Capital raising is one of the vital keys to succeeding in real estate. Flipping houses, renovating apartments, and generating income from rental properties are some of the capital raising strategies of successful investors like Sugar House Investments Managing Partner, Brad Shepherd. Brad joins Sam Wilson to talk about maximizing your capital while minimizing your workload. Walking us through his first rental purchase, Brad recalls the stuff learned along the way. Join us as Brad shares how he got into real estate, why he chose to do it, and what made him the success that he is today.
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Why Capital Raising In Real Estate Is A Team Sport With Brad Shepherd
Brad Shepherd has experience both in the development and management of retail and hospitality properties. He’s raised capital from both domestic and international investors. He has also been exclusively focused on capital raising for commercial projects since 2017.
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Brad, welcome to the show.
Thanks a lot, Sam. It’s great to be here.
The pleasure is mine. The same three questions I ask every guest who comes on the show. Can you very quickly tell us where did you start, where are you now, and how did you get there?
I started back in college. I did a Finance degree intending to get into commercial real estate. I interned with the large commercial firm up in Seattle and I loved it. Life took me in a different direction, so I didn’t go that commercial route. As soon as I’ve got out of college, I started buying my own rental properties. I wanted to switch out of residential and get back into commercial.
I started looking at buying my own apartments, self-storage, etc. I was able to find this little niche working with the successful operators, helping them raise capital, bring investors to the table, and it has been fun. That’s where I’m at now. I still have my rental portfolio but the focus is on the large commercial deals at this point.
I have had people on this show that owned 400, 800, and 1,000 single-family homes, and they figured out a way to scale it but the path to scaling that is much more ambiguous maybe than it is to buy 300 units at a time. You were like, “This makes more sense.”
More power to them for figuring it out.
I couldn’t do it either. I honestly tried and, in the end, I fell flat on my face. I didn’t have the systems or something, whether it’s right or where there are so many houses, people, and tenants. It didn’t make sense. When you transitioned, what was the moment where you said, “I’m onto something, and here’s the way I’m going to do it.”
My wife and I were originally from Utah. That’s where we had our original rental portfolio. We moved to Austin, Texas, years ago and we tried to do some more active stuff like fix and flips, and some wholesaling. We had fun with it but I realized, “I don’t like this. I don’t like picking out paint colors, and tile and herding around contractors.” It dawned on me like, “What am I doing this stuff for?” At the same point, we were experiencing some hiccups with some of our long-term standard rentals. We had some Airbnbs going and those were okay but it took a lot of work.
The question we were asking ourselves as we are getting into our 40s is, “Do we want to be doing this much activity? We’ve got these little young kids that we are trying to take care of. We want more time with them. What do we do?” It dawned on me to get back into commercial. I saw that as a way to simplify and come up to a higher scale, work more with professional property managers, professional contracting groups, and it was attractive.
How did you figure out your strategy of becoming a capital raiser?
I started talking to commercial brokers, getting on their buyer’s list, looking at deals, and thinking about who I would need. What I realized quickly was that it’s a team sport. Everything else I had done to that point was me, my wife, and I had a partner on for fun because we liked each other. When you’ve got into the commercial space, I realized, “I can’t do everything here,” so I started to network with people in the space and think about where we could focus. I focus on one thing and maybe you focus on operations, sourcing, and the brokers or whatever. When I was working with these operators, the consistent theme was we needed help raising capital, then I started to look around.
Are there other people that are doing this focused exclusively on the capital raising side? There are and it turned on light bulbs for me. I was like, “Maybe I could use the Finance degree in a different way than what I had originally thought.” I used that Finance degree to focus on putting together these attractive portfolios, opportunities and being able to present them well to potential investors. The rest is history. It has been great.
How did you select or maybe they selected you, the first group to work with?
Raising capital is a team sport. You have to realize that it’s a professional, full-time effort.
Recognizing it as a team sport, I started to talk to these operators who were already doing well and found out what are they doing for their extra capital needs. When they are short, who do they contact? I reached out and started talking to them about opportunities to work together. Again, I’m recognizing it as a team sport, and I wanted to connect with people who are already successful in doing this type of work. That’s where it took off. I learned from them, we have evolved, and then we went the broker-dealer route. Now, we are fully licensed to be able to do it and fully compliant. It was definitely a process of starting networking within the industry itself.
I’m excited about the broker-dealer route. This is not something I have had anyone come on the show and talk about it. I have a guest that I’m going to have this conversation with. I will get to compare that one and what we had talked about. Maybe compare notes on both sides of this. It’s not a common path inside of the real estate capital raising side.
A lot of people are working the gray area where it’s like, “Am I capital raising? Am I part of the general partnership? Am I part of the management or am I on the general partnership label and I’m not doing anything day-to-day? You decide.” As you said, “We are going to remove all ambiguity and I’m going to go to the broker-dealer route.” What has been that like? Tell us why you did it and what are some of those restrictions or benefits of doing it.
Originally, we operated in that gray area. We will come in with a creative arrangement, make us part of the general partnership, talk about how we help with the due diligence and the investor relationships ongoing. That’s where a lot of people operate to this day. You have to get creative but there has been more effort on the SEC side to enforce some of the rules there. In fact, me and a lot of people I’ve worked with got letters from SEC in late 2019 or right before COVID saying, “We are not announcing anything but be aware, we are watching.”
Once we’ve got that letter, I was like, “No more funny business. How do we do this right?” We went back to our securities attorneys and talked about, “What is the best way to structure this?” The consistent theme from all the attorneys that we talked with was the broker-dealer route. We were able to find a broker-dealer sponsor to work with. I’m a registered representative of a broker-dealer. I had to go out there, pass a couple of securities tests, and get licensed. I have to be licensed in every state where a potential investor sits so I can have a legal conversation with them, and that cleaned up everything.
Now, my relationship with the general partnerships and the operators is just very clean. I’m being paid a cut of the money that I raised just like any other broker-dealer out there. They bring money to Fidelity and Schwab. They place life insurance, get a cut and commission. It’s exactly the same. I have to do it in the investor’s best interest. That’s the standard we are held to but with a very clear, highly responsible, and ethical approach to it. It simplified everything. I took away all the gray areas, which helps me sleep better at night.
Do you still participate on the general partnership side or are you raising capital and that’s it?
Once we went the broker-dealer route, it’s on the capital raising side, so we were no longer trying to wiggle our way into the general partnership paperwork.
It’s interesting because that’s a strategic move. For some of us, we do the capital raising side to work our way into being our own general partner. It’s a stepping stone along the way like, “Help you to raise money, and then I took down a small deal, and it’s this linear progression,” but for you, you said, “That’s fine. I can go out and raise for 100 deals. I can put money in each of these deals and it doesn’t matter. I take a cut of it, move forward, and that’s it.” Is that the thinking there?
My original intention is I will talk to these brokers like, “I want to look at these. Send me something 250 units and above and these parameters.” I realized that that’s a professional, full-time effort. I applaud the operating teams that are out there doing it. I’m cheering them on. I want them to be successful. It turns out from my skillset, my Finance degree, my personal situation with my wife and kids, being able to focus simply on the capital raising side, relying on operators who are sophisticated and already proven to be successful, and they have the systems in place.
It dawned on me. “I can compete against these guys or work with them. How about I work with them?” Part of the general partnership when a deal goes phenomenal. They are going to be the biggest winners out of the end of the process. We get paid handsomely on the capital raising side as well without the responsibility on my shoulders of the daily operations. It suits my lifestyle fantastically.
How do you protect yourself because you plug these people into the investment but then you are turning over all their information to that sponsor in the end? That point forward, it’s like, “You turn Sam Wilson over to a sponsor X for deal 1 then deal 2, you are having to reinvent the milk cow every time.” For the next deal, how do you work around that?
The potential exists but that would quickly sour the relationship with the operator. If we have done a good job and they see us as a strong partner that can bring capital to them and help them get their deals across the finish line, they don’t want to burn that bridge. It would burn the bridge if we find out that they have had gone direct to our investors. We stay in touch with them.
We are doing regular reach out. My job is to answer their questions, get them comfortable, stay in touch throughout the investment life cycle, throw a holiday party, thank them for their support, and celebrate the wins. It’s possible that an operator could then pick their email address and run with them on the next deal but that would sour any potential opportunities to work together going forward.
The sooner you can join hands with somebody that’s more successful than you, somebody as ambitious as you, the better.
What about in communications? I’m involved as an LP as much as I am a GP. You are getting all these inbound communications from the sponsor. Are you still staying in the middle on that and handling communications?
I’m a little relaxed around that. I like my investors to see the communication directly from the sponsors and I’m fine with that. They are going to get an extra layer of communication from me as well. Sending their monthly or quarterly update directly to my investors, I’m okay with that, and then I’m going to put together a summary. I know the other deals that that investor is in and might be with other operators. I’m going to be communicating with that investor directly about all their deals and separately on a regular cadence as well. They enjoy hearing it directly as well as it consolidated like, “Here’s how all your investments are doing this month.”
Do you ever foresee yourself getting more on the active side of real estate investment or do you want to stay in this lane for now?
Never say never. It’s a great little niche, though, that we enjoy. My kids now are still young. We moved from Austin to Boise but our rental properties are in Texas. I’m looking here at the Boise market and seeing what’s going on here. It’s amazing. It’s equal to or greater than the activity, and the appreciation that’s going on in Austin.
I’m looking at it like, “Maybe I need to make a play here somewhere,” but I’m feeling like, “I might wait for my kids to be a little bit older.” I love the idea of showing my boys the ropes. It’s a little easier to show them the ropes when I can drive them out to a physical building and say, “Here’s what we are doing,” than like, “Here’s the wires and the PPMS.” It’s not quite exciting for the little guys.
There is something about the paperwork that doesn’t excite a five-year-old. I have certainly enjoyed this conversation. Let’s jump here into the final four questions. The first one is this, what is one tool or resource you find you can’t live without?
My email marketing platform is critical to be able to gather the email addresses and communicate regularly, make notes in there, and who gets what. I use AWeber. I have been using that for many years. Maybe there are some better tools out there now but that’s my CRM, to be honest. I definitely rely on that.
Question two. If you could help our audience avoid one mistake in real estate, what would it be and how would you avoid it?
I wish I had partnered up earlier. I spent fifteen years or so doing the lone wolf activity and building up my portfolio. In the last few years, as I have worked with teams, my growth has accelerated much more quickly. The sooner you can join hands with somebody that’s more successful than you. You can link up with mentorship or somebody as ambitious as you, the better.
When it comes to investing in the world, what’s one thing you are doing now to make the world a better place?
My wife and I are active in our church community. We both have volunteer assignments. Every week, I show up with our youth. We are calling them our young men. They are 12, 13 or 14-year-olds that we help mentor, tutor, do fun activities with, and we enjoy that.
Lastly, if the audience wants to get in touch with you, what is the best way to do that?
The best way is to find us on our website, SugarhouseInvestments.com. That’s the best way to reach out to us. I’ve got into Twitter and it has been fun to hang out on there. I’m @BradShep on Twitter and you are welcome to connect with me there, too.
Thank you for your time. I do appreciate it.
Thanks, Sam.
Important Links:
- Brad Shepherd
- AWeber
- @BradShep – Twitter
About Brad Shepherd
Brad has been involved in commercial real estate for over 20 years. His experience includes development and management of retail and hospitality space, and raising capital from both domestic and international investors. He’s been exclusively focused on capital raising for commercial syndications since 2017.
