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HOW TO MAKE A PROFIT BY INVESTING IN GOVERNMENT
SECTION 8 HOUSING

A discussion with Leo Hefner

John Debevoise:Greetings everyone and welcome to another serving of Bizness Soup Talk Radio. If it’s in business, it’s Bizness Soup. I’m your host John Debevoise. Today from the South Bend 7 Fund. We have a managing partner, Leo Hefner, talking about how they acquire distressed properties, rehab them and convert them into income producing properties for the fund. From South Bend 7, Leo Hafner, welcome to the program.

Leo Hefner:Hey, thank you very much. I’m glad to be here.

John Debevoise:South bend is a private equity fund. What does that mean?

Leo Hefner:We’re a debt free private real estate equity fund and what that means is we are an investment vehicle registered under the SEC laws of regulation B, section 506(c)-

John Debevoise:Oh, and I know that one verbatim. And what does that mean to my audience when somebody says, “Oh yeah, we’re this,” my eyes roll back in my head.

Leo Hefner:It essentially means that we put the fund together properly and tried to put it together in the safest way possible for the investors. And we’re operating buying cash flowing residential real estate in the Midwest. But the 506(c) part of it means that we can advertise, but we have to credit it investors only. So we can only pretty much at this point take high net worth individuals.

John Debevoise:So South Bend is a private equity fund. You invest in these income producing residential properties in the Midwest as you just said.

Leo Hefner:Correct.

John Debevoise:Give me some examples of what it is you’ve invested and then let’s get into the return on investment that you’re giving your private equity fund members.

Leo Hefner:We’ve been buying single family and some smaller multiplex properties, meaning we have a couple of duplexes, we had a fourplex. Apartment buildings are still a little bit too expensive. So primarily we’ve been buying these houses worth 50 to a 100 thousand dollars in the Midwest at these deep discounts. Right now we’re buying in Indiana, Tennessee and we’re in the process of moving into Missouri.

Leo Hefner:So these are houses where people who are on section 8, people who have some sort of a housing assistance would be living. And we’re putting together these houses and making these safer neighborhoods and good places for people to live and raise their families.

John Debevoise:So as an investor, why would I be interested in investing in a property, single family detached where obviously there’s no debt to it. But why as an investor would I be interested in buying a house that would be under section 8?

Leo Hefner:As an investor, you wouldn’t actually be buying one house. You’re buying into all of the properties we currently have in our portfolio and all properties that will be going into our portfolio. So it’s like if you, right now were investing with us, you’d be buying into an apartment building because we have so many doors. So as far as section 8 goes, why would you want section 8?

Leo Hefner:The places where we invest in have very good landlord tenant laws. If we have to have an eviction, we can have people out in two weeks and if they trash our house, they lose their section 8 benefits. So these people are motivated to have a good clean house to live in and not trash it. So we’ve been very fortunate to be in these areas with good landlord tenant laws and section 8.

John Debevoise:And for those people out there, my audience is typically the small business owner up and operating. They have a business, they have a product or service and they have money. It’s a good crowd to work with as they’ve found through my website where you can get your five points to real estate investments at Biz Soup. That’s B-I-Z S-O-U-P, the five points, and as you all know, my five points in business is the idea, the plan, the people, the execution, and the solution. We talk about that all the time. Remove any one of them and your business will fail as we have proven on many of our episodes On Bizness Soup as we help you avoid those pitfalls of failure. Section 8 means what to an investor?

Leo Hefner:Section 8 is a housing subsidy for low income families where the government pays a portion or all of their rent. So as the landlord, we get most all of our rents directly from the government.

John Debevoise:It’s not a food chain where the government gives the tenant the money and then you have to get it from the tenant. It comes straight from the government on a specific date.

Leo Hefner:Absolutely. It comes straight to us, straight to our property managers bypassing the tenant completely.

John Debevoise:And I wanted to make sure that our audience understood that because there’s so many things that float out there in the marketplace about section 8 housing that of course it’s all negative. Here’s the positive aspect as you’re describing it from an income standpoint, nothing’s guaranteed in this world as Milton Friedman has often said, and there is no free lunch, but as an investor you get your income directly from the federal government and you don’t have to worry about your tenant making that payment. Now that’s all or part. If they don’t make up the difference, well then the eviction process can begin.

Leo Hefner:Correct. So it costs us quite a bit when somebody moves out. So if somebody is behind in their rent, that’s usually not our first triggers to try and evict them. We definitely do work with our tenants so that they’re not out on the street or having to look for another place. I mean, I’ve even found some of these people behind in their rent and found them jobs to go and do, put them on a maintenance crew to be able to continue to stay where they’re at. So we’re definitely have their best interests at heart.

John Debevoise:We’re talking with Leo Hefner from the South Bend Private Equity Fund. If you have any questions or comments you can get to us through Biz Soup. Just go to bizsoup.com that’s B-I-Z S-O-U-P. Shoot us a question and we’ll get that right on over to Leo from South Bend.

John Debevoise:Now why are we featuring Leo and his project South Bend, a private equity fund and the interesting aspects about income property, for me, income property is income property, whether it be a commercial property, multifamily or single family detached. Income is income, triple net or a gross lease, however you structure it, the income on property is still income. There is a rate of return.

John Debevoise:Leo, what kind of rate of return on an average are you giving your equity fund participants on their holdings on the single family detached?

Leo Hefner:Because our SEC attorney is listening in, I got to make sure that we stay within all those guidelines so I can talk about historical past performance because as we know, historical performance is not indicative of future performance. So at almost three years in we’ve been able to offer a 6% preferred return with a net profit distribution, which has been looking at about seven and a third percent annualized return to our investors.

John Debevoise:And as you referenced, you’re not necessarily on the deed to each one of these individual properties. You own an interest in a fund along with everyone else based upon your capital participation or basically the amount of money that you put in. It’s a percentage.

Leo Hefner:That is correct. So investors invest into the fund itself and then they own a percentage of each of that cashflow that’s coming in on the properties and the properties are deeded to the fund itself.

John Debevoise:So the fund that I would be, say theoretically and historically is because you have your attorney listening in. So, as an investor I am sharing in that revenue along with everyone else predicated on the percentage of my investment. What about the depreciation? How is that passed through?

Leo Hefner:Because we are a private equity fund and not a rate that depreciation pass through to our investors via K-1 so that they get to the benefit of the depreciation and all of the costs associated with owning homes.

John Debevoise:You made reference to a REIT. Now for those of you and there’s probably very few of my audience maybe first time listeners that don’t know what a REIT is. That stands for A Real Estate Investment Trust or R-E-I-T. what is the difference between a private equity fund and a REIT?

Leo Hefner:Based on where we just were in a conversation, a REIT, you’re going to get a 1099 miscellaneous on any income that you’ve generated through that investment, which means that you are paying all your taxes on that. You get no depreciation, there’s no pass through costs that is all on you. Whatever tax bracket you’re in, that’s the taxes you’re paying.

John Debevoise:And that’s reflected in a 1099.

Leo Hefner:Correct. So beyond that, most REITs, if they start small, they start out as a private fund like us. And then they, once they get to a certain size, then they can choose to, it’s like having a corporation do a, to be taxed as an S corp with pass through.

Leo Hefner:So a REIT is actually an IRS designation on a real estate investment corporation that invests in real estate so that the REIT does not pay taxes and all of the tax is passed to the investor.

John Debevoise:In your private equity fund, as you already described, what the benefits of the pass through you get the pass through of the income and the depreciation, are you limited to the kind of properties that you can buy? You were mentioning for reference that you do single family detached on occasion, multifamily. What about commercial, whether it be standalone or multi-tenant?

Leo Hefner:Right now, if we tried to go and buy a commercial building, it’s not in our private placement memorandum and we may have current investors that don’t want commercial, so we would have to make some adjustments in that memorandum and then clarify that with our investors if they’re okay going commercial. Other than that, as long as we’re staying residential, we don’t have any issues currently.

John Debevoise:All right, so there are limits as to the decision making capabilities of South Bend 7 which is your fund. You just can’t go out and buy anything that you so choose. It’s all delineated in your offering.

Leo Hefner:It is. So, that’s our fiduciary responsibility. It’s like me selling you a truck and then going and buying a semi. That’s not what you want. You want a truck, so we have to stay within the guidelines of what we’re telling people we’re buying because that’s what they’re coming in for.

John Debevoise:We’re talking with Leo Hefner from the South Bend Private Equity Fund out of Southern California and they are a private equity fund as we’ve discussed in single family detached homes, and I say detached homes, that’s a real estate term, single family homes and they are not townhomes, they’re not condos, they are separate.

John Debevoise:Their own property, deeded piece of property, regardless of the size of the lot. They are standalone, single family detached homes is what he’s specializing in. That’s a difference between standalone commercial or a commercial center or a multiunit or hotels. And so that’s a terminology to understand what they’re involved with.

Leo Hefner:Because we’re debt free it’s not a sexy investment. It’s single family houses. I hear that a lot. “Well your investment’s not sexy.” You’re right. It’s like safe sex because we have no debt. A lady told us that the other day. It was funny. I’m like, “I’m going to use that because that’s cool.” That’s the first answer I have to, your investment’s not sexy. You’re right.

Leo Hefner:But we try and play in that space that would be more like a bond. You break off a portion of your portfolio, your investment portfolio, you put it in bonds because the chances of you losing that money to any kind of an economic turn is slim to none. So because we have no debt, no liabilities, mortgages, no private loans, we are operating in that same place. We don’t have anybody that we have to answer to on how we’re keeping a house. If a tree falls on it and it’s an insurance claim, we don’t have banks telling terms to us.

John Debevoise:As a private equity fund, obviously you’re in this to make money as well. So there is a fee. What from the gross is the fee for the management of the private equity fund that perhaps my listeners would be involved with?

Leo Hefner:So actually I get paid the same as the investors do. I get paid a portion of the cashflow and if the rents are down then our paycheck is down so we cruise right along with them. It’s very much in our best interest to make sure that all the places are rented and people are paying their rent.

John Debevoise:For my listenership, this is not a scripted call. Leo and I have not discussed the questions that I was going to ask him and a lot of times as you will find on my Q and A’s with my guests, their answers will determine the questions that will follow, such as what are the fees involved? I don’t give my audience or I don’t give my guests the opportunity to prepare that much. I don’t dig up dirt on them. What I’m interested in is the benefits to my audience of the small business owner. We’re talking with Leo Hefner from South Bend Private Equity Fund.

Leo Hefner:We’re at a stage where we are growing. We’re bringing on a CFO currently. He’s got 30 years in the casino industry as CFO for Bally’s, the Sands, for a lot of the big casinos you would know in Vegas and Reno. We brought on a marketing director, so we’re putting some very good people into place in areas where it’s going to compliment my skillset and it’s going to compliment my partner’s skillset.

John Debevoise:We’ve been talking with Leo Hefner from the South Bend Private Equity Fund. Leo, thanks for joining us on this serving of Bizness Soup. It’s been great to talk with you about South Bend Private Equity Fund.

Leo Hefner:Thank you so much.

John Debevoise:All right-

Leo Hefner:I appreciate being here.