, the experience of the sponsor matters, and I think that probably is like a key thing. There’s got to be some experience that is relevant to the project, right? Not like, well, I built three single houses and now I’m going to do a retail strip mall, you know, or whatever. It’s going to be somewhat relevant experience, right?

Adam: [00:36:03] The other thing that’s important to look at is, really the biggest killer in real estate, is debt, the amounts of debt. And if somebody is just layered upon, put layer upon layer of debt on something, you know, they’re going to be able to show those high returns, but it’s going to put their…

Eve: [00:36:22] It’s all going to go to the bank, yeah.

Adam: [00:36:25] Delivering is going to be much harder. So, the best thing, look at people who have lower debt. Even people at, say, sub 50%, 30, 40% debt. If you got sponsors that are talking about that kind of debt, their return profile is going to be significantly lower, but much, much more likely to achieve the returns.

Eve: [00:36:46] But you know what’s interesting about that, that is a targeted neighborhood profile that you’re talking about. So, if you go into a neighborhood that hasn’t had much investment and where city or state wants to have it and they add second to third mortgages that come from an urban redevelopment authority or grants or matching facade grants, etc., then you can lower the debt. So interestingly, I think that those sorts of investments or those sorts of projects that are in, not the hot markets, might actually survive because they have that sort of, I don’t want to forecast anything, but they have that sort of profile. They tend to have sub 50% traditional bank debt.

Adam: [00:37:38] Yeah, that’s, it’s just so important because people talk about the capital stack. I think the language that is used when you talk about the capital stack is misleading. What they say is, they say the first to be paid and then the second to be paid. So, the language that is used when you talk about the bank is the first to be paid and then the equity holders are paid next, is a positive spin on what the capital stack is.

Eve: [00:38:07] Right.

Adam: [00:38:07] But really, what the capital stack means is, being in first position, they have the first right to take the project away from everybody else. That’s what the capital stack is.

Eve: [00:38:21] Now you’re scaring me.

Adam: [00:38:23] That is the power of foreclosure to wipe out all the other investors. That’s what the capital stack means. So, the higher the level of debt, the more people that are there who can take over the project wipe you out.

Eve: [00:38:39] Yes.

Adam: [00:38:40] That’s why the capital stack is, I think the language that’s used is misguiding. It’s not first paid, it’s first right to wipe everybody else out. And that’s why you want to have less debt.

Eve: [00:38:52] Okay. Okay. So, I’m going to ask you one more question that we’ve talked about offline and say, why don’t we ask online? So, if you were to go about helping Small Change my funding portal, double its investor base, what would that campaign look like?

Adam: [00:39:08] Yes, that’s a very good question. So, I would say it depends on how much money you want to spend. So, I’ll give you a range of options. First of all, get on as many podcasts as you can. I know you’ve got your own podcasts. Podcasts are incredibly powerful. Podcasts are micro and nano influencers. You get on as many real estate podcasts as you can. They stay out there forever, it’s a fantastic way of building your visibility and developing a network of more investors, and it’s totally free. It’s just your time. That’s number one. Another thing that you can do is, of course you can do paid advertising. So, we are including non-accredited investors. Gosh, in total I would say our cost of getting investors is running, probably including non-accredited investors, probably sub $20 to $25 a lead. That’s a lead. That’s not an investment.

Eve: [00:40:11] And that’s actually someone who ends up investing?

Adam: [00:40:14] No, not somebody who ends up investing. That’s a lead.

Eve: [00:40:17] A lead. And then what percentage of those convert to investors.

Adam: [00:40:21] So, we only do accredited investors and it’s significantly more for accredited investors. And the accredited investors are running up to $100 a lead. And then we find that the total cost of converting an accredited investor on their first deal is between $3500 and $4500. And the average investment for an accredited investor is between, if your minimum is 25,000, it’s going to be 45,000 to 50,000. If your minimum is 50,000, then the average is going to be 80,000 to 100,000. So, it runs, it ends up being between 3% and 4% the cost of your marketing budget.

Eve: [00:41:00] Okay.

Adam: [00:41:01] Right. Sorry. Not three, 3 to 4% the total amount that you raise should be your marketing budget.

Eve: [00:41:09] But you think it’s higher for non-accredited investors?

Adam: [00:41:12] Well, I don’t know because I haven’t really worked the non-accredited investor market, I imagine…

Eve: [00:41:17] It might be the same.

Adam: [00:41:18] It might, it’s not going to be far off.

Eve: [00:41:20] Because they’re just investing maybe smaller amounts and more of them.

Adam: [00:41:25] Yes, more often. But here’s the thing, you know. We’re talking about first investment within the first 60 to 90 days. Within the first 60 days, you want to be getting, you want to be converting your prospects into actually investing. So, those numbers apply to that period. That group of people will reinvest if you treat them properly and your cost of acquiring them, the second time, is zero.

Eve: [00:41:51] I mean, we’ve noticed that on our platform too. We have a larger and larger base of people, actually, who’ve invested over three times and many more times than that. So, they become very loyal customers. And so, our responsibility is to make sure the opportunities we put on the site are as good as we can get. Right?

Adam: [00:42:10] And also, follow up communication is vital as well. As long as you communicate effectively, it’s really important to communicate with people that will inspire them to invest multiple times. So, those are the basic numbers. I was just, something else came to mind for you that you could try. The other thing that works really well and I, there’s a lot of options, I’m trying to think of the least expensive options.

Eve: [00:42:38] Well, actually, Adam, you taught me well, because full disclosure, Adam helped me way back and helped me to launch this podcast, which has been successful, but also a huge learning experience for me. So, thank you very much. And also, you taught me about always on campaigns, which was evergreen, always on campaigns, which I think is a remarkable tool for people who don’t have the time to be on Twitter and Facebook every day, five times a day, and we’re still doing that. Maybe you want to explain an always on campaign.

Adam: [00:43:15] Yes. So, in digital marketing, the concept is the funnel, so it’s a funnel. And at the top of the funnel, you want top of funnel tactics to get people into your network. Include podcasts, paid advertising, paid webinars, paid email blasts, paid marketing in general. And there’s a whole range of different ways that you can drive traffic to your funnels. Now, each one of them. And then if you have multiple funnels, that will attract different people, but they’re all automated. So, for example, you might have a white paper giveaway, or you might have a case study giveaway, or a PDF about something, or a video training about something, and for each one of those lead magnets, you create social media posts.

Adam: [00:44:07] And so, for a webinar, you might have 20, an evergreen webinar or a PDF, you might have 20 or 30 posts, and then for another one, you might have 20 or 30 posts. So, in the end you’re going to have hundreds of posts that go out on social media automated. They are posted on social media. And people see them, they click on the link and when they sign up to get your PDF, boom, you got their name, email, address, whether or not they are accredited and then you trigger automated emails. It is so powerful to do that because once you build that machine, leads just keep coming in all the time. I probably get ten new leads every single day and I don’t do anything for them. But you know, the funny thing is, as well…

Eve: [00:44:54] Well, you have, you’ve done a lot for them. That’s not true. But you’ve built all of this. But the thing that fascinates me about it is that, you know, social media is very, very fast moving, right? Especially Twitter. So, if you were to natively post something there today, the good chance is that most of the people, you know, will not see it. So, if you put it in an always on campaign, it’s going to pop up some other time and you might catch a few more people who didn’t see it the first time.

Adam: [00:45:21] Exactly. The other thing that’s cool about an always on campaign, an automated posting campaign is that when somebody does research on you, they go to your Twitter account, they go to your LinkedIn account, they go to Facebook account, what do they see? Post after post, after post, all of them super cool, all of them top of funnel stuff. They might glance across the first ten and the 11th one. They think that’s really cool. That’s really interesting.

Eve: [00:45:50] Yeah.

Adam: [00:45:52] That’s the one that inspires them to give you their name and email address. But more than that, I see all these different posts and all this high value content educational stuff that you’re putting out there. They know you’re the real deal, right? And come to know that you are. You can be trusted that you really working at it. You’re not sitting in some basement in, you know, somewhere. Who the heck knows, right? In a, you know, basement somewhere and you know, scamming them, you’re the real deal. And they also think of you as an authority. They realize that you are a leader of the crowd just as you are, Eve. Right. I mean, it’s my first book, right on crowdfunding.

Eve: [00:46:33] That’s right. Yeah.

Adam: [00:46:34] There’s a lot of people in it.

Eve: [00:46:35] Yeah. Yeah. Well, it’s all a lot of work. What I like about always on campaigns is, I don’t know that it’s less work, but it’s targeted work. So, you don’t always, you don’t have the stress of having to think about the next post all the time. So, you can create this bucket of work that you complete. And then you let it loose, so to speak. Right? So, I thought that was very powerful. And the podcasting is also very powerful, but I see it as an educational experience as well. Anyway. So, I have no more questions for you. Do you have any for me? 3 minutes and we’re done.

Adam: [00:47:11] What’s going on in the world of Regulation Crowdfunding.

Eve: [00:47:16] So, Regulation Crowdfunding took a couple of shifts this year, over the last year or two that were great. One was that the upper limit of target for a sponsor or an issuer is now $5 million every 365 days, which was an enormous improvement over 1.7 million. And also, accredited investors can now invest as much as they like, and you do not need to verify their status. They can self-verify. So, it’s actually more seamless than the offering that you typically do with sponsors. There’s no verification, it’s just a self-verification. So, that is a big wow, I think. So, you can use for everyone. But non-accredited investors still are limited as to how much they can invest. However, those limits were changed as well. They used to be the lesser of a percentage of income or net worth, and now it’s the greater of. So there have been little shifts that have pushed, you know, raising more money, raising larger amounts, permitting investors to invest more.

Eve: [00:48:26] And then last week, the SEC adjusted the cap for the three tiers in raising money for issuers around financial statements. So, if you want to raise up to 107,000 until last week and now up to 124,000, you don’t need any financial statements except a self-verified one. When you’re raising money as an issuer, let’s say you only want to raise a little bit, so you can now raise up to 124,000 with self-verified financial statements. As a first-time issuer, if you want to raise more than that, you can now raise up to 1.235 million with third-party financial review. Of course, if you’re a real estate developer and you have a brand-new entity, it’s going to be a third party financial review of nothing. But nevertheless, you need to have that, right. And then if you want to raise over 1.235 million, you have to have a third-party audit completed.

Adam: [00:49:28] I see.

Eve: [00:49:28] So, those are the…

Adam: [00:49:31] Kind of the changes. Have you noticed it materially harder to raise money this year since all this market turmoil or not in Ref CF?

Eve: [00:49:42] Yes, maybe it’s very hard to track that. It’s possible. Our projects are so varied that it’s, I mean, if we had hundreds of them and I could put them in buckets, I might be able to track that. But they’re so varied, our common denominator is impact and real estate, not the product that’s being offered or the opportunity that’s being offered. So, it can vary from a very traditional waterfall to 2% debt. It’s really a big variation. So, it’s hard to say. I don’t know. We’ll see in a few months. I had one issuer come back to me who completed a raise earlier this year saying that he wanted to raise more money because debt was just harder for him to get. So, definitely, which means less debt from a bank, more equity required. So, definitely some shifts like that, I don’t know yet.

Adam: [00:50:39] Yeah. Lending has definitely tightened up.

Eve: [00:50:42] So Adam, you know, in the 2008, 2009 downturn, I had a portfolio that actually performed very well, and I barely noticed it because the buildings I had were small and boutique and unique, and there was always someone who would rent a space. And so, it didn’t have the impact that I think other buildings, properties had. So, I don’t know the answer to that. Does anyone really, you know? I don’t know.

Adam: [00:51:14] Let’s just stay closely in touch over the next few months.

Eve: [00:51:17] So, let me ask you, what’s your really big, hairy, audacious goal with the Gower Crowd?

Adam: [00:51:23] I think to educate more. I send out a lot of high value educational content that I don’t sell. So, I actually, we’ve got a lot of really first class training materials and I’ve just been, I’ve not really been particularly proactive in giving people access to it. So, I think that’s what we’re going to be doing. It’s exactly what I’m going to be doing for the rest of the day and tomorrow, is putting together some funnels that say, look, we’ve got this great stuff that is for sale. So, take a look at it. If you want to test the… have a look at it, try it. If you don’t like, I give you money back. But I’m going make more effort to sell more of them.

Eve: [00:52:13] Yeah, yeah.

Adam: [00:52:13] Yeah, it’s really good stuff and it just, we’ve restricted it to private clients mostly. But in this market, I just think more people need access to it. They’re going to need help. And so, we’re going to release more of that.

Eve: [00:52:28] I should really check it out to see if you have anything that works for non-accredited investors in terms of educational, because I agree with you. I think education is key.

Adam: [00:52:38] Yeah. All right. Yeah, we…

Eve: [00:52:41] We can talk more about that.

Adam: [00:52:42] Sure.

Eve: [00:52:43] Well, thank you very, very much. And we’re going to talk again.

Adam: [00:52:47] Such a pleasure seeing Eve. It’s been far too long. Thank you so much for inviting me on the show.

Eve: [00:53:06] I hope you enjoyed today’s guest and our deep dive. You can find out more about this episode or others you might have missed on the show notes page at RethinkRealEstateforGood.co. There’s lots to listen to there. You can support this podcast by sharing it with others, posting about it on social media or leaving a rating and review. To catch all the latest from me you can follow me on LinkedIn. Even better, if you’re ready to dabble in some impact investing yourself head on over to wefunder.com/smallchange, where you can invest directly in Small Change and our mission to democratize capital formation to create impact in commercial real estate development. A special thanks to David Allardice for his excellent editing of this podcast and original music, and a big thanks to you for spending your time with me today. We’ll talk again soon. But for now, this is Eve Picker signing off to go make some change.