If you’re dedicated to the real estate world, then by now, you’re probably familiar with the term “hedge funds.” But what exactly are those? And how can you profit from them?
Investing in a hedge fund makes it possible for you to invest in multiple properties with less money than it would take to buy a property outrightly. To explain things further, we’re joined today by Luke Petrozza. Not only will you learn a lot from this episode, but you’ll make money out of it. So make sure to listen and share this with others!
The Truth About Hedge Funds… And How To Profit From Them With Luke Petrozza
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I see it all the time. You want to build wealth by investing in real estate but the problem is what you want to do might not match where you live or your lifestyle. The truth is that not all real estate investing strategies work in every market. For most people, it’s only natural that you think you have to invest in your backyard because real estate is such a tangible object. You think you need to be able to touch it.
For that reason, most real estate investors settle on the problems and limitations that their hometown market brings. I am here to show you that you do not need to live where you invest. You can have location and time freedom as a real estate investor. My goal is to dispel those myths and inspire you to think differently about how you invest in real estate by taking a virtual perspective. My motto is live anywhere and invests where you want. Let’s get started.
In this episode, I’m going to be speaking with Luke Petrozza, who works in acquisitions for a hedge fund called Imagine Homes. This episode is going to blow your mind. I hear wholesalers all the time bringing up hedge funds but do you know what they are? Who are they? What do they do? Most of us don’t know. When I got started working with hedge funds, they seemed very like Wizard of Oz to me. I imagined this huge baseless public company. I had no idea what they did behind those doors.
In this episode, I am asking all the questions. Everything that I think a typical wholesaler would want to know has been asked. You are going to learn so much from this episode. You are going to make some money off this episode, so make sure you read and share it with anybody you think might benefit. Let’s get into the episode. Luke, welcome to the show.
Thank you, Lauren. I appreciate you having me.
Tell me about who you are, how you are related to Imagine Homes, and all that good stuff.
I got into the real estate game several years ago and dabbled in a couple of different things. Through various ventures, I’ve got into wholesaling and started to find out that I liked working with individual buyers that I could do repeat deals with. A lot of the time, that ended up being some type of hedge fund or institutional type buyer. I have continued that path since 2017, when I started doing deals with hedge funds. It has been a wild ride. Most of us have stories that tie into how we’ve got into it but I’m pretty traditional on my end. I was working an engineering job at the time, didn’t like it, and figured out that real estate was probably an avenue that I could explore to get out of that. Here we are.
Hedge Funds: In its simplest form, hedge funds are a group of investors pulling money together. They build a big buying power to acquire many properties at higher prices.
You’ve got your start wholesaling on your own, not working with hedge funds, and were working with them so much. What happened? Did you strike up a deal with one of your end buyers or what?
I started on my own. I was down in South Carolina at the time and doing some one-offs with individual buyers, investors, and stuff like that. I came across a group that was doing a ton of business down there and in some other cities as well. I did 1 or 2 transactions with them and was like, “This is easy.” I go find the properties. You tell me exactly what you want. I literally go and find them. It was a nice setup. It was that light bulb moment for me when I was like, “I can either spend a ton of time building up these massive buyers list and having a whole bunch of different people that I have worked with, which is good. At the same time, it’s a very streamlined process that you work with individual entities or hedge funds.”
I would imagine it’s a lot less headache. There are a lot of advantages in some ways. You probably learn a lot more about how the inner workings of these buyers and how it all works, which I’m going to ask you a little bit more about. Let’s get right into it. What is a hedge fund?
In its simplest form is a group of investors that come together. They pull their money together and have big buying power, so they can buy up a lot of properties at higher prices than the typical mom-and-pop landlord or investor can. They are going out. A lot of them hear the SFR Space. They acquire properties, renovate them and hold them out for rentals over the course of time.
Do they set up a fund together?
Yeah. There are investors that pull their capital together. Everybody does it a little bit differently. There are different ways you can leverage your properties and things once you purchased them. The more that you buy, the more you can take out in terms of debt on those properties and assets that you have, which increases your buying power as a whole. You can scale up in that way. It’s done a few different ways but in general, it’s a pool of money together. You can go out and buy a ton of properties.
I know that there are these bigger hedge funds called Blackstone or something like that. This massive company does not have an owner. I don’t see a face when I think of that company. I don’t think of it as a family-owned business. I think of it as this publicly-traded company. There are hedge funds of that scale but then are there funds like a smaller scale where say, someone like me starts a hedge fund? Is that a thing?
Yeah. Imagine Homes is that thing. We are a privately held company and licensed brokerage in the various states and markets that we are in but it isn’t a publicly-traded company. Some of the bigger funds have gone through those iterations of purchasing, renovating, and holding these places, sold, and essentially gone public. Imagine Homes, at this point, probably have around 1,300 houses across our markets. We are still relatively small compared to some of the people that have 80,000 or 100,000 homes. There are full scale and spectrum of the size of these types of buyers.
From the wholesaler’s perspective, we assume that hedge funds are all Blackstones. They are a huge publicly-traded company but a lot of us don’t realize that a lot of them can be normal like family-owned businesses. Where does a hedge fund get its money?
Honestly, it depends. There are different ways to raise it. For us, we have had different types of investors and folks but a lot of the time, it’s through relationships. We started relatively smaller and raised a small round of funding for the first fund and have since proved that model off and show that it works. You then can go back to other investors and say, “Here’s what we did with this first round. Here’s the performance of the portfolio. Here’s what everything has looked like once it’s stabilized.”
Real estate investors must provide an awesome asset to people that they can call home for a long time. Your mission should give them places to live where they typically wouldn’t find themselves.
You can use that as leverage to say, “If you guys want to do that as well, here’s the chance.” It typically starts smaller. I’m not even sure how they’ve got started in the infancy stage of some of those bigger ones but it’s scaling up and showing that the model works, you proved them out and showed that you can buy effectively, renovate them, and rent them out for what you think you can. As long as you can do that and the portfolio is performing, then typically, people will throw more money at you and to investors as well.
Let’s talk about the portfolio performing. As a wholesaler myself, I do it virtually. I like to think about what my buyer demands and what my buyer’s needs are for a property. “What’s the highest investment use for this property specifically? What buyer can I find for?” Whenever it’s a property that I feel it’s a better rental, I go straight to what hedge fund is buying here. You are usually the most competitive or the easiest to work with, to be honest. What do you look for in an individual property? Is there a rule of thumb, any rent to price ratio? It’s something where you can give it to us wholesalers to help us out.
There’s not a standard answer to this. If you have a property or an area, or something where you are looking to do some marketing, find some properties, or whatever it is, I will find the contact in the fund that you need to speak with. It’s some type of acquisitions role or somebody that’s overseeing what is coming into the portfolio.
If you can find that person that you need to be talking with, they will give you their buyer’s box. They will give you their criteria, “Here’s what we buy. Here’s what we look for.” It’s typically pretty black and white. Your builts are pretty specific. Square footage, bedrooms, bathrooms, all that stuff is pretty well laid out you just have to find the person that knows that, and you can have a relationship with.
One of the things that I like to do to be able to find that person is if you have a local real estate agent in your market that would be willing to go onto the MLS and pull some info for you. Have them sort all of the transactions that were done, say, in the 2021 or so, and see who had all of the buyer transactions but no listings. Typically, that is an agent with a license where they are doing a ton of buyer representation, which is like an institutional buyer-investor. They don’t do anything associated with it. There are only going to be a few of them but I reached out to those agents and I bet you find one of those people is an acquisitions type person.
That’s a ninja trick. I wouldn’t have thought of that. What I normally do is I get a list of the recent sales and look at what company has bought a lot. There’s a certain company with a very obscure LLC name that’s purchased 10 in 1 month but usually, that’s the hedge fund. You are hard to find. If you search by LLC, it won’t find you guys, so I will search by your mailing address, and that will go to your office. That’s probably how I found you.
When I was doing a lot of wholesaling, that was the issue that I ran into. It’s like, “I know this fund. I see what they are buying. I know the areas. I can see what properties they are listed on the beads but I don’t know who to contact. I have an LLC. I tried skip tracing, and it’s too many dead ends that I kept running into. What I found is, if you can pick up the phone and call an agent and be like, “I see that you did a ton of business with this one particular buyer. I have a property that I think they might be interested in. Would you be able to put me in touch with them?”
Sometimes they will be like, “Cool. Yes,” or sometimes they will be like, “Great. Send it to me.” I will send it over to them, either way, I have found that’s a pretty effective way to get in touch with a human being as opposed to getting an address or something. You are spinning your wheels. I have not done that very well, so if you can pull that off, awesome. Good for you.
Sometimes you feel you keep getting dead ends but I have managed to find some that way. Your way is very smart. I didn’t think of that. That’s why I wanted you on this show to tell us some of the stuff that we don’t know about your world. In my head, whenever I think of a hedge fund and marketing a property to you, I don’t know what you do to analyze the deal.
Sometimes your numbers, I’m like, “They offered that,” and sometimes I’m like, “I wouldn’t have thought that for that property.” What does it look like when a wholesaler brings a deal to you guys? As an acquisitions person, what do you do? Do you put it in a spreadsheet, it spits it out and tells you, “Buy it or not buy it?”
Hedge Funds: Pick up the phone and inform buyers directly about the houses might be interested in. This is an effective way to get in touch with a human being than simply getting an address.
In its simple form, yes. It’s a lot of like custom-developed software to be able to analyze these but it’s a big spreadsheet that crunches some numbers for you. We look at different things and try to estimate if you know what we can rent it for what the renovation is going to be. Typically, you have some type of yield that you are aiming to hit based on those numbers. I have found that we are pretty competitive in areas where people are not necessarily doing a ton of other rentals. We are typically able to pay more than mom-and-pop landlords.
Some of the areas that are gentrifying and up and coming have been a little bit tougher in certain spots. When people in flippers are coming in and paying $300,000 for a place, they put $100,000 into it and turn around and sell it for $500,000. We are probably not going to be the best buyer in that situation. The lower-end stuff, our price point at least, in our markets here is in the $100, $200, $300 range and most of the markets that we are in. We are typically pretty competitive in those price ranges.
How do you figure out what a property will rent for?
You look at comps. It’s similar to finding the ARV of a place. You try to find out what’s listed up on any of the rental sites and things. We also have some proprietary stuff that does a lot of scraping for those same sites. We see, “This place listed on this date,” that thing. We can get an idea of what does it looks like. The ideal spot that you want to be in is you start setting your own cops. It’s like, “I own another house right down the street here. I rented this for $2,000 a month. I’m pretty confident that I can get $2,000 a month in this house.”
It’s very similar square footage but it’s about all that good stuff. If you don’t have great comps, it’s always a little bit of trying to be conservative and understand what you think you can get. The goal is to be able to get some properties that you own, renovate, and rent it. You can say, “I have proved out the rent here.” You then can do it a whole bunch of times.
What websites should someone have to look for rental comps like a Zillow? Is there another site that you should look at?
Zillow’s good. That’s probably the biggest one, HotPads, Realtor.com. Those are probably the main ones that we typically look at. You should typically be able to find something. This is one of the things that threw me off a little bit when I started. A lot of the time, if I’m looking at a deal where it’s a flip property, I can’t find any comps to say, “What is this house worth?” That would steer me away from that a little bit.
It’s like, “There’s not much activity going on. Am I going to have people that want to buy this house? I’m not sure.” It’s a little bit of a deterrent, the flips, for me when I find that. It’s the opposite with rentals. If I go to an area and I don’t see any rental comps but it’s a quality neighborhood and looks like a nice place, most likely, there’s going to be somebody that wants to live there and a rental property but they don’t have any available.
A lot of times, some of our best ones have come in areas where we don’t even have good comps or anyone that points us to say, “Here’s so much we can rent it for,” but quality AB-type neighborhood, good school district, the family wants to live out there. Maybe it doesn’t have the money for a down payment or something like that. They typically can rent pretty well. We play more in the suburbs with the better schools and stuff than a lot of the other investors that are in some of the lower quality like assets and neighborhoods.
If you have no comps, do you guess the price?
The wholesaling industry has always been seen as something you can simply bootstrap. Although you can start that way, you will soon realize that you need to figure out how to manage capital.
It’s a little bit of that. You can get a similar feel if you have a different neighborhood, where it’s like a 4-bedroom, 2 and a half baths, the neighboring area or something like that but it’s not within a mile or something. You can get an idea. It’s like, “If I rented this place for $2,400 a month, do I feel as good about this area? No. Maybe I will drop that down a little bit but I feel better about this area, yes. Better schools, houses, whatever. Maybe it could go up a little bit.”
You try to get your best judgment on the ones that you don’t have comps on and see what it ends up being. The hedge funds are not having to hit every single deal perfectly. We always try to make sure that we are buying the right assets in the right places and hitting the numbers that we are aiming to hit. At the same time, if we missed on the house by a little bit and didn’t necessarily hit that number in the grand scheme of the portfolio, it’s not a huge deal. If you are a single investor buying one house and you miss on that one, it’s a much bigger deal when you are doing it individually. There’s a little bit of leeway there to try to figure out like, “Do we need to get some data points here and try to figure out what we can rent these places for?”
You say the right assets are in the right places, so what is Imagine Homes buy box?
We are in probably seven different cities. Each city has its little nuances and things but in general, we stay in the A and B Class neighborhoods. We stay in the higher-end stuff. Our low end on rents is probably about $1,400 a month going up to $2,500, $2,600, $2,700 type range. We stay in those areas for a few reasons behind it but a lot of the turns and stuff basically, it takes the same amount of money to turn a $2,500 a month rental as opposed to an $800 a month rental.
You are making a lot more on those $2,500 than you are on the $800. We play in a little bit higher price range. In terms of quality of assets outside of the neighborhoods, a lot of the houses are from the 1950s, ’60s, and grandma’s house hasn’t been updated. It has the blue and pink tile in the bathroom and kitchen with the old cabinets and stuff. We pretty much renovate those and get them up to 2022 standards with your more modern type of look to it. That’s what we like.
I saw your website. I like that you put you have rented with us and can see where you have rentals. You do a good job on your remodels. You make them look nice. You are getting the highest value in all your rentals. You are not like a slum lord. You are making sure they are A-Class now.
One of our core values that we imagine is best in class. We try to do that across the board with the experiences that we provide to folks like yourself who are providing properties to us, as well as our GCs and contractors who work with us and renovating these places. The end-user ends up being somebody that wants to live in these places as a home. Providing an awesome asset that they can call home and hopefully live for a long time and raise a family or whatever they are doing. That’s important. That’s the mission to be able to get people places to live that they typically wouldn’t be able to do themselves but we can provide it for them.
What is something that wholesalers do that annoys you? How can wholesalers work with you and do better? I’m going to come from a place and tell you a little story. I have never bought from a wholesaler before. I have been a wholesaler for years. I started as a fix and flipper/I would wholesale what I didn’t want. I have never been on the other side where I was buying from a wholesaler. I never did that but in the last few months, I’m like, “I’m going to give this a go and see what is out there.” We have some goals. I want to flip at least 1 to 2 houses a month for fix and flip. I wanted to see if that could be another stream of leads.
I put a post out and started getting all these replies from wholesalers or DM-ing me on Facebook and whatnot. Some of them give me no information about the property at all. No analysis of their own. They put no thought. Their price is the market price. I have had some of those. I’m like, “That’s what it would go if it were on the market. Try again.” They give me no photos. There’s nothing. Tell me some things that wholesalers do that are a little like, “I can’t even look at your deal or do better.” Help us.
Hedge Funds: By investing in several properties at once, you get a bit of leeway. You don’t necessarily have to hit that number in the grand scheme of the portfolio.
Wholesaling, as an industry, is always talked about from the guru’s perspective of being an easy way to get into real estate. “You don’t need money or credit. You can do it without anything, bootstrap it and start doing deals.” That mentality for the beginning wholesaler and investor that gets into it, you can start that way but very quickly, you start to realize, “I need to figure out how to manage capital, how to do marketing, appointments and sales, and all these things to hire people.” What you are doing is you’re building a business. First and foremost is to look at it from not that I’m a wholesaler but you are an entrepreneur and a business owner.
If this is your business, how do you want to run that? Do you want to be seen as somebody that is providing a ton of value to your buyers and the people that you work with? Do you want to be somebody fly-by-night person stuff out there and not respond and don’t pick up your phone? That’s a part of it. Having that mentality from the beginning, “I’m an entrepreneur. I’m doing to build this thing and do it the right way,” that’s a big piece of it. Some specific points that I would say are a little bit frustrating, and being a wholesaler, I get it. I have been through these myself. On the other side of it, I see it a lot.
Transparency is probably the biggest one. What I mean by that is, if a wholesaler has a property under contract, they are talking to the seller, whatever it is, I want you to be transparent with that homeowner, first of all, so that you are not misleading them in any way, not setting them up for failure or having unrealistic expectations on that side of it. Transparency with the other side, being the buyer side as well.
If you do that consistently with both the seller and the buyer side, when you get together, have a contract, and have a deal that gets put into place, everything moves smoothly. The hiccups have always come through ones where it’s like the seller does not know what’s going on. It has been talked about is, “I’m buying this.” They have a bunch of people that come in, and it happens. Setting realistic expectations on the front end with your sellers and likewise transparency on the backend with your buyers is probably the easiest way to make things go smoothly.
I want to give an example of things that happen due to a lack of transparency. I have gotten wholesalers sending me deals. They are like, “You need to close in five days.” You are like, “That’s somebody who has not been transparent with the seller and has eaten up their escrow days.” It’s now day 25, and they have a 30-day escrow and are scrambling. No buyer can buy anything in five days. We have to go through the title process. You are being a little unrealistic. That’s because you weren’t transparent with the seller. If you were more transparent and you told the seller what was going on, for us, we will put a property under contract. We tell the seller, “This is what we do.”
We buy houses to fix and flip, which we do. We are like HGTV. If you watch those shows, we do that. We will buy some properties as rentals and, at times, assign our contracts to other investors who we have worked with for years. At times, we will show them the properties and sell them to them as well. We say, “We are going to do an inspection, our first round is usually a quick round of photos. The second round is us bringing in any capital partners, general contractors, project managers, or anybody that we need to walk through that could be some of our end buyers into that property. Is that going to be a problem?” Usually, if you are upfront before signing the contract, the seller is cool because you are telling them the truth, and they appreciate that.
Most wholesalers will not. They will say, “I’m going to buy the property, all cash. It’s me.” They surprise the seller with four inspections and multiple people walking through their house. We tell them upfront and set the stage but sometimes, it happens where you get a seller that is not easier to work with. We had it, and I was telling Luke about it. We told the seller, “This is what we do. This is who we are.” He wanted one showing. We said, “We are going to have several people at that one showing. It’s going to be probably under six. Is that okay?”
He said, “Yeah.” We show up. He freaks out and won’t let us in. It was like an egg on our face. We looked terrible to our end buyers. One of our end buyers was like, “You wasted our time,” and you were like, “I had no idea that guy would do that.” In that situation, as most end buyers understand. When there’s good communication and transparency, I think you understand. We give an example of what happened. Luke is one of my buyers, and I also buy in this market to fix and flip. We have a goal of one property a month.
We lost our one property due to that seller that wouldn’t let us in. I’m venting about this story. I’m going to bring it up as many times as I possibly can because I’m still upset about it. Luke put in an offer on a property. It was the best offer you totally would have won. I had to tell Luke, “I feel bad but we have to hit our goal and buy this one.” Talk about transparency, and I didn’t have to tell you that. I was like, “I’ve got to because he was my buddy.” I would feel so bad if I didn’t. When you have transparency, you would never feel like you have to tell a story or lie. It feels good, to be honest, as a wholesaler. I think wholesalers can definitely do a little better at that.
As a whole, it gets a bad rap. Wholesaling, in general, has a negative connotation associated with it. In the end, there are good people that are doing good things and saving people from bad situations. To no fault of their own sometimes, they didn’t get out of their own way to deal but you are there to solve a problem. If you can help somebody out of a situation that they are either going to not be in themselves or they don’t know how to get out of themselves, you can get paid for that.
Transparency on the backend with property buyers is probably the easiest way to make things go smoothly for a real estate investor.
That’s the cool part being able to help people while you can provide value to somebody else’s life but also improve your own and grow your business. There’s a right way to do it. We love working with folks like you who are professionally done. You have amazing people, and your communication’s always on point. It makes a big difference to be able to work with those types of sellers and wholesalers. We appreciate it.
We can always get better. In 2022, I’m trying to elevate my company and be the best in class. I like that. I wrote that down. We could always be better but I loved your perspective. If anybody had a property to sell, and perhaps it’s a market that you are in, where could they go to submit the property?
I would go to Imagine-Homes.com, and there’s a form on there that you can fill out. It will go the base on where the property is, whichever market, and the persons responsible for it. Probably the easiest thing to do is go to the website, fill out the form, and we will get in touch with you.
I wasn’t sure if you wanted me to put out your email address or would you rather go to the website? What would you prefer?
I can throw my email. I’m not going to be the contact in all of the markets. I can certainly send my email out there. I can distribute if I need to but it’s my name, Luke.Petrozza@Imagine-Homes.com.
It was awesome to have you. You are a wealth of information. I’m super excited you took the time. Thanks for coming.
Thank you so much for having me, Lauren. It has been my pleasure. Thanks again.
If you liked that episode, make sure you share it with a friend. If you want to learn more about how to wholesale virtually, make sure you check out www.VirtualInvestingMastery.com, where I can show you how to wholesale with buyers like Luke. See you next time. Thanks for reading.
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About Lauren Hardy
Lauren Hardy is a Virtual Investing expert and Real Estate influencer who owns multiple companies in the real estate industry including real estate investment, coaching, and software companies.
She is also a Wholesaling Inc coach and co-hostoftheWholesaling Inc Podcast. Her experience in the last decade has been focused on real estate investing and creating products and services to serve the real estate investing community.
If you are interested in investing in real estate virtually, house flipping,or virtual landlording, Lauren’s your girl