December 3, 2024 • 41 mins
On The Visionaries Show, we had the pleasure of chatting with Michael Klein, founder of Freedom Financial Funds, about his journey from commercial banking to building a thriving business in real estate finance. Michael shared stories about the challenges he overcame, raising $14 million in a single meeting and the lessons that shaped his success.
This episode is filled with practical advice and inspiration for anyone looking to grow their career or business.
Key Takeaways:
- Michael’s Career Path: From banking to co-founding Freedom Financial Funds, Michael built a niche in real estate finance.
- Focus on Skills: Early career success comes from prioritizing skill-building over salary.
- Networking Wins: Strong connections helped Michael raise $14 million in just one hour.
- Solve Real Problems: Understanding tools like leverage buyouts leads to smarter decisions.
- Entrepreneurial Advice: Monitor cash flow, set high standards, and overdeliver for customers.
- Smart Growth: Use external resources wisely to fuel sustainable growth.
Catch this episode of The Visionaries Show for Michael’s story and advice you can put into action today!
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Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
(00:16):
Welcome to the visionary show.
I'm your host, Jen Crow.
I am Mohan Ananda.
And we have here today, Mr.
Michael Klein, founder and CEO of Freedom Financial Funds.
Michael, could you introduce yourself, please?
Sure.
Thank you, Jen.
My name is Michael Klein.
(00:36):
As was stated, co-founded Freedom Financial Funds almost nine years ago.
private equity fund manager for 16 years.
We've funded nearly $4 billion of real estate secured loans in that timeframe.
And we've been a pretty consistent provider of returns to our investors, very consistentprovider of approximately eight and a half percent per year in that 16 year.
(01:11):
timeframe.
So that's what we do and that's how we've done.
Okay, let me kind of give you what we are trying to accomplish today.
You know, we talked to obviously very successful entrepreneurs, visionaries, and obviouslyyou are one of them.
(01:32):
Now for our audience, they are interested to know how you started or how you created this
successful enterprise and what the process you one goes through to accomplish such apossible success.
So give a kind of a start from the early stage.
(01:54):
What made you to think and, you know, accomplish this and what process you did and howwould you advise our audience?
Sure.
Happy to do that.
So by way of background, I started as a commercial banker
in the early 1980s when commercial bankers at many of the banks had professional trainingand I was blessed to experience that.
(02:24):
Back in the 1980s, small and mid-sized businesses would consider their banker as one oftheir top three advisors and
And that was really the lure for me to go into it after graduating from college.
(02:44):
Learned a lot, did a lot, had an amazing first 15 years of my career, and then was on thewrong side of a merger and decided that it was time to be an entrepreneur and went out and
did a leveraged buyout of an automotive parts distribution company.
I'm a car nut, and so it made sense even though I was in financial services.
(03:08):
Ran that for five years, increased its revenue fivefold in those five years.
Ran it.
Unfortunately, my wife had a terminal illness and needed to go back home, which was inCalifornia.
So we sold the company, came back to California.
I sold the company for enough to take time off, but not all the time off.
(03:31):
So I needed to go back to work and I went back into banking.
And what had transpired in
that time I was away was that the banks had stopped training years prior.
There were many, roll-ups and mergers.
And instead of being a top three provider of advice to businesses, we had fallen as aprofession to number 19.
(04:01):
So people would be more likely to go to their drywall contractor for advice than the bank.
And I said to myself, well, this is an opportunity.
And started to look at how to put together a private fund to replace the banks,specifically in real estate finance.
(04:24):
And specifically in the value added segment of real estate finance, which would includetaking the existing buildings that are underperforming and repositioning them.
or building brand new buildings from the ground up.
Before you go further, want to just get a little clear picture.
Okay.
(04:45):
You made a decision to go into real estate.
Yes.
You said you were going to put a private fund together.
What made you to go to that?
Good question.
going back in time, which I didn't fill in this part of the equation.
So in that 15 years that I was a banker, approximately seven of those years were in thereal estate finance arena.
(05:14):
So I had a deep understanding of real estate finance already.
I liked it.
I liked the client base.
When you get to work with real estate developers,
you get to work with creative, positive energy people that are always thinking out of thebox about how to make something terrific that isn't terrific, right?
(05:44):
And my experience in automotive parts, by the way, was just the opposite.
So I wanted to surround myself with people that were engaging and interesting and
and optimistic about the future.
So I had the background and when I came back to the Los Angeles area, I went back intoreal estate finance at the banks.
(06:11):
And I spent a few years there when I just realized that the system was completely brokenfrom a customer perspective.
And so that's what triggered the thought of saying, there's a pain here, how can I?
How can I solve for that pain?
And the pain was incredibly slow decision-making processes because internally within thebanks where there hadn't been consistent training and a consistent set of definitions,
(06:48):
people would talk past each other.
It was as if you were in a country where there was a thousand different dialects.
It's very difficult to get one thing done if everybody isn't fully understanding of whatthe definition of a particular word is.
And that was happening at the banks.
And so that was in the mid-2000, call it mid 2005 or so, 2006.
(07:14):
And then, so I started shopping the idea of the family offices that I knew that had quitea bit of capital.
if roll back the clock to 2006 and seven, it was a pretty frothy time in lending.
the interesting going head to head with banks that were making loans that were ill-advisedwas low.
(07:42):
Roll forward a little bit more, 2008, things get really scary.
the bank start pulling back and one of the family offices that I had contacted as earlyas, call it 2006, now had an interest.
And so started really developing the business plan in earnest in mid 2008, was sittingthere finalizing the business plan with my co-founder of
(08:16):
Fund one when he said, wouldn't it be interesting if you ended up getting a package toleave your firm?
And the next day my administrative assistant called me in tears saying I was being let go.
And I secretly was saying to myself, yes, this is great.
I left in August of 2008.
(08:41):
Lehman Brothers shortly thereafter went bankrupt and a week after that we had our first
capital raising meeting and we raised $14 million an hour meeting in a conference room ofan investment firm that's still one of our largest investors.
you know, we're sort of off to the races.
(09:03):
We launched the first fund January 1st of 2009 and had a really good run with that officeand
you know, built a successful business there.
Did you decide on whether you were going to have commercial real estate or residentialreal estate or how was the mix of?
(09:30):
Yeah, good, good, good, great question.
So as a private fund, we can be opportunistic, but we also have to have guardrails.
And the guardrails for me are
no consumer loans.
Okay.
I just won't get involved with consumers.
(09:51):
So business to business is one thing, but business to consumer is a whole different thing.
so we, we, we've never made consumer loans.
won't make consumer loans.
So they're only business loans.
Now, if you, if you go back to the timeline of when we started and call it 2010, 11, 12,13,
(10:16):
there was all these foreclosed homes.
And there were a lot of professional operators that were buying those homes.
And we created a novel product at the time, and I almost cringe when I use the wordproduct, because it's really a loan.
It's not really a product per se.
(10:38):
where we created commercial lines of credit,
for these operators that were buying anywhere from our smallest operators were buying 50homes a year and our largest were buying 2000 homes a year.
And we fully automated a system so that we were processing about 500 homes a year with onefull-time equivalent employee.
(11:07):
And that was a great run.
margins started to collapse as is always the case when there's no liquidity in the market,there's big margins and when there's a lot of liquidity in excuse me, in the market,
margins contract.
And so around the end of 2015, we started exiting that business.
(11:34):
Accidential, no commercial.
Well, that was probably half the business.
The other half of the business was commercial.
Cause it was, there was just no liquidity, massive amounts of liquidity, let's just say.
So our first deal we did in 2009 was a project in San Bernardino, California.
(12:03):
It was pre-leased to the County of San Bernardino.
The County of San Bernardino at the time was a AAA credit.
I haven't looked recently, but it's one of the stronger counties in the state ofCalifornia.
They were the tenant for 100 % of the building.
The developer was half finished with the building.
(12:24):
It was a $10 million project.
They had 5 million of their own cash in the deal.
Their 22 year bank relationship wouldn't close on the deal.
they referred to us, we closed on it, we did a 50 % of cost loan, they got their buildingcomplete, got the tenant in, and we were off to the races because now we, it's, the first
(12:48):
snowflake is the hardest one to get, right?
And then you get a handful of snowflakes and then hopefully you get a snowball ofsnowflakes.
And so, here, you know, and that's.
now 16 years later, you $3.8 billion of deals.
(13:09):
So, but the first deal was $5 million and the first bit of capital was 13 million.
And we currently, we've decided to stay a boutique firm and we currently manageapproximately $135 million of equity capital.
And, you know, it keeps us under the,
(13:34):
under the reporting layers that you get into with the SEC.
that's a personal choice of my partners and I.
So.
I'll break the ice a little bit, okay?
Cause those are great information.
Love to know everything that you did, you're doing and the vision.
(13:58):
I wanna know for the purpose of, for the sake of our younger audience,
who may be getting into college or right out of college and well, I'm gonna get a job in abank and then someday I'll do something that Michael is now doing.
When you transition from working in corporate into entrepreneurship, can you give us threethings that you would have done better?
(14:26):
That you didn't know before.
You can give 10 if you like, but.
Yeah.
So I mean, I'll tell you that the parts I did right, the parts I did wrong.
know, if hindsight is 20-20, right?
One, what I did right, coming out of college, in the banking world, there were trainingprograms.
(14:49):
There's still a few training programs out there.
I targeted the top three in the country.
One didn't return my phone call.
One laughed.
and the other one hired me.
Okay, so, know, so that worked out.
And then later in my career, the one that laughed made me in charge of reporting on creditto the board of directors of the company, small bank called Chase.
(15:22):
you know, coming out of school, find the training program, go there, don't worry about themoney.
just get the training program, okay?
Your salary doesn't matter.
What matters is getting the training.
And if you can go to New York and get the training, go to New York and get the trainingbecause there's no place better than to learn finance than New York.
(15:47):
Well, you know, I mean, people in London might say in London, but the fact of the matteris that it's a world financial center.
You'll work your tail off.
you'll work double what your friends in California or in South Carolina or Florida areworking, you'll also get twice as much experience in half the time.
(16:09):
And then what I would tell you is, and this is the tough part because one of the thingsthat we all want in life is a significant other and relationships and relationships lead,
and relationships lead, especially when you're young, to children.
and children lead to mortgages and mortgages lead to overhead and overhead leads to adependence upon a paycheck.
(16:35):
So if I had to do it all over again, I would have probably left at five years of reallygood experience and started my entrepreneurial journey then.
But my corporate journey was going so well that it wasn't until the corporation was merged
with another corporation and I was on the losing end of that merger.
(17:03):
didn't lose my job, but what happened was that all of the, when you rise up to a uppermiddle level of corporate life, your next job is completely dependent upon the people that
you know and they know you and they trust you.
And when you go through a merger and there's a change of control,
(17:24):
provision in contracts, which there was, you lose a lot of those contacts.
And now you're competing against people that are known by the new leaders.
And so that was my signal.
It was time to go do what I had planned on doing anyway, but I've got caught up in all thepromotions.
(17:47):
How many years have you been in corporate at that point?
15.
15.
So you would do...
five years instead of, yeah, because, because when you, know, you get to 15, when you getto 15, you've got great experience and that's awesome.
But you also, in my case have, a couple of kids, a stay at home, spouse and, you know, alot of overhead.
(18:09):
So that, that makes that jump much scarier, than if you're say five years in and you'restill single.
And I mean, what, what are you going to lose your apartment?
Yeah.
I remember Mohand mentioning this to me a long time ago.
You mentioned this Mohand.
If there's one thing you would want to tell the young kids, young entrepreneurs is that doit early because you can make mistakes early and the consequences are easier to handle
(18:38):
than when you are like maybe 40s, 50s, right?
Yeah.
So that's number one is get the training.
Don't think about the money.
Maybe get the meaningful experience early on from corporate and then make the jump as soonas you think you have that meaningful experience.
And what's the third one?
Well, I would say that this is an odd thing, but when I finally stopped worrying aboutmoney, money was no longer a worry.
(19:12):
Okay.
And so if I used to teach high performance driving, okay.
And don't look at what you're afraid of.
Look at where you want to go.
If you're worried about money, you're afraid of money.
If you don't worry about money, then money won't be a worry and it'll flow.
(19:35):
If you're actually solving people's problems, whatever it is that you do and you're...
you're creating value for them for what it is that you're charging for, whether it's aservice or a product, it'll come.
Wow.
read that this morning.
No, no, but in real estate, if you want to be a lender, you need to have some more otherdeveloped the capital from, you know, other family offices or private equity.
(20:08):
So you need a kind of a network.
So how do you start as a young person, even with some experience?
How do you?
You have to partner with someone, in my opinion.
I partnered with somebody that when was, he's approximately 18 years older than I am,right?
(20:30):
So another generation older who had a fair amount of success under his belt, okay?
Had a nine figure net worth nine figure, IE,
over a hundred million dollar net worth from his, you know, self-made.
So really successful.
So he had...
(20:51):
you know, of the 13, I guess it was 13 million that we raised, he put up three and of the10, the other 10, know, seven and a half was from his folks and you know, two and a half
was from my folks, you know, so I couldn't have started on two and a half.
(21:13):
It's just not enough, right?
So you partner with somebody and if you're lucky,
You need a network of people and brains.
that's the one.
Only for real estate or other type of enterprises also you would do the same thing.
I would.
(21:34):
Yeah.
So in other words, know, if let's say I had a, I mean, so I went off and did auto parts.
I had no network.
I think that that was a mistake.
If I had had a network, I think I would have been able to call on
someone in that network with experience to help me do the due diligence.
(21:55):
Because I acquired a not so well performing division of a Fortune 500 company.
Because I know what you're saying.
This is a very important term.
You said you did a leverage buyout.
Yes.
(22:15):
That's first thing you said.
And leverage buyout is an interesting concept.
Maybe we want to, how that is, you know, it can be done or how it is.
Yeah, for my sake, what is a leverage buyout?
Yeah, okay.
So, so it's, it, it's a, it's sort of a Wall Street term, but, basically what it means isthat as the sponsor or the buyer or the owner, however you want to term it.
(22:48):
you're not putting in a lot of money and the rest of the money is coming from debt.
Okay.
And in my case, it was from a bank that put up 86 cents of every dollar and I put up 14cents of every dollar.
So we were our leverage going in day one was seven times debt to net worth, which ispretty
(23:18):
that you have to run really fast when that happens, okay?
And you, because you can't make a lot of mistakes.
And a lot of private equity companies in the, that typically, that are typically doingmergers and acquisition type of work tend to leverage companies up a lot because
(23:43):
management can't sit back and relax.
They have to work really hard.
My understanding of leverage buyout, I think it's a great thing to look at it.
Many times the companies are not performing very well.
They are in decline.
Yes.
You don't put your money at all, but there are certain assets which can be like, it canleverage that as security to go to the bank and say that, I'm going to take this company.
(24:16):
but we have this kind of assets.
Can you come up with a certain, you know, loan based on that?
And that loan is paid to the seller.
And then you don't really take any, any responsibility other than running the company andgetting it better.
Is that?
(24:37):
Yeah.
So I would say that in an ideal world, if you have a lot of track record, you take noresponsibility.
Okay.
in a more realistic, say, world that most of the people are going to run into that aregoing to listen to this and watch it.
(24:59):
They're going to probably have to sign personal guarantees to get money.
In to the assets of the...
In addition, and I know I had to.
So I pledged all the inventory and all the accounts receivable.
Okay.
And all the intangibles to the bank and in exchange for that, and and then put up for $14for every $86 they put up.
(25:27):
then, in exchange for that, I, you know, I had a revolving line in a term loan that Ineeded to, needed to run real fast to make sure that it worked.
and, and the company, the, entity that I bought was,
failing.
And that's why the Fortune 500 I was given.
(25:49):
What I didn't realize, and this is where having a network and expertise in an industrycomes in, is that I didn't know how failing it really was.
And the company that sold it to me, as much as you would like to think that every Fortune500 is going to have filled with honest people, wasn't.
And so I walked into a real mess.
(26:15):
that was way worse than I had anticipated.
instead of what I told my wife when we did it, honey, everything will be okay.
We'll be making money in six months.
It was 18 months.
Okay.
Turn around is kind of hard, isn't it?
Whenever you build a failing company or how do you really turn it around, make itprofitable?
(26:38):
Well, okay, so the first thing you have to worry about is top line, right?
Sales, okay?
If you don't have sales, everything else is academic.
So that's the first step.
Make sure that you have a program to attract customers and keep customers.
(26:59):
And then the next thing, and I find that a lot of people don't do this well, but is,
manage your cash and manage it daily.
Okay.
You have to know what your outflows are and you need to know what your outflows are everysingle day.
(27:19):
cannot, you cannot let your accountant, you send them off books and three months later ortwo months later, even three weeks later, get, get your results because, because if you're
trying to turn around something that's cashflow negative, you have to know
that you're making progress toward getting to cashflow breakeven and then to cashflowpositive and on.
(27:45):
So that's my experience and that's in dealing with small and mid-size companies.
Sometimes I scratch my head on some of the giant companies that are funded by venturecapital, because they'll run negative cashflow for eons, because they're trying to buy
market share.
(28:06):
But if you're personally signing on the bottom line for a debt, you need to figure outquickly how to make it so that you're not bleeding cash.
So top line first and then make sure that you are on top of your expenses.
And so that mentality sticks with us today.
(28:26):
We're extraordinarily profitable in our company today.
And I can tell you that no later than the seventh day after the month, our books areclosed.
we know exactly where we are.
we issue an audited financial statement and audited by a top six firm by the 15th ofFebruary.
(28:54):
knowing your numbers and keeping track of your numbers is critical to operating thecompany effectively, in my opinion.
So, I mean, before Jen brings up, I want to ask you kind of an interesting scenario,meaning somebody comes out of college and have some experience, but he does not know or he
(29:18):
or she does not know what business he should go into, but he want to be an entrepreneur.
Now, your experience is in real estate.
I mean, really real estate.
How would you or would you recommend how the person should look into real estate incomparison to some other like information technology, AI, digital technology?
(29:42):
How would you recommend based on your experience in real estate?
Well, I guess first and foremost, would say play to their strengths.
OK, so you have an engineering background, right?
And so I don't.
(30:03):
I have a finance background.
So my background in finance is where I still am working, right?
And so
Play to your strengths and play to your interests because you're going to spend a lot oftime doing it.
Whatever.
(30:23):
I don't know.
I don't know a single successful entrepreneur that didn't work a lot, especially in thefirst five years of the business.
Okay.
I mean, you know, they're 10 years in or 15 years in, you might be going, that guy plays alot of golf or that guy plays a lot of tennis or whatever the situation is.
But in that first five years, they worked a lot.
(30:48):
And so you need to play to what your strengths are and your interests are.
so if you...
I mean, that's another thing.
I'm gonna bounce around here a little bit, but we're talking about getting your firstjobs.
One of the best parts of your first jobs is finding out what you don't wanna do.
(31:11):
Okay?
I mean, I highly recommend trying to get in with a company that has training.
because you're gonna get valuable skills that you can take with you for the rest of yourlife.
you might end up in a distribution company.
Okay, I know of one that actually, my fiance's daughter, she actually listened to thatadvice and she got a job at a distribution company that has a train program.
(31:41):
And, you know, at the end of the day, I don't think she's all that excited about thedistribution company, but, know, after a couple of years, she's going to have a lot of
really good experience.
one of my daughters, got a, management training position at, whole foods and then decidedthat, when she was in the commissary section, which was like running, you know, all the
(32:03):
prepared food stuff.
that she just had no interest in managing a whole bunch of people dealing with food stuff.
So it's important that you get a training program, but it's also important to know that itisn't necessarily gonna be forever.
One, two, finding out what you don't wanna do at 23 or 24 or 25 is just as important asfinding out what you do wanna do.
(32:31):
And so I...
I would say one of the great gateways into real estate is through one of the commercialreal estate brokerage firms, like a CBRE, is one of the largest, or Collier's, which is
also quite large.
(32:51):
They'll put you, most likely they'll put you on a draw, which means that you have to payit back through your commission earnings.
They may put you on a small salary.
but you're gonna learn the business from the ground up.
And you're gonna learn if you like it or not, okay?
And if you do, because it's a mission oriented type of business, you're gonna be preparingyourself mentally to be an entrepreneur because you'll get used to income insecurity and
(33:26):
how to live with that.
And, you know, take of what you said, I just want to summarize it in a sense.
If you want to become an entrepreneur, if you want to go into and select a specific space,that industry, whatever you want to do, you should like it very much and you should
(33:48):
devote.
Is that a kind of a message?
Yeah, I would say that.
I would say that's good.
I'm also going to steal something that I heard from Mike Rowe on the big
fan of micro because he will focus on jobs that are not as glamorous as some.
And he pointed out a long time ago that a guy who decides to create a business in cleaningseptic tanks, okay, isn't necessarily going to be passionate about cleaning septic tanks
(34:24):
when he starts.
in his first job with cleaning septic tanks.
However, the passion comes from getting really, really good at it and then perfecting itand then becoming excellent as a customer, from a customer service standpoint, and then
from an efficiency standpoint and keeping your employees happy.
And there's all these other challenges at being the best at septic tank cleaning.
(34:50):
And so a lot of times,
You hear this line, especially for the young people, follow your passion.
Well, when you're 22, you may not really have a passion.
Okay.
So your passion will come from becoming excellent at something, but it's hard to becomeexcellent at something if you don't have a natural affinity for it.
(35:13):
So I will never be excellent at calculus.
I just not, that was something I had to get through to get my...
various degrees, but other people I knew just loved it, right?
(35:33):
I was fortunate in that I found fairly early on in college that finance and all of thesort of projections and pro formas and cash flows and all that stuff made sense and it was
easy.
And so that's what
That's what caused me to kind of go in that direction.
(35:56):
I can just, we are getting kind of time here.
So we knew like a conclusion.
If you want to give an advice, what says three things an entrepreneur should have?
Kind of of summarize in that fashion.
Okay.
These are the three things you should have to become a successful entrepreneur.
(36:18):
important ingredients to become a successful entrepreneur.
Sure.
Yeah, first of all, high standards, OK, of yourself and your team.
because because I mean, it's a simple rule.
(36:41):
And a lot of people and lot of companies do not follow this.
Do what you say you're going to do.
Do it when you say you're going to do it and do it for the price you say you're going todo it for.
OK.
And people don't do all three of those things consistently, but you have to have thosestandards and you have to have those.
And that has to run through your organization.
And if you have yourself personally very high standards, that's gonna permeate yourorganization and that's how you're gonna be successful.
(37:16):
So that's one.
So high standards are critical.
strong work ethic, okay?
And that sort of comes with high standards on the one hand, but you can have highstandards and be lazy, you know, and not want to work.
So you have to work.
And then a commitment to giving your client or customer more than they expected.
(37:44):
Overdeliver.
Yeah, overdeliver.
Yeah, I mean, if people have an expectation for if you're in the restaurant business andyou serve steak and, you know, they have an expectation in their mind of what a $50 steak
(38:06):
should cost, make it so that they think that they just got a great deal.
You know, whatever, whatever, you know, make it so that they feel like they got a $60steak.
mean, if you, if you,
If you're a cool service, I can show a young person how to make a quarter million dollarsa year servicing pools.
Okay.
You know, but have your crew be there when they say they're gonna be there.
(38:31):
Have them do exactly what it is that they say they do.
Make certain that the customer's never having to call to follow up on stuff that isn'tdone.
Charge a fair price.
You know, I mean, it's just, it's...
You have to do the same thing over and over and over again.
Let me summarize what you just said.
(38:53):
Correct me if I'm wrong.
So to be a successful entrepreneur, you need to have a high standard or your integrity.
You have to work very hard.
Then the work ethics has to be there so that your performance is based on you becoming anexample.
(39:14):
Third,
you make your customers extremely happy.
That's it.
I'm sure the people who listen to those who want to become an entrepreneur, successfulentrepreneur, I'm sure they will make this and try their luck.
(39:37):
I learned a lot today, but there's one takeaway for me.
So out of everything that you said,
We're gonna summarize this, we're gonna see everything and I'm gonna reread, rewatch thisbecause really, gosh, nuggets of wisdom.
Find out what you don't want to do.
I never really thought about it because you can only get it from experience and it's allabout, hey, know your passion, know what you're passionate at, know what you're good at,
(40:03):
lay to your strengths, but you have to also know what you don't want to do because whatyou don't want to do, what you're not good at, if you keep doing it, it brings you down
and then you forget about
your passion, you forget about the good stuff, you become negative, right?
That I guess is my favorite takeaway out of all of this.
Well, thank you so much, Michael.
(40:26):
Thank you, Mohan.
Thank you for joining us today.
So we're at the last bit of our interview of our podcast episode today.
This is our first virtual episode.
We'll see you again in the next episode.
My name is Jen Crow.
My name is Mohan Anand.
(40:46):
Thanks again.
Yes.
And this is The Visionary Show.
We'll see you again in the next episode.
Bye.
Thank you.
Welcome to the visionary show.
I'm your host, Jen Crow.
I am Mohan Ananda.
And we have here today, Mr.
Michael Klein, founder and CEO of Freedom Financial Funds.
Michael, could you introduce yourself, please?
Sure.
Thank you, Jen.
My name is Michael Klein.
(00:36):
As was stated, co-founded Freedom Financial Funds almost nine years ago.
private equity fund manager for 16 years.
We've funded nearly $4 billion of real estate secured loans in that timeframe.
And we've been a pretty consistent provider of returns to our investors, very consistentprovider of approximately eight and a half percent per year in that 16 year.
(01:11):
timeframe.
So that's what we do and that's how we've done.
Okay, let me kind of give you what we are trying to accomplish today.
You know, we talked to obviously very successful entrepreneurs, visionaries, and obviouslyyou are one of them.
(01:32):
Now for our audience, they are interested to know how you started or how you created this
successful enterprise and what the process you one goes through to accomplish such apossible success.
So give a kind of a start from the early stage.
(01:54):
What made you to think and, you know, accomplish this and what process you did and howwould you advise our audience?
Sure.
Happy to do that.
So by way of background, I started as a commercial banker
in the early 1980s when commercial bankers at many of the banks had professional trainingand I was blessed to experience that.
(02:24):
Back in the 1980s, small and mid-sized businesses would consider their banker as one oftheir top three advisors and
And that was really the lure for me to go into it after graduating from college.
(02:44):
Learned a lot, did a lot, had an amazing first 15 years of my career, and then was on thewrong side of a merger and decided that it was time to be an entrepreneur and went out and
did a leveraged buyout of an automotive parts distribution company.
I'm a car nut, and so it made sense even though I was in financial services.
(03:08):
Ran that for five years, increased its revenue fivefold in those five years.
Ran it.
Unfortunately, my wife had a terminal illness and needed to go back home, which was inCalifornia.
So we sold the company, came back to California.
I sold the company for enough to take time off, but not all the time off.
(03:31):
So I needed to go back to work and I went back into banking.
And what had transpired in
that time I was away was that the banks had stopped training years prior.
There were many, roll-ups and mergers.
And instead of being a top three provider of advice to businesses, we had fallen as aprofession to number 19.
(04:01):
So people would be more likely to go to their drywall contractor for advice than the bank.
And I said to myself, well, this is an opportunity.
And started to look at how to put together a private fund to replace the banks,specifically in real estate finance.
(04:24):
And specifically in the value added segment of real estate finance, which would includetaking the existing buildings that are underperforming and repositioning them.
or building brand new buildings from the ground up.
Before you go further, want to just get a little clear picture.
Okay.
(04:45):
You made a decision to go into real estate.
Yes.
You said you were going to put a private fund together.
What made you to go to that?
Good question.
going back in time, which I didn't fill in this part of the equation.
So in that 15 years that I was a banker, approximately seven of those years were in thereal estate finance arena.
(05:14):
So I had a deep understanding of real estate finance already.
I liked it.
I liked the client base.
When you get to work with real estate developers,
you get to work with creative, positive energy people that are always thinking out of thebox about how to make something terrific that isn't terrific, right?
(05:44):
And my experience in automotive parts, by the way, was just the opposite.
So I wanted to surround myself with people that were engaging and interesting and
and optimistic about the future.
So I had the background and when I came back to the Los Angeles area, I went back intoreal estate finance at the banks.
(06:11):
And I spent a few years there when I just realized that the system was completely brokenfrom a customer perspective.
And so that's what triggered the thought of saying, there's a pain here, how can I?
How can I solve for that pain?
And the pain was incredibly slow decision-making processes because internally within thebanks where there hadn't been consistent training and a consistent set of definitions,
(06:48):
people would talk past each other.
It was as if you were in a country where there was a thousand different dialects.
It's very difficult to get one thing done if everybody isn't fully understanding of whatthe definition of a particular word is.
And that was happening at the banks.
And so that was in the mid-2000, call it mid 2005 or so, 2006.
(07:14):
And then, so I started shopping the idea of the family offices that I knew that had quitea bit of capital.
if roll back the clock to 2006 and seven, it was a pretty frothy time in lending.
the interesting going head to head with banks that were making loans that were ill-advisedwas low.
(07:42):
Roll forward a little bit more, 2008, things get really scary.
the bank start pulling back and one of the family offices that I had contacted as earlyas, call it 2006, now had an interest.
And so started really developing the business plan in earnest in mid 2008, was sittingthere finalizing the business plan with my co-founder of
(08:16):
Fund one when he said, wouldn't it be interesting if you ended up getting a package toleave your firm?
And the next day my administrative assistant called me in tears saying I was being let go.
And I secretly was saying to myself, yes, this is great.
I left in August of 2008.
(08:41):
Lehman Brothers shortly thereafter went bankrupt and a week after that we had our first
capital raising meeting and we raised $14 million an hour meeting in a conference room ofan investment firm that's still one of our largest investors.
you know, we're sort of off to the races.
(09:03):
We launched the first fund January 1st of 2009 and had a really good run with that officeand
you know, built a successful business there.
Did you decide on whether you were going to have commercial real estate or residentialreal estate or how was the mix of?
(09:30):
Yeah, good, good, good, great question.
So as a private fund, we can be opportunistic, but we also have to have guardrails.
And the guardrails for me are
no consumer loans.
Okay.
I just won't get involved with consumers.
(09:51):
So business to business is one thing, but business to consumer is a whole different thing.
so we, we, we've never made consumer loans.
won't make consumer loans.
So they're only business loans.
Now, if you, if you go back to the timeline of when we started and call it 2010, 11, 12,13,
(10:16):
there was all these foreclosed homes.
And there were a lot of professional operators that were buying those homes.
And we created a novel product at the time, and I almost cringe when I use the wordproduct, because it's really a loan.
It's not really a product per se.
(10:38):
where we created commercial lines of credit,
for these operators that were buying anywhere from our smallest operators were buying 50homes a year and our largest were buying 2000 homes a year.
And we fully automated a system so that we were processing about 500 homes a year with onefull-time equivalent employee.
(11:07):
And that was a great run.
margins started to collapse as is always the case when there's no liquidity in the market,there's big margins and when there's a lot of liquidity in excuse me, in the market,
margins contract.
And so around the end of 2015, we started exiting that business.
(11:34):
Accidential, no commercial.
Well, that was probably half the business.
The other half of the business was commercial.
Cause it was, there was just no liquidity, massive amounts of liquidity, let's just say.
So our first deal we did in 2009 was a project in San Bernardino, California.
(12:03):
It was pre-leased to the County of San Bernardino.
The County of San Bernardino at the time was a AAA credit.
I haven't looked recently, but it's one of the stronger counties in the state ofCalifornia.
They were the tenant for 100 % of the building.
The developer was half finished with the building.
(12:24):
It was a $10 million project.
They had 5 million of their own cash in the deal.
Their 22 year bank relationship wouldn't close on the deal.
they referred to us, we closed on it, we did a 50 % of cost loan, they got their buildingcomplete, got the tenant in, and we were off to the races because now we, it's, the first
(12:48):
snowflake is the hardest one to get, right?
And then you get a handful of snowflakes and then hopefully you get a snowball ofsnowflakes.
And so, here, you know, and that's.
now 16 years later, you $3.8 billion of deals.
(13:09):
So, but the first deal was $5 million and the first bit of capital was 13 million.
And we currently, we've decided to stay a boutique firm and we currently manageapproximately $135 million of equity capital.
And, you know, it keeps us under the,
(13:34):
under the reporting layers that you get into with the SEC.
that's a personal choice of my partners and I.
So.
I'll break the ice a little bit, okay?
Cause those are great information.
Love to know everything that you did, you're doing and the vision.
(13:58):
I wanna know for the purpose of, for the sake of our younger audience,
who may be getting into college or right out of college and well, I'm gonna get a job in abank and then someday I'll do something that Michael is now doing.
When you transition from working in corporate into entrepreneurship, can you give us threethings that you would have done better?
(14:26):
That you didn't know before.
You can give 10 if you like, but.
Yeah.
So I mean, I'll tell you that the parts I did right, the parts I did wrong.
know, if hindsight is 20-20, right?
One, what I did right, coming out of college, in the banking world, there were trainingprograms.
(14:49):
There's still a few training programs out there.
I targeted the top three in the country.
One didn't return my phone call.
One laughed.
and the other one hired me.
Okay, so, know, so that worked out.
And then later in my career, the one that laughed made me in charge of reporting on creditto the board of directors of the company, small bank called Chase.
(15:22):
you know, coming out of school, find the training program, go there, don't worry about themoney.
just get the training program, okay?
Your salary doesn't matter.
What matters is getting the training.
And if you can go to New York and get the training, go to New York and get the trainingbecause there's no place better than to learn finance than New York.
(15:47):
Well, you know, I mean, people in London might say in London, but the fact of the matteris that it's a world financial center.
You'll work your tail off.
you'll work double what your friends in California or in South Carolina or Florida areworking, you'll also get twice as much experience in half the time.
(16:09):
And then what I would tell you is, and this is the tough part because one of the thingsthat we all want in life is a significant other and relationships and relationships lead,
and relationships lead, especially when you're young, to children.
and children lead to mortgages and mortgages lead to overhead and overhead leads to adependence upon a paycheck.
(16:35):
So if I had to do it all over again, I would have probably left at five years of reallygood experience and started my entrepreneurial journey then.
But my corporate journey was going so well that it wasn't until the corporation was merged
with another corporation and I was on the losing end of that merger.
(17:03):
didn't lose my job, but what happened was that all of the, when you rise up to a uppermiddle level of corporate life, your next job is completely dependent upon the people that
you know and they know you and they trust you.
And when you go through a merger and there's a change of control,
(17:24):
provision in contracts, which there was, you lose a lot of those contacts.
And now you're competing against people that are known by the new leaders.
And so that was my signal.
It was time to go do what I had planned on doing anyway, but I've got caught up in all thepromotions.
(17:47):
How many years have you been in corporate at that point?
15.
15.
So you would do...
five years instead of, yeah, because, because when you, know, you get to 15, when you getto 15, you've got great experience and that's awesome.
But you also, in my case have, a couple of kids, a stay at home, spouse and, you know, alot of overhead.
(18:09):
So that, that makes that jump much scarier, than if you're say five years in and you'restill single.
And I mean, what, what are you going to lose your apartment?
Yeah.
I remember Mohand mentioning this to me a long time ago.
You mentioned this Mohand.
If there's one thing you would want to tell the young kids, young entrepreneurs is that doit early because you can make mistakes early and the consequences are easier to handle
(18:38):
than when you are like maybe 40s, 50s, right?
Yeah.
So that's number one is get the training.
Don't think about the money.
Maybe get the meaningful experience early on from corporate and then make the jump as soonas you think you have that meaningful experience.
And what's the third one?
Well, I would say that this is an odd thing, but when I finally stopped worrying aboutmoney, money was no longer a worry.
(19:12):
Okay.
And so if I used to teach high performance driving, okay.
And don't look at what you're afraid of.
Look at where you want to go.
If you're worried about money, you're afraid of money.
If you don't worry about money, then money won't be a worry and it'll flow.
(19:35):
If you're actually solving people's problems, whatever it is that you do and you're...
you're creating value for them for what it is that you're charging for, whether it's aservice or a product, it'll come.
Wow.
read that this morning.
No, no, but in real estate, if you want to be a lender, you need to have some more otherdeveloped the capital from, you know, other family offices or private equity.
(20:08):
So you need a kind of a network.
So how do you start as a young person, even with some experience?
How do you?
You have to partner with someone, in my opinion.
I partnered with somebody that when was, he's approximately 18 years older than I am,right?
(20:30):
So another generation older who had a fair amount of success under his belt, okay?
Had a nine figure net worth nine figure, IE,
over a hundred million dollar net worth from his, you know, self-made.
So really successful.
So he had...
(20:51):
you know, of the 13, I guess it was 13 million that we raised, he put up three and of the10, the other 10, know, seven and a half was from his folks and you know, two and a half
was from my folks, you know, so I couldn't have started on two and a half.
(21:13):
It's just not enough, right?
So you partner with somebody and if you're lucky,
You need a network of people and brains.
that's the one.
Only for real estate or other type of enterprises also you would do the same thing.
I would.
(21:34):
Yeah.
So in other words, know, if let's say I had a, I mean, so I went off and did auto parts.
I had no network.
I think that that was a mistake.
If I had had a network, I think I would have been able to call on
someone in that network with experience to help me do the due diligence.
(21:55):
Because I acquired a not so well performing division of a Fortune 500 company.
Because I know what you're saying.
This is a very important term.
You said you did a leverage buyout.
Yes.
(22:15):
That's first thing you said.
And leverage buyout is an interesting concept.
Maybe we want to, how that is, you know, it can be done or how it is.
Yeah, for my sake, what is a leverage buyout?
Yeah, okay.
So, so it's, it, it's a, it's sort of a Wall Street term, but, basically what it means isthat as the sponsor or the buyer or the owner, however you want to term it.
(22:48):
you're not putting in a lot of money and the rest of the money is coming from debt.
Okay.
And in my case, it was from a bank that put up 86 cents of every dollar and I put up 14cents of every dollar.
So we were our leverage going in day one was seven times debt to net worth, which ispretty
(23:18):
that you have to run really fast when that happens, okay?
And you, because you can't make a lot of mistakes.
And a lot of private equity companies in the, that typically, that are typically doingmergers and acquisition type of work tend to leverage companies up a lot because
(23:43):
management can't sit back and relax.
They have to work really hard.
My understanding of leverage buyout, I think it's a great thing to look at it.
Many times the companies are not performing very well.
They are in decline.
Yes.
You don't put your money at all, but there are certain assets which can be like, it canleverage that as security to go to the bank and say that, I'm going to take this company.
(24:16):
but we have this kind of assets.
Can you come up with a certain, you know, loan based on that?
And that loan is paid to the seller.
And then you don't really take any, any responsibility other than running the company andgetting it better.
Is that?
(24:37):
Yeah.
So I would say that in an ideal world, if you have a lot of track record, you take noresponsibility.
Okay.
in a more realistic, say, world that most of the people are going to run into that aregoing to listen to this and watch it.
(24:59):
They're going to probably have to sign personal guarantees to get money.
In to the assets of the...
In addition, and I know I had to.
So I pledged all the inventory and all the accounts receivable.
Okay.
And all the intangibles to the bank and in exchange for that, and and then put up for $14for every $86 they put up.
(25:27):
then, in exchange for that, I, you know, I had a revolving line in a term loan that Ineeded to, needed to run real fast to make sure that it worked.
and, and the company, the, entity that I bought was,
failing.
And that's why the Fortune 500 I was given.
(25:49):
What I didn't realize, and this is where having a network and expertise in an industrycomes in, is that I didn't know how failing it really was.
And the company that sold it to me, as much as you would like to think that every Fortune500 is going to have filled with honest people, wasn't.
And so I walked into a real mess.
(26:15):
that was way worse than I had anticipated.
instead of what I told my wife when we did it, honey, everything will be okay.
We'll be making money in six months.
It was 18 months.
Okay.
Turn around is kind of hard, isn't it?
Whenever you build a failing company or how do you really turn it around, make itprofitable?
(26:38):
Well, okay, so the first thing you have to worry about is top line, right?
Sales, okay?
If you don't have sales, everything else is academic.
So that's the first step.
Make sure that you have a program to attract customers and keep customers.
(26:59):
And then the next thing, and I find that a lot of people don't do this well, but is,
manage your cash and manage it daily.
Okay.
You have to know what your outflows are and you need to know what your outflows are everysingle day.
(27:19):
cannot, you cannot let your accountant, you send them off books and three months later ortwo months later, even three weeks later, get, get your results because, because if you're
trying to turn around something that's cashflow negative, you have to know
that you're making progress toward getting to cashflow breakeven and then to cashflowpositive and on.
(27:45):
So that's my experience and that's in dealing with small and mid-size companies.
Sometimes I scratch my head on some of the giant companies that are funded by venturecapital, because they'll run negative cashflow for eons, because they're trying to buy
market share.
(28:06):
But if you're personally signing on the bottom line for a debt, you need to figure outquickly how to make it so that you're not bleeding cash.
So top line first and then make sure that you are on top of your expenses.
And so that mentality sticks with us today.
(28:26):
We're extraordinarily profitable in our company today.
And I can tell you that no later than the seventh day after the month, our books areclosed.
we know exactly where we are.
we issue an audited financial statement and audited by a top six firm by the 15th ofFebruary.
(28:54):
knowing your numbers and keeping track of your numbers is critical to operating thecompany effectively, in my opinion.
So, I mean, before Jen brings up, I want to ask you kind of an interesting scenario,meaning somebody comes out of college and have some experience, but he does not know or he
(29:18):
or she does not know what business he should go into, but he want to be an entrepreneur.
Now, your experience is in real estate.
I mean, really real estate.
How would you or would you recommend how the person should look into real estate incomparison to some other like information technology, AI, digital technology?
(29:42):
How would you recommend based on your experience in real estate?
Well, I guess first and foremost, would say play to their strengths.
OK, so you have an engineering background, right?
And so I don't.
(30:03):
I have a finance background.
So my background in finance is where I still am working, right?
And so
Play to your strengths and play to your interests because you're going to spend a lot oftime doing it.
Whatever.
(30:23):
I don't know.
I don't know a single successful entrepreneur that didn't work a lot, especially in thefirst five years of the business.
Okay.
I mean, you know, they're 10 years in or 15 years in, you might be going, that guy plays alot of golf or that guy plays a lot of tennis or whatever the situation is.
But in that first five years, they worked a lot.
(30:48):
And so you need to play to what your strengths are and your interests are.
so if you...
I mean, that's another thing.
I'm gonna bounce around here a little bit, but we're talking about getting your firstjobs.
One of the best parts of your first jobs is finding out what you don't wanna do.
(31:11):
Okay?
I mean, I highly recommend trying to get in with a company that has training.
because you're gonna get valuable skills that you can take with you for the rest of yourlife.
you might end up in a distribution company.
Okay, I know of one that actually, my fiance's daughter, she actually listened to thatadvice and she got a job at a distribution company that has a train program.
(31:41):
And, you know, at the end of the day, I don't think she's all that excited about thedistribution company, but, know, after a couple of years, she's going to have a lot of
really good experience.
one of my daughters, got a, management training position at, whole foods and then decidedthat, when she was in the commissary section, which was like running, you know, all the
(32:03):
prepared food stuff.
that she just had no interest in managing a whole bunch of people dealing with food stuff.
So it's important that you get a training program, but it's also important to know that itisn't necessarily gonna be forever.
One, two, finding out what you don't wanna do at 23 or 24 or 25 is just as important asfinding out what you do wanna do.
(32:31):
And so I...
I would say one of the great gateways into real estate is through one of the commercialreal estate brokerage firms, like a CBRE, is one of the largest, or Collier's, which is
also quite large.
(32:51):
They'll put you, most likely they'll put you on a draw, which means that you have to payit back through your commission earnings.
They may put you on a small salary.
but you're gonna learn the business from the ground up.
And you're gonna learn if you like it or not, okay?
And if you do, because it's a mission oriented type of business, you're gonna be preparingyourself mentally to be an entrepreneur because you'll get used to income insecurity and
(33:26):
how to live with that.
And, you know, take of what you said, I just want to summarize it in a sense.
If you want to become an entrepreneur, if you want to go into and select a specific space,that industry, whatever you want to do, you should like it very much and you should
(33:48):
devote.
Is that a kind of a message?
Yeah, I would say that.
I would say that's good.
I'm also going to steal something that I heard from Mike Rowe on the big
fan of micro because he will focus on jobs that are not as glamorous as some.
And he pointed out a long time ago that a guy who decides to create a business in cleaningseptic tanks, okay, isn't necessarily going to be passionate about cleaning septic tanks
(34:24):
when he starts.
in his first job with cleaning septic tanks.
However, the passion comes from getting really, really good at it and then perfecting itand then becoming excellent as a customer, from a customer service standpoint, and then
from an efficiency standpoint and keeping your employees happy.
And there's all these other challenges at being the best at septic tank cleaning.
(34:50):
And so a lot of times,
You hear this line, especially for the young people, follow your passion.
Well, when you're 22, you may not really have a passion.
Okay.
So your passion will come from becoming excellent at something, but it's hard to becomeexcellent at something if you don't have a natural affinity for it.
(35:13):
So I will never be excellent at calculus.
I just not, that was something I had to get through to get my...
various degrees, but other people I knew just loved it, right?
(35:33):
I was fortunate in that I found fairly early on in college that finance and all of thesort of projections and pro formas and cash flows and all that stuff made sense and it was
easy.
And so that's what
That's what caused me to kind of go in that direction.
(35:56):
I can just, we are getting kind of time here.
So we knew like a conclusion.
If you want to give an advice, what says three things an entrepreneur should have?
Kind of of summarize in that fashion.
Okay.
These are the three things you should have to become a successful entrepreneur.
(36:18):
important ingredients to become a successful entrepreneur.
Sure.
Yeah, first of all, high standards, OK, of yourself and your team.
because because I mean, it's a simple rule.
(36:41):
And a lot of people and lot of companies do not follow this.
Do what you say you're going to do.
Do it when you say you're going to do it and do it for the price you say you're going todo it for.
OK.
And people don't do all three of those things consistently, but you have to have thosestandards and you have to have those.
And that has to run through your organization.
And if you have yourself personally very high standards, that's gonna permeate yourorganization and that's how you're gonna be successful.
(37:16):
So that's one.
So high standards are critical.
strong work ethic, okay?
And that sort of comes with high standards on the one hand, but you can have highstandards and be lazy, you know, and not want to work.
So you have to work.
And then a commitment to giving your client or customer more than they expected.
(37:44):
Overdeliver.
Yeah, overdeliver.
Yeah, I mean, if people have an expectation for if you're in the restaurant business andyou serve steak and, you know, they have an expectation in their mind of what a $50 steak
(38:06):
should cost, make it so that they think that they just got a great deal.
You know, whatever, whatever, you know, make it so that they feel like they got a $60steak.
mean, if you, if you,
If you're a cool service, I can show a young person how to make a quarter million dollarsa year servicing pools.
Okay.
You know, but have your crew be there when they say they're gonna be there.
(38:31):
Have them do exactly what it is that they say they do.
Make certain that the customer's never having to call to follow up on stuff that isn'tdone.
Charge a fair price.
You know, I mean, it's just, it's...
You have to do the same thing over and over and over again.
Let me summarize what you just said.
(38:53):
Correct me if I'm wrong.
So to be a successful entrepreneur, you need to have a high standard or your integrity.
You have to work very hard.
Then the work ethics has to be there so that your performance is based on you becoming anexample.
(39:14):
Third,
you make your customers extremely happy.
That's it.
I'm sure the people who listen to those who want to become an entrepreneur, successfulentrepreneur, I'm sure they will make this and try their luck.
(39:37):
I learned a lot today, but there's one takeaway for me.
So out of everything that you said,
We're gonna summarize this, we're gonna see everything and I'm gonna reread, rewatch thisbecause really, gosh, nuggets of wisdom.
Find out what you don't want to do.
I never really thought about it because you can only get it from experience and it's allabout, hey, know your passion, know what you're passionate at, know what you're good at,
(40:03):
lay to your strengths, but you have to also know what you don't want to do because whatyou don't want to do, what you're not good at, if you keep doing it, it brings you down
and then you forget about
your passion, you forget about the good stuff, you become negative, right?
That I guess is my favorite takeaway out of all of this.
Well, thank you so much, Michael.
(40:26):
Thank you, Mohan.
Thank you for joining us today.
So we're at the last bit of our interview of our podcast episode today.
This is our first virtual episode.
We'll see you again in the next episode.
My name is Jen Crow.
My name is Mohan Anand.
(40:46):
Thanks again.
Yes.
And this is The Visionary Show.
We'll see you again in the next episode.
Bye.
Thank you.
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