JS 92: Crowdfunding Real Estate Investments with Scott Picken Founder & CEO of Wealth MigrateJanuary 24th, 2015 by Jason | Comments Off on JS 92: Crowdfunding Real Estate Investments with Scott Picken Founder & CEO of Wealth Migrate
Today’s JetSetter Show features Scott Picken of Wealth Migrate as the guest. He and Jason Hartman discuss demographic trends, the importance of transparency and really knowing what’s going on with your own investments and how crowd-funding as a means of investment is changing and developing.
02.13 – Scott Picken gives the back story to how Wealth Migrate came into being.
04.49 – It’s important to look at demographic and societal trends when figuring out different markets.
08.10 – Is direct investing still the only real way to know what’s happening with your investment?
11.51 – Wealth Migrate sets itself apart from other companies through its international links and its professional nature with reliable experts on the ground.
15.30 – The attitude to crowd-funding is changing, and it’s only going to get bigger.
17.57 – You can reach a point where, regardless of your background, you are an equal.
21.27 – For more information, head to the main website at www.WealthMigrate.com
Mentioned in this episode
The 4-Hour Work Week by Tim Ferriss
Overseas investments have wealth preservation as their top priority every time.
People have had the wool pulled over their eyes for long enough – it’s time to take more control.
Making sure all of your interests are aligned is such a fundamental point.
This show is produced by the Hartman Media Company. For more information and links to all our great podcasts, visit www.HartmanMedia.com
Welcome to the Jet Setter Show, where we explore lifestyle-friendly destinations world-wide. Enjoy and learn from a variety of experts on topics ranging from up-scale travel and wholesale prices to retiring overseas, to global real-estate and business opportunities to tax havens and expatriate opportunities. You’ll get great ideas on unique cultures, causes and cruise vacations. Whether you’re wealthy or just want to live a wealthy lifestyle, the Jet Setter Show is for you. Here’s your host, Jason Hartman.
It’s my pleasure to welcome Scott Picken to the show; he is CEO of Wealth Migrate, and he is helping investors migrate their money in different parts of the world and in different jurisdictions. If you think of geese flying South for the Winter, why stay up in the cold North when it makes more sense to be in the South? That’s kind of the theme of today’s talk. Scott, welcome, how are you?
Excellent, Jason, thanks very much for having me online – your websites and the podcasts you do are fascinating.
Well thank you! And you’re coming to us from South Africa, I assume?
Very much so. Ironically, the exact thing that I read about on your websites, I’m from an idyllic little town in South Africa – where everyone else chooses to go on holiday, I choose to live.
And where are you located? I’ve been to Cape Town, and to Johannesburg, and I thought Cape Town was one of the 5 most beautiful places on Earth, and I’ve been to a lot of places!
Cape Town, ironically, on TripAdvisor has been rated the number one city seven years in a row. I live actually 5 hours drive north of Cape Town – it’s a little holiday town in the middle of the Garden Route, which is called Knysna in the heart of the Garden Route, and that ironically, for the last 10 years, has been voted the number one holiday town in South Africa. If you haven’t been there, you wouldn’t really know where it is, but it’s effectively up the coast from Cape Town.
Fantastic, good stuff. Well tell us a little bit about how you got started in Wealth Migrate and what it is.
I can give you the long story or I can give you the short story. In very simple terms, I’ve only ever done real estate. I did my first project when I was 13 – I persuaded my parents to renovate our house so that I wouldn’t have to share a bedroom with my brother. I did my first development when I was 19, and that’s when I started at University. I’ve always been fascinated by how technology can evolve and adapt in industry, and I did my dissertation on it in 1998 on looking at how IT was going to revolutionize the construction of property or real estate industry. In simple terms, I flew over to London and I lived in London for 9 years, from the age of 21. From only wanting to accumulate First World assets with a First World income and wanting to live the lifestyle in an emerging economy – over the years, I realized a number of major problems.
The most important problem for most people is they don’t have access to enough capital to be able to access the right type of opportunities. Secondly, and particularly in the international markets, they don’t know how to find the right partners. In the back end of 2008 when we had the Lehman Brothers crash and the whole global financial crisis, there was a massive opportunity for people to have collective buying power, to come together and pick up really good quality assets around the world.
There was one opportunity in Wimbledon, London – everyone knows Wimbledon from the tennis, but .. £10 million pretty quickly and I ran around, speaking to a number of people, but I just couldn’t raise the capital quick enough. That really was the catalyst, on top of the existing business I already had, where we had helped thousands of people invest internationally in direct property, but that was the catalyst to bring people together so that they could jointly benefit from the power of the crowd in investing in top quality assets around the world. That’s really where Wealth Migrate was born.
So what types of assets are you talking about? I mean, real estate assets, but what types?
Primarily, we like to go deep on verticals. I give people the analogy that in the crowd-funding space there’s a lot of flea markets out there and at flea markets you can get good quality stuff, but you can also get mediocre stuff. Whereas at Harrods or one of the 5th Avenue stores, Macy’s or something, you only get good quality. Our number one objective is quality and safety.
When people invest overseas, the number one thing they want is wealth preservation, and then only after wealth preservation do they look for wealth creation. To give you an example, some of the stuff we look at is quality residential assets where the fundamentals are right in cities. To give you an example, like in America there’s Atlanta, where the population’s growing – we’re buying quality assets at below replacement cost and with good rental income yields.
Another example is the medical field. We’re very strong in medical and age care. Around the world, medical and age care is tipped as one of the strongest commercial sectors to be in. If you think about it, it’s actually common sense. No matter what happens in the economy, people need doctors. Doctors tend to not move, so you get very good long-term leases – they’re very stable, strong tenants. The last thing is that doctors are very passionate about what they do, but they’re not necessarily financially aware that if they move down the road, they can get $20 less. Plus, also, the licenses tend to stay with buildings, not with doctors.
To give you an example, we build medical or biomedical portfolios around the world, but primarily in South Africa, Australia, the US and the UK because those First World markets have an ageing population and medical and age care are very much sought after and have a long-term cycle. I’ve noticed with the trends, it’s all very much income-based, wealth preservation and long-term focused that we’re looking at.
That’s good. So in which country – I mean, this gets complicated when it’s international. Maybe this is the right question first: Who is the general partner or the syndicator of the deal, and in which country are they based? How do you hold them accountable for the deal and make sure that they’re following the right rules? Because these deals are crowd-funded, are you acting as the platform only, or are you also setting up the deals and being the general partner in the deals?
We operate under a Harvard model. So to answer your first question, if, for example, the asset is in America, then it falls under American legislation and we have to comply with all the SEC rules. If it’s in Australia, we have to comply with all ASEC rules. If it’s in the UK, it’s the FSP. In South Africa it’s the FSB. Every country has different rules and regulations, and every country, wherever the asset is situated, will then make one compliant with regards to tax structuring and compliance.
The second part to your question is that we, as the portal and the platform, provide the service where we’ve got over 3 decades of experience and we’ve done over 10,800 international deals to a value of about $1.34 billion US. We are relying on partners where we’ve got an extensive track record already with projects, with partners, with their delivery, and now the only thing that’s been able to be unlocked with the use of technology and legislation is for people, through the crowd-funding channel, to get access to those quality partners and those quality deals. At the moment, we are still actively involved and engaged in every deal. Our entire business model is where we, as a platform, only generate revenue on the back-end, after the investor has got the return they were expecting, which keeps out interests aligned.
We’ve got three values in our company: trust, transparency and our interests being aligned, which is exactly the same as the animals in nature and the whole principle of migration. To answer your question in simple terms, we are tied as tightly to the investor through the duration of the deal, and therefore it’s our responsibility to make sure that the partners on the ground deliver and provide the investors the return.
I appreciate what you’re saying, and this is kind of a catch-22 in the world of investing. On the one side, I love the idea of being a direct investor and I recommend that our clients be direct investors because when they’re directly investing in things, and they own and control the asset, they don’t leave themselves susceptible, Scott, to the three major problems when investing in somebody else’s deal.
The first problem: You might be investing with a crook.
The second problem: You might be investing with an idiot.
The third problem: Assuming they’re honest and competent – hopefully you’re going to get over those two hurdles – they tend to take huge management fees off the top for managing the deal.
Your philosophy sounds much more aligned than many of the other promoters I talk to, but how does the investor really know that that’s not just a saying? How do they make sure that really happens that way?
Jason, it’s a fantastic question; you’ve clearly been around the block a few times because I love your analogy of the three problems.
And I’m clearly not letting you off easy, am I?
Not at all. In fact, I actually have a stat out of South Africa that more than 80% of people that invest overseas actually lose money, and that’s not just in real estate, but in stocks, bonds and everything else. Generally, people go naively and they expect great things from their partners, they don’t have most of the facts, they don’t have the transparency and generally, it’s the unknown stuff that tends to catch them out. In terms of the crooks, we all know the stories all over the world; there’s plenty of idiots that parlay as brilliant salesmen and then make their money upfront and then run away and you’re left with the asset overseas.
As my Chairman says, who’s brilliant himself and has invested in multiple markets around the world, “If you buy a bad asset at home, it’s a lemon for life. If you buy a bad asset internationally, it’s a lemon for generations.” We’re very conscious of that. One of the ways we stay away from idiots and crooks is, in simple terms, we make them put their money where their mouth is. Every partner on the ground has to invest physical capital. Time is irrelevant to me; we need physical capital in the deal so that their interests are aligned with ours and our investors.
We also invest capital so that our interests are aligned. We like to protect our investors’ money as if it was our own, but we’ve also got our own money in the deal.
The third one, and I think probably the most important one, is that if you look at the old model of syndication, where effectively all the money was taken upfront, their interest is to raise as much money as possible and not really to look after the quality of the asset because they’re getting their money on the front end. The traditional fund model, or reap model, if you want to call it that, is to get as much money under management and then earn that 2% management fee. The biggest number one driver is how much money is under management. When that money goes up or down in value, it’s not so much to their problem, although it really affects the investor. They just look at how much they’ve got under management.
Our interests and the entire way we’ve created the business model, and we’ve got full transparency as to every cost included in the deal, both in the beginning, the middle and the end – I, as an investor, just like you as an investor, Jason, there’s no difference if the two of us were doing this together and we went and bought a house. You don’t expect me to earn all the money on the front end. You also don’t expect me to literally milk the cow so badly through the 5 years of investing that there’s nothing left by the end. What you would appreciate, generally, as most investors is that we treat it exactly the same as investors, and one only benefits once one out-performs the hurdle race on the back end.
Give us an example of maybe some specific deals, and let’s walk through one or two of those real quickly if we could.
Okay, perfect. One of the ones that we enjoyed at the end of last year was a medical portfolio in Atlanta. It was 7 medical buildings. The total value of the portfolio was about $16 million. Now, just to let you know, our sweet spot is where the equity required is north of $1 million, but south of $10 million. To be fair, that’s the same in the UK and the same in Australia.
OKay, let me interrupt you, Scott, for just a moment. These are accredited investors, I assume, that can do these deals, right?
Correct, that’s right.
Okay, good. And accreditation – that’s a US phenomenon outlined by the Securities and Exchange Commission. What about around the world? I’m just curious, because this project in Atlanta – you have investors worldwide, right? Or had, I should say.
In simple terms, we needed $6 million in equity. We raised it on five different continents from 27 different investors, and as far afield as the Middle East, Africa, Australasia, Europe and North America. The thing that really differentiates us from virtually everyone else is that less than 10% of the capital actually came from North America, whereas obviously with most of the crowd-funding sites, the majority is coming from in-house, in America.
In terms of the legislation, I could bore you to death for 3 days. One of the most important things is to remain locally legal and to comply, and there are specific ways that you need to comply with each jurisdiction, and then ultimately if the asset’s in America, to comply with the SEC. To give you simple terms, with that deal in America, we were SEC compliant and had everything signed off by the SEC.
Okay, good. So you took only accredited investors in that deal. Tell us about the rest of the deal. What else happened in it?
There was about $6 million in equity required; we got 65% loan to value from a local American bank at 4.2% financing. The thing we like most about the deal was that it was 89% occupied when we bought it. The 38% of the tenants were what they call ‘blue chip’ or ‘first grade’ tenants, which were actually Government tenants on 10-year leases, and it was your VA, your Veterans’ Association, so long-term leases. That really gave us sustainability and most importantly, predictability going forward. What we liked is that we’ve got partners on the ground.
We specialize in medical, but we’ve got partners on the ground that specialize in medical as well. By the time the property had closed and was in our name, we’d actually filled up the remaining 11% with a 10-year lease which actually increased the value of the entire portfolio by over $1 million immediately. We didn’t take one cent of that. Every single cent was passed on to the investors.
The nice thing from our perspective is that we pay quarterly dividends out to the investors. They had their first quarterly dividends reviewed – they were expecting a total amount, and this is what I love about commercial, due to all the financial reviews, they were expecting $500,000. We ended up getting $600,000 because of being able to get that tenant in place quickly. I think the last thing I would say, really, which is of interest is that if there’s also the seller, there were a number of doctors that were looking to accept, and we were able to come in with a lot of experience, we were able to move quite quickly, we were able to do our due diligence and we managed to pick up that asset at between 8-15% below market value in terms of actual cap rates if you look at the area in actual like for like.
Good stuff. So what about a non-US-based deal? Because most of your investors are North American, as you said.
Most of them aren’t. More than 90% of that deal was not North American-invested.
Oh, on that deal. But you did make the general statement then about crowd-funding around the world and that it’s most active in North America, right?
Well, yes and no. What is happening in North America is that the legislation is clearest, but there are a tremendous amount of international investors looking to invest around the world. Just last year, $15 billion left China to invest in 3 markets: Australia, the UK and the USA. $7 billion, literally 7% of your entire market of residential property in the US, was bought by foreign investors, and 22% of them were just Chinese, just to give you an example.
What’s happening with the crowd-funding space is that people that are investing in direct assets, and to use your three things of crooks, idiots and management fees, they’ve had enough of having the wool pulled over their eyes. They’ve tried to get wealth preservation overseas, they don’t have trust, they don’t have transparency and a lot of them are taking a hiding, and that’s why a lot of them are now starting to move towards technology, where they can see what’s going on, they do understand the transparency. In countries like Australia where it’s legal, in the UK where it’s legal, in Malaysia they’re about to drop the legislation – there’s going to be no difference between accreditation: you can invest $1 if you want to.
Around the world, different markets are having different aspects, but the most important thing I would say to you is that there’s a huge movement for people in the emerging world, all over the world, to be investing in First World assets and to get a First World income, and technology is starting to facilitate that more and more.
It’s really opening up opportunities and democratizing the whole thing, and you know what I think is one of the most exciting things about this, Scott? As much as I really like the idea of being a direct investor, I think it’s really going to make a dent in the Wall Street cartel, where investors really will have some good other options where they can be much closer to deals. The Wall Street thing is just obviously not working. Well, it only works for insiders, we’ll put it that way.
It’s flattening the world and it’s democratizing the space, isn’t it?
Well, Jason, there’s two parts to that. If you look at the Wall Street funds and everything else, generally they’re buying assets with a 20% IRA and north of that, but by the time that’s watered down with all the fees, you as the individual investor are walking away with 4, 5, 6% if you cover inflation. You remain in the middle class, you remain poor, you work all your life, like my Father did and you end up retiring with no money and life is really hard.
And yet the top 1%, like my Chairman, Hennie Bezuidenhoudt, they get access to some of the best deals around the world. In the past, I had no ability to partake in that. I don’t have $6 million US to put into an asset, but I did have $100,000 to put in to participate with him, to be treated as exactly an equal partner, to have access to exactly the same opportunity, the same growth potential, and most importantly, which most people don’t understand, I also learnt through the entire process so that I could get stronger and stronger at the age of 37.
That is a great thing, no question about it. So when we go to the huge management fees off the top idea, in your deals, how do you vet them? How does the investor know that the people running the deal aren’t using company credit cards and flying around the world First Class, wining and dining other investors – which I’ve always thought was ridiculous. That doesn’t benefit the existing investors necessarily, that’s just for them to raise more money. Or paying themselves big salaries or things like that. They are on an equal platform in terms of the investment returns, but because they control the bank accounts and the credit cards, that’s where it can become unequal, right?
You know, I tend to say this to a lot of people – crowd-funding is an extremely exciting space, but people need to be careful in real estate because as an example, we’re real estate people that have embraced technology. What worries me a little bit is when technology people just embrace real estate because it’s the next exciting thing.
I couldn’t agree more. The tech people think that they can just dive into this business and build a software platform and make it all work, but they don’t know about real estate. It’s amazing.
Jason, you’re spot on. To answer your question, we’ve been investing, and I told you, it’s $1.34 billion that had nothing to do with crowd-funding, that’s what we’ve been doing for 3 decades. We bring that experience to the table. How do you manage partners? We’ve got a global investing due diligence system that every investor has complete transparency, which is actually 10 layers of due diligence. It starts right from which country, which currency, which asset class, right through to the actual quality of the partner and everything else. If I had more time, I could take you into that in a huge amount of detail.
What we’ve done through the life of hard knocks and experience is we kept coming up with red flags and ways to test, test, test, test, test and measure, test and measure so that one is not having partners on the ground that are flying around the world with credit cards. One very classic example is that on every deal, we have joint access to bank accounts, we do interviews of all financials, everything is agreed upfront in terms of management costs, in terms of managing the building or putting in tenants or any of the actual, tangible costs that are physical or easy to be audited.
The last thing I would say to you is that we partner with Grant Thornton, which is one of the top five accounting firms around the world, to consistently be going in and doing those audits as an external partner, to give that trust and transparency. Every single thing we’ve tried to create is based on those three values I spoke of – trust, transparency and our interests being aligned.
I’m sorry, but your interests are not aligned if people are flying around the world, wining and dining their partners. We don’t take one cent out of deals. If I pay for the Skype call, as an example, it’s not coming out of any of our deals – it’s an operating cost for our Head Office company, which is funded externally by our real estate deals.
Right, good points, Scott, that’s great. Well, what else? I know we’ve got to wrap up, but what else do you want people to know? Give out your website, too.
So the website is www.WealthMigrate.com. Again, depending on where you are around the world, and I’m sure a lot of people, Jason, are following you from all over the world, but the .com is the main Mothership, and then in different countries, it generally has the URL that’s significant to that country (Australia is .com.au etc etc) I think I’d like to say, just very quickly, from your perspective, what you’re doing is phenomenal. I read the book, The 4-Hour Work Week by Tim Ferriss in 2012 and I live a magnificent life in a beautiful place now, and it really is possible. Everything that you’re teaching people is very, very possible because I’m doing it.
Where this crowd-funding thing’s going, the thing that excites me most is that this whole democratization thing you talk of is that if you went to Davos or heard what happened in Davos at the World Economic Forum, the biggest risk that faces our .. is not terrorism, it’s actually the wealth gap, and it’s this whole diversity between the haves and have nots. Crowd-funding, just like the printing press did in the 1400s – although it’s going to happen a lot quicker than it did in the 1400s – is going to enable wealth to be democratized and it’s going to be the solution to this wealth gap. Just that alone will have a massive impact.
Something that we are a driver of and something that we are very passionate about is the wealth movement, which is to enable people around the world to create wealth, to benefit from the wealth effects, and our target by 2020 is to impact a billion people on this planet. We won’t do that on our own; it’ll be like-minded people like yourself and others, but the benefit and the power of technology when you think about when you have education and technology and you put the two together, it’ll change people’s lives around the world and it’s the most positive benefit that we can make on this planet. That’s very much the philosophy upon which we operate.
Speaking of which, if we’re going to democratize this, and we see this movement happening, what is your minimum investment in these deals?
Oh, pretty low. Most are $25,000 or $50,000, so $10,000, that’s good.
At the end of the day, I don’t care what anyone says. I wish I could tell you that it’s completely like buying a song on iTunes. It’s not. There’s still human involvement, and so with time, as legislation changes, but more importantly, as technology improves, my aim is to get it down to $1 per person per investment. At the moment, it’s $10,000.
And by the way, I did misspeak about that. Some of the lower crowd-funding platforms go to like $1,000, but the typical funds or LLC-type deals that you’re looking at that are privately promoted and are sometimes on crowd-funding, those are usually $25,000 or $50,000, so that’s good. It really opens up the door and creates a lot more opportunity for small individual investors.
Scott, it was great talking with you, I apologize for any background noise on my end, and keep up the good work! It was good having you on the show.
Jason, perfect, and if I can help you or anyone else, please let me know because I love jetsetting around the world and living in the emerging world and earning First World assets with a First World income. It’s magical.
You’re engaging in geo-arbitrage, it’s a great thing.
That’s exactly it. Every time my currency devalues, I laugh when everyone else panics.
Yeah, thanks for joining us, Scott.
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