Ed Fernandez is the CEO of 1031 Crowdfunding, which is responsible for raising $800M of equity from individuals and institutional investors through private and public real estate offerings. In this episode, Ed discusses how his company has become the leading real estate crowdfunding platform for 1031 exchanges, how investors can access the platform, and what industry problems this strategy is solving.
Ed Fernandez | Real Estate Background
- CEO of 1031 Crowdfunding, which is responsible for raising $800M of equity from individuals and institutional investors through private and public real estate offerings. They are the leading real estate investing platform for 1031 exchanges and alternative investment vehicles focused on tax deferral.
- Portfolio:
- GP and LP of $350M
- Based in: Irvine, CA
- Say hi to him at:
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TRANSCRIPT
Ash Patel: Hello, Best Ever listeners. Welcome to the best real estate investing advice ever show. I'm Ash Patel and I'm with today's guest, Edward Fernandez. Edward is joining us from Irvine, California. He is the CEO of 1031 Crowdfunding, which is responsible for raising $800 million of equity from individuals, institutional investors through private capital and public real estate offerings. They are the leading real estate investing platform for 1031 exchanges and alternative investment vehicles focused on tax deferral. Ed's portfolio consists of being a GP and LP on $350 million of real estate. Ed, thank you for joining us, and how are you today?
Ed Fernandez: I'm doing great, Ash. Thank you for having me.
Ash Patel: It's our pleasure. Ed, before we get started, can you give the Best Ever listeners a little bit more about your background and what you're focused on now?
Ed Fernandez: Sure. So I've been doing real estate alternative investments since about 2000. I started as an internal wholesaler at a financial firm, educating financial advisors on why they should invest in our products. So I was there about 14 years, and I started from being the guy on the phone to the guy that was creating all the offerings... So I cut my teeth in the real estate market at that firm, and I was there for 14 years. And about nine years ago, I started to do my own thing. And based on that, I took everything that I learned from my previous experience, and create 1031 Crowdfunding, and here we are today.
Ash Patel: Ed, when you mentioned alternative investments, what exactly is that?
Ed Fernandez: So when I'm talking investment, the most important thing is it's an illiquid investment in actual real estate. Unlike investing in traded REITs, which really act more equities, and are volatile to the stock market, alternative investments really get a passive investor the true feel and returns of investing in actual real estate through a passive [unintelligible 00:03:12.09]
Ash Patel: You have a monumental task convincing financial advisors to invest in real estate. You know, those two worlds don't intersect, right? And the reason I say that is I've interviewed a number of CFAs, financial advisors, I've got a lot of friends in that industry as well, and they never invest in real estate. The financial advisors that I've interviewed have clearly said that "I don't encourage my clients to invest in real estate, because there's no way for me to get paid on that." So you're coming into this world - you sound like a disrupter, with an insurmountable task. What are you doing here?
Ed Fernandez: And that's the thing, is unfortunately, you get what you [unintelligible 00:03:56.27] Even though the guys are still advisors, and they're advising their clients, they still need to get paid, and it's understandably that if they can't get compensated in an investment vehicle that potentially could benefit their overall client base, it's with complete understanding of why they wouldn't go ahead and allocate funds into that. But with that being said, it's really not that hard; once you sit down and you educate these guys, and they start seeing the returns... And then you find the guys that really are focused on helping the investor and helping the client for their future, the task is really not that hard. They just need to be educated, that's all.
Ash Patel: So the financial advisors, their clientele - is it mostly institutions, corporations, 401K plans, or individuals?
Ed Fernandez: It's really retail investors. The institutional guys really use money managers, and those money managers will allocate the portfolio as they see fit, because they have full discretion. It's the retail investors; the investor that has $100,000, $200,000, that is looking for a professional to manage their money is the ones that we actually are talking to.
Ash Patel: Alright, so you are a disrupter, because not a lot of people are doing this, right?
Ed Fernandez: Well, when we first started, there wasn't a lot of people doing this. But now everybody's nipping at our heels a little bit... So we do have some competitors out there, but yeah, we were the trailblazing type company to move in that direction.
Ash Patel: Ed, the million-dollar question - how do the financial advisors get compensated?
Ed Fernandez: Well, basically, every alternative investment has a commission built into it, but it's who you're talking to you. So you have advisors that are called registered investment advisors; they don't charge a commission, so they get a fee based on assets under management. So as long as the actual investment can be held, what we would call above the line - what that means is, "Okay, well, all my money is at Schwab", or "All my money's at Fidelity" or "All my money's at TD", well, then as long as that investment can be held in that platform, they'll get paid based on the assets under management. So those are the easier guys; the guys that actually get paid a commission - that's a little bit more difficult, because if you create the product, you have to actually go to that financial institution where these advisors work, and convince them through due diligence that this product should be on their platform, and then be allowed to distribute to those advisors. But in that case, there's always a built-in commission for them to be compensated.
Ash Patel: And you do both of those scenarios.
Ed Fernandez: Yes, sir.
Ash Patel: So when you're going to an institution, the amount of due diligence that you have to go through has to be insane.
Ed Fernandez: Oh, yeah. They want to look under the hood. They want to see who the warm bodies are, character, integrity, track record, past performance, and then they start looking at the economics. Does the deal work? So yeah, you have to go through a lot of due diligence to get it done. But once they've done one or two deals and things have gone well, it's really just a matter of dotting the i's and crossing the t's. Really, that's all it is.
Ash Patel: And the company is called 1031 Crowdfunding.
Ed Fernandez: Yes, sir.
Ash Patel: How does somebody get onto that platform? Or are these all deals that you control?
Ed Fernandez: That's a great question. So we play two roles. First of all, you can go to www.1031crowdfunding.com and you'll find us there. But to answer your second question, we act like a marketplace. So 1031 Crowdfunding is like a shopping mall. So you walk into the mall, and the mall has storefronts. And each storefront is going to attract a different client. So at 1031 Crowdfunding not only do we have our own opportunities, but we have third party opportunities that I have relationships with over 15 years or so. And the reason for that - it's important to have people who have options; we don't want people just investing in our deals. Well, what if they don't like our deal? Well, we want to be able to provide them a menu of options to accomplish their goals.
Ash Patel: And do these institutions further vet each deal and those operators as well?
Ed Fernandez: They do that. So if you're going to go on my platform, we have analysts here, we have an acquisition team here... So for lack of better words, because we make sausage - I'm going to use this analogy - and we receive one that's already been made, we kind of know what to look for, and peel back the layers to determine whether we want to entertain the deal or not.
Now, one of the things that we do do - and a lot of investors ask us, "Well, why do you do this?" So we'll put a not-so-good deal on our platform, and we'll indicate that that deal is not so good. Here's why. Because of our competitors, investors will visit us, they'll visit a competitor, and that competitor may have that same third party deal on their platform. But there's no indicator on there whether that deal is a good deal, an okay deal, or a bad deal. So regardless whether an investor would invest with us, we want to make sure that we are seen as the company that educates investors. So for lack of better words, you go to a competitor's website, but on our website, we've indicated "Not so good", they're going to question "Why are you not telling me this deal's not so good? Because the other side I went to said it wasn't." So it kind of gives us that competitive advantage.
Ash Patel: What is the threshold to get onto this platform as an operator? Is there a minimum deal size?
Ed Fernandez: No, normally deal size is anywhere between 20 million or more, because the upfront costs associated with creating these opportunities really is a cost that is across the board. So the bigger the deal, the lower the cost. The smaller the deal, the higher the cost, based on a percentage. So we want to make sure that deals are at least 20 million or greater to minimize those upfront costs to investors.
Ash Patel: What asset classes are on your platform?
Ed Fernandez: Oh, boy, are you ready? So we have multifamily, senior housing, student housing, self-storage, industrial, office, medical office; we have a deal on the platform right now, it's the training facility for the Las Vegas Raiders. We have Walgreens, Amazon, Dollar General. So you name it, it's on the platform; the only thing you won't see a single family residences. We even have mineral rights, where you can buy the land and pull oil out of the ground. So there's a lot of diversity that's on the platform.
Ash Patel: What's the average yield for these investments?
Ed Fernandez: Great question. That's between 3.5% and 9%. So a wide range based on asset type.
Ash Patel: And is there still a split on the backend? Is this a fund that's perpetual?
Ed Fernandez: It's not.
Ash Patel: So it's a deal by deal fund, so to speak?
Ed Fernandez: Correct. It's a closed-ended fund, not an open-ended fund?
Ash Patel: Got it. Okay. And how many different operators do you have on the platform?
Ed Fernandez: We have about 54. We are one of the 54. So we work with all the institutions that are involved in this space, and tenure is not indicative of whether you get on or not; tenure is an aspect of our due diligence, how long you've been in the business, but it's really the economics of the deal that actually determines whether the deal is a good deal, an okay deal, or not so good.
Ash Patel: I'm imagining this isn't cheap, because it's very convenient. If I'm an operator, instead of raising $30, $40 million, I can come to you. What is that going to cost me?
Ed Fernandez: It really doesn't cost you much, because operators are not stupid; they're going to put the cost on top of the deal. So the operator is going to put out the money to create the opportunity, but then the operator is going to put that on top of the deal, so that they get reimbursed. So investors, i.e. upfront load, are the ones that carry the cost for the operator to distribute that product.
Ash Patel: Well, let's dive into those fees. I get that they get passed on, but what are they?
Ed Fernandez: So you've got an acquisition fee... So let's define load - so load is something that does not go in the operator's pocket. The load is comprised of two components. So you have capital expenses, CapEx; that's the money that goes into the real estate. And then you have transactional costs.
One of the things that we do that's very attracted to investors is actually remove the closing risk when it comes to a 1031 exchange. And I don't know if you noticed, but a 1031 exchange has a very finite time period; you have 45 days to try to find something to replace that you just sold, and that includes holidays, weekends, and that timeframe flies by. So what we do in in this asset type or product is the real estate is already purchased up front. So if the real estate is purchased up front, if I'm gonna put up $20 million to buy a piece of real estate asset - Ash, I don't know if you're gonna invest in it. I don't know if anyone's going to invest in it. I might have to keep it. So if I'm going to put up $20 million, guess what - I'm going to do an appraisal title, survey, property condition report... I'm doing everything I need to do to determine whether this is a good asset or not. All those costs, ie load, are passed on to the investors. As far as the fee is concerned, there's a commission; that commission is 6% on equity, and then there's a disposition fee upon the sale of the real estate, and there's an acquisition fee. So all in all, load is anywhere between 8% to 20% of the deal, give or take, what kind of deal it is.
Ash Patel: Got it. And Ed, I'm struggling trying to understand the 1031 benefit here. Our listeners are very familiar with 1031s, but how does that play into your platform?
Ed Fernandez: So our client profile is anywhere between 60 to 90 years old. So they have built their wealth; they're not interested in trying to have a 1x 2x 3x on their money. They're trying to protect their principal; they want to defer the taxes, but they want to continue their lifestyle and replace the income that they've been receiving from the assets they've sold. So the benefit to investors, if you're tired of dealing with the tenants, the toilets and the trash, if you've run out of time in your 45-day period, those are the investors that come to us, because all the real estate on the platform has already been purchased and you can literally complete your transaction in five days and avoid paying a tremendous amount of taxes based on the property you've just sold.
Ash Patel: Interesting. Okay. So when I'm older, and I have this portfolio that I want to be done with, I can sell it all, put it into your platform and 1031 all my money into that?
Ed Fernandez: Absolutely. And the unique thing is that because we have so many opportunities on the website, you don't have to put all your money in one deal; you can diversify yourself and create what we would call a mini mutual fund for your 1031 exchange. You can choose asset type, you can choose geographical location, you can choose the debt terms... So my point is that if you want a little bit of this, a little bit of that, and a little bit of this, you're diversifying your risk by being able to actually buy what you want to buy, when you want to buy.
Ash Patel: Interesting, and I love the concept. I didn't know you could 1031 from real estate into a crowdfunded deal, so to speak.
Ed Fernandez: We do what's called Delaware Statutory Trust, we use the term DSTs for short. So those have been around since 2004, and they're directly on the IRS website as an option for an exchange. And to try to keep it as simple as possible for your listeners, a DST is very similar to a living or family trust; where there's a trustee managing a trust, the beneficiaries of the trust. So when you invest in one of these DSTs, you become a beneficial owner of that asset that's in the trust. That's why it qualifies for an exchange. So you're really buying real estate, you're just buying it in a passive way, but actually qualifies for an exchange.
Break: [00:16:34.12]
Ash Patel: What a great solution. You're solving an industry problem. And for the Best Ever listeners that don't know how to win the 1031 game, can you share that? We get the kicking the can down the road, and you build this giant snowball that one day people think, "Oh my god, it's gonna catch up to me at some point." But tell our listeners how you win the 1031 game.
Ed Fernandez: Sure. So I love pictures. I use analogies. I haven't been to Hawaii in a while, but I love Hawaii. So think of taxes as a wave. You go to the North Shore of Oahu, waves are 50 feet or higher, they're huge. So think of 1031 exchanges as the surfboard. As long as you stay on that surfboard and avoid that wave, you will never ever experienced paying the taxes and leave it for your heirs. But as soon as you get off of that surfboard, that wave that is 50 feet, 70 feet, 100 feet comes crashing down on you. So what we do is make sure that investors understand that you need to swap until you drop. And as long as you swap until you drop, your heirs will never experience the taxes, and it's the best way to build wealth and leave a legacy.
Ash Patel: And it helps that transition. So really, the way to win the 1031 game is when you pass, your heirs get your property at a stepped up basis. But do you really want to leave them with real estate that they have to dispose of, and manage in the time being? Or do you roll it over into something passive, that is easily transitioned? So I love that you're solving this problem that a lot of people know about, but I don't think a lot of people have a good plan. We'll do our trusts, or wills, and all that, but in the meantime, we're building our real estate portfolio, and we think, "Okay, when I get older, when I'm in bad health, I'll create a succession plan and consolidate, and I'll sell 10 properties and just buy two big ones..." But what a great solution here. How do you educate the world on what you're doing?
Ed Fernandez: One client at a time. It's very important that we take the time to educate one client at a time. It's interesting, when we get on the phone with sometimes lawyers and CPAs, professionals, they really don't have any idea that things exist. So as a CEO, I still take client phone calls, because it's very important that we take the misled, the misunderstood, the deceived investor and provide them with a secure, transparent environment to invest and build wealth for the future and for their children.
Ash Patel: Ed, why not take the 30-year-old, 40-year-old professional that's making a lot of money, that wants passive investments? Does your platform not have a competitive advantage against other platforms when it comes to non 1031 type investments?
Ed Fernandez: Great question. Not only do we do 1031 Exchange investments, we also do REITs, partnerships, private placements, notes, we have opportunity zone funds... So literally, we have at least 100 options on our website for all to invest. So we do get the 30, the 35-year-old, 40-year-old, but more often than not, they're not going to invest in an exchange product... Because think about it, they're control freaks. And I understand - they're young guys, they still have a lot of energy, they want to control their own destiny. The last thing they want to do is hand their money in a passive form. But for those investors that are younger, that want to actually invest - we get a lot of investors focused on opportunity's own funds. They've sold some stock, they've sold businesses, and so they want to defer those capital gains, so we get those investors into opportunity zone funds.
And then you have those investors that are trying to diversify themselves from the equity markets, so we provide those types of products as well. So the bulk of our business is our exchanges; I would say 70% of our business is exchanges, 30% of our business is all the others.
Ash Patel: Is this like the New York mob, where you can get in, but you can't get out? So if I come in - let's say I have a health scare, and I come in, and all of a sudden it turns out to be nothing. Can I come back out?
Ed Fernandez: I'm gonna put my compliance answer hat on first, and then I'll give you a practical answer. Compliance answer is this - if a three to six year hold of an opportunity like this is going to cause you heartburn, you shouldn't entertain these ideas, because they're illiquid. My practical answer is, we have a secondary market on our website. Currently, we have thousands and thousands of investors that have registered to our site; we have successfully created a secondary market on our site, where the investor comes up to us and says, "Hey, I've got a family emergency, I've gotta get out of this thing. Can you help me?" Yeah, sure, we'll take that deal, put it on our platform in the secondary market, we'll email all these investors, and if an investor says, "I'll take that option", we create the transition for investors to get out, and create instant liquidity. But other than that, if you're an investor, you should expect to hold this thing three to six years. If that's a problem, this is not for you.
Ash Patel: Yeah. And I should have asked that question a little bit better. Of course, I get that the term of that investment has a specific time period. But once that investment is sold, do I have to keep my money in your platform? Or can I pull it back out into my personal bank account?
Ed Fernandez: Great question. So if you're in an exchange, we will always have to send your money back to you. So 60 days prior to the sale of the real estate, Ash, we're gonna call you and say, "Hey, Ash, you've got to set up your exchange account. Give me that information", we give it to escrow, once the property settles and funds are dispersed, that money is going into your Qualified Intermediary account. At that time, you can decide to do something with us again, you can decide to buy something on your own, or you can pay the tax, but we can never take your money and roll it into another deal automatically.
Ash Patel: Got it. Okay. And then I can 1031 back out as well.
Ed Fernandez: Absolutely. That's why we'll send it to your Qualified Intermediary, so you have that exchange option.
Ash Patel: Alright, so I love this even more. There's a lot of people that overbuy, or overpay, just to satisfy that 45-day window. And in my opinion, that's why this real estate market is inflated. It's one of the factors that I think is causing this real estate market to be over-inflated, when you've got $10-$20 million dollars that you're gonna end up paying taxes on if you don't redeploy it, "So let's just buy something." We get calls from brokers all the time, "Ash, do you want to sell anything? I've got a 1031 buyer that's got three days left, and they're willing to overpay."
So for those younger guys and girls that have a deal and they can't satisfy the window, they can come into your fund, and then when it's done, five, six years, whatever it is, they can come back out.
Ed Fernandez: Yeah. I have to use this term, but they use us like a parking lot.
Ash Patel: You're a band-aid man. Yeah.
Ed Fernandez: Yeah. Or like a parking lot. They kind of take a pit stop, change the tires, refuel, and then if they want to go back into the active market of real estate after this is done and it's all full cycle, they can do so.
Ash Patel: I don't know that you should be talking to me. You should go talk to all those Markus & Millichap and CBRE brokers that call me and say, "Ash, what have you got? I've got three days."
Ed Fernandez: They call us all the time, Ash. They call us all the time. They're scrambling around, they're panicking, and they call us, and we help their clients.
Ash Patel: Well, on that topic, do they get their commission?
Ed Fernandez: Well, they can't, unfortunately, because of the fact that these are securities, right?
Ash Patel: Right.
Ed Fernandez: And so because these are securities, you have to have a securities license to get paid commission. But nine out of the ten times when you're creating a listing, here's what a client says: "Well, hey, Ash - great, I'm gonna put my property on the market. But what do you have for me on my [unintelligible 00:25:38.29]?" And if you don't have that answer - you know what? I'm just gonna keep my real estate. But now brokers are saying "Look, we do have an option for you. Go to this company, they have all these types of real estate assets on there, and they can literally satisfy your exchange in five days." Guess what the client does? The client gives them the listing, and h puts the property up for sale, because they have an option.
Ash Patel: Alright, let's be realistic... So they're not going to tell their clients that until the very last minute, because they're gonna want to be paid the commission.
Ed Fernandez: That's exactly right. Last minute, they do it all the time.
Ash Patel: So is that the window, five days from when I come to you and say, "I've got five days left"? Is that the window where you can accommodate 1031 money?
Ed Fernandez: Oh, yes, sir. Absolutely. So we can satisfy your exchange as quickly as five days. Worst-case scenario, you're on day 45, we can help you identify assets on your ID form that day, and then you can transact a week or two later, if you choose to.
Ash Patel: Man, I love that. So that's where your broker relationships could come in. At the 11th hour, I'm your guy.
Ed Fernandez: That's exactly right. And that happens all the time.
Ash Patel: Good. The brokers do their clients a real service by saving that taxable burden.
Ed Fernandez: Yeah, we're getting more and more lawyers, CPAs brokers to come into our platform to try to help their clients solve their issues.
Ash Patel: Why doesn't everybody start copying your business model?
Ed Fernandez: They have. [laughs] They have. So it's annoying, but it's also a compliment... So we're always innovative. So we have exclusivity to our code. One of our partners, she does business with Sony, and [unintelligible 00:27:29.00] and Macy's, and handles all their security on their servers... So our code is proprietary to us, exclusive to us. So whatever we dream, we can create, and that's what gives us our competitive advantage. All our competitors are using white label platforms, where all you're doing is changing the color palettes; we can change it to whatever we want. All we've got to do is think about it and we can create it.
Ash Patel: Got it. Ed, what is your best real estate investing advice ever?
Ed Fernandez: That's a good question. I would say stick to what you know. A lot of investors that come to us, they don't know what they don't know. And I would say if you're very comfortable with multifamily or a multi tenant type asset where it's senior housing, student housing or self storage, don't try to figure out how to do a Walgreens or an Amazon or a Dollar General. Too much of a learning curve. If you're on that side of the real estate spectrum, I would say if that's what you know, stick with that. But that would be my best advice, because a lot of investors come to us trying to learn a new asset type, and it makes them very uncomfortable. So I would say just stick to what you know; if it's served you well in the past, it should serve you well in the future.
Ash Patel: Ed, are you ready for the Best Ever lightning round?
Ed Fernandez: Let's do it.
Ash Patel: Alright. Ed, what's the Best Ever book you've recently read?
Ed Fernandez: How to Invest, by David Rubenstein. He's the co founder of Carlyle. Very interesting to hear how he interviews all these top CEOs, and how these CEOs have come about, how they handle situations, how they invest their own money. Very interesting book to read.
Ash Patel: Ed, what's the Best Ever way you like to give back?
Ed Fernandez: Great question. So my wife is our COO, so she handles that... So we put out posts, and every holiday we get inquiries. So we get inquiries of families that their houses burned down, or there's an abusive situation, so 1031 Crowdfunding cuts checks to help all these people out with their situations.
Ash Patel: Ed, how can the Best Ever listeners reach out to you?
Ed Fernandez: Go to our website, 1031crowdfunding.com. Or give us a call at 844-533-1031.
Ash Patel: Ed, I want to thank you for your time today. This was a service that I didn't know is out there. Much to the dismay of the IRS, you probably save a lot of people a lot of tax writing that they otherwise would have forgotten... So thank you very much for your time and sharing what you're doing with us.
Ed Fernandez: Ash, thank you so much for having us, and I wish you a happy holiday, my friend.
Ash Patel: Likewise, brother. Best Ever listeners, thank you so much for joining us. If you enjoyed this episode, please leave us a five star review, share this podcast with someone you think can benefit from it. Also, follow, subscribe, and have a Best Every day.
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