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Veterans Buy America.

Andy Williams is a former Marine who was determined to better his life (and secure his future) through real estate. In a fairly short period of time he built a substantial portfolio of homes, a real estate development business focused on larger projects, and now, a program that seeks to turn veterans into entrepreneurs just like himself.  While his organization, Recon Realty, is focused on making a profit, Andy’s heart is in the impact he can make (Recon Realty is also a B-Corps).

As Andy describes it, “Real estate was a safe haven [from the war] for me and [his wife] Ashley. It was a safe investment vehicle that allowed for us to serve our community in a small way as we built a portfolio of rental properties. After a few projects, we realized that impact investing was our calling. We used it as a bridge to get back home from Iraq, to start a family, and ultimately build a business.” And with that experience, they aim to help make it easier for other veterans to do the same.

In 2018, Recon ran a pilot program where a dozen veterans were guided through the process of buying, flipping and renting income properties, and this coalesced as Veterans Buy America. They call it a “residential developer accelerator,” and their goal is to now grow it nationally. “It doesn’t matter how much money you have. It’s whether you’re solving a problem,” Andy has said. “I want to show the world that entrepreneurs like me can exist.”

Insights and Inspirations

  • Andy went from military veteran to owning a portfolio of homes to becoming a developer of much larger projects.
  • Andy’s head is focused on profit. But his heart is focused on impact. He wants to teach vets just like him how to “own a piece of America.”
  • So far, Andy’s program has successfully helped 100 vets become RE developers. His BHAG is to help 100,000.
Read the podcast transcript here

Eve Picker: [00:00:11] Hi there, thanks for joining me on Rethink Real Estate. I’m on a mission to make real estate work for everyone. Real estate can help to solve climate change, can house people affordably, can create beautiful streetscapes, unify neighborhoods and enliven cities. So, I’m on a journey to find the most creative thinkers and doers out there. I’m not the only one who wants to rethink real estate. You can learn more about me at EvePicker.com or you can find me at SmallChange.co, a real estate crowdfunding platform with impact real estate investment opportunities open for investment right now. And if you want to support this podcast, join me at Patreon.com/rethinkrealestate, where there are special opportunities for my friends and followers.

Eve: [00:01:10] Today, I’m talking with Andy Williams, the founder of Recon Realty, amongst other things. Andy was a Marine determined to better his life through real estate. In a fairly short period of time, he built a substantial portfolio of homes, a real estate development business focused on larger projects, and a program that seeks to turn veterans into entrepreneurs just like Andy. While Recon Realty is focused on making a profit, Andy’s heart is in the impact. The question for him is, how can he use real estate to turn transitioning veterans into entrepreneurs so that they too can turn a profit? Patriots need to start buying up America, he says. I’m going to learn a lot from Andy and so might you. So 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 or go to Patreon.com/rethinkrealestate to learn about special opportunities for my friends and followers and subscribe if you can.

Eve: [00:02:42] Hello, Andy, thanks so much for joining me today.

Andy Williams: [00:02:46] Oh, it’s a pleasure to be here. Thanks for having me.

Eve: [00:02:49] So you’ve gone from being a U.S. Marine to a real estate developer to impact entrepreneur, in a pretty short period of time. And I wanted to start by asking you how you got involved in real estate.

Andy: [00:03:03] Real estate really was a transition from private security contracting to civilian life. I was trying to build a bridge back home, so I bought my first rental property in 2006. And it was a safe investment, an easy investment and made sense. And I just kept doing it for about six years, buying rental properties in my hometown with the intent to build enough cash flow to replace my income that I was making overseas.

Eve: [00:03:38] And where is your hometown?

Andy: [00:03:41] It’s in central Texas.

Eve: [00:03:42] Okay.

Andy: [00:03:42] So I’m 5th generation Texan. So…

Eve: [00:03:45] Okay.

Andy: [00:03:46] After getting back from the Marines, I made Texas my home.

Eve: [00:03:50] What did it take to purchase your first time? I mean, that’s a pretty big leap from Marine to buying a house.

Andy: [00:03:58] Yeah, actually, my first house was around 50,000-dollar rental property. So it took me, I think I put 20 percent down, so it was about 8,000 dollars. And after I got out of the Marines, I’d actually save some money while I was in. And then I was making, you know, very good pay, working with the State Department, under private security contract. So, I I’d basically reinvest my my monthly salary into rental properties for about six years.

Eve: [00:04:33] Wow. So. And did you need to make these properties tenant ready? Like, I suppose I’m wondering what skills you had to learn in that transition and how you identified the right sort of properties to buy. And you know, what your plan was. What was your big strategy?

Andy: [00:04:50] I didn’t have one of that time. I grew up in in this in this community that was segregated. It was there was good houses, bad houses, you know, people that were rich and there was people that was poor. There was really not a middle class. And so when I started making money, I wanted to buy properties for the underserved and provide sustainable housing. So, my dad was a concrete foreman when I was growing up. And around that time, he was he was aging out, wasn’t able to do the do the work that that he had in his trade. And he was kind of out of work. So, he was kind of my eyes on the ground, and I would buy properties and he would be my project manager and he would make them ready and then we would lease them out. It was very mom and pop.

Eve: [00:05:45] That’s fabulous. Yeah. Were your first houses a success or did you have any failures, any moments where you regretted what you were doing?

Andy: [00:05:57] No.  I’m very conservative and I was always I’ve always been an investor for the long haul. So, you know, I think I just sold last year a property that was in my portfolio for 15 years. I think some of the the fifth house I ever bought was a duplex. It’s still in my portfolio. I’ve always looked at real estate as a as a way to kind of build wealth, but also solve a problem. And I think that’s what attracted me to the affordable housing market. Because I grew up understanding that real estate and safe housing, quality housing was really a privilege that was afforded to few.

Eve: [00:06:43] Yes.

Andy: [00:06:43] And when I was in a position to, you know, do well, I wanted to do good. And so it became a safe return. It wasn’t until I started trying to build an operation around it, was there risk really being assessed because I was buying really cheap properties in a market that I felt that I understood. I actually felt that it was misaligned and I wanted to play on the long haul and being well traveled as a as a veteran and seeing kind of the simplicity of being able to buy a home, you know, fix it up and rent it out and looked at the rate in the rents and the cash flow, it just made sense. But when you started to, it was it wasn’t until 2012 when I came back from Iraq. At that point, I had about 50 rentals and I wanted to kind of start a business. And so I started looking at trying to integrate construction component and I started flipping houses. And that’s when I started realizing that there was a different dynamic. Most of that had to do with the characters. When I started investing in the in the city, the Dallas Fort Worth area. I ran into some bad actors and not everyone did what they said. And you had to kind of have protocols in place. And so, I spent a better part of three years building some infrastructure. But I was able to kind of make some mistakes and build through those those challenges because I always held a decent sized rental portfolio, that in my mind was kind of a baseline. It was a cushion, in case you ever ran into some problems you could dump a rental and if you needed to leverage, you had cash flow coming from your rental portfolio. So, you never really was too overexposed.

Eve: [00:08:56] So how big is that portfolio? I mean, what do you think the baseline should be for people who are listening?

Andy: [00:09:03] That really depends on your goals. I mean, mine was, you know, about a five-million-dollar portfolio. And, you know, I was thinking I got it up to about 100 houses. I’ve scaled it down over the last three years because I hit that threshold where I didn’t want to deal in that housing stock. And then also I didn’t want to reinvest in the communities where I had properties. I ran into some some infrastructure challenges. My dad passed away in 2014. My mom started managing the properties and that that original portfolio really was just kind of a mom-and-pop operation and meant to be mom and pop. And once, you know, it kind of served its purpose, I divested it. And then I moved my operation to the major market and then I started building teams. And the projects I’m doing now, they’re more, you know, leveraged on teams. I’m good at I’m good at certain things, certain things. You know, I’m not as strong at or passionate about. And so I leveraged my my military background to kind of build teams and into medium to large size projects that are basically what I’ve learned over the last five years is that, you know, good projects are are really executed with good teams and a solid project is is really effective if you can assemble the right team around it. And so I focus on team building around projects at this point. And entrepreneurially, I have a focus on, you know, capacity building and training that I actually do what I’ve already done. And that’s more more where I’m headed in the future. We’re actually rebuilding our portfolio now, but we’re doing build to rent and we’re we’re playing in and into areas and we’re focused on distressed communities that have been redlined or segregated or socially deprived of capital because of its demographic. And we’re trying to get ahead of gentrification and build capacity…

Eve: [00:11:15] Right, right.

Andy: [00:11:15] And then trying to hold some properties there as we we have an input.

Eve: [00:11:19] But what a great story. Those small properties really helped you build a much, much bigger career. And that’s, that’s pretty valuable, right?

Andy: [00:11:31] Yeah, I think the sense is, is, you know, you make your mistakes and you learn. But I think the biggest thing that I’ve learned over the last three years, maybe five, is that, you know, I got started early and I was lucky because I was you know, I was advised to invest for the long haul and I wasn’t looking for, you know, a quick buck. And once I figured out something that made sense and it made money and kept doing the same thing.

Eve: [00:12:01] Yeah.

Andy: [00:12:02] It’s like in the military, you know, in the Special Forces community, you don’t you don’t really add a magic style or systems. You just kind of focus on mastering the basics. And that’s that’s what I did. So when I look at, you know, buying, you know, single family homes to to do renovate to rent, it’s very simple. You do it once you figure out what your kind of your cost is, you know, you take a wood frame home 1950s. You got to figure out what it’s going to be to get that renovated and get it turn what it’s going to rent for, what your leverage is going to be. And you just rinse and repeat once you figure out how to get in there. Right. You you get it gutted. You put it back together and you throw a tenant in there. It’s really should be, you know, an operation, a management issue. And you just scale up to what your capacity is. And, you know, there’s a lot of liquidity in the market now, too. And so, you know, the finance vehicles that are present today weren’t present 10, 15 years ago. So it’s a lot easier to to really execute the scale. You know, an operation and you just got to find the right markets and the right product.

Eve: [00:13:18] Right, right, right.

Andy: [00:13:18] So you can go that down.

Eve: [00:13:20] But I’ve also read that you want to use real estate to turn transitioning vets into entrepreneurs. And so, you know, to help people like you do the same thing in some way. And how do you do that?

Andy: [00:13:37] A couple of years ago, I got to a point where, you know, I had some national exposure and I was able to create a conversation with the right people. So, I’ve always thought that and believed in the idea that America runs on capitalism and veterans were not necessarily being positioned to build sustainable businesses. We were kind of being, you know, reintegrated into corporate America. And, you know, a lot of veterans just aren’t cut out, nor that they need to just go right to work. They need to figure out a passion that they can pour their energy into. And it can be project based.

Eve: [00:14:22] You know, my son is a vet, so I witnessed that firsthand. Takes away the transition. Yeah.

Andy: [00:14:29] Yeah, so funny story. There’s a Marine that got me in the real estate. He was a World War II Bronze Star recipient. He fought at the Battle of Iwo Jima. And I still have some of the properties that he sold to me. But when I when I was in Iraq, I was on leave and I have seen this old frail man pulling some carpet out of this duplex. And I stopped and I asked him what he was doing and if it was his property and if he’d be willing to sell it. And, you know, gave me his number. When I got back overseas, I called, and we talked for about a month and a half and end up selling me the property. I didn’t know him until he sold me actually about 30 properties, which helped me scale, but I never got to know him. He came back from World War II and he started a fencing company, and he was moving houses from Fort Stockton down to central Texas. And he he kind of had a retirement built on free and clear properties. And so I kind of followed his blueprint. But when I when I seen myself, you know, fast forward 2012, 2013, 2014. And then I get some national exposure. I just was frustrated that my peers, my friends, my fellow veterans weren’t positioned right. And I just always felt America needed to do better, but I just didn’t think they understood. So, I went to the Department of Labor and I sat down with them and I worked with them to create a programatic that, you know, I believe was a transition platform. And we tested it and we brought it to market. And we’re now in the process of expanding that that mission. Rehab Warriors does exactly that. We teach veterans to be the average home builders and developers. The big difference is we’re not telling them to come work for me or they’re not vertically integrated and we’re a construction company. We actually don’t have them picking up tools and hammers and we don’t teach them trades to work for DR Horton or Lennar. We we actually give them the principles. We show them how to model financial projects and we give them access to capital and we have them go access properties in their market.

Andy: [00:16:42] And we’ve got a lot of success. And that’s more my passion. You know, I could flip 1000 homes in the next ten years. I could, you know, build a large rental portfolio, but that’s not success for me. Success is if I can train 10,000 veterans to do what I’ve already done and find peace at home. Because I think the war fighter really does deserve to own part of the country by which it served. And the other way, I think that we’re going to be able to to be able to do that, you know, truthfully is to buy at a discount, create the value and rebuild the infrastructure. And that’s why we have a huge emphasis on affordable housing in distress zones. We teach these veterans, and we redirect their energies and efforts into their communities. And they’re finding properties and they’re having a lot of success. And naturally, they’re building teams. But more importantly, they’re local to their community and they’re solving problems in their local community and they’re finding their passion. And America’s better for it, you know, I’m better for it. And and America is getting a new breed of developer that I believe it deserves.

Eve: [00:17:53] So tell me about some of these success stories. Like it sounds like you’re sort of starting out on this journey. How many vets have you trained? How many have been successful? What does it look like so far?

Andy: [00:18:05] So we have 100 percent success rate. And, you know, we we probably supported about 100 veterans. So far through the training, we have about 50 on the platform we’re going to roll out, which we’re still early stage because I focused on making sure that we had 100 percent success and then tooling it down to where the veterans wanted to be. But we had a military veteran perfect case study. Female veteran, you know, started a minority owned business right inside the community that she was discharged from. And you know, she she got into, you know, our community back in June 2020. We helped source and identify the right property by August, matched her up with a local banker. She was able to access, you know, very competitive financing. We try not to play in the hard money space. We don’t play in the private money space. We really have a position. We want proper capital to execute these projects. And so access to capital was something that I emphasized the last year and a half, two years. But she just finished her project, took her 90 days, bought a working home, took it apart, put it together. And, you know, she she ran into some some contractor issues, which is mostly…

Eve: [00:19:24] Pretty normal.

Andy: [00:19:26] Yeah. And that’s where we really emphasize the support is we, anyone can show you how to find a property, anyone can show you how to model, and anyone can show you where the money is. What we do is we build a community where we help walk you through it. Because we want you to be successful, because if you get you get through one property, you’re going to continue on the journey. So, we help navigate the contractor issues. And she ended up completing a beautiful rehab and set on the market. She got a full price offer and she closed and she made, she made money. She made a lot of money.

Eve: [00:20:04] Good for her.

Andy: [00:20:06] It wasn’t the money, though, that that was motivating. It was the fact that she she got through it and she was able to, you know, less than one mile from the gate that she left and discharged. She was able to reintegrate successfully. And she chose our program over any of the any of the programs that the military had. And so we have a waiting list. So, you know, there’s a lot of veterans that that are on the waiting list. We’re building out the infrastructure. But right now, as a founder, I’m kind of putting the culture in place.

Eve: [00:20:36] Yeah, yeah.

Andy: [00:20:37] The market, it’s really, it’s really hot right now. And I don’t want to send a bunch of veterans into the communities right now to go buy, because really, you shouldn’t be flipping houses in markets that are kind of peaking. And most of the market shifted to new construction. We do teach home building. And then as for myself, I shifted to developments. And I think, you know, we’re being disciplined right, and we’re trying to, we’re waiting for the dip and then we’re going to assemble and deploy. But in the meantime, we’re putting the training wheels on and we’re putting them, the people through the program so that they can execute. And more importantly, we we’re building the culture where we want to we want to put the community first, yield second and we want to serve.

Eve: [00:21:22] Right. So, like, just generally, what are some of the challenges you’ve been confronted with? Because you’ve come a long way from your roots. There must have been financing challenges and, you know, neighborhood complaints. And I don’t know what else. You know, aside from the contractor challenges which are always there.

Andy: [00:21:44] Yeah. I mean, I think, you know, let’s take it down because, you know, my my smallest project we just put on the market, you know, 150,000-dollar rehab that we threw up. We bought it for 60, put 70 into it and you know, turned the market to a little affordable house that we could have tore down and rebuilt. But we wanted to connect with the community. But in that same neighborhood, we got 13 acres and a contract where we’re going to throw up a tax credit investment. Low-income housing tax credit, portable housing, you know, three story corner unit, garden style apartment. And really, it’s the challenges we’ve navigated, you know, so far has been just understanding what, while we’re there and what we’re doing. I don’t really see real estate as complex as some people. I mean, the financing is is very intricate to the project. And I’ve been very, you know, focused on going downstream. You know, there’s a lot of private capital out there, financial institutions, you know, there’s crowdfunding platforms. But my focus has been really I want the federal allocation. You know, there’s trillions of dollars spent on affordable housing. So, you know, I’m going to go get the money that, you know, is best suited and effective at modeling out.

Eve: [00:23:09] Um hmm.

Andy: [00:23:09]  I’m on the State Board of Affordable Housing. And so, I have some some initiatives and I’m pushing at the state level here in Texas. And we’re executing beautifully the model and we’re navigating the challenges. But what’s happened with the approach for the overall mission is that I’m allowing organizations to align, that they really see the big picture, going to help me move the needle forward. And that’s how we’re creating progress. Because it’s, we’re solving the real problem.

Eve: [00:23:45] Um hmm. So one final question. What’s what’s next for you? It doesn’t sound like you stay in one place too long.

Andy: [00:23:53] Yeah, I think what’s next is just keep doing what I’m doing. I’m really focused on Rehab Warriors. We just got done redeveloping and rezoning a large tract that we’re going to we’re going. To have a seven-year commitment to the city where we’re going to end up building 500 single family homes.

Eve: [00:24:16] Wow.

Andy: [00:24:16] Over 100 build to rent single family homes and town homes. And we got a multi-family affordable housing project, a single-family affordable housing project and some retail. So that was kind of my case study. We picked up some land, brought it to an RP from HUD and my development team and I’m a I’m a I’m a small part of the development team, but a big part of the mission. We’re able to work with the city and this small community that didn’t really have the right developers supporting them. And we came in and we put together this master plan.

Eve: [00:24:54] Um hmm.

Andy: [00:24:54] And, you know, the by-product of it is we’re going to continue to serve the community. And my goal is to just close the loop between the size of projects I’m doing in the in the single-family homes that actually have a passion for capacity building for the veterans. Because I really believe that the veterans have, in my mind, the ability to not just reintegrate, but safely land inside America’s housing market and solve a real critical problem. Because we have an affordable housing crisis across the country. We have a lot of skilled trades and unskilled trades gap, but everyone sees that as the problem. Right. But it’s the opportunity for me because I see the problem is I got 250,000 more fighters coming home every year and they’re trying to figure out what’s next. And I’m just going to give them a very focused target. That just go and do this and you’ll find not just peace of mind but purpose. And if you do it right, you execute and you end up economically mobile, which is the end state. Because if we can, you know, help our war fighters come back home and have economic mobility in America, we’re better off. And so that’s my mission to improve America’s housing stock by, you know, reintegrating veterans, but doing it in a way where we’re winning and we’re ushering them into a conscious capitalist community.

Eve: [00:26:27] It’s an honorable goal and a really big one. And I really hope you’ll be incredibly successful at it and I thank you very much for taking the time to talk to me today.

Andy: [00:26:38] Yeah, it’s a pleasure. And you’ve done some great work. And, you know, I think your platform is also, you know, an option. And I think I love what you’re doing because, you know, you’re democratizing access to great projects with great operators.

Eve: [00:26:55] Yeah.

Andy: [00:26:56] It’s needed. I think everyone wants to be a part of, you know, the change. And I think that this is just one area. You know, my goal is just to capacity build, build operators so they see this is a focus. So, it was a pleasure. And I keep doing the good work.

Eve: [00:27:14] Yeah. Yeah. No, Andy, I want to say I think I mean, I think, you know, I’ve always been horrified at how vets have been treated when they leave the military and having seen the sort of support that they get inside before they leave. It’s it’s not it doesn’t seem to be the right sort of support. So, I think what you’re doing is fantastic. Just keep going.

Andy: [00:27:38] Yes. I appreciate it and you as well. Thank you for having me.

Eve: [00:27:42] Okay, bye.

Andy: [00:27:50] Bye, bye.

Eve: [00:27:50] That was Andy Williams. He’s a self-made real estate mogul with a heart. He’s passing on what he’s learned to other vets just like him, so that they, too, can participate in the wealth this country has to offer. It doesn’t matter how much money you have, it’s whether you’re solving a problem. Andy says, I want to show the world that entrepreneurs like me can exist. You can find out more about this episode on the show notes page at EvePicker.com, or you can find other episodes you might have missed. Or you can show your support at Patreon.com/RethinkRealEstate, where you can learn about special opportunities for my friends and followers. A special thanks to David Allardice for his excellent editing of this podcast and original music. And 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.

Image courtesy of Andy Williams/Recon Realty

Get in on the GROUNDFLOOR.

In 2013, Brian Dally co-founded GROUNDFLOOR with the seed of an idea born out of the Jobs ACT of 2012.  From humble beginnings, funding their first $50,000 loan with just 50 investors, Brian and his partner have built GROUNDFLOOR into the go-to funding platform if you want to fix’n flip property.  And now they’ve added in Accessory Dwelling Units as well. Last year, with the pandemic looming over their heads, 90,000 investors invested $145 million into fix’n flips through GROUNDFLOOR.

Brian has a diverse educational background, from political theory to business to law. He worked as an entrepreneur back in the dot-com boom of the 1990s, and for communications companies in product management and VC strategy. In starting GROUNDFLOOR, based in Atlanta, he and his team broke new ground as the first company approved by the SEC to offer real estate debt investment, via Reg A, to accredited and non-accredited investors alike.

But Brian isn’t planning to stop at fix’n flips or ADUs. He thinks the GROUNDFLOOR model can be used on a much bigger scale, and on a much more varied asset class. He is optimistic about where they are headed, and after successfully weathering a pandemic year, which included reducing fees and interest rates for borrowers to reduce the financial burdens, he says, “‘We emerged from it stronger and better.”

Insights and Inspirations

  • With GROUNDFLOOR, Brian has opened the door to investors of all types, truly democratizing investment. You just need $10 to invest in a GROUNDFLOOR loan.
  • GROUNDFLOOR was an early adopter of one of 2012 Jobs Act regulations that seeded the investment crowdfunding industry – Regulation A.
  • Last year GROUNDFLOOR raised $145 million in tiny fractional amounts, and made 90 loans to developers fixing and flipping properties. And this with the pandemic raging.
Read the podcast transcript here

Eve Picker: [00:00:16] Hi there, thanks for joining me on Rethink Real Estate. I’m on a mission to make real estate work for everyone. Real estate can help to solve climate change, can house people affordably, can create beautiful streetscapes, unify neighborhoods and enliven cities. So I’m on a journey to find the most creative thinkers and doers out there. I’m not the only one who wants to rethink real estate. You can learn more about me at EvePicker.com or you can find me at SmallChange.co, a real estate crowdfunding platform with impact real estate investment opportunities open for investment right now. And if you want to support this podcast, join me at Patreon.com/rethinkrealestate where there are special opportunities for my friends and followers.

Eve: [00:01:24] Today, I’m talking with Brian Dally of GROUNDFLOOR. GROUNDFLOOR started with the seed of an idea born out of the Jobs Act of 2012. From humble beginnings, funding their first 50,000 dollar loan with just 50 investors, Brian and his partner have built GROUNDFLOOR into the go to funding platform if you want to fix and flip property. And now they’ve added in accessory dwelling units as well. Last year, with the pandemic looming over their heads, 90,000 investors invested 145 million dollars into ‘fix-n-flips’ through GROUNDFLOOR. You might learn how to fund your next ADU. It’s an unusual model and worth listening 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 or go to Patreon.com/rethinkrealestate to learn about special opportunities for my friends and followers and subscribe if you can.

Eve: [00:02:44] Hi, Brian, it’s a real pleasure to have you on my show today.

Brian Dally: [00:02:48] Great to be with you, Eve.

Eve: [00:02:50] Yes, so you and I are kind of in the same business, we both founded companies based on the 2012 Jobs Act and we both care about democratizing investment in real estate. So I want to just start talking about what you do first today and that is GROUNDFLOOR.  Why don’t you just explain what GROUNDFLOOR is.

Brian: [00:03:13] Well, as you said, we realized back in 2012-2013, you and I didn’t know each other back then, but you were tracking the same trend. You know, the world of investment and capital formation was undergoing some very early change back then, and it continues to go through change, even today. But what started back then is Congress and the SEC put rules in place that for the first time allowed everybody, regardless of your income or wealth, to participate in a whole class of securities offerings that haven’t been open to people who don’t meet the definition of an accredited investor.

Eve: [00:04:00] Let me jump in.

Brian: [00:04:01] Sure.

Eve: [00:04:01] Because people don’t know what an accredited investor is. It’s probably about three percent of the adult population in the state, which in itself is pretty shocking and it’s anyone who has income of 200,000 dollars a year and has had for three years. Or has net worth of a million dollars, at least a million dollars without their primary residence. That’s right. Right?

Brian: [00:04:26] Yeah, exactly. And that’s a very small slice of the American population. And if you meet that definition, if you’re in that club for a long time, you have had access to investments that the other 97 percent of us haven’t had. And which started to change in 2012 is Congress and the SEC put forward rules that would start to open that up. Now, since then, they’ve continued to improve those rules, spell them out a little bit more. Companies like Small Change and GROUNDFLOOR have been built. Republic is another one that allows you to invest in startups, for example, or StartEngine or SeedInvest, there are a bunch of portals now where you can go invest in a wide variety of securities offerings that weren’t open to us all before. We saw that coming, we started a company to help open up that market and we’re still going. Now, we’ve got about 90,000 investors who are investing. Last year put in about 150 million in aggregate into our investments. We’re funding 70 or 80 different real estate projects per month now using this model. And I mean, we’re really just getting started. I think you would agree, right, with Small Change we’re just in the early innings even still.

Eve: [00:05:43] So what is your model? Because we both have real estate platforms, but they’re pretty wildly different, right?

Brian: [00:05:49] Yeah, we looked at the market for investments and we said, look, what’s missing out there is sort of a short term high yield secured investment that people could get their hands around. You know, so many times you invest in real estate or you invest in a startup or something, and your capital is locked up for a very long period of time. Typically, the terms of those investments don’t give you a lot of control over it. Like, for example, if you put money in any of the eREITs like Fundrise or RealtyMogul, any of these new kind of funds that have launched, you weren’t able to access your capital when you probably wanted it. And you’re in Covid. Because they shut down redemptions out of those funds. And we looked at the landscape of investments and realized what was really missing was for all of us to invest the same way that hedge funds and banks do, which is on a per deal basis, on a short term, a short term loan that that has a high yield. So where we started with GROUNDFLOOR was with value added renovation to single family houses that were being basically built by independent entrepreneurs. Right, so you have somebody who had a real estate project that they wanted to fix and flip, for example, or fix up and rent out and create rental housing out of it. We make a loan to them and then we turn around and allow individual investors to participate in that loan, ten dollars at a time. So, most people invest about an average of two or three hundred dollars. But you can start with a minimum of just ten. And what that means is if you have 1,000 dollars to invest, you can invest in 100 loans, which is a very nicely diversified portfolio. You’re as diversified as a lot of small private equity funds or hedge funds. So you get the same benefits of diversification and the loans repay on an average of about nine to ten months. And the average rate that people are earning ranged between 10 and 11 percent. So it’s a very high rate of return on short holding period in an asset that if you watch any house flipping show, you can understand what’s going on there.

Eve: [00:08:01] Sure.

Brian: [00:08:01] And I think that’s why it’s been so popular, is those factors.

Eve: [00:08:04] So, a couple of things. One is I get what you’re offering investors. Opportunity to invest in a way they’ve never had before. What does this do for developers who do ‘fix-n-flips?’                             ?

Brian: [00:08:17] So developers who do ‘fix-n-flips’ or who are trading rental housing or we also finance independent builders who are doing new construction. There are a couple of problems with the capital markets, the way that they’ve been built, so far, on the legacy infrastructure. The legacy infrastructure is financed by some kind, what used to be banks. But when banks stopped funding this category of real estate development or or this type of small business, if you will, these types of projects, really who stepped in were sort of wealthy people with checkbooks. In any town, there are probably a couple dozen people who will finance these types of real estate projects. The problem is that the form of lending was not very professional. It was hard to find these lenders. The terms were all over the map, sometimes very lopsided terms for these agreements.

Eve: [00:09:12] Yeah.

Brian: [00:09:12] And I think the problem is if you’re just getting started out as real estate investor, a house flipper, a builder, it’s pretty hard to find your way in those capital markets. And I think the other problem is that a lot of the real estate development that’s getting done in residential real estate, in places where housing stock is aging, for example, when Wall Street steps in, they just buy up blocks of a neighborhood and they bulldoze everything and they build up McMansions or they build up some kind of mass market product. And that doesn’t leave a lot of room for the independent builder or the independent real estate investor. So they’ve been playing at a disadvantage over the last 10 or 15 years. And GROUNDFLOOR’s approach solves that problem because we’re not lending out tens of millions of dollars at a time to one company that’s going to go bulldoze a neighborhood. We’re working with independent real estate developers who know these neighborhoods. They probably live in the neighborhoods. They care about the neighborhoods. And I think that’s a good counterweight to gentrification. Right. I think it’s a way to to renovate the residential real estate stock in a way that is more community friendly. Right. It also allows people in the community to participate in the financing of it, which I think is a novel idea.

Eve: [00:10:32] And so where are you lending now?

Brian: [00:10:35] We lend in about 30 states. Our lending is heavily concentrated in the southeastern U.S. We dabbled quite a bit in the mid-Atlantic and the midwest and we’re starting to expand out west now. We started to finance projects in Colorado. We’ve done a couple in Washington state. We’re not in California, but we’re in about 30 states for lending and then investors nationwide.

Eve: [00:10:59] Yeah, yeah, obviously. And then how do you vet the the developers and the deals.

Brian: [00:11:05] We’re frankly looking at developers on these deals the same way that anybody who’s lending money or investing money in an entrepreneur would look at an entrepreneur. We’re asking ourselves, can this entrepreneur with this plan create the result that they’re hoping to create? And a lot of times we use this expertise to help entrepreneurs realize maybe the deal wasn’t as good as they thought it was going to be. Right. Maybe their plan, they didn’t have a big enough budget. Right. We really look very closely at the budgets for the projects and we look a lot at the valuation at the end. Do we believe I mean, every entrepreneur, myself included, we always believe what we’re doing is super valuable. Right. So GROUNDFLOOR will serve as a little bit of a reality check for those situations where maybe their expectations are a little inflated. We need to make sure that the properties can sell for enough in the end…

Eve: [00:12:00] That investors get their money back, right?

Brian: [00:12:02] Yeah, I mean that and they get it back in a timely manner. Right? I mean, that’s that’s really important to the model that investors can trust the projects that we put up. It’s not that things don’t go wrong. Things do go wrong. You know, when you’re renovating something, you know this well. You’ve dealt with so many interesting projects in Pittsburgh and beyond that, you know, you’ve seen it firsthand. I mean, you can’t plan for every contingency, right?

Eve: [00:12:27] For sure.

Brian: [00:12:27] Things take longer, things cost more money. And so in our vetting, we make sure that the plan covers those major contingencies. And that’s why we’ve had such a low loss ratio. Over time, we’ve lost less than one percent of the money that we’ve loaned out. And the returns of 10.5 percent are net of those losses. So, it’s a pretty low volatility and investment where you really know what to expect.

Eve: [00:12:54] Right.

Brian: [00:12:54] That’s why it works for the investor. Why it works for the borrower, for the entrepreneurs, they get a professional outfit that’s actually looking at the merits of what they’re trying to do. And we’re providing some advice to them and a perspective. And if everything lines up, we’re happy to fund it. We’re doing like I said, we’re doing about 70 to 80 fundings a month right now.

Eve: [00:13:14] Wow. A few years back when I met you, we talked about how hard it was to find your crowd of investors.

Brian: [00:13:23] Yes.

Eve: [00:13:23] And what you have to go through at the beginning. And I’d love to talk about what that was like and how that compares to today and what you think made a difference.

Brian: [00:13:33] Well, I realized early on that, and I think you felt this too, you and I are creating, you know, an unknown product in an unknown category from an unknown company. Right? So it kind of just amazed me in the early days that anybody would, you know…

Eve: [00:13:52] That’s absolutely true.

Brian: [00:13:54] Isn’t that the feeling, though? It’s kind of just amazing.

Eve: [00:13:57] Yeah. And by the way, we just closed an offering today for 890,000 dollars.

Brian: [00:14:02] I saw that. Congratulations. That’s huge!

Eve: [00:14:06] Yeah.

Brian: [00:14:06] That’s huge! Congratulations. That’s got to be one of the bigger ones, I would think.

Eve: [00:14:11] Yes.

Brian: [00:14:12] Yeah, I would think so. That’s that’s a huge success. And that’s a testament to just continuing to persist because I think what I was about to say is, I think you’re probably feeling this too, is that people now are more comfortable with the idea that this exists, you know, this category exists, that they, too, can get access to these deals. And there’s a little less of what I used to call the Groucho Marx problem, which is like I wouldn’t want to invest in any investment that would allow me to. Right? It’s a problem of investor psychology. And I think the category has advanced now enough that people are interested. I also think we’re seeing the rise of the retail investor more generally. I mean, look no further than what happened last month with Robinhood and GameStop.

Eve: [00:14:59] Yep.

Brian: [00:15:00] The retail investor is waking up and as they wake up, they’re also realizing that public markets for a lot of people feel like it’s a rigged casino. And they’re now open to the idea that they can invest, that they should invest, that they can band together to put their capital to work and cause a change. And I think some of these traders are going to become investors. And that’s part of what’s happening, too. And then the third factor that has started to change the game and bring in a lot more growth. And we had a record Q2 and record Q3 last year because of some of those other factors, you know, the retail investor waking up and opting out of public markets. But I think the future growth that’s to come and that we’re starting to see lift off from now is the track record that we’ve all built. Right.

Eve: [00:15:49] Yes.

Brian: [00:15:49] Now that we’re repaying, you know, we have over 1,500 loans that we’ve repaid.

Eve: [00:15:54] Yes.

Brian: [00:15:55] You know, and people now can see what the empirical data tells them about what they can expect. You can go on our website and see a scatterplot of, I think 9,000 portfolios that have returned capital on at least one loan over the years and you can see what returns that portfolio has earned on average based on how many loans they’ve invested in. What you learn is the more you invest, the more you can predict the return. And I think that’s giving people more confidence in the category, in the companies and in the products, right, that we’re building here.

Eve: [00:16:29] Right right right. So along with all of this, but I want to go back to what I originally asked. Sorry. And that was like I remember you telling me a story about what it took to get one person to invest in the beginning. And how many did you have last year?

Brian: [00:16:45] Gosh, we now have 80,000 investors.

Eve: [00:16:47] That’s amazing and really what is a fairly short time to kind of scratching your head over why you can’t even find one investor to…

Brian: [00:16:56] Well, the first loan we funded was a 50,000 dollar loan for a house flip in Adair Park in Atlanta, which is a neighborhood, transitional neighborhood near the beltline. I think we put, it was a 40,000 dollar loan. We put 39 investors in it, you know, a thousand dollars each. And it was a lot of work.

Eve: [00:17:16] A lot of work.

Brian: [00:17:18] A loan that small won’t last a day or two on the platform.

Eve: [00:17:22] Yes.

Brian: [00:17:22] And, you know, people are investing smaller amounts in many more loans. So there might be 500 people in that loan. Three or four…

Eve: [00:17:31] It’s pretty amazing that you can invest just ten dollars.

Brian: [00:17:33] I think just yesterday we hit a new record for I think 1.2 million dollars was invested on the platform just yesterday alone.

Eve: [00:17:41] Oh, wow. That’s that’s amazing. Congratulations.

Brian: [00:17:44] We’ve come a long way. But I’ll tell you one thing that’s exciting to me about that is that now that we have those basics in place is we recently started piloting an ADU financing program.

Eve: [00:17:57] That was my next…

Brian: [00:17:59] Oh, oh good.

Eve: [00:18:00] Question. Yeah. I want to know about your ADU program because that’s a little bit different for you. And I wanted to ask why you are piloting that.

Brian: [00:18:09] I’m psyched to talk about that, because when we started off, yes, we wanted to build a financial product, but more than that, we wanted to build a platform that could be used for good. You know, we wanted to open up this asset class. We wanted to make a great investment product. But we also hoped that people would come to the platform as borrowers or sponsors and investors in order to have a positive impact on the world as well. I feel very strongly that the source of capital really matters to the result that we actually see in the world. And I think real estate plays an important role in shaping our communities. I mean, it’s where people live and shop and work. And I think that who is financing that work really matters. And I think this ADU program is exciting to me because as an entrepreneur, when you build a platform, you have ideas about how people will use the platform. You can’t predict it. If it goes well, people use your platform to create even more value for themselves in the world around you. Then you even get. Right. I mean, that’s the whole idea of a platform. And still with this ADU pilot, we were actually approached by some people in that community who are having trouble finding financing because of the particular borrower situation that sometimes exists where you have somebody who doesn’t want to move out of their house, out of their neighborhood. Home values are changing over. They like to participate in the growth of the neighborhood and they see ADUs as a way to do that because we’re increasing density. I mean, there are two ways of dealing with increasing lot values and housing stock values. Right. One is you can knock everything down and just rebuild it all with mcmansions and more valuable real estate. I think most of us in the impact community would agree that sucks. Right? The other way is to increase density by changing the zoning rules and you change the zoning rules, but then you still need financing.

Eve: [00:20:11] Right.

Brian: [00:20:11] So to support that increased density. And I know you’ve talked with PadSplit, for example. That’s one way to increase density. This ADU sort of approach is another way…

Eve: [00:20:21] PadSplit doesn’t really increase density. They find unused spaces.

Brian: [00:20:26] Right.

Eve: [00:20:27] A little bit different. And by the way, I feel bad, because we we haven’t told everyone what ADU stands for. It’s accessory dwelling unit. And it’s also what we know as a granny flat. It’s just an additional unit on your property, on your piece of land.

Brian: [00:20:44] I think the reason we were excited about it is we saw it right away as a valuable approach to urban development in certain situations, especially with gentrifying neighborhoods where homeowners don’t need to be displaced, but they can participate in what’s happening around them as owners and grow their equity value without having to be displaced.

Eve: [00:21:06] Yeah.

Brian: [00:21:07] Right. So, selling their property and taking that money and moving elsewhere, we think is a suboptimal outcome for many people who would rather stay right where they are. You know, stay in their neighborhood, retain the character of the neighborhood, but open up some more housing opportunity in that neighborhood, too.

Eve: [00:21:24] Yeah.

Brian: [00:21:26] We’ve got excited about it, mostly because we saw a place where, you know, the traditional financing sources weren’t going to step in. We thought that investors on our platform would like it. And we were right. The first two ADU deals that we’ve put out there have sold very quickly. Had a really enthusiastic reaction. And so, you know, we we have a little ways to go to kind of build up the pilot. But I’ll tell you, we piloted new construction two years ago, and it’s already, I think it’s on track to be about a third or maybe even 40 percent of our volume this year. And I mean, the same thing could happen with ADUs.

Eve: [00:22:01] The most difficult thing might be that the person who wants to build an ADU, accessory dwelling unit, the homeowner may have absolutely no experience building anything.

Brian: [00:22:13] Right.

Eve: [00:22:13] What do they do? And this is probably one of the most difficult things to crack about accessory dwelling units. How do people who have no development, no real estate experience, go about adding that value to that property?

Brian: [00:22:28] Happily, there’s an ecosystem of builders, contractors, architects who are ready to meet the needs of the people who want to do that. The problem is that those people cost money. The projects cost money.

Eve: [00:22:44] Yes.

Brian: [00:22:44] And a lot of people don’t have the money. So even if you know about the idea, you know, first of all, you have to get connected into the ecosystem of people who work on these things and do them right. Right. Do them within the zoning standards, you know, do them in a way that will be good for long term value. People who are inexperienced that I think have to tap into that network. But then even if they tap into that network, what’s been missing is the money. Where do you get the money to do it?

Eve: [00:23:12] Right. And, you know, the whole business of financing something as complicated as well.

Brian: [00:23:19] Agreed.

Eve: [00:23:19] You know, provide something consistent and easy to understand, that would be really helpful.

Brian: [00:23:25] And that’s the goal, right. So we’re we’re looking to partner with contractors and architects who know how to get these projects off the ground. And so, when someone has an interest, there’s already a network of providers that know how to plan it out, design it, and, of course, finance it, because we’re we’re out there offering that fund.

Eve: [00:23:51] That’s fabulous. Yeah, yeah, yeah. You know, I was on a panel with a CDFI a few months ago and was horrified when they explained with great pride how they had spent the last three or four years developing a program which looked like it would, you know, finance a couple ADUs, maybe four a year. And I was just like, how do we even get this to work if there’s no financing out there?

Brian: [00:24:14] Right.

Eve: [00:24:15] Yeah.

Brian: [00:24:16] Yeah. I think people on our platform, investors on our platform have a lot of appetite for it. I think it’s a it’s a really attractive investment. I think it’s a really attractive initiative for homeowners in certain situations where they want to stay put and they want to grow their equity value in concert with the neighborhood around them. And I like it because we think that one of the benefits of crowdfunding for financing as a way to finance real estate is that people should be involved, directly involved in deciding what gets financed and how. This is a way that that can happen. Right?

Eve: [00:24:56] I like ADUs because I think they build on infrastructure and community that’s already there, which is a great thing. You know, the bus stop that’s right out there on the street or grocery shop or a school or anything like that is already there in that community. And we’re adding density around those really important pieces. So it’s a fabulous idea. So I want to go to your background now. Your background is very diverse. Communication technology, gaming, political theory, business and law, but not real estate. So I wonder how you came to this real estate platform from your background?

Brian: [00:25:36] Well, I have been an investor since about age 15. And one category that I had never really invested in was real estate. You know, you always hear it’s it’s almost like a trope in American life, right? Like, well, the way to build cash flow is through owning real estate. Right. And so there’s there are no shortage of real estate investing seminars and whatever out there. So I feel like real estate investing is kind of in the air, you know, in America, more or less. I mean, it’s amazing to me that we still have house flipping shows that are watched. You know, people people are interested in it. And I think that drove me as an entrepreneur because what I was looking for after leaving the wireless industry in my previous startup, by agreement, I could no longer work in the wireless industry. But we had built this wireless company that was structured in a way that allowed people to route around, you know, the cell phone network, except when they absolutely had to have it. And then they could, you know, the calls would switch from the Wi-Fi network to the cell phone network. And the company that we built, it’s called the Republic Wireless it’s still around today. One of the things I noticed and I think this is true in politics, in philanthropy, I know it’s true in finance, people when you give them a platform where they can band together, I mean, this happened on Reddit, right? You give them a platform where they can band together and cause some change by voting with their dollars, by buying differently, by investing differently. They will do it because we can all debate whether people are smart enough to make their own decisions or whether they know what they’re doing or not. The truth is, regardless of whether they are or not, they’re going to behave as though they are. And that’s what can drive a lot of change in the world. And I think we start to get a closed loop feedback system where people do get a lot smarter. And so, you know, as an entrepreneur, I was very attracted to that. I didn’t quite know what sort of financial product we could build and what would be underneath it. But pretty quickly, Nick and I realized that if you’re building this new type of product and you’re trying to open up this type of investing, you should probably do it in a space like residential real estate that’s tangible, that people can understand, that people are excited about. And I think that’s what really led us there. Now, once we got there, you know, also as an entrepreneur, you need to have something as a beachhead that, you know, makes up for the perceived risk, like, for example, at Republic Wireless, we’re launching phones, we said, look, this is an unlimited plan that’s going to cost you 20 bucks a month instead of 150 bucks a month. And you’re not going to be locked into a contract. Well, people really like that. They saw some advantage in that. So they were willing to try the technology. With GROUNDFLOOR, we said, look, you know, you’re not going to lock up your money, you know, for years. You’re going to lock it up for months. You’re going to get a really high rate of return. If this thing works, over ten percent and you’re going to get to control it, you’re not turning your money over to a fund manager.

Eve: [00:28:46] Um-hm.

Brian: [00:28:46] You get to make the decision. And I think because it was residential real estate, they believed it. Right? It was tangible and they could buy into it. If we had done it in some exotic category that nobody understood, like financing receivables or something, I don’t think it would have been as successful. So I had to learn about real estate. I’ve spent a lot of time with people with many decades of experience in real estate. And now very shortly as an operator will have made a billion dollars worth of loans in this category.

Eve: [00:29:16] I think that’s fantastic.

Brian: [00:29:16] You know, which is not an insignificant number. So I had to climb the learning curve. We have a lot of advisors and executives around the company with deep experience in this. And as an entrepreneur, you know, a lot of us want to learn something. This was an exciting area for me to to learn. And now I guess I don’t get to claim that I’m not experienced in real estate anymore.

Eve: [00:29:36] I think that would be true. What do you love doing the most about this?

Brian: [00:29:41] I love working with people who are putting themselves out there and taking a chance. So the people who I’ve most enjoyed interacting with are the entrepreneurs who are financing projects on our platform. I can really identify with them and equally the investors who are venturing off into this unknown. I really identify with those people. You know, we started raising money from our customer base to finance the growth of the company. So we have a crowdfunded equity offering that’s still live today on SeedInvest. I love talking to people about getting involved in angel investing. So I really like engaging with the people who are drawn to these platforms because I admire them for being intrepid enough to take the risk and vote with their dollars to change the way that we finance, in this case, real estate. And we’re startup. I think that’s that’s what I love about it.

Eve: [00:30:41] I think that’s great. And actually, there’s still a relatively small number, because one of the reasons this is hard is there’s still a pretty big group of people out there who don’t trust online investing and…

Brian: [00:30:54] It’s still the early innings, it really is. 

Eve: [00:30:56] Early innings. Yeah. So what is your big, hairy, audacious goal for GROUNDFLOOR?

Brian: [00:31:04] The big, hairy, audacious goal is to take the model that we’ve pioneered for these private capital markets and to show that what we’ve done in these first couple of sub asset classes in real estate can be done at a bigger scale across a broader scope. You know, the big, hairy, audacious goal would be to infect other asset classes with this model. You know, it’s a very disruptive model. It’s easy for people to look down on it and say, oh, it’s underpowered, but that always happens with disruptive technology. So my big, hairy, audacious goal for this is to see how many asset classes at what level of scale this model can produce, the kind of results that it’s producing in this market. And I don’t know where the endpoint for that is. I think it can go very, very far. So I don’t have a specific quantification of that. But that’s the idea, is I’d like to take what I think we’ve proven in this one market and see how many more markets we can extend it into.

Eve: [00:32:08] And I have another question for you that may be a little bit difficult, but is there anything else that you’re noticing out there that really excites you about the way we might do things differently, live a lot differently, what we what we can change?

Brian: [00:32:22] I look at our own market and I think it’s true in digital assets, I think it’s true in the securities that we’re offering online, I think it’s true and how we transact in real estate. I see a lot of opportunity to remove friction from the system. I mean, you look at something like title and how much time and money.

Eve: [00:32:44] Oh yeah.

Brian: [00:32:45] Is put into clearing title and then battling the insurance company when there’s a defect in title that comes up later. I think this is the bane of real estate investors everywhere. And I think it’s true in private market transactions with illiquid assets generally. And I think it’s something I’m excited to see change because I feel like it’s a very difficult change to effectuate. But I think as a community, we’re going to keep chipping away at it and eventually we’re going to have to knock down the barriers to I mean, title is a great example. But I would just say in general, these kind of transactions in illiquid securities need to, the friction needs to come down.

Eve: [00:33:28] Yeah, I totally agree with you. Well, thank you really so much for talking with me. I really enjoyed it. And I’m really wondering what’s going to happen this year if you did so well last year as well, too. Right.

Brian: [00:33:42] I think things are looking up, you know, in 2021. And and I hope we get to work together.

Eve: [00:33:48] Yes.

Brian: [00:33:49] Eve, I really admire the work that you’ve been doing and been persistent enough to keep doing over the years. And I hope we get to join forces someday and do some work together.

Eve: [00:33:59] That would be fantastic. Thank you so much, Brian. Bye.

Brian: [00:34:02] Yeah, you too.

Eve: [00:34:06] That was Brian Dally. Brian isn’t planning to stop at ‘fix-n-flips’ or accessory dwelling units. He thinks the GROUNDFLOOR model can be used on a much bigger scale. And on a much more varied asset class with 145 million raised in 2020, I can’t wait to see where he takes the company in 2021. You can find out more about this episode on the show notes page at EvePicker.com. Or you can find other episodes you might have missed. Or you can show your support at Patreon.com/RethinkRealEstate, where you can learn about special opportunities for my friends and followers. A special thanks to David Allardice for his excellent editing of this podcast and original music. And 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.

Image courtesy of GROUNDFLOOR/Brian Dally

The potential of unused space.

The US may be facing the most severe housing crisis in its history. Restrictive building regulations and zoning have pushed real estate prices out of reach for more and more Americans. The problem, which has been growing for the last fifty years, has been sharply accelerated by the pandemic.  

While some progress is being made, the rate of homelessness is outstripping policymaking to squash it. This problem requires more creative responses, both long-term and temporary, that recognize the unique characteristics of cities and their populations.

Vacant land 

Many cities have vacant and underutilized land. There’s a growing awareness that cities are the most sustainable places to live and this makes vacant lots in cities quite attractive. Often small in size, they can be well-suited for the building of small, affordable homes. Developers and architects are turning their attention to these lots in an effort to make an impact on housing affordability. Architects like Brian Gaudio, turned housing manufacturer, who launched his company Module to build efficient infill homes. Or Jonathan Tate, a New Orleans- based architect who focused on designing and building affordable housing on odd-shaped and forgotten lots. One of his projects, Starter Home Two, was built using crowdfunded equity raised through Small Change.

Adaptive reuse

Underutilized government offices, hotels and shuttered public schools might also help to solve the housing shortage. The pandemic has increased the inventory of buildings that now stand vacant. And some developers and investors are creatively acting upon the opportunity.

Repvblik, an LA development company, has built its practice around adaptive reuse since 2015. In Branson, Missouri, they have converted a Days Inn Hotel into affordable housing, turning 423 hotel rooms into 341 affordable multifamily units. Plato’s Cave now includes coworking spaces, meeting rooms, a gym, a communal kitchen and dining room for functions, a beach volleyball court, and free-to-use bicycles. The cost of conversion for this project was less than half of the cost of building a new property. Starcity, a San Francisco-based company, is also converting defunct and underused commercial and hospitality spaces. And ASK Studio, an architectural firm, has converted an 1888 local high school, in Clinton, Iowa, into 16 affordable multifamily units.

Empty rooms

But what about homeowners who are feeling the squeeze and have a spare room or two in their home? Or real estate owners who are just not realizing the appropriate rent for their property? Atticus LeBlanc, an affordable housing advocate for over a decade now, founded Padsplit to address affordable housing a little differently. Instead of building new, he advocates for using every empty space in every home for an abundance of affordable living options. On Padsplit, a technology platform, homeowners can list a room, or find a local contractor to reconfigure their home so that they can share it with multiple tenants. On the outside, a PadSplit looks like any other traditional home. But on the inside each house typically has five to eight furnished bedrooms, with shared bathrooms, kitchen, dining, and laundry rooms (no living rooms). Utilities, internet service and cleaning is included in weekly rent, making these “pads” extremely flexible housing options. Padsplit homes are designed to allow single person households, or individual workers in our communities, to be able to rent individual rooms rather than entire homes.

Want to learn more? Listen in to my podcast conversation with Atticus.

Image by Htm CC BY 4.0, via Wikimedia

The impact accelerator.

From ecologist to impact investment guru, Dr. Stephanie Gripne has had a singular career arc. Originally trained in wildlife management and conservation, she went on to work on issues surrounding the built environment, in conservation real estate, environmental markets, and in the wonky world of financing strategies and historic tax credits. At the same time she was working as a research fellow, studying impact investing and philanthropy, and she became involved in the Colorado impact investing scene.

In 2012, it all came together when she founded the Impact Finance Center (IFC), based in Denver, as a nonprofit academic center with a mission to identify, train and activate philanthropists and investors to become impact investors. In 2019, the IFC added on an Impact Investing Institute, to provide education to organizations, family offices, foundations and other funding groups. Today, Stephanie’s big, hairy audacious goal is to move a trillion dollars into impact investing.  

Stephanie believes that impact investing is all about educating people – and the IFC is quickly becoming the go-to place for every level of investor, from the well-endowed non-profit world to individuals who have never invested before. We know you’ll be hearing more from Stephanie and the IFC, for sure.

Insights and Inspirations

  • Stephanie wants the Impact Finance Center to be the place to go for agenda-free and trustworthy investor education.
  • The Impact Finance Center is an accelerator for impact investors.
  • Stephanie believes there is a gigantic audience of potential impact investors out there we can reach.
  • The IFC provides impact education through portfolio evaluation, educational offerings (with 200 classes online), training and an ever-growing number of themed impact investor clubs.
  • And you should check out the Impact Real Estate Investing Club.
Read the podcast transcript here

Eve Picker: [00:00:14] Hi there. Thanks for joining me on Rethink Real Estate. I’m on a mission to make real estate work for everyone. Real estate can help to solve climate change, can house people affordably, can create beautiful streetscapes, unify neighborhoods and enliven cities. So, I’m on a journey to find the most creative thinkers and doers out there. I’m not the only one who wants to rethink real estate. You can learn more about me at EvePicker.com, or you can find me at SmallChange.co, a real estate crowdfunding platform with impact real estate investment opportunities open for investment right now. And if you want to support this podcast, join me at Patreon.com/RethinkRealEstate, where there are special opportunities for my friends and followers.

Eve: [00:01:09] Today, I’m talking with Dr. Stephanie Gripne. In what seems to be an improbable amount of time, Stephanie has gone from ecologist to impact investment guru. Her big, hairy, audacious goal is to move a trillion dollars into impact investing. Ten years ago, about four years after getting her doctorate, she became director of the Initiative for Sustainable Development at the University of Colorado’s Real Estate Center. There she was immersed in issues surrounding the built environment and socially responsible investing. In 2012, she took the leap and founded the Impact Finance Center as a nonprofit academic center with a mission to identify, train and activate philanthropists and investors to become impact investors. I’ve already learned a lot from Stephanie, but I’m going to learn more and so might you. So, 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. Or go to Patreon.com/RethinkRealEstate to learn about special opportunities for my friends and followers, and subscribe if you can.

Eve: [00:02:40] Stephanie, I’m so happy to talk to you today.

Stephanie Gripne: [00:02:44] Eve, I am so happy to talk with you today.

Eve: [00:02:47] So, you have a supremely cool resume and it’s pretty clear how driven you are. There’s a lot to talk about, but I wanted to start by talking about what you’re working on today. You lead the Impact Finance Center. What is that?

Stephanie: [00:03:01] That’s a great question, Eve. For those of you in the audience who have heard of an accelerator, you might have heard of TechStars or 500 startups or Y Combinator. Those accelerators are essentially boot camps for people who want to start a startup or a small business. So, they identify, educate and invest in entrepreneurs. When I was a professor in 2010-12 at the University of Colorado at the Leeds School of Business, I was actually the director of the Initiative for Sustainable Real Estate Development. I just kept wondering why isn’t there more money flowing into good things? And I finally kept unpeeling the onion and realizing there are not entities out there providing investor education that is non-conflicted or trustworthy, in that most of the investor education is actually trying to get your business. So, it comes from Wall Street and they’re trying to become your investment adviser or raise a fund. And so, my hypothesis was that if we started providing non-conflicted investor education from the inside of a nonprofit, where we weren’t going to try to raise a fund or become your investment advisor, we could actually educate and activate these investors. So, going back to the accelerator analogy, Impact Finance Center is essentially an accelerator for impact investors. Instead of identifying, educating and investing in entrepreneurs, we identify and educate individuals and organizations who want to become impact investors. And those typically are: private foundations, community foundations, high net worth individuals, companies and family offices.

Eve: [00:04:51] So, that’s really how you and I started talking way back on the plane ramp, where we met, right?

Stephanie: [00:04:58] That is true. We did mean on a plane ramp in California. And yes, we are. I had been following the crowdfunding movement for some time and figuring out what my role in it was going to be.

Eve: [00:05:10] How do you accomplish investor education and accelerate those impact investors? What is it you actually do?

Stephanie: [00:05:17] That’s a great question. We really offer five ways for people to get education. One, and this is the the holy grail of it all, is we can evaluate your investment advisor portfolio, and that is pretty brutal. We evaluated a 100 million dollar foundation in Seattle and found out their investment advisor had charged them in excess of fees of one million dollars over five years to underperform by five million dollars.

Eve: [00:05:49] Ohhh.

Stephanie: [00:05:49] We have a 15 million dollar foundation in Denver … where we evaluated their investment advisor and found out they had been charged in excess of fees of $240,000 over seven years to underperform by 1.4 million dollars. So, we have, that is number one. We can evaluate your portfolio and investment advisor for governance and fees and evidence-based decision evaluation and impact. And then, the next phase is just education. We’re putting our 200 classes online. We have 47 recorded webinars up there. So, if you’re a do-it-yourselfer … sign on our Impact Investing Institute and train yourself. We also offer one-on-one training, small group training and large group training.

Eve: [00:06:39] Wow. That’s a lot of work, Stephanie. When did you launch the center?

Stephanie: [00:06:43] I was a professor at University of Colorado in 2010-12. And I realized then, once I had essentially collected evidence and accidentally discovered that the financial return of a grant is negative 100 percent loss. I determined that this impact investing was legal; and determined that, also, that people were interested, but there wasn’t a place for them to go learn. And then, the other piece, I realized, is asking somebody to do a first investment, cutting a 25,000 dollar check, even if you have a lot of money, is scary. And so, the key was, that’s in my, I use a baseball analogy, that’s a major league investment. And so, how do you create a T-ball opportunity for people to learn by doing. And so, that’s either using simulations like business case competitions or kind of monopoly. We do some simulation type activities, where you get to pretend you’re an investor or you actually do a small dollar amount. And we often have people take money they would have donated and pool it together in a giving circle model, and then they learn how to invest together.

Eve: [00:07:55] Interesting. Interesting. Who are you trying to reach? Like, who do you think your audience is? How big is it?

Stephanie: [00:08:04] Our audience is gigantic. If you just Google the number of millionaires in states like Colorado or Georgia or Massachusetts, and you’ll see a range from 150,000 millionaires to over a million millionaires … that’s a great question, Eve. People often ask me, oh, would you rather not work with a foundation or, versus a high net worth individual? And there’s two criteria that we look to partner with people. One, they have to be motivated and willing to take action. If you’re going to be on the slow boat will still help you, but you don’t get to be first in line. So, you have to be willing to move and take action. And the second thing is, you have to be an independent thinker. If you’re somebody who likes to have the crowd go first and you join the crowd, you’re probably not the right individual organization to come find us. And so, those are difficult to go find. But it’s great. We’re really nice about it. When people get stuck, we’re like, hey, it’s OK, go back and do this homework, and when you’re ready to get back into it, move forward. But what that means, Eve,  is that I have worked with foundations where 20 trustees, oftentimes family members, are in unison, and I’ve worked with a grumpy high-net worth individual that’s difficult to move. So, it doesn’t have to be an individual or a foundation or a family office or a corporation. It just has to be a willingness to take action.

Eve: [00:09:29] And beyond the gigantic audience of accredited investors, as you know, they are only about three percent of the population, there is now a growing audience of people who’ve never invested before and sit in the non-accredited group. So it’s huge, right?

Stephanie: [00:09:45] It’s endless. And it’s interesting, because I was trying to think the other day about how I got started. And I know my dad, when I was 12 or 13 years old, we invested in Micron Together Technology Company. I’m 47 years old. I don’t know how I found, it had to have been at the library, found a book on Motley Fool that taught direct investing. So, direct investing with public companies. And I still have some of those stocks I first invested in. But I actually did an investment in Enron, because it was a renewable energy company. So, I kind of like to think of myself as an early adopter in the modern-day crowdfunding.

Eve: [00:10:25] Since have you started seeing a shift towards impact investing?

Stephanie: [00:10:30] Oh, absolutely. In Colorado, for example, we started the Center in 2012, and I’ll go back and answer your your last question in a little bit. When we started the Center, I realized when I was at University of Colorado when I had that ‘aha’ moment that, wow, people do need education, and I thought every entrepreneurship center needs an innovative finance center. And then I took a step back, and I’m like, wait, every university that’s going to struggle financially needs innovative finance center to stay financially viable. And then I took a step back, and I thought, wait, every association of, I call them ‘clubs of money,’ a community foundation association, a YPO, family office association. They need this curriculum too. And there was, at the time, only 15 centers and really only two of us that actually do transactions. And so, that was my idea, to leave in 2012 and then start a nonprofit, multi-university academic center where we could essentially provide a curriculum in a box. And just to give you a sense of how long it takes to get going, at least in Colorado …

Eve: [00:11:46] Are you telling me how long it takes to get going?

Stephanie: [00:11:48] Well, just to just have a sense, in 2010-12, our first two transactions we supported were the Museum of Contemporary Art and the Alliance Center, and those both were real estate transactions, and one was a foundation and a couple of board members. So, they got 101 percent return. And we financed the Museum of Contemporary Art and saved them 550,000 a year. The other one was a project I led with the Alliance Center in partnership with the Denver Foundation, and we used a donor-advised fund to do a loan at zero and one percent that essentially saved that nonprofit six million dollars and gave the donor 101 percent return. I worked on those two transactions for three years and they all moved when the bills were due. They tried everything else for years and years and years. And then, when the adjustable rate mortgage was going to be due, or the building renovation COP bill was going to be due, that’s when they were finally willing to move. So, that there was a negative-like desperation as the birthplace of innovation. It took three years for two transactions. And I do believe Colorado’s probably done 100 impact investment transactions in the last three months.

Eve: [00:13:02] Wow. The story you’re telling is much like mine. I think if you build something new and I suppose on the cutting edge, it takes a really long time and you have to have stick-to-it-ness. Right. Just have to keep going.

Stephanie: [00:13:15] You do. You have to have the Stockdale paradox. You have to have this eternal knowledge you will prevail in the end. And I had great advice from a friend, Dan, whose dad said, you need to stick past three and a half years and go to five years. Most people give up at three and a half years. And there’s a great metaphor. It’s like paddling an iceberg with flippers on. It takes a long time to get that iceberg going.

Eve: [00:13:38] Yeah, it really does. It can be a little depressing but there it is.

Stephanie: [00:13:42] Um-Hmm.

Eve: [00:13:42] This is a pretty unusual place for a Ph.D. in forestry to end up. That’s what you have, right?

Stephanie: [00:13:49] Yes.

Eve: [00:13:49] So I have read about Fish and Wildlife and spotted owls on your resume. Tell me about the journey that took you from wildlife to impact investment.

Stephanie: [00:14:01] It was great. I was watching an interview this morning with Heather McGhee, and she’s approaching this conversation from a race issue. I grew up in an environmental issue, and she’s framing it using a zero sum game. And I grew up in central Idaho, in Sun Valley, Idaho. And there was a zero sum framing where it was, either we either could save the endangered species of the wolves and the salmon, or we could have jobs. And I just remember knowing deeply in my heart that there was enough resources for both of them, and my friends would literally threaten the lives of my other friends with guns. And there was a river guide I used to work for that, a bunch of the river guides, made a sticker that said ‘Happiness is the fisheries’ biologists’ face on a milk carton.’ And it was a very tumultuous, and in some ways, violent way to grow up. And I just I didn’t know. I thought it was about the wildlife at that point. And now I’m really clear it was a resource allocation issue. And I deeply believe there’s enough money for communities and the environment and jobs. And so, that just has motivated me since I was 16 and I’ll never forget. I do like woodworking. And I announced when I was 16 or 17 that I was going to become a carpenter and make furniture. And my dad, who was incredibly supportive, my late dad, of whatever I would choose, said Stephanie, what about architect? I said, I said no. I said, what about wildlife biologist? And my dad said, you have a mind for business, Stephanie. Why don’t you go make a lot of money and then you can have influence on the environment. And my dad, actually, he was a workout guy that would take companies through bankruptcy, but the last 10 years of his career, he took a company out of bankruptcy, a precast concrete company. So, for 10 years, my family made every precast concrete box in the state of Idaho, electrical box, etc., and air conditioner pad. And I said, Dad, I just don’t have the constitution to do it the way you did it. I’m not willing to go make money in whatever way I can and then do what I want to do. I’m going to do what I want to do along the way.

Eve: [00:16:22] Yeah, I think this must be part of being a parent, not really understanding what your kids are doing. Right. What would be good outcomes, do you think, if more people invest in important change making projects, what are the outcomes you hope for?

Stephanie: [00:16:41] I’ll actually, answer that question and continue my last answer a little bit. My dad would end up being quite wealthy, becoming homeless for two years, and then at 24 years of age, he would come back to live with me. And so, the roles were reversed, for those of you who cared for your parents, except my roles were reversed for me when I was 24. And I remember I was doing my Ph.D. in seven states with ranchers and, a socioeconomic analysis, a conservation project, and I got to study with my hero, the chief of the Forest Service, Dr. Jack Ward Thomas. I was also working for the Forest Service in multiple roles all around the country based out of Lander, Wyoming. And my mom came down with pancreatic cancer and my dad was living with us in a home in Lander, Wyoming. And I remember coming home one day and I said, I don’t care if you walk dogs or volunteer or you get a job, but you can’t just stay in this basement apartment. You have to do something. And he would get a real estate license and a mortgage broker license. And he didn’t cost a lot of money to support him at that time because he was living in a basement apartment of our house. And so, essentially what we did is we were used to being poor graduate students. And so, instead of taking all the excess money of having two salaries and a grad’s stipend, we would buy a house. You could buy a house in Lander, Wyoming, for six to eight thousand dollars from down payment, 120,000 dollars house from 2000-2005.

Eve: [00:18:17] Wow.

Stephanie: [00:18:18] And the reason I’m saying this is my mom passed in 2003 and I wasn’t emotionally ready to sell the house. My sister was. So, I bought the house from my sister. And I think most of us, our road to becoming an investor in a meaningful way, is that second house. The first house is, I made it. I’m an adult. I’m building wealth. But that’s a, it’s a very different experience to get your second house. And I don’t know that I would have offensively purchased my second house. It kind of came to me because my mom passed. But once that second one happened, I talked to several people who’ve had this experience, you’re like, wait a minute, I can do this. I can own an asset and make money. And so, we bought a third house and then, on the fourth or fifth house, my dad came home and he said, Stephers, he’s like, there’s these families coming into our mortgage business. A lot of them have bad credit, but there are some that have bad credit that actually used to have good credit. They just had a medical situation and they didn’t have the right medical insurance. And now they’re in this bankruptcy called a medical bankruptcy. So they’re not allowed to buy a house or car, even though they are people who paid their bills. And so we ended up doing a lease option with these families and we had a family meeting and agreed that we wanted a 10 percent return. And so we would set aside 10 percent of their rent as a partial equity. And if the house appreciated above 10 percent return during their medical bankruptcy, essentially get the upside of that. And the houses during that time period appreciated fifteen to twenty five percent. So we got the joy of philanthropy, a job for my dad, an amazing tenant, a solid 10 percent return, and they got dignity. Got to move into their home three to five years early and get partial equity upside. And so I think that all of us are on this quest of connection and meaning. And when you realize, like I did then at twenty four, twenty five years of age, that you can do well by doing good. I don’t think most of us can go back from that.

Eve: [00:20:27] I think you’re a rock star. You probably made some friends for life as well in that process, right.

Stephanie: [00:20:34] Absolutely. That was about three hundred transactions ago and I’m I have lots of friends along the way. Three to four hundred. I’ve lost count. I kind of stopped keeping count after two hundred. As as my colleague Todd James says, 60 percent of what we do has been visible and behind the scenes. So there’s a lot of lovely, incredible, awesome people out there that don’t even know that we were helping push and pull to make their dreams happen. And, you know, it’s it’s it’s an incredible role to play in people’s lives.

Eve: [00:21:03] You really did shift from fish and wildlife to real estate, and then you dragged me into it recently, which I’m really enjoying. But we’re working together on one of your many projects, which you didn’t mention before when you talked about the five ways to educate people. You’re also creating impact investing clubs, which are really fascinating, they’re themed clubs where potential impact investors gather and you’re educating them with a particular focus. And we’re on the journey of building a real estate impact investing club.

Stephanie: [00:21:38] We are, Eve. I didn’t mention this at the beginning. So Impact Finance Center does two things. We identify, educate and activate individuals and organizations to become impact investors and we also build what we call community infrastructure, which can be replicated, scaled and customized. And in that bucket of community infrastructure, you just mentioned investor clubs, which is one piece of it. We also stood up the first statewide marketplace for impact investing, which is the second time I met you when you came out to Impact Days.

Eve: [00:22:11] That’s right. Yeah.

Stephanie: [00:22:11] Our Impact Days, and that’s, you can think of it is, imagine everybody who needed money in the state, doing good, shows up and they create a farmer’s market booth and we activate new investors and organize existing investors and we bring the investors to go shopping in the farmer’s market. We call that Impactings. A Bodega is a subset of that marketplace. And that’s what we’re branding as our Investor Clubs. And then we also have two hundred classes, which we refer to as our Impact Investing Institute. And one of the most exciting pieces of infrastructure that we created was, are you familiar with The Who’s Who Under 40 that business journals do?

Eve: [00:22:49] Yes, yep.

Stephanie: [00:22:50] Yeah. We reached out to our business journal and we said we’re going to do Who’s Who in impact investing for the Rocky Mountain region. Do you want to be our media partner? And that was exciting because the first year we did it, we had 300 people apply.

Eve: [00:23:03] Oh, wow, that’s great.

Stephanie: [00:23:05] The second year that we had 1,300, and so that builds the book. And then the last piece, which is really the key, is our impact investing, giving circle or investor accelerator, and that’s in partnership with civil society organizations like Community Foundations. So, right now we have 34 women that could be middle-income or high-net worth, or connected to a company or family office or foundation, who are major league when it comes to intelligence, and major league when it comes to alignment, and major league when it comes to admission, and major league when it comes to access to money. But they’ve never actually written a check to support a sutainable real estate project, or a small business, or a startup. And so in this case, we make it low cost, easy and fun. We say, let’s participate in a giving circle, donate two thousand dollars in and we end up getting a kitty of seventy five thousand to one hundred and fifty thousand and we say, who needs money? And this year we had a 111 women apply, 112 women apply, for over 50 million dollars of need. And then we go through a selection process and they do due diligence, and they invest in a couple investments for their first investments. Because it’s a pooled donor-advised fund that the Women’s Foundation of Colorado, they don’t get the money back, it’s essentially a learned by doing fund experience where hopefully they walk in is that as a donor, they walk out as an investor and then they say, I want to join the investor club. So, yes, Eve, the investor clubs are…

Eve: [00:24:38] This is especially important, this educational piece, because because women don’t invest. And I can tell you that with certainty on Small Change, women, just a tiny minority of investors. It really kind of puzzles me.

Stephanie: [00:24:53] You know, it’s interesting because I am counting on my fingers right now and hopefully going to my toes. I have several women who will be investing in Lyneir’s project who have been spreading the good news on Lyneir and some of the other great offerings you have on Small Change right now. And I’ll be completely honest with you, we we started the Investor Club as a response to Colorado’s CDFIs, Community Financial Development Institutions and nonprofit lenders, who basically said Steph, that’s been great. The three year pilot, we had a goal to move one hundred million. We’re up to three hundred million. Success. But we need to still keep helping raise capital for the CDFI’s and non-profit lenders. And so the first Investor Club was a Main Street Lender Club. The second one was our Indigenous Investor Club. And then the third one was with the federal government’s Sustainable Forestry Mass Timber CLT Investor Club that connects with real estate. And now we’re starting clubs in California and Massachusetts and with the New York CDFIs.   But I have to say Eve Picker, the most popular one, has been the Real Estate Investor Club.

Eve: [00:26:02] This was unexpected, wasn’t it? We have to keep up.

Stephanie: [00:26:06] Yeah, I was only mildly surprised. I saw there’s a quest to need. Nobody gets paid to do the work we’re doing. I think that’s the difficult part.  If Wall Street had figured out how to get paid to educate investors we would have money flowing like hotcakes to Main Street investments.

Eve: [00:26:23] And, you know, it’s been pretty stunning because some on our club meeting announcements for mid-March, there’s something like 1,800 people signed up on LinkedIn and I have no idea where they’re coming from. It’s pretty big. It’s pretty astounding, so we better put on a really good show, right.

Stephanie: [00:26:43] Yeah, it’s well it’s easy to do. I mean, people who are either investing or working in community real estate, creating real estate, affordable housing, mass timber CLT, all of the all the good stuff. Is there some of the most inspiring people you’ve ever met.

Eve: [00:26:58] Yes, I agree.

Stephanie: [00:26:58] So so it’s pretty much you just have to set the stage and let them shine.

Eve: [00:27:04] Let me ask you, so what happens to the club meeting and how it happened? What’s your formula?

Stephanie: [00:27:10] Yeah. And and for those of you who are familiar and who’ve gone to like a pitch competition or an expo, that’s what I think about it. I think it is essentially a virtual farmer’s market. And our goal is investor education specifically and also some social venture education. But what we want to do is we do an investor panel and we want to showcase different types of investors so people can see themselves in the crowd and go, wait, they’re just like me. I could do that, too. And so really, that’s about getting diverse, interesting investors up there so we can make it seem more accessible to people sitting in the crowd that they can go from not identifying as an investor to becoming an investor. And then the same is true for the social ventures like community real estate projects. It’s a way to educate people about what’s possible. Most people I mean, Eve, you know better than anybody, but if you and I walked out of our front door right now and and just talk to the next hundred people that walked by and said, are you an investor? All of them are investors, but most of them would probably we’d probably get five to ten of them who would say that they identify as an investor?

Eve: [00:28:24] Yeah, maybe less, actually.

Stephanie: [00:28:27] Maybe less. And that is the challenge. Like I remember when Mitt Romney was running for president, the Mormon Church put up signs, they had a campaign and put up billboards and they put up everyday faces and they called I’m a Mormon campaign. And I feel like we need to put up do a similar campaign, that I’m an Investor campaign.

Eve: [00:28:46] Yeah, that’s right. I think that’s a great idea because an investor could be someone who invests ten bucks in their friend’s startup or an investor can be someone who invests a million dollars into something big.

Stephanie: [00:28:59] I would even argue a mom who goes to the grocery store and decides which milk she’s going to buy for her child as an investor. She’s invested in the supply chain of…

Eve: [00:29:08] Oh, yeah.

Stephanie: [00:29:09] Are you buying organic or not organic or how are the companies trading?

Eve: [00:29:13] Or if they decide to go purchase at a farmer’s market instead of the grocery store.

Stephanie: [00:29:18] Every time a dollar changes hands, you’re an investor.

Eve: [00:29:24] Yes. I think you have a broader description of investor than I think of. But you’re right. So the club meetings are like a mixture of panels with investors, large and small, talking about their experiences and what it means to them and social ventures. And then a little pitch round right. Of deals that are looking for money.

Stephanie: [00:29:43] Yeah. So we we essentially, because we’re in Covid, we can’t do this in person. And so I think that’s to the benefit of this, Eve.

Eve: [00:29:50] I agree.

Stephanie: [00:29:52] And because in Colorado, when you came out to Colorado, Impact Days, we physically have a farmer’s market, you know, where…

Eve: [00:29:59] I don’t want to travel that much. I kind of like this Zoom thing.

Stephanie: [00:30:02] Absolutely. So we’re essentially putting the farmer’s market online. And so we created an investor catalog. And it’s really the social venture panel is to give five to 12 minutes casually for people to learn about a couple of the investment opportunities. And then we do a speed round of two minutes. And it’s shocking to me sometimes that people actually shine better in the two minutes than they do when they’re given seven to ten minutes.

Eve: [00:30:29] Yeah, it’s pretty fun. And people get an opportunity to ask questions, too. I think it’s exciting for me. I mean, what’s your ultimate goal with these clubs? What would be a fantastic outcome in five years for you?

Stephanie: [00:30:41] I’ll put my geeky academic entrepreneur hat on for a second. We actually wrote a paper called Laying the Groundwork for the National Impact Investing Marketplace. So we published in the Foundation Review. And we’re pretty confident now that if you take our infrastructure and combine it with some other infrastructure, such as Lenny Lavis up in Seattle, he has realized impact investor flow, a Fleg regenerative accelerator. If you take some of our joint infrastructure together, we can actually completely fix the capital markets and move a trillion dollars into impact. I can do it two ways. I can go fundraise 20 million dollars and take what we did in Colorado and expand it to all 50 states. Or we can earn money from some of our social ventures, such as our Impact Investing Institute, and use it to self-fund our expansion to all 50 states. So what’s exciting about the Investor Clubs is most of our Investor Clubs are actually being purchased or supported by foundations who want to do economic development and Covid recovery. Federal government, USDA, Forest Service. And we’ve had interest in state governments, too. So I think if I was in state government or foundation interested or family office interest in Covid recovery or a corporation, I would be basically investing in as many Impact Investing Giving Circles and Investor Clubs as I could afford to support. I think that getting one percent of our wealth to invest in Main Street as an example in Colorado, that would be five billion dollars that could be leveraged through CDFI’s and banks for a 15 billion to 50 billion dollar year investment. It wouldn’t take much, just one percent of the wealth.

Eve: [00:32:27] Um-hmm. Fantastic. I’m going to change gears again. Just ask a few more questions to wrap up and they’re about you. And what do you love doing the most and why?

Stephanie: [00:32:39] I love most partner dancing. Ballroom dancing is my favorite joy in the whole world. Which I feel like it’s going to be the last activity that comes back to us after Covid. So I’m sort of isolated. I’m single in Denver, Colorado, and I Waltz and Cha-Cha and Two-step and learning the Latin dances and I Swing and I just can’t wait to get back to partner dancing.

Eve: [00:33:04] So I have to ask, have you watched my very favorite Australian movie called Strictly Ballroom?

Stephanie: [00:33:09] I have seen Strictly Ballroom. Yes.

Eve: [00:33:13] So, the Star of Strictly Ballroom used to live next to me in Sydney.

Stephanie: [00:33:17] Well, I can’t wait to be traveling with you to Sydney.

Eve: [00:33:20] I don’t think he lives there any more.

Stephanie: [00:33:24] We can go have lunch.

Eve: [00:33:24] And what are you excited about the most?

Stephanie: [00:33:27] I am excited, two things. Is, as I used to feel like that from 2012-20, I felt like I know there’s an answer and we just have to develop the answer. And now I feel like the answers there. All the puzzle pieces are on the table. Now, we just have to put the puzzle pieces together. And so I’m excited about all of the amazing impact investors and all the amazing social ventures out there. There is so much goodness and love and light and inspiring people who are showing up in the impossible ways to make the world a better place. And so I’m very fortunate in that I get to hear from people with resources and people needing resources, doing amazing things and have the the joy of being able to connect them together. And our phone has just been ringing off the hook. Especially a lot of middle aged white women, just between the combination of the global pandemic and our civil rights crisis have just called. And many of them have got a text once that says, what can I do to help my sisters of color immediately? And she made an investment quickly. I had another woman call. We do a fellowship of ten sessions. And on her first session, she’s like, I’m ready to make a first hundred thousand dollar investment today. I’m like, OK, there we go. And so, yeah. So it’s just great to see how many people are showing up and going, now’s the time. I can’t wait any longer.

Eve: [00:34:59] It’s been really wonderful talking to you and I really can’t wait to see what becomes of the Impact Finance Center and our club and what’s next for you.

Stephanie: [00:35:09] Oh, well, and likewise, Eve. I just want to give a gratitude and compliment to you, because I don’t know that we’ve discussed this, but when this movement was getting off the ground, I was very aware there’s a role to activate new investors, educate and organize existing investors and build the financial fintech solution. And I chose to be on the education of investor side, and I couldn’t be more happy to be collaborating with you. You’re just somebody who is a visionary and a joy and has incredible integrity. And I think,

Eve: [00:35:44] I’m blushing now.

Stephanie: [00:35:45] Oh, I think that what you do and what I do are two pieces…

Eve: [00:35:51] Perfect match.

Stephanie: [00:35:51] Of a puzzle that literally will democratize and provide that pathway to solve the problems that I had as a 15 year old, 16 year old watching.

Eve: [00:36:01] You know, you’re right. I mean, I think investor education is the most difficult part of what I do, and I can’t do that and investor education. So I’m extremely grateful to have you around.

Stephanie: [00:36:14] Well, let’s go find what should our goal be in the next five years.

Eve: [00:36:18] We should build humongous impact investor club and just showcase thousands of projects. And, you know, I’d have to quantify that goal clearly.

Stephanie: [00:36:30] Well, I’m going put a goal out for us. It’s February 18, 2021. How about a year from now, our goal will be able to have a list of twenty thousand investors that are actively investing in and community real estate.

Eve: [00:36:43] I think that’s a fantastic goal. I’m happy to add to it.

Stephanie: [00:36:48] Fantastic. It’s a true honor and joy to be in partnership with you.

Eve: [00:36:51] Thank you.

Stephanie: [00:36:52] Thank you.

Eve: [00:37:04] That was Dr. Stephanie Gripne. Stephanie believes that impact investing is all about educating people – trustworthy, non-conflicted investor education. The Impact Financial Center is quickly becoming the go-to place for just this type of education and for every level of investor, from foundations to individuals who have never invested before. You’ll be hearing more about the Impact Finance Center, I’m sure. Please share this podcast so that more people learn about Stephanie and the Impact Finance Center. You can find out more about this episode on the show notes page at EvePicker.com, or you can find other episodes you might have missed. Or you can show your support at Patreon.com /RethinkRealEstate, where you can learn about special opportunities for my friends and followers. A special thanks to David Allardice for his excellent editing of this podcast and original music. And 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.

Image courtesy of Dr. Stephanie Gripne/IFC and CO Impact Days

Totally backwards.

Michael H. Shuman – economist, attorney, author, entrepreneur and a go-to person on local and community economics. Local, local, local. In everything he does Michael is focused on the little guy (or girl). And he firmly believes that a robust economy would not be so robust without all of those little main street businesses and startups. 

Over the past 30 years, Michael has given, on average, more than one invited talk per week in nearly every state and in more than a dozen countries. He says, “I love public speaking, because it gives me an opportunity to explain difficult, arcane topics in simple, hopefully entertaining terms to people who care about their communities.” Michael has also been credited with being one of the architects of the 2012 JOBS Act and hence is one of the fathers of investment crowdfunding. Without him we wouldn’t have our crowdfunding platform, Small Change. 

In addition to all his other outreach, Michael is the author, co-author, and editor of a number of books. His most recent is, Put Your Money Where Your Life Is: How to Invest Locally Using Solo 401ks and Self-Directed IRAs.

Insights and Inspirations

  • Locally-owned businesses comprise 60 to 80 percent of the private marketplace in the average U.S. community. But economic developers and subsidies almost always overlook them.
  • At the state and local level, it’s estimated that 100 billion dollars per year is spent on attracting big corporations. And this is a tiny fraction of what actually constitutes a community’s local economy. And that’s totally backwards.
  • Communities with a higher density of locally-owned business have higher per capita job growth rate. They have less poverty. They have more civic engagement, higher voting participation, higher rates of volunteership.
  • In four years of investment crowdfunding, 700,000 people have invested almost half a billion dollars into several thousand companies and projects – overwhelmingly, disproportionately companies led by women and people of color.

Information and Links

Read the podcast transcript here

Eve Picker: [00:00:09] Hi there. Thanks so much for joining me today for the latest episode of Impact Real Estate Investing. Today, I’m talking with Michael Shuman, an economist, attorney, author, entrepreneur and a go-to person on local and community economics. Michael has been credited with being one of the architects of the 2012 Jobs Act. He’s one of the fathers of investment crowdfunding. Without him, I wouldn’t have my crowdfunding platform, Small Change. Michael’s given an average of more than one invited talk per week, mostly to local governments and universities for the past 30 years, in nearly every U.S. state and more than a dozen countries. He says, “I love public speaking because it gives me an opportunity to explain difficult, arcane topics in simple, hopefully entertaining terms to people who care about their communities.”  Not being busy enough, Michael has also authored, co-authored and edited quite a few books, most recently ‘Put Your Money Where Your Life Is: How to Invest Locally Using Solo 401ks and Self-Directed IRAs.’ I’m going to learn a lot from Michael and so might you, so listen in. Be sure to go to EvePicker.com, to find out more on the show notes page for this episode. And be sure to sign up for my newsletter so you can access information about impact real estate investing and get the latest news about the exciting projects on my crowdfunding platform, Small Change.

Eve Picker: [00:01:58] Hello, Michael, I’m really delighted to have you on my show today.

Michael Shuman: [00:02:02] Great to be here.

Eve: [00:02:04] Put your money where your life is. That’s the title of your latest book. And it seemed like a really obvious statement. Why do you need to write a book about this?

Michael: [00:02:15] Well, maybe I’m just book-o-philic, that I tend to write a lot of books and that’s the way I express myself. But I did feel like there were two bodies of knowledge I was trying to bring together. One was a whole emerging body of knowledge around why local businesses and local economies are so important. And the other is this body of knowledge about how to use these somewhat obscure tax tools, the self-directed IRA and the solo 401k, For local investing. And so, bringing these two things together in a readable form, that was really the objective and I couldn’t see a way of doing that just as a pamphlet.

Eve: [00:03:05] But I suppose more than that, like why local? Who are you trying to reach with this book and why? Why do you think it’s important?

Michael: [00:03:12] Well, I would say for about 30 years, I have been on a campaign to remake economic development, and the reason is, is that I think there is a very impressive body of evidence that locally owned businesses are the key to community prosperity. They comprise 60 to 80 percent of the private marketplace in the average American community. They are highly profitable. They are highly competitive. They have done great despite the ways in which economic developers and subsidies have overlooked them. And yet, when it comes to economic development, when you talk with an economic developer for any length of time, they will tell you that their mission is to attract and retain business. And when you unpack that term, attract and retain, it’s really all about global companies. So a tiny fraction of what constitutes a community’s economy is what in fact is driving economic development. And it’s totally backwards. So, what I’ve been arguing is that we have to figure out ways of nurturing and strengthening and getting capital into local business. And if we do that and, we can really enhance jobs, income, wealth and tax receipts.

Eve: [00:04:49] We’ve got that backwards. Do we have it backwards at the local level, at the state level? What about the federal level?

Michael: [00:04:55] Every level conceivable has it backwards. At the state and local level, it’s estimated that something near 100 billion dollars per year is spent on attraction, corporate attraction. At the federal level, it’s not really corporate attraction, but what you see is all of these subsidies, which are largely going to larger businesses, big Ag, big cattle, big water, big coal, big oil and gas. I mean, you name it. And small businesses in the end are getting the crumbs. So, yeah, I think this is a systematic problem and requires some systematic solutions.

Eve: [00:05:43] How did you get interested in this?

Michael: [00:05:46] I became interested in this in a circuitous way, so I was graduated from law school in 1982 and really detested the idea of becoming a lawyer. So, I started a nonprofit in the field of peace and justice. It was called the Center for Innovative Diplomacy. And one of the things that we did in the ten or so years that this organization lasted, is we organized several thousand mayors and city council members across the United States to get involved in what we called municipal foreign policy. So, the involvement of cities and say in nuclear free zones or anti-apartheid campaigns or human rights initiatives. And I got very excited about this way of influencing international policy. But I started to think about how to get involved in economic development through these tools. And I had a partnership with an organization based in Europe that was then called Towns and Development. And you can think of Towns and Development as sort of sister cities with attitude. So, they had thousands of links between northern and southern cities built around economic development, and Towns and Development asked me to write a critique, a sort of retrospective of what at that point was more than a decade of work. And at the end of that critique, I said, you guys are doing marvelous work. You have great principles for economic development. The problem is, is that your practice of economic development has no relationship to the principles. That is, if the northern city sends a big company to the southern partner, you celebrate that as a big success. But in fact, success needed to be measured in greater self-reliance. And it was that moment that I realized I needed to pivot and start working on a whole different field. So, I wrote a book in the mid 90’s called ‘Going Local,’ and I thought it would be a one-off book. I would, you know, write it, be done. But it opened so many interesting doors that that’s really what I’ve been doing ever since.

Eve: [00:08:19] What would be good outcomes if we move towards more localized economies?

Michael: [00:08:26] If you look at the evidence out there of lots of different studies, we know that communities with a higher density of locally-owned business have higher per capita job growth rate. They have less poverty. They have more civic engagement, higher voting participation, higher rates of volunteership. We know from an EPA study that locally-owned smokestack businesses pollute about one tenth as much as their absentee-owned counterparts. We know that locally-owned businesses are the dynamism of what promotes entrepreneurship and what promotes people really being committed and excited about a stable city. So, I feel like the list is very long and compelling. And so, I really feel like if we had a world of more localized economies, we would be wealthier, we would be more equitable and we would be less likely to go to war with one another.

Eve: [00:09:37] I have to ask. Is there a gold standard city or community out there that you would point to for localized economies?

Michael: [00:09:45] I have become familiar through studies that I do with many local governments. I’ve become familiar with several hundred local governments. And honestly, there’s none that I would give better than a B or B minus to.

Eve: [00:10:03] Oh, OK.

Michael: [00:10:05] And I think part of the problem is the pernicious impact of these outdated ideas about economic development. And so what a typical city you look at, say, a Portland or a Seattle, which nominally seems like a very green kind of city. And they have all of these departments working on recycling and storm water management and energy efficiency. And by those criteria, these cities are looking really good. And then they have economic development departments that are filled with dinosaurs that all they want to do is spend vast amounts of public money to attract global companies.

Eve: [00:10:52] Yeah.

Michael: [00:10:53] And they systematically ignore their local businesses.

Eve: [00:10:56] Yeah, I live in a place like that.

Michael: [00:10:58] Pittsburgh. Yes. And, you know, in Pittsburgh has despite that, I think, become a more self reliant community. I mean, they turned, but …

Eve: [00:11:11] But you know, Michael, I think that’s because, isn’t Pittsburgh, the birthplace of community development corporations?

Michael: [00:11:18] Yes.

Eve: [00:11:20] Community development activity is very, very big here. And that’s almost like their own little localized economy. So, that may be part of the difference. Does that make sense?

Michael: [00:11:31] I think it does. And I think the other thing, I mean, I’m not intimately familiar with Pittsburgh, but one of the things as a visitor that I have noted about it is that it’s really a city of amazing neighborhoods.

Eve: [00:11:46] Yes, it is. Yep.

Michael: [00:11:47] And the definition of those neighborhoods.

Eve: [00:11:50] Physically quite distinct.

Michael: [00:11:52] Yes. I think that makes a difference, too, because people then self organize around that sense of neighborhood well-being.

Eve: [00:12:01] I think that’s right. It’s one of the things I’ve always thought about, like in when I go visit San Francisco, which is a beautiful city, one neighborhood bleeds into the other. And I’ve come to really love the very distinct neighborhood personalities here and the character, the buildings, and it’s really interesting. Yeah.

Michael: [00:12:20] I lived in San Francisco for about 10 years and I used to say to people, it’s a terrible place to visit because the only way you can enjoy San Francisco is by slowly taking it in, walking the streets, going from neighborhood to neighborhood. And there’s no way you can do justice to that as a tourist going to Alcatraz.

Eve: [00:12:47] Right. Yeah, well, that’s how I prefer to visit cities anyway. Would there be any bad outcomes if we move towards localized economies? Like what would we be missing?

Michael: [00:12:57] So, there are different conceptions of localization.  And I believe that critics of localization have in their head what I would call a theory of ‘dumb localization.’ And what it is, is it, looks at, say, what Brazil did in the 1960s with the idea that, oh, we need to build up our internal economy, we’ll put up trade barriers, we’ll put up technology transfer limits, we’ll punish people for coming into the country with long visa processes. And by that process, we will build up more internal self-reliance. That’s the way globalization fanatics think about localization. And if we do that, we will become poorer, and countries will become backward, and we will miss out. So, I really think that localization has to be defined in more market terms, that localization means consumers freely finding great local deals and goods and services and freely choosing those. It means businesses expanding to meet local needs. It means governments getting rid of subsidies that are currently favoring global businesses.

Eve: [00:14:27] So, if you were the mayor of a city that was a D on your scale, what would you do to make it an A, an A local economy?

Michael: [00:14:38] The first thing I would do is I would announce that we were not giving a penny of subsidy to any business, so that automatically would save me a good deal of money that I could spend on other things. I would create a procurement system that really looked objectively at the impacts of local business when they were potential bidders versus non-local business. And I would realize that the local businesses pay more in taxes and therefore they deserve a boost in the procurement process that objectively reflects that. I would change my city’s investment policies so that rather than putting money out in the global economy, I would, like the cities of Tucson or Phoenix, put my money in local banks so it could be re-lent to support various economic development projects. I would think about how to use municipal bonds and municipal powers of creating investment funds in order to foster various kinds of economic development projects like affordable housing or local food projects. So, there’s a long list of things that cities could do that really is hard to find any city that’s doing that right now.

Eve: [00:16:03] I mean, honestly, one of my pet peeves is most cities look outside their borders for the best consultants, whereas they often have a lot of talent inside. And that’s also one way to increase the economy of a city. And it’s a very weird dynamic, but I think you’re probably right. There are tons of things you could do.

Michael: [00:16:23] I’ve experienced that here. I live in Montgomery County, Maryland, and I can’t tell you the number of times I have bid on Montgomery County contracts. And they go for some …

Eve: [00:16:35] Oh, yeah, I can imagine.

Michael: [00:16:37] … competitive person a hundred miles away, and they lose out on the tax benefits.

Eve: [00:16:42] Yeah, I may as well be invisible in Pittsburgh, I think.

Michael: [00:16:45] Well, you’re not invisible to me and to the rest of the country, so that’s the good news.

Eve: [00:16:49] That’s the problem, right?  That we want to shift to local. So, OK. And how do you think the pandemic, I have to talk about this, might impact this trajectory? Because I have a feeling in some ways it might actually help.

Michael: [00:17:05] I think it has helped. And what I’ve noticed is that most of the cities that I’m working with have at least put the word resilience into their vocabulary and are thinking about how they can make their communities more resilient. What they haven’t realized yet is that resilience is the opposite of what David Ricardo advocated in ‘comparative advantage,’ and which is, it’s a subtlety, but at some point they’re going to realize, oh, yeah, resilience means more diversity of business. It means greater self-reliance. It means greater localization. It means what we’re doing in economic development is a little bit outdated. So, that’s going to take some time to work its way through the system. But ultimately, it will be a very good thing because we’ll be resilient not just against the next pandemic, but will be resilient on the next capital flight and the next climate catastrophe and so forth.

Eve: [00:18:11] Yeah, one of the things that’s been fascinating me about the pandemic, which I think feeds into this, is there’s definitely people moving out of cities. Not that I believe the cities will die. There’s always going to be room in Tokyo and Paris, okay, but there’s definitely a shift back to smaller places. And that means that there’ll be money in those places. And often there are main streets which are very underutilized. And I’m hopeful that those small local economies will be revitalized. That would be a good outcome in amongst this misery, right?

Michael: [00:18:44] Absolutely. I was in North Carolina. I shouldn’t have traveled there in the pandemic, but…

Eve: [00:18:51] No, that’s for sure.

Michael: [00:18:53] … I made the decision to go there when one of the curves was on the down slope. But it was a was a discussion with economic developers in the Charlotte area about how to heal the urban-rural divide. So, I did a lot of reading and thinking about this. And I actually agree with you that, I mean, if you look at the literature out there, there is an assumption that rural is dead and people are moving to the cities. And to some extent that has been true. But I think what you’re observing is really happening. That there is a turning point that has happened in rural America that a lot of people don’t appreciate. That Internet connectivity has come to much of rural America, not all of it, but much of it, that people of color, particularly immigrants are beginning to move there because it’s a cheaper place to live. And that’s diversifying rural America. We’re also seeing a lot of retirees going there and they bring Social Security and their pension savings, and that money drives the economy in different ways. So, yeah, and if you add resilience to the mix, you really see why for, not all Americans, and you’re right, you know, the great cities are still going to be great cities. But for some Americans, some fraction of millions of Americans, they will move into rural America.

Eve: [00:20:25] Yeah, we still have financing issues for investing in rural America. We have an offering on our platform right now that could not find a loan, and were told over and over again by banks that we don’t lend in rural areas. And so I think, you know, the whole financing system behind everything is also part of this story. Right?

Michael: [00:20:47] It’s another form of redlining, isn’t it?

Michael: [00:20:50] Yeah, it is. OK, well, I want to move on to regulation crowdfunding, which is the love of my life. And I know that you’ve been involved in it since day one, before I was. And I’d love you to tell us about that journey.

Michael: [00:21:04] Yeah. So. As I said earlier, one of the things that I have found fascinating in the whole discourse about local economy is that every answer to a question opens up new questions. And as I, in the 1990s and early 2000s was sort of thinking about how do we change economic development policy, I started to pay attention to the capital system and started to see how difficult it was for a small business to raise grassroots capital. And my very specific experience with this is, for about two years, and I think this was maybe 2001 to 2003, I tried to start a chicken company in the Eastern Shore of Maryland and it was going to be called Bay Friendly Chicken. It was to offer a greener alternative to what the bionic chicken that Tyson and Perdue were offering. And I started to think about ways of raising money. And I’d have meetings with securities attorneys and learn just how extraordinarily difficult …

Eve: [00:22:32] Ridiculous.

Michael: [00:22:32] And expensive it was to even get a penny of money from a grassroots investor.

Eve: [00:22:38] Yeh.

Michael: [00:22:38] And I started to think about what the rationale of this was. And they would say, well, you know, we don’t want grandma to be buying swampland in Florida. It’s always grandma. It’s always Florida. It’s always swampland. And look, I have a mother who is 97, 98 now. I don’t want her buying swampland in Florida. But what does my mother do with her money? My mother goes to the local casino. She lives in St. Louis. And when she goes to the casino, do they say to her, Mrs. Shuman, excuse me, but are you an accredited gambler? No. I mean, and she is not an accredited gambler. She is, you know, she is one of tens of millions of Americans who enter into thousands of casinos and they can lose everything independent of their income.

Eve: [00:23:40] Yes.

Michael: [00:23:41] And yet we never regulate that. And so that contradiction was like a chicken bone in my throat. And 2008 crisis came and I said, you know, I’m going to start writing about this. So, I wrote a piece for the Federal Reserve. They have a community journal.

Eve: [00:24:00] Okay.

Michael: [00:24:01] And basically made the suggestion that there should be a 100 dollar exemption in securities law, that any human being should be able to put 100 hundred dollars into a business with absolutely no legal work whatsoever. Lawyer Free Zone. And some friends of mine kind of got wind of this. They wrote a rule-making petition to the SEC, Securities and Exchange Commission, and hundreds of people wrote letters in support. So, that was sort of the beginning of a lot of conversations and there were other people who were simultaneously doing similar conversations. And then, I remember there was a hearing on Capitol Hill about a proposed crowdfunding bill introduced by Patrick McHenry, conservative of North Carolina. And I remember the head of the SEC was being grilled by Tea Party Republicans. And I was sitting in the room watching this. And they asked her, they said, you know, you’ve got a proposal in front of you for a one hundred dollar exemption. What have you done with it? And at this point, unemployment in the country was running at about 10 percent because of the Great Recession. And she responded with such condescension and contempt and said, look, we get these kinds of proposals all the time. And, yeah, you know, we’ll get around to them …

[00:25:47] Oooh.

[00:25:47] … and the Congresspeople left and right, were, like, outraged. We have unprecedented unemployment. We know that local businesses can help fix this. And yet you in the SEC are systematically ignoring the simplest of reforms. That committee voted unanimously in favor of McHenry’s proposal and the House supermajority passed it. Now, where McHenry went with crowdfunding was not where I suggested. He actually originally suggested a ten thousand dollar exemption for people. And then it got whittled back to two thousand dollars. And all of these additional regulatory things got put on it. So, it was half a loaf, but it was something. And I think crowdfunding has been a qualified success. The bill was passed in 2012. It took four unnecessary years of haggling for the SEC and FINRA to put forward rules for implementation. But in the four years since, the data show 700,000 people putting in almost half a billion dollars into several thousand companies and projects, and that the beneficiaries have been overwhelmingly, disproportionately companies led by women and people of color. I think it’s doing some good things out there.

Eve: [00:27:26] Yeah, no, I agree. Well, this is what we use on our platform. And I think it also helps for us, those real estate developers who are doing really innovative and necessary projects, sometimes small, that most banks don’t want to deal with. And so, that also propels the economy forward. When you have someone thinking about how to deal with the affordable housing crisis and they can’t get a loan for their project idea, that’s a problem. So, there’s lots of ways that this has helped. It’s a fantastic rule, but it’s got a long way to go. What’s the silliest thing, do you think about this rule? I can probably give you a lot of those, but I’d like to know what you think.

Michael: [00:28:12] What’s the silliest thing about the rule? Well, the silliest thing is something they just fixed. And it wasn’t so much that it was implicit in this rule. It was a long standing piece of securities law. But they finally, in their discretion, got rid of it. And that was prohibiting businesses and grassroots investors, from having conversations before the formality of the issue was done. And this idea in securities law that communication will somehow pollute the marketplace has got it fundamentally backwards. Communication is what lays the foundation for a marketplace. And when there is a conversation between a real estate project and a grassroots investor before there is any formal transaction, it should be a moment of celebration, not a moment of repression. And when the SEC finally, finally, finally put in some rule changes in the first week of November, which most people overlooked because there was an election happening.

Eve: [00:29:25] Oh, I didn’t overlook it.

Michael: [00:29:27] Of course, what election?

Eve: [00:29:33] But I’m you know, I’m on the federal register every day looking for the thing to be posted.

Michael: [00:29:38] Right. Right. We’re still waiting, aren’t we?

Eve: [00:29:40] Yes. So, for people listening, you know, the rules are not implemented until 60 days after they’re posted on the federal register. And so while there was a vote, it’s still not moving along. Right, Michael?

Michael: [00:29:53] Right. Right. I think $2,200 per person is too low a number. I think it should be higher. I do think it’s getting the number that a company or a project can raise, from a little over a million dollars to five million is a very big step forward.

Eve: [00:30:13] I should probably, like, take a break and just explain to listeners who don’t know about regulation crowdfunding that this is really the first step towards democratizing investment. It’s a rule that permits everyday people, everyone, not just accredited investors, to invest in businesses or real estate projects that developers bring to them, and business owners bring to them. And they do that by requiring platforms, called funding portals, to be registered with the SEC and to be members of FINRA, the Financial Regulatory Agency, to sort of manage this business of putting everyday investors together with businesses. And the rule really started out as having a cap of 1.07 million that businesses could raise every year, and permitting everyone to invest 2,200 a year, not per project, a year. If they want to invest more than that there is a calculation around income and net worth, and it even capped what accredited investors could invest in. Even Warren Buffett is not currently permitted to invest more than 107,000 a year.

Eve: [00:31:24] So, these upgrades raise the cap that you can raise through an offering to five million dollars. And while they do not raise that $2,200 cap, they do raise what unaccredited investors can invest by changing the way the net worth and income calculation is made, which is a good thing. And they also permit accredited investors to invest as much as they want. So, these are pretty big steps forward, right, Michael? And then the thing that you care a lot about is the ‘test the water’ piece, which I agree with you on.

Michael: [00:31:57] Yeah, that’s a very good explanation. And one other thing I would just add for your listeners is that sometimes there’s confusion about donation crowdfunding with investment crowdfunding. And donation crowdfunding on sites like Kickstarter, Indiegogo, that has been always permitted because donations are not securities, and securities are what are heavily regulated and that’s, those regulations are what we are talking about.

Eve: [00:32:27] Right. If you go to Small Change or you go to Wefunder or any of those sites and you invest, you really become an investor in the capital stack of that business or that development project. And there’s an offering made, an offering of what the business owner might return to you because you invest in their projects.

Michael: [00:32:49] Yeah, and I think it’s worth saying to your listeners why this is so revolutionary. And for the last 10 years, at least when I was able to talk to audiences in person, which you can’t do now, still, I would I would ask them three questions. And the first question was, by show of hands, how many of you have mindfully bought something locally, maybe at a farmers market over the last week and almost all the hands go up. People love their local businesses and they love the things in their economy. And then I ask, well, OK, how many of you have a show of hands do your banking at a locally-owned bank or credit union. Half the hands go down. And then I say, those of you with pension funds, how many of you put at least one percent of your pension funds in these local businesses that are 60 to 80 percent of your economy, and all the hands go down. And suddenly people realize, oh, my god, why is that? Why is all of my money going to the global minority of businesses in the economy rather than supporting the projects and the businesses that I love? And it’s all about securities law. So, what this law represents is the beginning of a transformation, so that we are putting our money into the things that matter in our life.

Eve: [00:34:24] Yes, so you know the way I think that the SEC and FINRA missed the mark with this rule is, the amount of due diligence the platforms have to do is really burdensome. And you have to remember that these platforms are startup businesses. They’re small businesses trying to support other small businesses. And a small business can’t afford a full-time compliance officer. And essentially, that’s really what you need to be able to run one of these platforms. So, I think you’re right. If someone is going to invest $2,000 dollars, do you really need to have all of the burden of, I mean, the rule, that if I told you everything we have to do, it’s nuts. We do it because we have to, but it is a lot. So, that’s my pet peeve.

Michael: [00:35:13] Yeah, I think it’s a very important one. And I worry that your platform and many of the other platforms are going to have challenges long-term because the regulatory burdens are so high and that limits your ability to just pay the basic bills and keep the lights on.

Eve: [00:35:36] Oh, yeah. I mean, insurance for our platform is over $40,000 a year.

Michael: [00:35:41] Wow.

Eve: [00:35:42] That in itself is huge. I mean, the compliance piece of it, figured that out in the first few years and we have, come to a simplified and efficient system. So, that’s less of a problem for us now. It was excruciating in the early years, but there are expenses that just never go away and it’s hard to catch up with those. Insurance is a really big one because the insurance industry doesn’t understand this. This is a nascent industry that’s emerging and they are going to charge top dollar until there’s thousands of platforms like this.

Michael: [00:36:20] It’s outrageous. But let me just say, I love your platform. I love its personality. I love the things that you are putting on there. I think it’s unique and it’s mission-driven. And I think over time you will enjoy success that many of your competitors do not because they are not mission-driven or they are not distinguishable from one another in the same way yours is. And yours is after mission-oriented real estate. And I think now that the ceiling has been raised from one million to five million, I think a lot more projects are going to be coming on to your site. And that augurs well for your future.

Eve: [00:37:05] Yeah, I hope so. I think the missing piece still, and I’m going to keep that in mind in my dark moments when things are difficult as only they can be in a small business, I think still investor education is the most difficult piece. And there’s a lot for people to learn who’ve never been able to invest like this before. No matter what, they invest in, it’s a leap. And that’s really, I think, probably the hardest part of this. But what would the ultimate end goal be for this ruling in your mind? What should it be?

Michael: [00:37:41] I think currently Americans have about 56 trillion dollars invested in stocks, bonds, mutual funds, pension funds and insurance funds. So, those are all the long-term securities. And right now, about 99 percent of them are in global companies. I would like to see, say, 80 percent of that money in the locally owned businesses and real estate projects that they belong in. And when that happens, I will think we have achieved real success.

Eve: [00:38:20] Wow, that would be amazing.

Michael: [00:38:22] And, you know, it works out per capita. You know, earlier I said that the range, depending on how you define local business, is 60 to 80 percent of the private economy is local. So let’s take 60 percent. So 60 percent of 56 trillion dollars, you know, works out to 30 plus trillion dollars and dividing that by the number of Americans out there, 330 million. It’s about $100,000 per capita. So, I encourage listeners to think about your community, say you live in a 10,000 person community, multiply that number by 100,000 per capita. And that’s what the benefits of local investment could be for your community. It is hard to imagine a more significant stimulus that you could bring to your economy than bringing local investment in.

Eve: [00:39:21] Yeah, you’re right. So, you are a very busy guy. You’re a prolific author, prolific speaker. I think I read somewhere that you speak once a week. Professor, consultant. What do you love doing the most and why?

Michael: [00:39:38] Well, more and more, I love teaching. I mean, I’ve always loved teaching. I taught as a way of paying my bills at law school at Stanford. I taught a writing class. And I still teach now, and I have the privilege for the last four years of teaching at Bard Business School, which is a sustainability-oriented program. And the school is expanding and my course load is expanding. And I’m really, I’m liking that a lot because I think young people now are so much smarter than …

Eve: [00:40:15] Than we were?

Michael: [00:40:16] … the people I remember. I don’t want, Eve, you were very smart person, so I don’t want to say “we.” I’m going to only take this route myself. But when I was, when I was younger, the way that you changed the world was, And this is, again, from the law school perspective, that I would take a job for about $5,000 a year working for Ralph Nader as a Nader’s Raider. And that was doing good. And then, as I understood that world better, I realized, oh, what that world is all about is spending all of your time begging for money from rich people or rich foundations. And that’s how they made ends meet. And I did that for about 20 years and I was pretty good at that, but today’s young people have a different view of the world. They see the way to change the world is through mission-oriented business, and that by having great businesses out there doing great things, they can change the planet faster. And I think they’re right. And so, I love my role as a teacher to support them in that work.

Eve: [00:41:32] And so, like, my final big question is, this is the wrap up question. What’s next for you?

Michael: [00:41:39] So, what’s next for me is I am going to try to start soon a very simple newsletter that lists all of the local investment-oriented blogs, and all the local investment-oriented sites, and all the local investment-oriented people to try to get some glue, to hold all these various pieces together. Because I feel like there’s a proliferation of organizations, a proliferation of sites. But the big picture is still not quite there. So, I see a kind of a swan song act as I get into my mid-60s, a swan song act of really being a networker and bringing of people together for this larger cause. So, that’s that’s my next act.

Eve: [00:42:38] Well, I can’t wait to see the list, and I really enjoyed the conversation.

Michael: [00:42:43] I did as well. Thanks so much, Eve.

Eve: [00:42:45] Thank you.

Eve: [00:42:56] That was Michael Shuman. In everything he does, Michael is focused on the little guy or girl. He firmly believes that our robust economy would not be so robust without all of those little Main Street businesses and startups. And so he follows through on that belief every day, in his support of investment crowdfunding, in the lectures he gives, in his teachings, in the books he writes and in his consulting engagements with local governments. You can find out more about impact real estate investing and access to the show notes for today’s episode at my website, EvePicker.com. While you’re there, sign up for my newsletter to find out more about how to make money in real estate while building better cities. Thank you so much for spending your time with me today. And thank you, Michael, for sharing your thoughts. We’ll talk again soon. But for now, this is Eve Picker signing off to go make some change.

Image courtesy of Michael H,. Shuman