There are risks when investing in any asset class but Peoples Capital Group uses every tool available to protect their investors hard earned capital. This episode reviews the numerous ways PCG protects their investors and how they have been doing so for the last 10 years.
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Aaron Fragnito: All right, ladies and gentlemen, welcome back to the Passive Cashflow Podcast, episode number 10. Today we’re going to talk about, what does PCG do to protect investors. All right, so it’s so important that when you’re investing with a syndicate and you’re working with operators that are calling the shots day-to-day, they might be great at what they do, they might have done it a hundred times and know exactly what they’re doing but you want transparency and you want things like safety net clauses. You want to understand who’s personally guaranteeing the mortgage. You want to understand what happens if one of the operators passes away or gets injured and can’t work anymore. What happens if the building burns down? Also, what about the management company? Are they properly insured also, because they get sued first generally. We’re going to go over all that today. We’re going to talk about how we protect our investors by those measures and we’re going to break right into it right now.
First of all, if you want to learn more about how you can get invested in our buildings and learn more about our company, how we buy apartment buildings in New Jersey and work with passive investors, our website is peoplescapitalgroup.com. You can go there and check out more videos and subscribe to our podcast for new video every Friday at 8:00 AM.
How do we protect investors here? At Peoples Capital Group, the main thing we do, one of the first things we do is, we have something called a safety net clause in our operating agreement. This allows the investors protection against bad operators. Okay, of course this has never happened. This clause has never had to be executed, thank goodness. However, you want to ask your syndicators and your operators, what happens if there’s gross negligence? What happens if there’s theft? Maybe there’s another operator that steals from the operating account. What happens if their building goes into foreclosure because the operators are not doing their job right? The answer is often in syndications, nothing. The investors are along for the ride.
In our case we don’t think that’s fair. What we have is a safety net clause. If there’s gross negligence, if there’s theft too from one of the operators, if their building goes into foreclosure because we’re not doing our job right, obviously paying the mortgage on time is a pretty important thing here and an operating apartment building, then we actually relinquish control automatically to the investors. The passive investors become the active investors and the decision makers. The operators, Seth and I, would then become the passive investors. We would have to take a backseat to our investors then. Because at that point we hadn’t done our job right. There’s gross negligence, there’s theft or the building’s gone to foreclosure. That would then click on the safety net clause and that would unfortunately relinquish control from us over to the investors. That’s a good thing for the investors to have. That’s something that you want to make sure if something goes majorly wrong, the investor can protect their investment and then decide maybe to hire a broker and sell the building, hire a new management company or do whatever it takes to fix the issue and make sure the investors protect their investment.
Of course, this has never happened. This is called a safety net clause. This is not something that we ever expect to happen but that’s an important thing to put in there. Because we don’t expect it to happen and because it’s so unlikely, we’re comfortable with that being in there. If the building goes into foreclosure, we didn’t do our job right. We should not still retain our equity or our management control, our ability to call the shots day-to-day. At that point you really haven’t done your job right so there has to be a way to fire those operators and that’s exactly what we allow for in our operating agreement and we make it very straightforward, very black and white. If there is gross negligence, theft or the building goes into foreclosure, then in that case the powers of operations go back to the investors; go to the investors or the passive investors. That’s a great way to protect your investment at worst case scenario. Again, that’s never happened here. We don’t plan on it happening either.
The second thing we do to protect our investors is, we personally guarantee the mortgage where our investors don’t have to. Normally, if you’re buying a piece of real estate and you’re getting a mortgage on it, if the mortgage is below three or four million dollars you’re going to have to personally guarantee the mortgage. Now, we do that so our investors don’t have to. A personal guarantee of a mortgage stinks. It means that you owe the money whether you go file bankruptcy, you lose the property to foreclosure. All these scenarios, you’d still personally owe the money. You can close down the LLC, you can file personal bankruptcy, you can’t get rid of that debt. A personal guarantee of a loan is a very, very strong document that unfortunately means Seth and I are in it to win it. We owe that bank loan no matter what happens with the property, no matter what happens with the investment. At the end of the day, you better bet that we are going to do everything in our power to make sure everything goes according to plan because if it doesn’t we’re on the hook for that debt.
Again, none of this has ever happened, we never run into situations where the debts call or anything like that but you want to have these safety nets in here, these clauses, these rules that protect the investors. It’s so, so important when we draft our operating agreements, we think, “What would the investors want?” We’re talking to investors. We’re talking to dozens of investors so we know what they want. They tell us what they want and we try our best to put it in there as long as it’s fair to everyone.
We have to have our rules, we have to be able to operate within certain grounds, and be able to paint the hallway whatever color we want, and lease out to the tenants we want, and operate the building as we need to, but if we don’t do our job right, and that’s clear in one of those three scenarios, then we unfortunately don’t maintain control of the building and also we still owe the mortgage whether we’re operators in the LLC or not because we personally guarantee that mortgage. Our investors do not personally guarantee the mortgage. They are not on the hook for the mortgage. That’s a big, big plus to our investors in a big way. We protect them and we take on more the burden instead of them. We take on more the risk instead of them by personally guaranteeing the mortgage and having a safety net clause in there as well to make sure we’re good actors at all times.
The third thing here that we like to do it to protect our investors and their investment, their capital, is a life insurance. All right? Seth and I run this business. We understand that we are very, very important to this business. Without us around, things certainly do change. Of course, we have our management company, we have our staff but we’re realists. We know that if Seth and I are flying to Miami and the plane goes down, there’s going to be problems at Peoples Capital Group. We have life insurance policies that pay out very nicely to the LLC that our investors are invested in. Of course, we have a management company and we have attorneys and we have estate attorneys, we have accountants and CPAs and bookkeepers. There’s a whole process that comes into play if one of us or both of us is killed in one way or another or if there is a sickness or disease. We also have disability insurance. Let’s say Seth or I break my leg skiing and I can’t work for six months or something then we have something called disability insurance. If I broke my leg skiing by the way I’d be working the next day. I’d be texting on my way in the ambulance being like, “Darn, I broke my leg, let’s raise capital.” Basically, if there’s something that stops us from working, we have disability insurance.
That’s a very important thing because when you’re running a small business when you’re running a small syndicate like ours you’re a very important part of the role, you’re a very important part of the business. Because of that, you want to make sure you have life insurance, you have disability insurance so if something goes wrong and you can’t perform your job up to speed, then you want those insurances to kick in. Obviously, if you’re not around anymore on this planet then that life insurance kicks in. I won’t tell you how much my life insurance is worth because then my brakes might be cut. I’m going to make sure no one knows that amount.
All right let’s go on to another more serious topic here. Property insurance as well. We also, of course, obviously, get property insurance on the building. We have an umbrella policy also. If the building burns down or something like that, in many of those scenarios, we actually end up making a larger profit than we would if it didn’t burn down. Of course, that’s not our exit strategy but we properly insure the buildings for as much as we can. We get very good insurance so if anything were to happen, the building is fully insured and the investment is secured by the property insurance.
Again there, with insurance or property management insurance. PCG Property Management, Peoples Capital Group Property Management, manages all of our real estate. It’s very important that you have insurance for the management company. Generally, when there’s a slip and fall, let’s say a tenant owes the rent and they decided they’re not going to pay instead they’re going to slip and fall down the steps. This happens all the time especially in the winter months when they can claim ice or snow or whatnot. Not all the time it has happened. We obviously have good property management, we take care of our steps and make sure there’s no snow or ice on them. A lot of times when the tenant owes the rent, especially with lower income real estate, we do find you get slip and falls. Pretty nefarious lawsuits against the management there.
Now, the first thing they do is they sue the management company, so you want to make sure the management company is well insured, which our management company is very well insured, and the property is insured as well. If a tenant sues us for any reason, whether it’s a slip and fall or whatnot, then we are covered. Owning real estate over time especially in inner city areas, you do get suits from tenants.
We had one tenant try and sue us for a slip and fall one time but we have such good records that we showed the court that, “Look, we communicated with the tenant. Whatever their issue was it was fixed right away.” Then when the tenant claim the issue wasn’t fixed, we have proof and pictures that it was fixed. What the tenant did was actually break the step or the handrail again so we sent a contractor out to fix it. It was fixed. We got pictures of it. Then the tenant broke it again and then said they fell at that point but had no proof of that and we have proof that the item was fixed and then was broken quickly thereafter again, so it was pretty clear that the tenant had made this up.
Now the crazy thing is, the insurance company still settled even though it was a silly, completely false suit, but at the end of the day the insurance companies tend to just settle those suits, so it was a small settlement. But, you know, slip and fall do happen when you own a lot of real estate. It’s not the end of the world, you want to just be well insured, you want have good records. When we get something fixed with pictures of it, when we have service calls, we have records of it. When we send someone out there, what the issue is, when it was fixed. When we have tenants that are complaining, being rude, causing issues and likely resulting in some type of nefarious lawsuit, then we make sure to record all that and how the tenants treating us, all the threats for suits and whatnot and things like that and then one day they miraculously slip and fall and now they deciding to sue us. So, often when the rain comes due.
We do find that to be something we’ve dealt with in the past and it’s something we’re well prepared for and you always want to be well insured and well prepared for any bad apples like that and lawsuits that come out of the blue. Also, contractors working on your property and things like that. You always want to make sure they’re insured and you’re insured as well.
By having the safety net clause where if we are bad actors, our controls are relinquished to the investors, by having the personal guarantee of the mortgage on Seth and I and not the responsibility of the investors, by having life insurance and property insurance, very good property insurance, very good insurance for the management company, we make sure that our investors are protected, we make sure that if things go wrong, which, listen, things go wrong sometimes, you have tenants that don’t cooperate, you have situations where buildings are damaged and you need to make insurance claims or whatnot or even entire fires, buildings burned down, that happens. You want to make sure all your smoke detectors, fire detectors and your permits are up to code and your properties are up to code. By having all those things in place, if things go wrong, when things go wrong, you’re well prepared. Being well prepared means you lose less money or you don’t lose any money at all or maybe even make money out of a tough scenario. I’ve heard of scenarios where people’s buildings burned down and they actually make a lot more than they would have if it didn’t. Obviously we don’t want that scenario, but you want to be well prepared for these occasions. You want to be well prepared for the worst case scenario.
Again, these are very unlikely scenarios, none of these things ever happen. We never lost a building to [unintelligible 00:12:38], it’s pretty rare, but you always want to be prepared. As opposed to a stock, if your stock burns down you got nothing, but if you’re real estate is damaged, it’s insured and protected and that’s important to do. We are also insured and protected because the operators are equally as important as the real estate. By protecting and insuring ourselves and protecting and insuring property, we really, really protect our investors and that’s the trick here. That’s what you really want to focus on, is protecting your investors, making a safe place where they put their capital so they can invest passively in New Jersey apartment buildings and that’s what we do here.
If you want to learn more about how you can qualify for a New Jersey apartment building investment, go to peoplescapitalgroup.com, that website you can sign up to qualify. You can maybe jump on one of our webinars, you can come to one of our events. Now we’re doing four events in the office; we do a Sunday luncheon, a Saturday luncheon, a Tuesday night event and a Friday event. We literally have an event every week at one point or another. The first week we have the Sunday event, the second week is the Tuesday night event, the third week is the Saturday luncheon and the fourth week is the Friday breakfast. We do a bunch of different things, different times a day, different times of the month different days of the month so please come to one of our events they’re really awesome. We give a lot of information at these seminars. There’s limited seating so you go on our website peoplescapitalgroup.com and you can register for one of our events coming up or you can go on meetup.com and you can see our group there, is New Jersey Real Estate Network. We have over 3,000 members on meetup.com in New Jersey Real Estate Network so if you want to check that out, that’s a great place to jump on one of our events coming up and RSVP for that or even a webinar as well if you’re out of state.
Again, this is Aaron with Peoples Capital Group, and can you go to peoplescapitalgroup.com, today we talked about what PCG do to protect their investors, so I hope I gave you some good information there, some good insight on how we protect our investors. Again, we’d love to talk to you more about how you can get invested in a building with us. Check out our website peoplescapitalgroup.com and I’ll see you next Friday for another video.