Agents Building Cashflow

EP 180: Foolproof Way to Build True Wealth with Paul Moore

• Paul Moore

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In this episode of Agents Building Cashflow, Randal interviews Paul Moore, Founder and Managing Partner of Wellings Capital, who shares invaluable insights into the world of real estate investing. Paul recounts his journey from flipping houses and running a residential brokerage to managing a diversified real estate private equity fund. He delves into the importance of building true wealth through cash-flowing assets, the nuances of evaluating investment opportunities, and lessons learned from both successes and failures. 

Whether you're curious about multifamily syndications, fund management, or the potential of recession-resistant assets like mobile home parks, this conversation offers actionable takeaways for investors at all levels. Don’t miss out on this treasure trove of wisdom - tune in for the full episode!

Key takeaways to listen to:

  • Understanding the true definition of wealth as assets that generate predictable cash flow.
  • Avoiding speculation pitfalls by distinguishing between investing and gambling.
  • Learning the power of forced appreciation in commercial real estate through strategic value-add opportunities.
  • Discovering the benefits of diversified funds to mitigate risk across asset classes and operators.
  • Realizing the potential of mobile home parks as recession-resistant investments with increasing demand.

Resources Mentioned

About Paul Moore

After a stint at Ford Motor Company, Paul co-founded a staffing firm where he was 2x Finalist for Michigan Entrepreneur of the Year. After selling to a publicly traded firm, he began investing in real estate. He launched multiple investment and development companies, appeared on HGTV, and completed over 100 commercial and residential investments and exits. He has contributed to Fox Business and The Real Estate Guys Radio and is a regular contributor to BiggerPockets. 

Paul co-hosted a wealth-building podcast called How to Lose Money and he’s been featured on over 300 podcasts. He is the author of Storing Up Profits – Capitalize on America’s Obsession with Stuff by Investing in Self-Storage (BiggerPockets Publishing 2021) and The Perfect Investment – Create Enduring Wealth from the Historic Shift to Multifamily Housing. He is the Founder and Managing Partner of Wellings Capital.

Connect with Paul Moore:

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To connect with Randal and learn more about passive investing, visit www.ridgelineig.com and follow our social media pages below!

Paul Moore: [00:00:00] Kind of backing up to my years in flipping houses, flipping lots, and residential real estate. I was earning income, but I wasn't building wealth. A friend of mine said, Hey, what do you think the definition of true wealth is?  I didn't know. And he said, I think it's having assets that generate cash flow.

It's not the shiny car or the, you know, big mansion on the hill Those might be symbols of true wealth or not true wealth, but true wealth is having assets that predictably produce cash flow 

Intro: If you're a real estate agent earning 200, 000 a year and you want to grow your passive income, this show is for you.

Learn secrets other agents use and hear from experts in our field who will guide you on your journey to investing in assets like apartment communities. So you can take your commissions and turn them into cashflow. Here's your host, Randall. Let's dive in. 

Randal McLeaird: Hey, welcome back. Today's guest is Paul Moore. He is the managing partner [00:01:00] for Wellings Capital.

They are a private real estate equity firm that was established in 2015 and they have a very, it's not unique, I guess, but it's a great model where they have a fund that invests in different operators, in different asset classes, in different locations around the country. That's a diversified fund and they've been doing this for a long time.

So they have. A group of funds that they have stood up either closed and exited or still running funds. And so he's a wealth of knowledge. He gets to see a ton of different asset classes. We cover, you know, how we started in the residential side of real estate after he sold his company and started a brokerage that still runs today and got into the larger syndication and multifamily space and then transitioned that into just being a fund manager where he deploys capital into other people's deals.

That's the, the backstory. Again, because of all of his experience, he's able to speak to this business in depth. And so if you're looking either to learn more [00:02:00] about investing in a fund, kind of like what he has, looking to start a fund, then this is the type of conversation that you would want to listen to.

Okay. So again, wealth of knowledge, love to chat with him. He's been in real estate for such a long time that not to date you, Paul, sorry, man, but he's been in real estate for a long time and he's been through cycles and he's seen things and so, and different asset classes. So it's just a really good conversation with somebody who's experienced and knowledgeable in the space.

So if you're getting something out of the show, please go on, give us a rating and a review helps us a bunch, bring on awesome guests, just like Paul. So let's jump in and have the conversation. Here we go. Hey, Paul, welcome to the show. It is great to have you on today. I am excited for the conversation. You know, we were just talking offline a little bit about how you got into this space.

And I would love to hear the transition that we were just talking about from real estate agent into what you are working on now. And just, if you want to talk to that, I think it'd be a great place to start. 

Paul Moore: Yeah, Randall, it's great to be here. Thanks for having me on. I sold my [00:03:00] company. I was, I had an MBA, went to Ford Motor Company for five years, was very blessed.

We were able to sell our company five years after that to a publicly traded firm. And in 1998, I found myself thinking, I'm a full time investor now. And I thought, oh, I'm going to learn to invest. I going to learn to put this money I made from selling my company to work. And in fact, I turned out I wasn't an investor at all.

I was a full time speculator and I didn't make a difference. And you know investing is when your principal is generally protected and you've got a chance to make a return But speculating is when your principal is not safe at all And you've got a chance to make a return or to lose it all which I often did and so I Was doing that And I was doing I made all kinds of mistakes.

I invested too quickly. I didn't do the due diligence I believed in the big, you know, two to three percent return per month and all that stuff And you know [00:04:00] one of the guys I invested with is serving I think he's 22 years into his 158 year prison sentence for a ponzi scheme. And so A friend of mine said, Hey, you can buy these things called fixer uppers and we can actually fix these houses up and resell them was before the word flip was ever invented.

That's how old I am. And so in the year 2000, we bought our first fixer upper and we sold it like when three hours with a for sale by owner sign on the, in the yard for only a coat of paint on the main floor. And we thought, well, this is easy. We can do one a week. Well, you know, little did I know that I'd lose money on the next two.

But at any rate, over a couple of years of doing flip houses, Randall, we decided, Hey, it would make sense for me to get a real estate agent license. And then I can say, you know, maybe 3 percent on the front and the back end, and I can have an inside track on deals. So I got a license, started being a realtor.

Kept flipping houses, kept flipping waterfront [00:05:00] lots at a lake. I have a real fun story about how we grew our residential business. But, um, I'll tell you in summary, I wrote a book on the area. I call it the Definitive Guide to Smith Mountain Lake Real Estate. And then anybody looking for real estate at Smith Mountain Lake, you know, if they got that 211 page book, which I wrote just out of the overflow of stuff I'd learned in the last, you know, several years of working there back in the early 2000s.

Yeah, it was a great door opener. We ended up getting six agents and just basically round robin in the leads to those six agents. And when they sold a deal, you know, we shared in the commission. So it was fun. Off that 

Randal McLeaird: one lead source. Yeah. Yeah. That's fantastic. 

Paul Moore: It wasn't just the book. We actually did pay per click marketing through a website.

So we had a website at smithmountainhomes. com. People would come there. They might buy the book. They might get the ebook. They might get the audible version of the book. And then they would say, well, if I'm going to [00:06:00] get an agent, I should get the guy who wrote the book. Well, so they would type in their info and we would just pass it out.

Agents who were much better agents than I was. And, uh, I still have that running in the background even today. So that's a little bit about my so called residential career. If you want to start there. 

Randal McLeaird: Okay. First backup. What was the company you sold? 

Paul Moore: We had a staff leasing. It was actually called a P E O professional employer organization.

You did outsourced human resources. We did payroll taxes, benefits, workers, comp, unemployment, insurance, all that stuff for small companies, giving them big company benefits. And we sold that in the height of boom, where a lot of companies went public in that space. And one of the smaller public companies bought us and, you know, That was in 97.

Randal McLeaird: Yeah. Nice. Fantastic. Okay. So long history in, in business and exit in that when, when you first said it, I thought you exited a real estate business, a brokerage that you had already set up. [00:07:00] So that's why I just wanted to clarify. All right. So you're going through and you're running the residential side.

When did you make a shift into commercial and funds? I mean, you're sitting in a much different position today than that. If even though you still have that brokerage going is what it sounds like. So When did you start cluing into different asset classes than residential? 

Paul Moore: Yeah. So in 2008, something happened.

It's harder. 

Randal McLeaird: Strange. 

Paul Moore: And, uh, anyway, around 2008 or nine, I started trying to think about how to branch out because I saw how painful it was to just have all my assets tied up in one basket. But the Smith mountain homes thing was still going. I mean, we, we still sold, made commission through that whole downturn, but, um, actually heard about an oil and gas thing in North Dakota.

Yeah. You know that you're in San Antonio, so you know about oil, you know, fracking and all that. It was going around big time in North Dakota in a shale region called [00:08:00] the Bakken. And so we decided to invest up there and the investment wasn't very good. It was actually more of a speculation. And as I mentioned, this was 2010.

But we realized every time we went there, my business partner has a small jet. And every time he would go there, he'd have to fly back out of the Bakken to find a place to stay overnight. We realized all the housing was taken. There were people sleeping in their pickup trucks or semis along the side of the road in Walmart parking lots.

It was crazy time. There were 18 job openings, but there was no place for any of those people to live. So we quickly built. A multifamily housing community, a quasi extended stay hotel in the middle of the Bakken in a town with 3, 000 people that had about, I think it was 8, 000, 10, 000 visitors there for the oil boom, and then we quickly built another one next door, and that was my first launch into commercial real estate in 2011.

Randal McLeaird: [00:09:00] Yeah. Wow. That's recognizing it. I mean, that happened quite a bit in Texas. Yes. When the Eagle Ford was going off, there are a lot of mobile home partner, sorry, RV parks that popped up, didn't get finished because it fluctuated so much the job flow. So do you still hold those? Did you sell those? Is that shale still booming or what's happening there?

Paul Moore: It's really going well again. We actually sold in August of 2013. I don't know exactly what it was, but I think the oil price was around 100 a barrel. And, uh, it plummeted within the next year to like 30 a barrel. And so the guy who bought, thankfully they were very large and well capitalized and we built this to be nicer than the man camps in the area who just, you know, Or down and left.

And, um, you know, we had a beautiful housing facility that, you know, people would stay in any way after the boom. So 

Randal McLeaird: yeah, 

Paul Moore: that's still going today. 

Randal McLeaird: Yeah, that's good. That's a good differentiator for sure, because that's the ones that I saw fail or not continue, it was [00:10:00] like thrown up hastily man camps, as you put it.

That's exactly what they were. So. Well, that's an interesting in, so you'd never done any development, never done any, or had you done development? 

Paul Moore: Along the way, I had actually built seven or eight homes. I learned something really important. This is a writer downer. You shouldn't build a house from the ground up if you don't know how to tighten your own doorknob.

I'm just saying, okay, but I did find that out. So we had had that little bit of experience, but you know, it was, if you think about, I talked about speculation earlier, there's nothing wrong with speculating as long as you know, you're doing it and you're consciously aware that you could lose everything.

And that we, You know the Bakken shale that was a speculation built on a speculation because we were speculating that this ground up development would get occupied with People and it did and we were also speculating on oil prices staying high and they did as long as we owned it But you know not long after we sold it It was gone But just kind of [00:11:00] backing up to my years in flipping houses flipping lots and residential real estate I was earning income, but I wasn't building wealth.

A friend of mine said, Hey, what do you think the definition of true wealth is? I, I didn't know. And he said, I think it's having assets. That generate cashflow. It's not the shiny car or the big mansion on the hill. Those might be symbols of true wealth or not true wealth, but true wealth is having assets that predictably produce cashflow.

And I didn't really have that. I wasn't building that. So after we sold, you know, the commercial real estate development there, I stepped back and said, I really want to build some true wealth. And I'm not doing that through my real estate income, my, you know, residential brokerage. I'm not doing that through flipping houses necessarily.

And so I went back and got a mentor, spent about 25, 000, which was a lot at the time. It doesn't sound like as much now [00:12:00] after a lot of these gurus are charging much more than that these days. But, In 2014, got a mentor, went through the fairly intense, wonderful program for a year. And I learned so much in that program.

I was actually able to write a book called a humble title, the perfect investment. And that book was about multifamily investing. And I actually became a multifamily syndicator after that year of mentorship. And we were off to the races. competing against lots of other multi family syndicators who were driving prices way beyond what they should have been.

And that's what led me to my next step, but I'll take a breath there and we can talk more about that transition if you want. 

Randal McLeaird: I mean, one, it's a great time to get into the syndication game. Why they had just opened that up and you guys are getting into the opportunity early on. But yes, I've noticed because I was not familiar with syndication.

I was not [00:13:00] aware of what they were. And that's so I got my broker's license around 2009. 10 or something like that. And so I was heavily focused on the, on the single family side of things. But yeah, that was the time that the prices started going up on the multifamily space. And I mean, we've seen that culminate in the last two years with a lot of people having some issues that are going on.

So one, did you acquire some properties? Were you running those properties? Did you syndicate deals or how did, how did that lead into ownership of multifamily assets? What was the transition from getting the mentor to acquiring deals or did you just skip that and go straight into fund management? 

Paul Moore: Great questions.

If I could point out something I left out in that conversation, one thing I learned over the years was, you know, we all know how residential real estate is valued. It's based on comps. So if you have a 100, 000 flip house, you add 250, 000 in improvements, you got 350 in it. And it's in a 150, [00:14:00] 000 neighborhood.

You probably will be limited by the neighborhood, but commercial real estate's entirely different. It's based on math. And our mom and dad always told us to be good in math. This is why. So you can get this formula right. It's the value is the net operating income divided by the capitalization rate or the cap rate, the rate of return.

We probably Most of your listeners have been well schooled. I looked through your earlier episodes. You've covered a lot of that stuff But basically it means you can force appreciation You can actually make the asset appreciate just by improving the net operating income and if you're using debt A reasonable amount of leverage you can even juice that return that actual growth and appreciation even more And so that's why I really wanted to get into commercial real estate just to own, you know Assets that produce reliable cash flow and again, I believe that's true Well, so we wanted to do that.

We got in now. I was about 50 years old. I know I don't [00:15:00] look it right Uh, for those of you watching, you're thinking, this guy looks 70. No, seriously, I was about 50 years old and I had made my share of mistakes. I actually had a podcast for four years, Randall, called how to lose money. Is that what you called it?

We called it how to lose money. It was a wealth building podcast. My partner was actually a guy from San Antonio, Josh Thomas. And we actually, uh, no Austin, sorry, but anyway, he and I talked to 238 different business owners, entrepreneurs, marketing people, people who lost money, a lot of them in the 2008 range.

And basically we talked about how to not make those mistakes again in the future. So I had made a lot of mistakes. I was very aware of those mistakes. I was very aware that my family, you know of four kids and my wife didn't want to go through another 2008 where we found ourselves two and a half million dollars in debt, by the way from [00:16:00] flip houses and lots that we were holding the bag on when the market turned And we can talk more about that later if he wants a fun story how that ended But at any rate didn't want to do that again.

And so I found myself competing with A lot of different people who, to be super honest, they hadn't been through the recession. They were in middle school during the recession. There's nothing wrong with that at all. I'm talking about the great financial crisis of 2008. But the truth is a lot of these were really good marketers.

They were really good podcasters. They had really slick brochures and they were taking millions and eventually tens and even some hundreds of millions of dollars from people. And they didn't recognize the handwriting on the wall because as Warren Buffett said, sure, the rising tide has lifted all boats since.

And I'm adding some numbers he didn't say, but since 2009 to let's say 2022, 2022. The rising tide lifted all boats and all those guys were doubling their investors money the more [00:17:00] leverage they use the more profits they made While cap rates were shrinking and while people were just that was a basically a race to the bottom randall of people overpaying for assets, assuming the underwriting, you know, that the rents would, the trees would grow to the sky, meaning rents would keep growing at nine percent a year, assuming that, you know, operating expenses would actually go down, assuming interest rates wouldn't go up.

So they use floating rate debt and the more the better. And I actually saw this handwriting on the wall and I began to go on my BiggerPockets blog where I've been a blogger for years and had a live show for a number of years and I said, time out. This is really, really bad. This is not going to end well.

And so I thought in 2018, I actually thought. When things started to crack around October, November, December of 2017, I thought, oh, this is, we've reached the top. You can't really tell you've reached the [00:18:00] top, by the way, until you look in a rear view mirror. But, I need to finish that quote. Warren Buffett said, you know, yes, the tides, rising tides, lifting all boats, but someday that tide's going to go out and then we'll see who's skinny dipping or who's swimming naked, he said at different times.

And that's what we thought we were going to see. And so in late 2017, I said, this is it. We think this could be the top. Well, what happened in December of 23rd of 2017? Trump and Congress passed a law that made it incredibly more beneficial than ever to do cost segregation studies, to accelerate depreciation, and the commercial real estate boom was kicked into a new level.

So we basically pulled out in 2018. We said, okay, we're done. We had done one multifamily deal to finally answer your question. We said, you know, we're not going to compete anymore. We're not going to pay 20, 30, 40 percent more [00:19:00] than the right value and bank on forced appreciation. And so we pulled out and that's when we transitioned over to being a fund.

Then our goal with the fund after doing a few deals on our own was to actually go out and locate the best of the best operators. Who weren't slick marketers, who often people had never heard of, who needed money to fund their wonderful projects. Hopefully wonderful. I got to say that from my compliance director and hopefully they would produce, you know, safer, higher risk adjusted returns.

And our goal was to put together a portfolio of them under one umbrella and allow an investor with, for example. A 50, 000 investment. That's an accredited investor only. I should have said with a 50, 000 or more investment to get a piece of all these hopefully well vetted due diligence deals. [00:20:00] And that's what we've been doing since 2019.

Randal McLeaird: Thank you for that because that provides a lot of background. And so let's go back and kind of take that apart. You did a multifamily deal. You bought this property and you see in 2017, 2018, you guys are about to get out. Did you already exit that multifamily or did you hold that by that and hold for the longterm?

Paul Moore: No, actually that was a, how to lose money example, because we actually, we were so frustrated with not being able to compete with all these people overpaying. We bought an asset on 1962 multifamily asset and about a year into owning it, Randall. Some of the iron pipes, underground piping started to fail, and we had two buildings out of 19 where there were problems.

One was 107, 000 repair. Honestly, we probably didn't repair it in the most cost effective way. But at any rate, we went to the, all the [00:21:00] investors and said, look, we can more or less break even if we sell this now. We had an offer come in from a local syndicator. Or we can hang on and hopefully turn it around.

And, but if these iron pipes continue to fail, it could be a disaster. Yeah. So everybody, but one of the 48 or 49 investors all said, Hey, let's, let's sell. And so we sold that for a small loss and that was just another punctuation, exclamation mark, whatever on our. Desire to really not be the operator, but to go out and find the best of the best operators.

If you've seen an 80 20 curve, you know, I wish everybody could see this won't get it, but it's a skew curve, which means it's. From the bottom left on a graph up and to the right, and the 80 20 curve says that the top 20 percent or even the top 10 percent of operators will get, you know, potentially, you know, not always guaranteed, but [00:22:00] potentially double, triple, quadruple the risk adjusted keyword, risk adjusted returns as the average operator.

And so we, our goal was to find them. Honestly, we knew that it would take decades for us to get in that top 20 percent as an operator in one asset type. We realized as investors, Randall, we wanted to be in multiple asset types. There's no way we were going to be a top tier operator in self storage, mobile home parks, RV parks, multifamily, industrial, commercial retail.

So we realized we wanted all those. And we realized the way to do it would be to step back and go find those and put them together in one fund 

Randal McLeaird: I mean, that takes a lot of work in it on its own, right? As we were talking earlier, it takes quite a bit to vet a sponsor and to find a sponsor. And as a one off LP in a deal, a lot of times you're investing in a single syndication, like a single property syndication and one, one operator, right?

And so the diversification that you [00:23:00] get across the asset classes, locality locations, and the, and the operators, uh, is something that I looked in into a while back is setting up a fund to do that because I love that model. It's a fantastic model. So kudos to you guys for having that. And I know you guys are on like fun number five or something like that as well.

So you've been doing this for a while. So why don't we talk a little bit then about, I could go through and talk on the points that you went through and how you came to this realization. One, it's very difficult to be an operator and, uh, it takes a lot. Why don't we, before we move on to some of the biggest mistakes.

Investors make when they're looking for operators. We can, cause I definitely want to cover that. Let's stay on 2022 pricing. You going from 2017 when you guys, 2018, I don't know, when did you guys actually exit that deal? 

Paul Moore: Actually, it was March of 2020. And we all remember. 

Randal McLeaird: Yes. Yeah, exactly. Okay. So what you have seen, again, you have the ability to see a lot of [00:24:00] different opportunities that come across your desk, I'm sure, because operators, I'm sure, are sending you guys deals saying, Hey, we need money for this, that, and the other.

So the pricing that we were seeing and the cap rate compression that was happening, um, 2017, 18, 1920, 21, 22, what has gone on and how did you guys position yourselves, I guess, to find those operators and to invest in the right deals? 

Paul Moore: I quote Warren Buffett a lot. Warren Buffett is my real estate mentor. He doesn't know it, of course, but Warren Buffett and Charlie Munger said that they had never once in like 55 years of investing together, they had never once had a meaningful conversation about the economy when making investment or a divestment decision.

Their goal was to get Durable assets or durable products and for real estate that means, you know, I think recession resistant commercial real estate assets Run by great management teams. And again, that's what we're [00:25:00] doing. We're looking for these great operators as a fund at significantly under the actual value.

Buffett said, price is what you pay, value is what you get. And so he would look for assets that were, had intrinsic value that was much higher and over its potential value is much, much higher than the price, not just a little bit. And that's what we do. We pick operators Who can go in and they're specialists at finding these mom and pop deals that are significantly undervalued.

Here's a quick example, Beville, Texas place. You've probably heard of a population 12, 000 or so. We were on the ground in, uh, I think it was 2019 or 2020 with. Our operating partner there as they chose this self storage facility This was run by two parents that unfortunately passed away. Their five kids were all fighting The property had increasing delinquency increasing [00:26:00] problems They had a residential real estate asset or a broker trying to sell it for 3 million And the real value in its current condition Was 2.

4 million and that's what my Friend, our operating partner offered them 2. 4 million cash. He took it over. He added marketing. He cleaned it up quickly. He added processes, systems, cleaned out, got rid of the bad tenants. That's really easy to do in self storage compared to residential. He improved it dramatically.

He added some value by adding, you know, more units and outdoor storage and all kinds of stuff. And like I said, he bought it for 2. 4 million cash. He financed it for the first time with an appraised value four months later of get this 4. 6 million. So he put 2 million in debt on it. Now, 2 million in debt on a 2.

4 million purchase would have been an 83 percent LTC. That would have been a really risky deal, [00:27:00] but 2 million in debt on a 4. 6 million asset, which he'd improved it to again, using that formula. We talked about the commercial real estate value formula at 4. 6 million. That was only 43 percent LTV loan to value ratio on that debt.

So he was able to give 2 million out of that 2. 4 or so he had put in and hand it back to investors or recycle it quickly, which is a bit of a fun. So. That asset sold a year and a half later, I believe for 4. 6 million, that appraised value. And so obviously deals like that are really sweet. And so our, our operators are looking for these mom and pop undervalue deals that they can go in and improve.

And we've got so many stories and some failures as well in that regard as well. But mostly again, the benefit of a fund is. One failure, 10 successes, it's going to be a net win to the investor rather than invested in just [00:28:00] that one deal. 

Randal McLeaird: Yeah, for sure. Okay. So then let's talk then about how you guys go about vetting the operators that you work with, because like I said, we've done a series on questions.

You should ask a sponsor before investing with them. And we've talked to a lot of sponsors and operators on the show. How do you guys go about doing it? Because that is, that's your, your gig. That's what you guys do. You find and bet on these guys and you take investor capital and put it to work. And you're really truly a capital allocators in that sense.

So how do you guys go about doing it? 

Paul Moore: Yeah. So I'm going to give people a resource. You might already have it, Randall, but if you follow bigger pockets, you might know the name, Brian Burke. And I recommend you have him on your show if you haven't, but Brian's a friend. Brian wrote a book called the hands off investor.

And it's 350 meaty, painful to read pages on how to vet operators and vet deals. And most people that read it get depressed because they realize, Oh, this is [00:29:00] so much harder than I ever dreamed to do it right. The problem with due diligence, Randall, is The more you learn, the harder it is, because you learn all kinds of other ways that things could go wrong.

You take into account all kinds of potential outcomes you underwrite. You know, you, you do stress testing with higher interest rates, stress testing with lower rent, stress testing with increased vacancy. All kinds of things that you might not do if you're only spending four hours making a due diligence decision.

We actually do detailed criminal and background checks on the operators. We spend thousands of dollars doing that with a service that, you know, we outsource to. We do NOI net operating income audits on the property to prove that they're really cash flowing the way they say that they are. That can cost like $10,000 for one audit.

We go in and meet with the principles. We see how they talk to each other, how [00:30:00] they talk about their employees, how they talk about their investors, how they talk to the waiter staff at the restaurant, how they speak about their spouse. You know, are these people we really want to get in trouble with?

Because there could be and there likely will be trouble in a five or 10 year hold. And you got to ask yourself, would you really trust this person with your money for 10 years? And if not run away, you know, we want to see if their staff has been together in the first low turnover If they've been together a long time, we want to see what type of debt they use Are they using fixed or floating rate debt?

Are they? Gambling with our money and uh, what are the terms of the debt and what are the loan covenants and restrictions? Did Fannie and Freddie approve them or that were they, you know, approved somewhere else? And is that something we should look at? We look at, you know, their past, their track record.

How long have they been doing this asset class and what staff do [00:31:00] they have that are qualified to do this asset type in this location using this strategy? And we, you know, I think one of the most important things we do, Randall, is we try to say no a lot. Warren Buffett said the most successful people in the world say no a lot.

The very most successful say no Almost all the time and we try to do that last year We interviewed we reviewed 515 operators and deals And we only invested in four new ones that we didn't know at the beginning of 2023 and seven We already knew so 11 deals and 515 reviews And that's a lot of work and that's a, you know, a full time staff person.

Now it's three staff people a year and a half later in 2024 doing this work. And honestly, for someone who, you know, just to quickly read a website and watch a 30 minute webinar and make an investing decision, it might work out okay, but [00:32:00] it's probably worth doing more due diligence than that. 

Randal McLeaird: Yeah, for sure.

So you're talking about. All the due diligence that you all do, and it's across multiple different asset types, asset classes, and that sort of thing. So, how have you all gotten comfortable with the different asset classes? Because one is a lot. I assume at the beginning when you're launching a fund, you are looking at the underwrite, you're making sure that their numbers make sense on 123 Main Street, which is 150 unit, multifamily, or 200, whatever it is.

And you have to understand the underwriting as well as the operator in order to get comfortable. Is that how you guys look at it? Or you are seriously vetting their track record and looking at, When you say an NOI audit, is that on prior investments they have done or the current one you are in with them?

Paul Moore: So just taking the NOI audit question, if they're buying a new asset, so one way we've gotten comfortable in this very difficult environment is we've switched over from just doing common equity. To preferred equity [00:33:00] preferred equity puts us in a much lower risk or theoretical risk position for my compliance person and uh, theoretically lower risky deal Fixed return doesn't have unlimited upside like the common equity folks, but it also likely will have much less downside unless the deal goes totally south of course.

And so being in preferred equity, we're actually investing in one deal at a time. And often those deals are acquisitions. Whether it's an acquisition or recapitalization of an existing deal, we can do the net operating income audit. Uh, and if it's an acquisition, we'd be auditing, you know, the current owner, the sellers, 

Randal McLeaird: you 

Paul Moore: know, NOI net operating income to see if it's really what they say it is.

If it's a currently owned deal, but they're doing a recap on to pull out capital to go buy another deal or for whatever reason. And they wanted to keep their debt in place. So they added prof equity, you know, before we'll write that six and a [00:34:00] half million dollar check. And I use that number because we just closed on one, two days ago in that range, we will do a net operating income audit.

Randal McLeaird: So that's every, every deal you're, you're doing that on. 

Paul Moore: Not every single deal. If it's an operator we've known for years and we're already comfortable with, we wouldn't necessarily have to do that, especially if it's common equity, uh, and we're investing in a portfolio of their deals, but with preferred equity where we're investing in one deal at a time.

Yeah, that's how we do it. Got 

Randal McLeaird: it. 

Paul Moore: You asked how we got comfortable with these. Well, two big things out of my 28 point due diligence checklist, by the way, people can reach out to me and get a copy of that. But two things that I think you should look for and really focus on is number one, let's say three things.

First, team, did this team do this strategy and this asset class in this location for how long? Second, track record, how well did they do on their, both their full cycle and their partial cycle deals? And third, [00:35:00] what really ties those first two together is skin in the game. In other words, if they have a fabulous track record and they put in, let's say a million dollars of their own cold hard cash.

Into this deal and that's not in fees earned at the deal that they just dumped back in. I'm talking about their own cash that they wrote a check that makes us much more comfortable with doing a deal. You should always be asking those questions when you're doing due diligence and don't put up with a partial answer or a, you know, a, well, you know, we'll see how much we put in.

We're probably going to put in a lot. Well, you don't get the facts. 

Randal McLeaird: Yeah, that's great advice. So let's transition in the little bit of time we have left to your funds now, how you have them structured and, and what you guys are looking to deploy those funds into. So right now you have the Wellings Real Estate Income Fund.

I don't know how much we can actually talk about this as far as the return profile and that sort of thing, but just in [00:36:00] general, you have structured this. If we can talk about How the fund itself is structured. Is it an evergreen fund? Is it a closed end? Is it like, how have you guys set that up? And then how much are you raising and how much are you deploying at any given time?

If, if we, again, we can talk about that. 

Paul Moore: Sure. I have some limits on what I can say. You know, we're publicly registered fund. Our compliance department, you know, wants to make sure I'm not saying too much. This is for accredited investors who we've already had a conversation with. We already have a relationship with.

And, you know, that we really have decided are a fit for us and them, you know, our, our deal for them as well. But, um, at any rate, we're generally putting together assets from six or seven different asset classes. I've named some of those during the show. We're looking for income, and that income would generally be in the, you know, range of four to eight percent per year.

It's a ten year hold, it is closed end, [00:37:00] and then we will be generally looking for appreciation as well. So during the course of that ten years, we would expect that the asset would sell if it's common equity, or we'd be refinanced out, maybe, if it's preferred equity. And we would expect to not only get the income from that, but hopefully we'd have an opportunity to get appreciation as well.

Giving the investor a teens, uh, 12 to 15%, perhaps return with tax benefits along the way. There's absolutely no guarantee we'll hit that. There's absolutely no guarantee we'll have any return at all. As you know, there's risk in everything, but yeah, it's important to say that, you know, that deals really well, who could have predicted COVID who could predict a war who could predict all kinds of things that could happen that could mess up any investment.

Randal McLeaird: So there's not, is there one, again, what I see from the outside looking in the beauty of how you have structured it across the asset classes [00:38:00] and operators and locations is that you get to see a lot of these different investments. So right now, are you guys hot on one type of asset class thinking like this is the place to be for the foreseeable future?

Paul Moore: You know, that's a good question. Self storage was really hot for quite a while. And of course it's become overbuilt in a lot of areas. And, uh, you know, I could take you to Nashville and show you that it's highly overbuilt, but I can also take you to South Nashville to an area called Bellevue and say, look, it's underbuilt here.

So you can't really just say it's overbuilt across the board. And when you're looking for value add opportunities that are run by mom and pops and really poorly managed. That may have that intrinsic value we talked about. It doesn't matter where you are. You could be in a booming metro that's overbuilt and you can still buy an asset for, let's just say, two thirds of its intrinsic value.

And by adding that value by a professional management team, It doesn't really matter. And so that's really a lead in for [00:39:00] my answer, which is it doesn't really matter. What matters is getting that asset at a price that's far below value. All that said. I can tell you that mobile home parks are the only asset type we know with a shrinking supply and an increasing demand every year.

And, uh, there really is an affordable housing crisis. 10, 000 people will turn 65 today, but only 4, 000 of them will even have 10, 000 cash save for retirement. And so a lot of those folks turn their home equity, if they have any into a mobile home purchase where they can go live in a mobile home park.

They can have the freedom to travel. They don't have a thin wall between them and a neighbor, and they really like that opportunity. And, uh, so we really do like mobile home parks. We think that they're quite recession resistant, though there are no guarantees. And we think that in great economies and bad economies, [00:40:00] they will continue to perform really well.

There's over 40, 000 mobile home parks in the U. S., and the vast majority are run by mom and pops. And have a lot of potential upside just by running them well and having the extra capital to bring in new homes to the vacant lots, et cetera. 

Randal McLeaird: So if we've got somebody that wants to go out and buy one of these things, and they've been Maybe doing it for a while.

And you guys are vetting operators. You're looking at deals. They happen to have a smoking deal and they come to you. Let's talk about what that process looks like and submitting a deal to you guys. And then, you know, check size that you guys like to write. Where do you guys like to play? You've mentioned, you know, you've been in the capital stack in two different spots in common and, and in the, in the perfect equity position.

So again, do you have a preference or is it just deal specific operator specific? 

Paul Moore: Yeah, we're looking to raise about a hundred million dollars in equity and we're about two thirds of the way there in the last two years, [00:41:00] but open or perhaps another year, but we'll probably have a followup fund after On a specific deal, if it's common equity.

And if it's a portfolio, let's say five assets, we might put in up to a million dollars per asset. So it could be up to five million dollars in common equity. If it's preferred equity, which again, we feel is likely less risk. And a fixed return that often is in the mid to upper teens right now Because of a lot of different factors that are going into that We feel like we could invest up to five or six or even seven million dollars in one asset And we could even go more if it's a large asset.

There's a tremendous track record and lots of covenants And protections in there for us that we would negotiate with the owner. 

Randal McLeaird: Yeah. Yeah. Okay. So then some kind of control, if anything goes south, you guys can take it over just to clarify what that means with the covenant. [00:42:00] So, okay. Again, if someone is looking to invest again, you have, In operation, you guys have been doing this.

You're on, you can clarify for me, what fund are you guys on now? You've, you've done a number of them. 

Paul Moore: Growth fund and five income funds. Now our income funds, like the Wellings real estate income fund that you mentioned is actually an income and growth fund. We have, like I said, income and appreciation that we're targeting in there.

Randal McLeaird: Okay. Yeah. I didn't hear you've had a number of them. You're on what? One, two, three, four, five, at least four or five, six funds that you guys, okay. 

Paul Moore: This is our sixth fund. We have five funds and one growth fund. 

Randal McLeaird: Okay. So just like how we're talking about vetting, limited partners can invest with you all. They have to be accredited and they can invest and be able to diversify across a range of these asset classes.

So when they're investing in the current one that you guys have, they're investing in a fund that is then investing in assets. So how do they get A depreciation. And how do they [00:43:00] get some of the tax benefits? Uh, is it the same that it just all passes through, through the fund and then to the investor?

Paul Moore: Yeah. We insisted when we built this fund to offer K ones to our investor, which means they're basically partners in the deal that ownership, if you will, also carries with it depreciation losses. These are paper losses. That are generated by the depreciation rules, cost segregation, plus the 2017 tax law change that I mentioned.

Those allow us to often, no guarantee, pass along paper losses to investors, and they can use those paper losses, you know, and especially For you listeners who are qualified real estate professionals, you can sometimes use these paper losses to offset your current 1099 or W 2 income, which is pretty sweet.

Randal McLeaird: Yeah, compared to some where it just has to be passive income if you're not a real estate professional. 

Paul Moore: Yes. 

Randal McLeaird: And it's really 

Paul Moore: important to note that [00:44:00] everybody needs to consult their own tax professional for your own situation. There are many pass through losses that cannot be used against income. So I can't guarantee that any of ours ever would be, you have to check with your own tax pro.

Randal McLeaird: Paul, you're, you have a ton of knowledge in this space. So again, I love having you on the show and talking this through. And for me personally, like I said, there's some things that I would love to pick your brain about and talk more about. Just on a development of the fund side of things for our business that we're working on.

So again, I appreciate you jumping on. 

Paul Moore: You know, I, when I sold my company in 1997, I was 33 and then I went off and I told you, I became a full time speculator thinking I was an investor. But one thing that was really important to me is even though I had a couple of million dollars in my bank account, when I woke up in October of 1997, I wasn't any happier than I was the day before.

And I realized what I had hoped [00:45:00] to test someday in my life, that becoming a millionaire or a multi millionaire didn't really bring any happiness. It's really important that people have a purpose. It's really important that they have a transcendent meaning in their life that's much more than money or things or even relationships.

And so, one thing that I really want to encourage people is to go out, Even before you make the big bucks, even before you have that wealth and go out and find something you're passionate about and get involved now. One thing we've chosen as a company, Wellings Capital, to get involved in is the fight against human trafficking.

It's amazing that A hundred and what is it? A hundred and, uh, 15 years or so, 110 years after slavery was abolished in the us. I'm not, that's not 110, it's like 160 years. What am I doing anyway? I shouldn't do math Live Randall. Anyway. Um, there are more slaves in the world than any time in Earth history.

Even since we [00:46:00] started this podcast, hundreds and hundreds of children have been sold or captured into human trafficking, slavery. And this is a horrible life beyond horrors. If you took the record profits of ExxonMobil, General Motors, Nike, and Starbucks, added those record profits together and approximately double that number, that would be the annual profits.

Generated by human trafficking worldwide, according to the US State Department. And this is a tragedy. We didn't know what to do. We didn't know how to get involved. We didn't wanna send a check off to somebody we really didn't know. And really, I didn't think I wanted to go on a commando raid like that guy in the Sound of Freedom movie, and most people wouldn't.

So we did a similar process to, we do that we do with commercial real estate. We went out and vetted. Some of the best potential operators in the space that we could find and we landed on [00:47:00] one that we have generated, donated, and influenced over 600, 000 to. And we really recommend that people find their own that they're really passionate about.

If you want to know who's ours, it's AIM, A I M, aimfree. org is their website. You can go check out what they're doing in Cambodia and Belize. Setting people free, giving them a new life, protecting them from going back to the bad guys and even putting the bad guys behind bars. 

Randal McLeaird: That's fantastic. Yeah. I'm glad you brought that up because we talked about it offline before we, we got going and I definitely wanted to address that.

So that's amazing that you guys are doing that and have gotten to the 600, 000. Is there, do you guys have a goal there? I thought it was 5 million you guys are looking to raise. 

Paul Moore: We'd love to influence raise and donate over 5 million, you know, in the next four years or so. And that's a long road ahead of us, but you know, who knows somebody from the listens to your show might get involved and we'll never know it.

And that's wonderful. 

Randal McLeaird: [00:48:00] Yeah. Fantastic. Well, again, Paul, I love what you're doing in the space. I appreciate you sharing your knowledge, jumping on and chatting with me about what you guys are working on. And, um, so we got to stay in touch and best of luck with the rest of 2024 and into 25. 

Paul Moore: Okay. Thanks so much, Randall.

And if people want to, you know, reach out to me, they can do that at our website, wellingscapital. com. We got all kinds of free resources and some books I've written there as well. 

Randal McLeaird: Perfect. We'll put all that in the show notes and you can go straight through to Paul and his, and his team there. All right, Paul, we'll catch you guys on the next episode.

Did you know that 80 percent of the agents we speak with got into real estate in order to gain passive income so they could obtain financial freedom and become work optional? If you want to stay up to date, the best way is to make sure you're subscribed. So if you haven't done that, go ahead and do it now.

We'll catch you on the next episode. 

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Randal McLeaird

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Paul Moore

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