Welcome to The Real Estate Way to Wealth and Freedom podcast, with Jacob Ayers. Providing actionable content to help you along your journey to financial freedom through real estate investing. As the premier asset class, real estate has helped ordinary people just like you amass fortunes. The benefits of passive income from real estate investing will allow you to live a life you want. And now, your host, entrepreneur, real estate investor, and apartment deal syndicator, Jacob Ayers.
You see, technology is changing the way we do things in this life. From online dating to banking and even, the new craze, cryptocurrencies. Today we are going to talk about how technology is changing the way we invest in real estate. Our guest is Craig Cecilio. Craig is a principal at DiversyFund, Inc. and the founder and CEO of the California Coastal Funding Group. He has worked in the real estate industry for nearly 20 years. Over the course of his career, he’s participated in the development of over 1000 single-family residences in California.
Craig also owns a California Licensed Real Estate lending business for residential renovations and ground up construction, a loan servicing business and a real estate crowdfunding website known as DiversyFund. Since 1997, Craig has financed nearly 1 Billion Dollars in real estate assets… having raised over 100 million dollars for debt or equity for real estate transactions in the last 3 years. He has developed and managed over 25 million dollars of residential property. Without further ado, let’s jump into today’s episode.
CC: Thanks, Jacob. Thanks for having me on the show today.
CC: Well, the Real Estate goes way back, to even my childhood. I’ve always been one to venture off, kind of like an entrepreneur, and even as a young kid I was always doing lemonade stands, and doing landscaping, mowing lawns, all that type of stuff. As I entered the workforce, after attending school, it was kind of natural for me to gravitate towards real estate. I was raised in Connecticut and went to school in Colorado. Then I moved to California. Moved out here in 1997. I had a couple odd jobs. I was able to meet a couple of people who were very active in real estate investing and real estate syndication. They took me under their wings and taught me a few things.
The rest is history. From there, since I got a little curious at an early age, I was kind of OCD about it and I dove deep into real estate syndication. With that being said, I took every job there was in real estate. Then I first started with my first companies in 2004. It was definitely within the technology environment. I was always a big advocate of technology. As I saw things progress over the years with my background in real estate syndication, I heard about crowdfunding. It was a natural fit for myself to get involved with that.
I started DiversyFund in 2014, and by 2016 we had built out our platform to take online investments. At this point, we’ve got over $100 Million of assets under our management.
CC: I think crowdfunding has been around for a long long time, but in the real estate field, it’s really real estate syndication leveraged by technology. So real estate syndication is when you get a group of people that gather to finance or fund a project. Crowdfunding is using technology to aggregate people, in this case, the crowd, to come together and to fund a particular project.
In our case, we are able to take investors anywhere across the US, at very low dollar amounts, where we can leverage the technology to do a high dollar amount investing figure.
For instance, if we want to do a raise of 5 million dollars. You get 10 thousand dollars, from… I think it comes to… if I’m doing my math correct, from 500 people to finance that transaction. Whereas in the past, you were funding deals…you might do it, but you were just doing syndication to find 5 guys each with 1 million dollars to fund the project. So that’s the difference, using technology to add more people to get involved with a project.
CC: It’s decreasing the barriers to entry. The guy with 100,000 dollars is probably not going to be called by the broker who is going to get a commission for 5 million dollars. He is not going to be motivated to call the guy with $10,000 dollars or $5,000 dollars or $500 dollars. Therefore, by that reason alone, most of the good high-quality investments go to people who are already wealthy, go to family officers, go to hedge funds, and go to institutions.
The people who find the deals don’t want to spend time doing that. Through technology, we are able to have that segment of the population able to participate.
CC: Well, DiversyFund is a vertically integrated platform. That means that we are, we actually aren’t the broker, we are not financing somebody else’s transaction. We actually own the real estate, we develop the real estate that you invest in, we offer equity participation and our investments function as debt in some form or manner. The reason we do this, and I’ll go ahead and tell you the difference here, is that we are a very good balance sheet because I used to own an investment firm before, and my partner came from the investment world as well. We are able to leverage the equity with the institutional and bank’s money. To us, that is a safer investment.
Then, if you are doing debt, lending to somebody else, the bank said not to and that they had to get money through crowdfunding and that return to the people, to the investors, it’s going to be a double-digit return. You have to ask yourself, why are you investing in somebody who can’t get a bank loan? That’s a risk to your transaction.
That is why we are more equity base. Debt base would be lending the money to somebody. Getting some monthly payments back, quarterly payments or deferred payments. Whereas equity is where you participate in these projects and most of the time you get paid when the project pays off.
CC: I would say there is an education process with the investors. We are focused on institutional quality. Using institutions to fund some of our transactions. With the debt piece and our entire account. I know some people go towards the debt instrument and they put all their money into that debt instrument because it is debt and it functions a little bit differently.
The risk profile for us is that we believe ours is less risky than some of the debt instruments offered out there. The reason is that those people have not been qualified and approved by institutions. Therefore, there goes their credit scores and lack of experience. In that case, the chances of the project going south are much greater than we do on our platform itself. We have players’ experience.
I have 20 years of experience. My partner has 15 years of experience. We have a great track record. Perfect track record with that being said.
CC: First and foremost, we are a vertically integrated platform. That means, again, that we own the title of the property. That you have the ownership interest in the property. That is the biggest differentiator for us than everybody else. The second large differentiator, I believe is, it was founded by myself and Alan Lewis and both of us are real estate guys. Both of us were partners in previous investment firms.
I’ve owned a real estate investment firm since 2004, been in real estate since 1998. Alan has been in real estate his entire career after he got out of Columbia Law School. He worked in corporate securities in Wall Street, and you have a couple of guys who not only have experience in real estate but at the same time, you have guys who actually have experience running companies and running this platform.
The other platforms’ leadership, it may be the first time running a company and it’s also the first time for then running a company that is in real estate. Those are 3 major differences I would say.
CC: Without a doubt. We have the battle scars to show that.
CC: That’s a great question. This question, we get quite often, and I think that’s a very important question to ask. I don’t want to discourage people from getting involved in real estate and that is one thing I never want to tell someone, to not do something. At the end of the day, it does require experience to be successful at this. When my phone rings and it’s a guy who I’ve known for 20 years and is offering me an off-market deal.
We established those connections going back in the day and having those relationships with those who also came out from the downturn. You know they are going to call someone where the deals are done, and they can make money with that person. That holds a lot of leverage for us getting our deals.
We can take that same blueprint and put it across the whole US, but I think we might have to stop and do a little bit of internal searches. We have to look at other markets, but right now we are pretty well networked and a great pipeline going just because of having those relationships in place.
Granted you have those relationships, you still have to do your underwriting and due diligence. We are able to pick projects that not only we believe are less risky, we are also choosing projects that have a social impact. In addition, we are doing projects with a world-renowned designer right now. There are a couple in Beverly Hills. We are building here in San Diego a 58-apartment unit, which we are trying to make as green as possible. Making it all to be able to hook up electric cars. Have all the spots hooked up to that because Teslas are really taking off now. There’s been an increase in electric cars out there. We are able to do stuff like that.
CC: That’s a great question as well. Our backgrounds are in both, so, based on the market we are choosing our investments wisely. I love the mixed-use commercial space. One of the projects we have, the one with the 58 units, I’ll probably get a couple more going like that this year. As far as doing the single-family estates, I really want something that pops well.
We have a couple of projects up in the San Francisco Bay area, some locally here in San Diego, some in Orange County, in LA county… We are specifically targeting specific properties on that base. It’s a mixture of both. To answer your question directly, I would like to see a portfolio mixed with 80% commercial by the end of next year.
CC: I would say, everybody. I would say, anybody. Anyone who is not into alternative investment, anyone who is not into real estate, they should get their feet wet. They should go for a lower dollar amount. $1000 dollars, $2,000 dollars, $5,000 collars. Someone who wants to learn about real estate because we have full transparency. We get investors monthly updates on all our projects. They can participate as well.
We have a lot of older people. Retirees who want to build wealth and have passive income. They invest as well. Everybody from anywhere. We have people who invest just because they want to say, “Hey, I own that project. I own that.” We are building a house right now in Beverly Hills that is pretty cool looking. Some people want to say, “Hey, I was part of that. I am part owner of that project.” For that sense of pride and awareness of doing something like that.
CC: Yes, without a doubt. In the past, like I was saying before, the very first entry was high. No one was going to call you on a 5 million dollar equity transaction if you have $10,000, $5,000 or even $50,000. You were shut out of that whole community. How do you ever engage in that? How do you learn about it? We are offering that opportunity now to everybody.
CC: It’s all automated right now. It’s all on the website, www.diversyfund.com. You go there, you can hover over to offerings. We have single assets to participate in, we have a couple of alternative assets up there, and we have a fund up there as well. The fund is collateralized against all the assets. You can pick and choose what you like. You go in, you click on it and it will ask you series of questions, get a user and a login. Then, you can go in, log in. We have all the material, all the underwriting back on the website.
All the equity to read and look at. Hopefully, it has all your questions answered. That’s what we are learning. When a customer comes and asks us a question, we make sure the next offering is updated to include those questions. That is all automated and saved automatically into an account for you. You have your own user account. Then you’ll get a couple of emails after that. Your investment goes live after the qualification stage. Then you can start looking at your portfolio and the interest that you are earning on your money. It’s all on the backend of the website.
CC: It’s a little bit of both. In some cases, we might pre-fund to close a transaction. In some cases, its a long-term escrow. It’s a combination of both.
CC: Preferred equity return, and how we define it (we know a lot of us define things in different ways) is that you receive the money when the asset is disposed of. An asset is disposed of in many ways. One is, for example, we are building a new house. Let’s say, when the home sells, you receive your principal plus your interest earned at that time. On another hand, if we decided at that point in time to refinance that asset, go to a bank and get a refinance loan, at that point in time, you get your principal back plus interest as well.
There’s a couple of exit strategies to get your capital back in that form. What also happens is that preferred equity situation is, the way it works for us is, that we are the developer of these transactions. We don’t get paid until you get paid first. You get your principal, your interest, and we keep whatever is left over. Our interests are very aligned for us to fulfill offerings, make sure that we are completing those projects. We only benefit financially in the end. After you benefit.
CC: Yeah. At the end of the day, you have to have interests that are aligned with yourself and your investors. It has to be a win-win situation for both parties. It can’t be a win-lose situation.
CC: It depends on the offering type. What’s great about the JOBS Act and with crowdfunding today is that we do a Title 2C offering. We are going to have a Reg A+ offering on our site hopefully sometime in February or March. Those types of offerings work differently. In one of them, we can do general solicitations to anyone to invest at any point in time. This wasn’t true up until 2015. You had to either know someone ahead of time or had to be a friend of a friend. That’s how you were referred, by established relationships.
This is the first time ever that this is available to the general public. With that being said, a Title 2C offering means that you have to be verified as an accredited investor and that is all automated with the process on the website. It is going to send you some forms from our 3rd parties. They are going to ask you for some forms to fill out. Where the Reg A+ offering is something that is open to anybody regardless of economic status or income status.
That is something that we have actively processed through the SEC today and since they gave us approval that will open up to the general public and that one will have an entry level as low as $500. You go through a process of, you basically say, you don’t have to disclose your income at all to do that.
CC: Traditional investments are stocks, bonds, and cash. Anything outside of that is considered an alternative investment. Real estate is considered an alternative investment. Oil and gas are alternative investments. Most people, the common person hasn’t really heard about alternative investments, hasn’t had a chance to participate and invest in real estate. Unless you are a doctor or an attorney or a professor, you might have financial advisors. Someone who has your money in stocks, bonds, money market accounts, etc. In a nice one, you get 3 or 4% return.
You aren’t really getting these double-digit returns on your money. You are not diversifying your portfolio into your other categories. We are providing a way for you to diversify your portfolio with a very low dollar amount. Traditionally you would have to stick 1 Million Dollars or a couple hundred thousand dollars in something to participate in these. Now at the very end, it’s lower from $500 to $1000 to $5,000.
CC: It’s like having a second job. If you are going to do that, you have to become an expert in another field. I think most of us don’t want to become experts. We want to have our regular job and do what we are doing. We want to have our money grow passively as well, so we don’t have the education or even more so the time to do that. A lot of people are in stocks and bonds like I was talking about before. They are online doing this. Now, imagine doing that same thing online with real estate. That’s what crowdfunding provides.
CC: There are a lot of differences, I would say. I would say, this is more of a passive income than an active income stream for somebody. It’s not for someone to go out and go back to re-school themselves on things. With that being said, the time that it takes to educate yourself about real estate, to develop the relationships in real estate, to go in and learn your lessons in real estate, that takes some time. You are going to have some loss of opportunity right there.
I think, before anything, everybody should go out and do whatever they would like. I don’t want to take that away from them. If everyone wants to go out and buy a duplex or buy apartments, but there is a learning curve to do it, and some people just don’t want to do that. They want to have the benefits of making money, need a little bit less money, so they can do it this way passively instead of actively.
CC: Yes, if you are getting into duplexes and triplexes and that type of stuff, your phone rings and you have to manage that property with all sorts of issues. It’s very time-consuming. At the same time, you are not just managing real estate. You have to manage people. You can rent it yourself. There are a lot of moving parts.
CC: I always start with the operators. Look who is running the platform first. After that, look to see who is running the project. In our case, we are doing both at the same time. We run the platform and we run the projects. Take your time to do the due diligence. Then look at the particular assets. Is it something that you feel comfortable investing in at the end of the day. If you do and you want to give it a shot, I would say, start out with a small percentage first and see how you like it. See how you like the customer experience, see how you like the company you are working with, and see how you like the asset you are in. I think this is something here to stay.
It’s a good thing to get involved. We are in the first stages with everything. Out of all the companies out there, there probably are less than ten, I would say are crowdfunding platforms in real estate. There is not a lot out there. There are a lot of new ones out there. Be patient, do your due diligence, ask the right questions and hopefully people participate, because with the participation we are going to see some great things happen.
We are going to see things change in the whole dynamic of raising money in developments and real estate. I want us to be at the forefront of that. We are going to see many things throughout the whole country in this.
CC: I appreciate it. It’s great. It’s exciting, and it’s big goals for us. At the end of the day, when I’m staring out the window in my office in San Diego, and someone approaches us and says, “Hey, Craig, we want to redevelop the waterfront area, but the numbers don’t make sense with the banks to get it done. Do you guys want to crowdfund that?” We throw it on our platform and people participate to improve actually the city here.
Those are some of the things we are going to see evolve with time. Where people are more going into these projects just not for monetary reasons but to improve areas. Just think about that, and how we can change just the infrastructure of our country with that. It is just at the beginning stages right now.
CC: Sure, go ahead.
CC: I don’t know if I really had any hurdles with it in light of everything. You know, your first time, you are in voraciously raising capital, it’s the same as everybody else’s. It’s all your experience in doing it. The first time doing it and getting someone to believe in you. That comes down to your character and what you have done in your past. Whatever you are doing in the past, what you are doing currently and what you want to get involved with it. You need to do it well because people are not going to go with you, having a good work ethic and then go back to you.
CC: I am always forward thinking. I am always solution based. I never go into a situation with a, “oh, I have an issue here.” I go in with a, “here are 3 ways to solve that”.
CC: You know, not recently. Just watch the news. I don’t have anything online that I really find that I am learning from as much. I think in the past, I was fortunate enough to surround myself with some great people. Maybe I listened to them a little bit on things. But no, I don’t have a resource online that is the end-to all online right now. Investopedia, just for definitions.
CC: I love books. I have a really old version of Napoleon Hill’s Laws of Success. It’s a hardback, brown cover, it’s a very thick book, it’s 1500 pages. I’ve read it 10 times. It goes into there and goes over all the characteristics that you need to have to be successful. He says you need to have 20 for 20. You need to have them all. You can’t just have 1. He gives examples of people who maybe had 18 out of 20 or 19 out of 20. And there are some people that you would recognize in there who are successful but not really successful. Some very bad people. That’s one of my favorite books. I would say it’s great. It’s a great read.
CC: I would have bought more real estate back then.
CC: Well, I like where I am today. I would say to anyone else starting, I would say just do it. Get out there and do it. A balance of preparing and taking action. You need a balance of both. You need to actually read some stuff, learn some stuff, and take action. Sometimes you just have to take action.
CC: If you are not involved with crowdfunding, I’d love for you to get involved. Either try our platform or someone else’s. The more people that participate in it, the more we’ll see change happen in real estate environments.
CC: There is a lot about me on the website, www.diversyfund.com. That is connected to all our social media outlets as well. You can easily follow us there as well. Or myself, personally you can follow me on Instagram or Twitter as well.
CC: Thanks, Jacob. I appreciate it.
AJ: Thank you!
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