Learn how fractional ownership can revolutionize your approach to real estate investing! In this episode of The Agent of Wealth Podcast, host Marc Bautis explores the concept of co-investing in real estate with Brian Davis, co-founder of SparkRental and an expert in passive real estate investing. Brian shares valuable insights on how fractional ownership allows investors to diversify their portfolios and minimize risks while accessing opportunities that may have previously seemed out of reach.
In this episode, you will learn:
- The fundamentals of co-investing and how it differs from traditional real estate investing.
- The benefits of fractional ownership for both novice and seasoned investors.
- How SparkRental facilitates co-investing for its club members, making real estate investment more accessible.
- Practical tips for getting started in co-investing and maximizing your investment potential.
- And more!
Tune in to unlock the power of fractional ownership!
Resources:
SparkRental.com | Live Off Rents Podcast | support@sparkrental.com | brian@sparkrental.com | Bautis Financial: 8 Hillside Ave, Suite LL1 Montclair, New Jersey 07042 (862) 205-5000 | Schedule an Introductory Call
Disclosure: The transcript below has been edited for clarity and content. It is not a direct transcription of the full episode, which can be listened to above.
Welcome back to The Agent of Wealth Podcast, this is your host Marc Bautis. Today, I’m joined by a special guest, Brian Davis.
Brian is a real estate investor, personal finance writer, and co-founder of SparkRental, a passive real estate investing club. He has over two decades of experience in the real estate and financial services industries. Currently, he owns an interest in over 2,000 units, adding more each month in a form of dollar cost averaging
In addition to hosting the Live Off Rents Podcast, Brian regularly contributes as a real estate and personal finance expert for BiggerPockets, Inman, Best Ever Real Estate, R.E.tipster, and more.
Along with his wife and daughter, he spends most of the year overseas living by his own rules. He loves hiking, cooking, pairing wine with said cooking, scuba diving, and occasionally surfing. Most of all, he loves showing others how they too can create their ideal lives through real estate investing and lifestyle design.
Brian, welcome to the show.
Marc, thank you so much for having me.
Transitioning into Real Estate Investing: First Steps in Real Estate
It’s a pleasure. Brian, you started your career working for a hard money lender, seeing firsthand how investing can build wealth and passive income. How did you transition from that role to becoming a real estate investor?
Absolutely. I didn’t know anything about real estate, lending, finance, or anything in that realm when I graduated college with degrees in psychology and criminal justice. I had no idea what I wanted to do with my life. Fortunately, my parents introduced me to their friends and arranged informational interviews. One of those friends, a partner at a subprime mortgage lending company in 2003 — at the height of its popularity — offered me an internship for the summer after I graduated.
During my time there, I worked closely with him and his partner, who also provided hard money loans. At the end of the summer, they told me, “We don’t need another loan officer; we have plenty handling subprime mortgages. But we do need someone to help with our hard money loans.” They offered me a permanent position as an account executive.
I began working with real estate investors as my primary borrowers. Back in the mid-2000s, everyone seemed to be making money in real estate — it felt like a big party. I watched as investors made money hand over fist with flips and BRRRR deals. I thought, “I’m just as smart as these guys — smarter, even. I can do this too.” I decided to buy rental properties, believing I could generate enough rental income to stop working altogether.
With little knowledge, I rushed into purchasing multiple properties and lost a significant amount of money when the market crashed in 2008. I made every mistake possible, which I attribute to the arrogance of youth. I didn’t seek out mentors or coaches, and I paid the price for my lack of preparation. That’s a brief version of my journey…
Lessons Learned and New Directions in Real Estate Investing
So, I assume you learned some costly lessons in real estate investing. What did you do next in that field? Did you seek further education and knowledge, change paths and eventually return, or take a different approach altogether?
Yes, it was a bit of all of the above. I became an expert in rental investing, but I did it the hard way—making every mistake myself instead of learning from others. When 2008 hit, it was especially difficult because not only did my investments collapse, but my day job also vanished overnight; no one was borrowing hard money loans anymore. I had to find a new job and career, ultimately working for an e-commerce company that serviced landlords. The silver lining was that I got that job because I was a landlord. Without my direct experience in real estate investing, I likely wouldn’t have landed that position. I’ve been in the online business space ever since.
That was one turning point for me. Another occurred when my wife and I moved overseas in 2015, while I still had about 15 rental properties. After relocating to Abu Dhabi, I realized how much I had been subsidizing those properties’ returns with my own labor. I had spent countless weekends managing properties, dealing with contractors, and chasing down tenants. I often felt like the “nagger in chief,” trying to stay on top of people who didn’t follow through—whether they were tenants, property managers, or contractors.
What struck me was that the modest returns I was seeing on paper were, in reality, negative when accounting for my labor and time. This was a stark contrast to purely passive investments like buying index funds or participating in real estate syndications, where you don’t have to invest your own time. Eventually, I decided to divest all my rental properties while living overseas. Despite this, I still loved real estate and continued teaching it at SparkRental. However, I felt a lack of integrity teaching something I wasn’t actively doing.
To address this, I began exploring passive real estate investing. I experimented with various real estate crowdfunding platforms and invested in syndications to gain firsthand experience. During this time, many of our students—who were eager to learn—asked my partner and me if they could invest alongside us since they weren’t ready to buy properties themselves. Initially, we kept saying no, feeling out of alignment with their requests.
One day, I turned to my partner and suggested, “What if we actually said yes to that?” We began experimenting with co-investing projects, bringing in some of our students for a couple of single-family deals with a local partner in Michigan. While the returns were solid, it turned out to be too much work. So, we returned to the drawing board and experimented with a real estate syndication as a joint investment. This was a success and became a totally passive investment.
This led to our current focus: our co-investing club. Each month, we collaborate on deals with our club members, allowing them to invest small amounts. It’s been a fun way to approach investing as a community.
We’re going to expand on that, but I want to revisit two points you mentioned. First, when you had direct ownership of properties, you highlighted something that’s very true: while real estate may seem like a source of passive income, it actually involves a significant amount of work. Even if someone hires a property manager — regardless of whether they’re the best in the business — you’ll still need to follow up with them, make decisions, and handle various tasks. With direct ownership, it’s more like running a business; it’s essentially a side hustle.
The second point you made was about the returns you were seeing. Many people I know who invest in real estate look at their rental income and think, “I have a thousand dollars coming in each month, and my mortgage is $900, so my net is $100.” However, the reality is that many more factors go into calculating income and expenses, such as vacancy rates and repairs. It’s crucial to understand this and set appropriate expectations when entering the real estate market.
When I first started investing in rental properties, I also believed that cash flow was simply the rent minus the mortgage, and I was very mistaken. It took me a long time to learn this, and I realized that if I had sought out a mentor, coach, or even a more experienced partner, I could have avoided a lot of headaches. In our industry, we often use the “50% rule” to help people think more realistically: on average, about 50% of the rent will go toward non-mortgage expenses, including vacancy rates, repairs, maintenance, property taxes, insurance, accounting, and property management costs.
When people first hear this, their initial reaction is often, “Then how can I ever find a property that will cash flow?” And I say, exactly — that’s the point. It’s hard to find good deals, and there isn’t just a tree of properties waiting for you to pick from. Investing takes work, both in acquiring a good property and in managing it over time. So, it’s not passive investing, nor is it truly passive income. It’s active investing with semi-passive income, but it is a side hustle.
The SparkRental Co-Investing Club
Now, let’s transition to SparkRental and how the investment club works. You mentioned it’s a monthly meeting. Are members pooling their money together each month to invest, or do you find opportunities first and then figure out the contributions?
The Club Structure
Our attorney advises against using the word “pool,” but essentially, we are not syndicators ourselves, nor are we a fund of funds or selling securities. We don’t take a cut of the money invested. Instead, we follow a flat fee investment club model. Members pay a flat membership fee to join the club, and each month we come together to vet deals collectively.
You can think of it like an old-school stock investment club, where members gather to discuss stocks over drinks and then invest together. In our case, we focus on passive real estate investments instead of stocks. We aim to invite a syndicator to present deals to our members about once a month, although the number can vary depending on the opportunities available. It could be none in a month or two, but we aim for an average of 12 presentations a year.
This collaborative approach is fantastic because members bring up questions I might not have considered. It creates a sort of hive mind where everyone benefits from each other’s expertise and perspectives on the investments. For those interested in investing in a specific deal, the minimum investment is $5,000.
While that might seem like a significant amount, it’s much lower than the typical minimums of $50,000 or $100,000 required by private equity real estate syndications. One challenge with passive real estate syndications is the high minimum investment, combined with the difficulty of finding good sponsors and networking with them. Especially for non-accredited investors, SEC regulations prevent syndicators from publicly advertising investments available to them. This creates a catch-22: if you’re not an accredited investor, how do you find deals that you can participate in? That’s where we come in—we handle the networking for our club members, bringing in sponsors so we can all vet these deals together.
Investment Minimums
So, if an investor is interested in the deal, the minimum investment is $5,000?
That’s exactly how it works. Yeah. Anyone who wants to participate in the deal can do so with $5,000 or more. Together, collectively, we will be passing that $50,000 or $100,000 minimum, so we’re able to invest under a single entity. We create a joint LLC for each one of these deals. And there’s no pressure, no one has to invest in any one of these deals…
Part of our mission is diversification, and is bringing in lots of different types of deals – different types of properties, cities, states, syndicators – so not every deal is going to be a good fit for every person. Some people are more interested in cash flow, and income – passive income. Some people are more interested in growth and profits – that big paycheck at the end. That’s fine. That’s okay. Not every investment is going to be a perfect fit for every club member. But whoever wants to participate can do so. And if not, there’s going to be another deal in a few weeks, right?
Key Risks
Can you discuss some of the risks with these types of projects?
I can’t remember who wrote this book… but there’s a book called The Road Less Stupid. In it, they talk about investors – real estate investors in particular – and say that novice investors enter these through the lens of “how much can I make?” And more seasoned investors look through the lens of “how much can I lose?”
That’s the lens through which we try to look at these – focusing on risk first and foremost. You know, how is the sponsor addressing all of the different risks that we think are present for this deal, or in this market. The elephant in the room there is debt risk, right? The longer term the debt, the safer. If it’s fixed-interest debt, that’s better as well, right?
I’ll give you a really quick example… In one month last year, we were looking at a deal that we did not end up investing in, largely because we did not like that it had short-term bridge debt (2 years or 3 years bridge loan debt). And, we’re sitting there thinking, ‘I don’t know what the market is going to look like in two or three years. It might not be a good time for refinancing or for selling.’
We ended up investing in a deal where the sponsor, they were buying a portfolio of two hotels, and they were assuming a fixed interest loan at a 5.1% interest rate with nine years remaining on it. From there, the conversation was ‘Yeah, sure I don’t know that within the next two or three years there will be a good time to sell, but at some point within the next nine years there will probably be a good time to sell these hotels.’ Right? So you have that flexibility… Debt risk, that’s one area of risk.
Property management risk is another one. We like to invest with sponsors who ideally handle their property management in-house, and have a deep track record of doing so well. Or, if not, then they have a partnership with a local property management firm who they also have a deep track record of success with.
There’s also political risk. We try not to invest in any areas with anti-landlord laws, because the next time there is any kind of crisis, they’re going to be the first places to put in another eviction moratorium, for example. Now that doesn’t mean we will never invest in those markets. For example, we’ve done a couple of deals in southern California – a very tenant-friendly market – but, one of the deals we did there was vacation rentals in an unincorporated township up on the mountain. So, we did not have to worry about residential regulation. It was short-term rental stuff.
There’s construction risk. Who’s doing the repairs? Again, is it in-house? If so, has the syndicator done a lot of these types of deals before, in this city? Do they have the same team of contractors working on the properties? Or, are they bouncing around to a bunch of different markets and just hiring subcontractors or hiring contracting teams that adds to the risk, right?
The list goes on, but the point is you have these buckets of risk. You want to look at every single deal through those lenses. How are they managing all of these different types of risks, and how comfortable do I feel with how they’re mitigating these risks?
Evaluating Sponsors
How do you gauge the success of working with a specific sponsor? I’m sure there are specific attributes you want to see, when you’re bringing them into the club to work with your members. Is there something you do to make sure they are a good fit?
We have an informal rule, but we really try to follow it, and that’s that we don’t invest with the same sponsor within a year of doing our first deal with them. It’s like a one year probation period, basically, for sponsors. We have not always followed that rule, I wish we had…
But you want to see: What is their communication style? How do they handle hiccups? That’s how you can separate the weed from the chaff.
So, we do try to follow that rule. And the club is getting to the age now where we do feel more comfortable circling back to some of those sponsors who we did invest more than a year ago with and looking at some of their new deals. In some cases we do feel comfortable doing a second, third, fourth deal – because we have direct experience with them, we feel better investing more money with them in a new deal.
Ownership and Tax Reporting
Can you explain how the ownership is structured, as well as the process of tax reporting? What does that look like?
Yeah so we approach these as joint venture LLCs, so each participant in a given deal gets listed as the owner of the LLC proportionate to their investment amount. And, I mean, they’re an owner. The LLC itself will get a K1 at the end of each year, and then we have to have an accountant come in and divvy up that K1 for each individual. That does add a little bit of expense for these, but that’s the cost of going in as a small dollar investor in these kinds of private equity deals.
Market Climate and The Future
Considering the market climate and the lessons learned from previous deals, what’s your target for the number of deals that the club offers to its members? And how do you assess which opportunities are worth investing in?
We aim for twelve deals a year. We did 13 in 2023… It’s been a turbulent market for commercial real estate over the last two years, no question. Some of the earliest deals that we did… a couple of them are a little hairy, I’m not going to lie. In retrospect, that was not an ideal time in the market cycle for investing.
But what we have found is that both sponsors and limited partners – passive investors like us – everyone got a lot more conservative over the course of 2023, for the better. So late 2022, early 2023, some of those deals were still not being conservatively underwritten. The underwriting that we see today is a lot more conservative, and I think that it’s not a bad time to invest right now.
I think that there’s a lot of bad headlines in the news because of some of those deals in 2021, 2022, that have really struggled and in many cases have lost money. But, you know, when there’s bad headlines, that doesn’t always mean it’s a bad time to invest.
There’s always deals available and I think if we had known in 2022 – if we had the skill at analyzing these deals that we do today – I think we would have probably been able to avoid one or two of the underperforming deals that we did invest in at that point. But part of our philosophy with this club is just that you’re going to split small amounts of money across a lot of different deals, instead of putting a lot of money into a couple of deals. So, at the end of the year you’re gonna have maybe one or two that underperform, maybe one or two that over perform, and then most of them will just form a bell curve, right?
So, at the end of the year, you’re not sitting around chewing your fingernails and worrying about how that one investment that you put $100,000 into is doing. It’s an average of numbers on a page, of these 12 deals you’ve invested in, how do they all add up. It’s a lower-stress way of investing.
What types of timelines are these investments, typically? Are they all long-term, or do you ever consider bringing in short-term opportunities to the club?
It’s a mix. For example, we were looking at a deal this morning that is a short-term investment — less than a year. We’ve also invested in deals designed for the long term, where the goal is to stabilize cash flow, add value, and then refinance to return everyone’s initial investment. As limited partners (LPs) and passive investors in these deals, we retain our ownership interest in the property and continue to collect cash flow indefinitely, even after we’ve recouped our initial investment. This is often referred to as “infinite returns.”
Some investments are short-term, like a secured note we invested in a couple of months ago. This is a floating six-month note, allowing people to cash out at any time with six months’ notice, effectively making it a rolling six-month investment. Conversely, we might still be collecting cash flow from other investments 15 years from now. Ultimately, as we discussed earlier, part of our strategy is to aim for a diverse range of deals.
Alright, Brian, that’s all of the questions I have for you today. Thank you for joining me. Where can listeners go if they want to learn more about you, and what you do?
You can visit us at SparkRental.com, where our co-investing club is featured prominently. Feel free to reach out to us at support@sparkrental.com, or you can contact me personally at brian@sparkrental.com. We’re also active on various social platforms, including a Facebook group with around 50,000 real estate investors and another group for beginners with about 7,000 to 8,000 members. There are plenty of ways to connect with us, and we’d love to hear from you! As a mom-and-pop company, we truly enjoy chatting with people and learning about their real estate goals.
Great, we’ll include all of that in the resources section of the show notes. Thanks again, Brian, and thank you to everyone who tuned into today’s show. Don’t forget to follow The Agent of Wealth on the platform you listen from and leave us a review of the show. We are currently accepting new clients, if you’d like to schedule a 1-on-1 consultation with our advisors, please do so below.
Bautis Financial LLC is a registered investment advisor. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial advisor and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.