JF2693: The Secret Strategy for Turning Motels into Profitable Long-Term Housing with Andrew LeBaron

Andrew LeBaron decided he needed to niche down his real estate strategy. That’s when he had the idea to convert motels into long-term stays. Varying slightly from an apartment, Andrew’s motel conversion strategy allows him to cut certain costs and hurdles that typically accompany multifamily properties. In this episode, Andrew walks through the benefits of long-term stays over apartments, the budget differences between motels and multifamily, and how he’s created his conversion strategy.

Andrew LeBaron | Real Estate Background

  • Syndicator, Apartment Motel Owner. His business model is reviewing small to midsize motel/hotel assets, underwriting the deal, purchasing, converting, and refinancing.
  • Portfolio: GP on motel assets: 42-unit, 13-unit, 22-unit, and an 18-unit.
  • Upcoming deal for a 129-unit Motel that he will convert to apartments.
  • Based in: Phoenix, AZ
  • Say hi to him at: buymoretime.com | Facebook and Twitter: @andrewinvestor
  • Best Ever Book: Raising Capital for Real Estate by Hunter Thompson

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JF2689: Scale from LP to GP with These 3 Tips with Joel Fine

Starting out as a Limited Partner, Joel Fine did everything he could to learn about multifamily syndication: he read books, listened to podcasts, and even asked to be part of a weekly GP meeting on one of his passive deals. In this episode, Joel discusses how he scaled from being a Limited Partner to a General Partner.

Joel Fine | Real Estate Background

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Ash Patel: Hello Best Ever listeners. Welcome to The Best Real Estate Investing Advice Ever Show. I’m Ash Patel and I’m with today’s guest, Joel Fine. Joel is joining us from Austin, Texas. He is a multifamily investor and syndicator that buys undervalued assets, improves them, and then sells them. Joel’s portfolio includes over 1000 doors as a GP and over 5000 doors as an LP. Joel, thank you so much for joining us today and how are you?

Joel Fine: I’m great, Ash. Thank you very much for having me.

Ash Patel: It’s our pleasure.

Joel Fine: Really appreciate getting to talk to you.

Ash Patel: Yeah. Joel, before we get started, can you give the Best Ever listeners a little bit more about your background and what you’re focused on now?

Joel Fine: Absolutely, yeah. I originally went to college to learn to be an engineer. I worked as an engineer for many years, then as a project manager, and a program manager. Back then I was living in California. I started doing real estate on the side, but only did real estate outside of California. I didn’t like the characteristics of the California market; no cash flow at all, we were just counting on the appreciation. As it turns out, in hindsight, the appreciation was great, but I didn’t want to take that risk on buying properties that didn’t cash flow.

But eventually, I came around to learning about other markets that do cash flow. I bought a single-family house in Texas, and then some duplexes and triplexes and other small stuff in Ohio. I learned about syndication and started getting involved with syndications, first as a limited partner in a passive capacity, and then later, as an active general partner or sponsor. About the time I was starting to invest more heavily in real estate and ready to make the transition from passive to active, my wife and I moved from California to Texas; we moved about a year and a half ago, right in the middle of COVID. That was a kind of an exciting story in itself. At the same time, I left my W2 job and decided to go full-time into real estate. And at that time, that’s when I decided I want to pursue the active side of syndications, the active side of large-scale commercial multifamily… And I haven’t looked back since.

Ash Patel: So you moved to Austin right when it was popping?

Joel Fine: Yeah. In fact, I think I beat the flood by about a month. We moved in May of 2020, and within a few months, things just went crazy here.

Ash Patel: So Joel, for all those years that you invested as an LP, what were some of the things that you learned that GPS do well and that they don’t do so well?

Joel Fine: Let’s see. Things that GPS do well – first off, when they’re putting together a transaction, the assumptions they make about the transaction are absolutely essential. They can make assumptions that really can affect the apparent quality and value of a deal. For example, one of the assumptions you make is how quickly rents might rise over a period of time. If you move that a little bit, let’s say from 2% per year to 4% or 5% per year, it doesn’t sound like a big difference, but that can make a huge difference in the apparent outcome of the deal. So you have to look carefully at what kind of assumptions the GPs are making.

Beyond that, I love to see GPs that are transparent, that share a lot of information about what’s going on, both before the deal is closed, then after the deal is closed, and while they’re operating the property. Sharing the good and the bad. When things go well, and when the plan is being executed properly, but also when things aren’t going so well.

Sometimes you might have higher delinquencies than you anticipated, it might be a little more challenging to get renovations done, and so forth. So when things aren’t going well, it’s important to share that with the passive investors. They’re really not in control of the investment; most of my passive investors are remote, they don’t live in the Austin area. Likewise, when I was a passive investor, I didn’t live near the properties I was investing in. So there was really no way for me to make any first-hand observations about the property, so I was dependent on the general partners sharing information about the property. For me, that was really critical, this transparency. And then just diligence, making sure that they’re paying attention to the other properties operating, focusing on the key metrics, managing the property manager effectively; just good, high-quality execution.

Ash Patel: What made you transition from being an LP to wanting to become a GP.

Joel Fine: So when I first became an LP, it was sort of with the intent of, “Okay, I’m going to learn about this enough that I can decide if I want to be a GP or not.” I was content buying the small stuff, the duplexes, triplexes, and quads. But I felt like scaling up might be a good way to go. And as I learned about syndications and about how to go about investing in commercial multifamily, I realized that being on the active side is a much more effective way of scaling up. It gives me an element of control that I don’t have as a passive investor, and I’m willing to put in the time to do it.

As I said, when I moved from California to Texas, I left my W2 job to do this full-time. So I figured, “Okay. If I’m going to do it full time, I want to do it in the most effective, most scalable way possible.” For me, that was being on the sponsorship side over the general partnerships.

Ash Patel: Joel, what was your first deal as a GP?

Joel Fine: Let’s see… The first one was 42 doors in Austin; it’s a 1983 property, mostly untouched. The exterior looked pretty good, the interiors were pretty much what we call classic, which means they really hadn’t been renovated, they hadn’t been updated since the property was built in the ’80s. So there was a lot of opportunities there to improve the property, mostly cosmetically, which is really the ideal situation. A lot of properties, they’ll have issues like maybe foundation issues, or they’ll need a new roof. Things like that, you’ve got to do the repairs, but they aren’t going to really improve the top line, the rent you can get. A potential tenant isn’t going to come to a property and say, “That’s a beautiful new roof. I’m willing to pay an extra 50 bucks a month in rent to live here.”

On the other hand, if you swap out the interior components, if you repaint, put in new cabinets, countertops, new flooring, new plumbing fixtures, and lighting, that can really improve the property, not only from the perspective of the potential tenants, but also from the top line. Tenants are willing to pay more to live in a place that looks better. So anyway, that’s one of the characteristics of this property. Again, it’s 42 doors. As it happens, a few months later we bought the property next door that had 44 doors. Combining them, that’s 86 doors, and they’re literally next door to each other; they share a fence. We’re now running it as a single property.

That’s really important, because a 42-unit deal has challenges in terms of its scale. Below about 70 to 75 units, it’s really hard to manage effectively, because you can’t really afford an onsite property manager full-time. But once you go above 70 to 75, you can afford a full-time property manager and maybe even a full-time maintenance tech. That’s what happened with these properties – we combined them, a 42 and a 44 to 86. Now we’re running them as a more efficient property.

Break: [00:07:24][00:09:02]

Ash Patel: Joel, on the 42 units, how much did you raise for that deal?

Joel Fine: Let’s see. I think that was 1.9 million, purchase price was 4.4 million.

Ash Patel: The whole time that you were an LP knowing your end goal was to become a GP, were you prepping investors, gathering emails? Or did you wait until you found the deal?

Joel Fine: No. In fact, I started letting people know that I was involved in real estate, focused on real estate, and planning to syndicate. One of the things I did was I updated my LinkedIn profile to make it clear that I was no longer in the high-tech engineering IT field, I was now full-time in real estate, and I talked about the deals that I was a passive in. Because even as a passive, that’s a great learning opportunity to find out what syndication is all about, how the industry operates, how people manage their assets. In fact, in my first LP deal, I got the general partners to allow me to dial in to their weekly property management calls. I would dial in every week and just go on mute and listen. That was a terrific learning experience for me because I got to hear what kinds of problems they were having, how they addressed those problems, the problems that lingered and were difficult to solve so I used that as a learning experience. Then I communicated that kind of information to friends, family, acquaintances, people I knew, I attended lots and lots of meetups. I had been attending meetups in California. When I moved to Austin, I attended as many meetups so that I could hear, meet locals, just get to know the real estate community, and hopefully have them know me as a potential investment partner.

Ash Patel: Can you walk us through raising that 1.9 million?

Joel Fine: Yeah. I have to backup before the raise actually. My partners in this deal, there were three of us. My apprentice actually found the deal, got it under contract, and then brought me in to help out. We agreed that we would share the responsibilities of the capital raise. So we did the underwriting, reviewed the property, we wrote up a pitch deck, developed information that we could share with potential investors, and then we put together a webinar where we presented information about the deal. In that webinar, we shared all kinds of information. Again, transparency is important to me. We talked about not only the property itself and the business plan about the property, like what we wanted to do to the property to improve it, but we also talked about the markets, what was the neighborhood like, what’s the Austin market doing. We talked about what sort of comparable properties were in the area and why the behavior of those comparable properties justified the numbers we were putting together. We laid out our expectations of, “Hey, if we do the following upgrades to the units, we think we can get this much in additional rent, we think we can improve the net operating income, and so forth.”

We put that information together in a pitch deck, in a PowerPoint slide deck, presented that in a webinar. I think we had, I don’t know, at least 40 people attend. From there, it was actually fairly straightforward. It took us about two weeks to get all the commitments we needed to fund the deal. At that point, it was just a matter of going through the rest of the purchase process, including due diligence and getting the lender approval, getting the appraisal done, and so forth. It actually was very smooth. I think Austin is a very, what I would call a sexy market. When you tell people you have a deal in Austin, there’s a lot of interest in it. They know that Austin’s a fast appreciation market, it’s a place where jobs are growing, people are moving to Austin, so the demand is high. There’s a shortage of housing here so people are inclined, are attuned to invest in Austin. I think that was part of what made it relatively easy for us to raise the money. But within two weeks, we had the money and ready to go.

Ash Patel: What do you say to those people in New York, Austin, and Southern Florida, that say there’s no good deals here?

Joel Fine: Well, it’s very challenging to find deals, there’s no question about that. I have to give credit to my partners, they’re the ones that found that deal, and they found a couple of other deals since then that I participated in. It’s really all about relationships, getting to know brokers, getting to know sellers, getting to know lenders who might have access to deals. When you find deals, you underwrite them, and you have to be ready to move quickly. It can be challenging to get a deal to underwrite, to get a deal to look like it’s going to do well. But if you’ve got your ducks in a row, if you understand the market well, you know where the rents maybe are under market, and you have a good sense of what you can do to a property to improve it, there are opportunities. We’ve done two deals already in Austin, we’re in contract on numbers three and four. I’ve also done a couple of land deals here that are very promising.

Ash Patel: That’s incredible. Joel, in my experience, engineers make some of the best real estate investors because of all the systems and processes they employ. What’s one of the biggest mistakes you’ve made so far in your real estate investing career?

Joel Fine: Ooh, a mistake that I’ve made. I guess I would say one big mistake that I made was early on. One of the first properties I bought was a quad in Cleveland, Ohio. That was before I was really doing any syndications. In fact, I think it was even before I started being a limited partner. But this particular property was four units, it was in a suburb of Cleveland called East Cleveland. For folks who aren’t familiar with Cleveland, East Cleveland has a very poor reputation. It’s kind of the hood. This particular property was in a pocket of East Cleveland that was isolated from the rest of the city by a big park. It was right next to a much nicer suburb called Cleveland Heights. I was really optimistic about that. I convinced myself that my property, because of its location, was going to attract Cleveland Heights type tenants and not East Cleveland tenants. In hindsight, I was wrong. Bought it for 145,000, I did about $80,000 worth of renovations to it, it really needed a lot of work, rented it out for a couple of years. While I was renting it out, I had a property manager running it, but it consumed a lot of my time. Between vandalism, there were delinquent tenants, there were fistfights on the property, broken windows, broken lights. I finally gave up. I sold it for a little bit more than I paid for it, but much less than I put in, including the renovations. I probably lost about 60k on it. In hindsight, I suppose it was a good learning experience. I’ve heard folks call that expensive seminar.

Ash Patel: Just time and money.

Joel Fine: Exactly. It did help me on my journey. If I hadn’t bought that quad then I wouldn’t have bought other things I did buy in Cleveland that worked out much better. I wouldn’t say I regret it but it was certainly, in hindsight, a mistake.

Ash Patel: Yeah, thanks for sharing that. With your investors on the 42 unit and a 44 unit. What’s their projected return in such a competitive market?

Joel Fine: On that one, when we underwrote it, we were projecting 16% to 17% internal rate of return, IRR, with I think it was 10% cash on cash return. We had an 8% pref, we’ve been operating the property for a little less than a year, I think nine months now. When we bought the property, the units were almost all one-bedroom. The units were getting 950 to 975 a month, we underwrote for 1100 a month. We said, “Okay, we think after the renovations we do, we can get 1100 a month.” We did the renovations on a handful of units and tenants were willing to pay 1250 a month. We went from 1100 a month in our expectation to 1250 a month. We expect to beat our forecasts substantially. We haven’t quantified that, I don’t know what the number will work out to be. But we’re feeling really good about it. It’s like I said, the rent is higher than we anticipated that we put in our spreadsheets and so that’s just really good news for us and our investors.

Break: [00:16:43][00:19:40]

Ash Patel: Did you have appreciation as part of your proforma?

Joel Fine: Well, with commercial multifamily, the appreciation is embedded in the improvement to net operating income. It’s different from single families where appreciation is all about the comparable sales. If you’ve got a three-bedroom two-bath and your neighbor has a three-bedroom two-bath, you’re not going to get much more than your neighbor no matter what you do to the property, no matter how much rent you can get. But on a commercial multifamily property, if you can increase the rents and increase the net operating income, you can increase the value of the property, it’s almost linear. If you double the NOI, the net operating income, you can almost double the value of the property. For us, that’s what it’s all about. We can force appreciation by improving the property, by renovating, upgrading the tenant base, increasing rents, and thereby increasing the net operating income. That creates the appreciation so we don’t have to count on market appreciation. What we’re counting on is our ability to force that appreciation and then derive the benefits from it.

Ash Patel: Was your exit cap rate lower than your entrance cap rate?

Joel Fine: No. We always underwrite for a higher exit cap rate. It’s a more conservative thing to do. That particular property, I think we bought it 4.25% cap rate, which isn’t bad for Austin. In Austin, three and a half is not uncommon. But we bought it at 4.25 and I think we underwrote for 4.75% cap rate. It works out to about point 1% per year, which is roughly where we like to be.

Ash Patel: It’s very conservative underwriting. Good for you on that. Do you have a waterfall structure? If let’s say the cap rate is even lower when you exit and the appreciation is just through the roof.

Joel Fine: We haven’t put a waterfall structure on any of our multifamily value-adds. But the one land deal that I syndicated, I did put a waterfall again. That one, we have a 10% pref and then I think it’s something like 70/30 up to 20%, and then 50/50 after 20%. We figured, if we can deliver a 20% IRR to our investors, that’s pretty awesome. We all can be dancing in the streets. At that point, we’ll take a little bit more of the top-line as an incentive, as a reward for all of us for doing better than that.

Ash Patel: Joel, what is your best real estate investing advice ever?

Joel Fine: Best advice. I would say if you’re trying to get into the business, be ready to partner up. One of my limiting beliefs that took me a while to get over was I thought I had to do things on my own. When I was buying the little stuff, the duplexes and triplexes, I thought, “Okay, whatever I’m going to buy, I have to be able to afford to buy on my own.” Now I was dealing with debt, I was getting bank loans, but for everything I bought, I would have to come up with 25% of the purchase price. Once I broke through that limiting belief and decided I could partner up, suddenly I could buy much bigger assets, because I didn’t have to come in with 25% of the purchase price. I could come in with a much smaller number, maybe one or 2%. My other co-sponsors would come up with a little bit of it and then my passive investors would come up with the rest of the down payment, that would get us to 25 or 30%, the bank would do the rest. But the key thing is, by partnering up, both with other sponsors and limited partners, that enabled me to scale up substantially and buy a very different class of properties.

Ash Patel: Joel, are you ready for the Best Ever lightning round?

Joel Fine: Absolutely. Bring it on.

Ash Patel: Alright. Let’s do it. Joel, what’s the Best Ever book you’ve recently read?

Joel Fine: Well, let’s see. There are two of them, I want to give a shout-out to. These are actually for passive investors. I love it when people read these books and then have a conversation with me as potential passive investors because it makes them much more knowledgeable. One of them is called The Hands-Off Investor by Brian Burke and the other one is Passive Investing in Commercial Real Estate by James Kandasamy. They’re similar in terms of the content they present, but slightly different angles on the content. But the key is, they’re really great for people who are thinking about investing passively and just want to understand how to get into that, and how to do their due diligence since they can’t necessarily visit properties, they can’t necessarily look through the books the way general partners do. They’ve got to rely on a lot of information that the general partners are feeding them. Those books are really excellent resources for passive investors to learn about the business.

Ash Patel: What’s the best type of way you like to give back?

Joel Fine: A couple of things. One is, giving back for me is a kind of an interesting phrase because I think what I do on a daily basis improves lives. For me, that’s what’s giving back. When I buy a property and I renovate it and improve it, I’m improving the lives of my tenants, I’m giving them a better home to live in. That’s important to me. I’m also improving the lives of my investors by giving them a great return on their investment, by giving them good risk reward trade-off that allows them to diversify their portfolio and buy into asset classes that they might not otherwise be able to. I also run a meetup locally in Austin. I love to have people who want to learn about syndication and multifamily investing. Join me in my meetup. The education of other investors is important to me. When I was in California, I actually ran an educational nonprofit that focused on social and political education. I did that as a way to give back. I haven’t run across a charity organization in Texas just yet, but I’m hoping to find one that I can participate in.

Ash Patel: Joel, how can the Best Ever listeners reach out to you?

Joel Fine: Well, they can go to my website, lakelineproperties.com, or they can email me joel@lakelineproperties.com.

Ash Patel: Joel, thank you so much for joining us today, sharing your story, going to college, becoming an engineer, and getting into LP investments knowing your end goal was to be a GP. Congratulations on your success.

Joel Fine: Thank you very much. I appreciate the time.

Ash Patel: Best Ever listeners, thank you so much for joining us and have a Best Ever day.

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JF2687: How to Find First GP Deal with Melissa Elizondo

Melissa Elizondo wanted to branch out from her marketing firm and looked to add commercial real estate investments to her portfolio. In this episode, Melissa shares her current business strategy and analyzes her methods for closing on her first GP deal.

Melissa Elizondo | Real Estate Background

  • Partner at 1 Vision Capital which is a syndication group focused on converting existing landlords with single family portfolios into LPs on multifamily deals.
  • Portfolio: Limited Partner for 118-unit in Savannah, GA.
  • Full-time career as owner of marketing firm, Heartwood Marketing Solutions.
  • Based in: New Braunfels, Texas
  • Say hi to her at: 1visioncapital.com | Facebook and Instagram: @therealmelissaelizondo
  • Best Ever Book: The Energy of Money by Maria Nemeth Ph.D.

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JF2684: 6 Lessons in Becoming a Better Leader with Brandon Turner

We’re sharing the top ten sessions from the Best Ever Conference 2021 as we gear up for the next Best Ever Conference at the Gaylord Rockies Convention Center in Colorado this February 24-26th.

In this episode, Brandon Turner shares six lessons he’s learned about what it takes to be a better leader.

Register for the Best Ever Conference here: www.besteverconference.com

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TRANSCRIPTION

Joe Fairless: Welcome to another special episode of The Best Real Estate Investing Advice Ever Show where we are sharing the top sessions from the Best Ever Conference 2021. This year, the Best Ever Conference is back in person, February 24th through 26th. Come join us in Denver, Colorado. You’ll hear all the new keynote speakers, you’ll meet some new business partners, you’ll learn some insights from the presentations and from the people you meet, that you can apply to your business today. Here is an example of a session from last year that is still relevant today and will be beneficial for you.

Brandon Turner: Alright. Well, we’ve got 25 minutes to talk about leadership. For everything that I’ve learned in last couple years, I originally titled this presentation, My Confessions of a Terrible Leader, and then I realized maybe I should try to come up with some a little bit more plain. Basically, I want to teach you guys everything I’ve learned about being a leader, because I, for the longest time, said “I hate being a leader, I don’t want to be a leader, I don’t want to be a manager I hate being the boss.” We’ll talk about all that today. I especially love being here, because this very event, the Best Ever conference from several years ago, changed my entire life. I’m going to tell you about that in just a few minutes. Let’s make sure my slides and everything’s working correctly if I click through. There, it worked.

Alright, let’s start with a little bit of my background in leadership. I want to start with 10th grade, 11th grade, somewhere in there; I became really good friends with a buddy, his name was Cory. And Cory was an awesome dude. Cory, his dad was a plumber. Now, when I say plumber, he really owned a plumbing business. The reason I say he owned a plumbing business is because he wasn’t the one doing the toilets or unplugging the things. He ran the company, had dozens of employees, and was the wealthiest person I knew. My friend Cory was the wealthiest, richest person I knew. Their house was worth at least $150,000. It was insane when you’re that age. That was a pinnacle of rich in my life.

I remember one time, my friend Cory tells me that his parents hired a house cleaner to do their cleaning a couple times a week. I just thought, “Oh, it must be nice to be rich. Lazy, rich people.” That was my thought process at that time, was lazy, rich people. It started this belief in me that only lazy people… I was kind of raised with this belief. Only lazy people hire others to do the dirty work. I should just go and do the work myself.

Closely related to that is around the same time, my dad started teaching me how to change my oil. Turner 101, you do not bring your car in to get your oil changed, because real men do hard work. That was a belief that I had, real men do the hardest work, because that justifies you being a man. When I say man, my value to the world was my ability to actually get in there and do the work. This belief guided me for a long time. So rich people hire people to do stuff, but real men and the working class, we just do the work.

And then came, around that same period of time, my still probably all-time favorite movie, at least top five, Office Space. I’m sure many of you have seen Office Space and you recognize this character right here as the quintessential horrible boss; just a horrible individual that nobody wants to work for. But this training, this belief that leadership is about managing people through suits, ties, TPS reports, which is a phrase they use throughout the movie, and being disliked.

Now I’m a high I in the DISC profile, I love being liked, I want everyone to like me and I want to be liked. It kind of reminds me of Michael Scott from The Office, which also then influenced my leadership ideas. I’m just like, “That just sounds terrible.”

Belief number four was spread over the next few years. Let me tell you three quick stories. Number one, I tried to start a wooden sunglasses business. I thought it’d be cool to sell wooden sunglasses. They’re like wood on the outside, polarized on the front; they were amazing sunglasses. I hired my little brother and said, “Hey, how about you run the business and I’ll kind of bankroll it.” We did that for a year, never made any money whatsoever, it was completely a failure, stressful. I didn’t even learn anything other than that I did not want to be a manager, it was terrible. Around the same time, I hired my very first assistant. I was like, “I’m going to be a boss. I’m going to hire an assistant help me get things done. She could help me with my email…” This time I started doing Bigger Pockets stuff, and my Bigger Pockets, the podcasting, the book writing… Oh, it’s getting a little bit crazy, so hire an assistant.

Day one, I set her up with a computer and I say “Okay, here you go.” And she said something along the lines of “What are all these little buttons all over the screen?” I realized that she had never used a computer before that day. She didn’t even understand the framework for a computer. How you have a desktop, you click icons, and they open up, none of that made sense to her. I realized this management thing sucks. I hired a person who doesn’t know how to do it, now I have to do it and I have to train… I kept her for a year and a half, and she’s a wonderful person, but could not do the job; it further emphasizes that this sucked.

Then I increased my role at Bigger Pockets. I became a VP at the company and I started managing a team of people underneath me, none of who I chose to manage. They were just people that were in the company that were put underneath me. It was the worst year of my life, was managing these people. They might have been great people, but I hated every minute. I had to do a forced one on one with them every week, and had to do all this annoying stuff to manage these people who didn’t like me and I didn’t really like them. I’m sure they’re fun, but we weren’t friends. So I had to manage people, hold them accountable, and it was just hell.

So I develop this other belief that “See, it just doesn’t work. I’m not a natural leader.” I would look at some people and I’m like, “Ah, they’re so good.” In fact, around that time, as I’m dealing with all this, I went and had lunch with Joe Fairless. My wife and I are sitting there with Joe, we’re explaining all the difficulties I’m having with my team and having to manage people, and I’m doing my real estate, just small little deals… I’m like, “How do you manage to grow in such a huge business?” He looked at me and goes, “It’s not really that hard.” I don’t think, to this day, I’ve ever told him how inspired I was by the fact that I realized there was another way to do this, and that I was clearly doing something wrong. I still don’t know what it was but the fact that it was so easy for him and light to manage an entire operation, I started to change a little bit. You see, I had this identity that I’m not a good leader. When I say identity, you guys know what I’m saying? It’s like this idea of like the word “I am not a good leader”, or I am a runner, I am a healthy person, I am a vegan. The words that follow I am, they often say are the most powerful words in the English language.

So my identity was I am not a leader, I’m not a manager, I don’t want to do this ever. And identity is so powerful. In fact, I probably don’t have time to tell the story but I’m going to anyway. Alfred Nobel, you may have heard his name before. He was the inventor of dynamite, or at least the guy who really took dynamite to a whole new level and mass produced it. He was nicknamed, in his obituary, the merchant of death; that was his obituary. The funny thing with his own obituary, because the newspaper screwed up, and they thought he died, but he really didn’t. So here’s Alfred Nobel reading his own obituary that says the merchant of death. It shocked him to his core, because he realized his identity that he had built for himself was somebody who was responsible for millions and millions of deaths. So he turned his life around in that moment, he shifted his identity in a heartbeat, and dedicated his life to peace. Therefore, that’s how we have the Nobel Peace Prize today. He set up that foundation and really changed the world for better because of an identity shift. So identity is so powerful.

I could spend hours just talking about identity. But I want to go to the belief number five, it’s closely related. Even in that conversation with Joe, I realized and I thought I don’t need to be a good leader. I’m okay just doing my small little deals, I can buy a duplex here and there, buy a house once in a while, keep doing the podcast, write some books, and I’m fine. I don’t need to be a good leader in order to thrive in life. But then something changed. First, I went to Nashville, Tennessee and hung out with my buddy Seth. Seth is the guy on the far right there, playing the guitar. Seth is a Grammy Award winning music producer, writer, amazing dude. He had this team of five or six people, many of them had won Grammys, they were top of their game, they’re amazing people. Here’s what’s funny. I hung out with him for a couple days, we did some recording in a studio because in my previous life I love music. I saw them show up when they wanted to show up during the day, didn’t ask what to do, they just worked on their work. It was meaningful, impactful work that made a difference, and they loved it, and they loved one another. They were so good friends, and had like collaborations, and it was fun, and they left when they wanted to. Seth did not manage them.

Yet this studio just pumped out hit after hit after hit of the songs that you would know from the radio. Seth led them, he led them there. I realized that is what I wanted more than anything else. I started with this feeling of “This is what I want in my life, was a team of rockstars doing meaningful work, making an impact in the world, having a great time, and doing life together.” I was like, “Oh, I want that with every piece of my soul.” I wanted it. Because I was at that spot where I wasn’t sure what to do next. Again, everything was kind of just okay.

Then what ruined me for life was I went to the Best Ever Conference and I spoke at it. I was a keynote speaker, this was now a couple years ago. I spoke there and I was on stage. I’ve got the podcast, and people read my book sometimes, so they threw me on stage graciously, but the reality was, I didn’t belong on that stage.

Break: [00:09:26][00:11:04]

Brandon Turner: The reality is I was mediocre at my real estate compared to everyone there. Yes, I had some properties, but I didn’t deserve to be on that stage. And I realized that I oftentimes was judging myself or patting myself on the back because of the room that I was in, surrounding myself with new investors, rather than getting myself in a room with people who were doing way more. So when I got in that room, I was like, “Oh, I need to go bigger.” So I took those two thoughts, the idea of working the way that my buddy Seth worked, what I saw at the Best Ever conference, and I kind of came up with this four step logical progression, I worked this in my head.

Number one, for me anyway, and maybe this is true for you, happiness and fulfillment are very much found through growth and achievement. Now whether right or wrong, I don’t know. But I get a lot of happiness in life when I conquer something, when I achieve something great, and get to a new level. I love that. That’s why I was feeling a little bit bummed out, because I wasn’t growing for a while, I had no growth. I call these the Four Therefores. Therefore, if that’s true in my life, in order to grow, I would have to focus on my superpower, what I could do better than everyone else, and less on other tasks. Therefore, I needed to hire, or I needed a partner, or outsource my non superpower tasks. Do you all see the logical progression here? Then finally, therefore, I needed to lead those people. They wouldn’t naturally go where I wanted them to go, I have to lead them toward the outcome I desired. Therefore, leadership was not for me and for many of you, the leadership is not an option for those people looking for an incredible life. If you’re looking for something incredible, it’s not an option.

Now my identity was I am not a leader, and I needed to shift that to I am a leader, it’s light and easy, and I love doing it. I had to change something. So how does one change that identity? You can’t just say I’m a vegan and suddenly you’re vegan. What does the identity change look like? Well, it looks like this – this is what I’ve realized over the years of just studying, talking with, and learning from just high performers. Identity is changed from a four-step process, really, it’s in the middle of that. There’s the mindset you come at it with, how you approach it is mindset. This is why Performance Coaching is so vital to every entrepreneur. If you do not have a performance coach, you need one that can help you adjust your mind, because that’s the start. Then it moves to the actions you take. For example, I want to be more plant based. I’m not 100% plant based but I wanted to be more plant based, so I started watching documentaries that I knew would trick my mind to getting the right mindset. The same thing, why does everyone say Rich Dad Poor Dad gets them into real estate? It’s not a real estate book. It’s because of the mindset.

The mindset helps you make the right actions, then the actions will strengthen the identity. The identity then leads to confidence, whatever that thing is, you feel more comfortable in it. The cool thing is energy becomes a cycle. The mindset leads to the actions, identity to confidence, the confidence leads to more actions, and that cycle continues forever. If you want to change anything in your life, these four things right here are going to do it. You can be anything you want to be if you change your identity through your mindset, actions, identity, and then build the confidence in that, and then repeat that process.

So what did that mean I had to shift my mindset? I want to go real quick through the mindset shift that I made. I already told you the five beliefs that I had that were incorrect, that I wanted to change. Again, incorrect, correct, whatever, but that I wanted to change; I needed to rewire the operating system that was in here. Working with a performance coach, this is where I shifted my mindset to.

Number one, my job is to be a general. Not a manager, not a middle manager, I don’t mean like necessarily a leader, I’m a general in a war. The general does not pick up a gun in most cases. He’s not out there in the front of the lines shooting things, he’s not out there crawling through barbed wire, honestly. He’s looking over the battlefield, he’s strategizing. I got this picture of this World War II type general, even to the point where I printed out a picture at one point and put it on my wall. I am the general in this.

Number two, management is not leadership and leadership is not management. Those are two separate things. I remember one day my performance coach literally had to tell me “Brandon, I forbid you from ever saying the word managing again.” Because clearly there was something in my soul, probably from Office Space, that made management a toxic term to me. When I started shifting that, I realized management is not the same as leadership. I still, to this day, do not want to manage people. That sounds horrible. Who wants to manage people? Fill out TPS reports, and do their quarterly reviews. That sounds awful. That’s not why I got into real estate; it’s not why you got into real estate.

Also, I shifted this mindset belief that when you work with people that you love and care for –and I would add this– and that are talented people. You love and care for them and they’re talented people, they’re doing the right job. It is not work, it is a beautiful life. It’s like trying to say it’s a symbiotic relationship of mutual growth and respect. I am helping them, I am working for them, and they are working for me, and we are helping each other achieve our goals in life.

Finally, leadership is the most manly of skills. I literally had to tell myself this, and the way that I present this… Again, if you’re female or you’re offended by manly, I don’t mean manly like I’m a man. I mean, think of people like Joan of Arc. That’s the term I mean, powerful. William Wallace, why do we all love Gladiator, every man loved Gladiator. Martin Luther King, Churchill, Jesus – these characters, when I think of them, they’re all amazing people because of their leadership skills. I look up to them as a role model because of their leadership skills. In other words, leadership is not something only rich people do. In fact, I have now shifted my belief system that my friend, Cory, and his dad – they were not rich, so they hired a housecleaner; they were rich because they hired a house cleaner.

That fundamental shift in my mentality has changed everything. I am not successful and therefore I hire people to do this or that. It’s “I am successful because I do those things.” That was hard for me to get over. Some of you are like, “Oh, that’s easy for me.” Well, that’s fine, we’re all at different places. But for me, I really had to overcome that limiting belief.

Finally, I believe that leadership leads to freedom, very much so. I think freedom is often found through structure. In fact, I’ll tell you about some structures we do here in a minute. But very much so, freedom is found through great leadership. If you want more financial freedom in your life, and just more freedom to be able to enjoy life, move, travel more, spend more time with your kids, the better you are as a leader, the more you will realize that.

Finally, the last point here about the mindset change. I realized leadership is a skill. It is a skill that you can learn just like becoming good at basketball or badminton, it is a skill that you will develop if you choose to develop. If you have that growth mindset that you can adapt, you can learn, you can learn to be a good leader. Granted, I don’t think there’s a ton of great books on leadership out there. I’ve read a lot of them and I’m going to give you guys five of my favorite later. But it’s one of those things, I don’t feel like I learned how I got into it.

Let’s go, today’s topic was six lessons in becoming a great leader. Let me lay out all those lessons right now for you real quickly. Grab a pen and paper if you’re not taking notes, I think this is important. Number one, a great leader is a quitter. In other words, I once heard a billionaire say in an interview, they said, “Why are you successful? Why are you a billionaire?” The response was “Because I’m a quitter.” In other words, the person said that every job that I do in my entire life, I find a way to quit that job. I don’t leave it alone, I find somebody to take over that job.” So ne of my jobs as a leader is to build a system, or define a process, or define a role. I might do that role for a little bit in the beginning, possibly, but I need to quit that as soon as possible. Because that allows other people who are amazing to step into that role and crush it.

Number two, a great leader is a cutter. Now what I mean by that is I’m going to use an analogy that I once read in a book. I don’t remember what book it was, somebody can probably tell me. But Dr. Oz, at the height of his career, when he was like really… Like he was on Oprah, had his own TV show, had magazines, he was doing CNN everyday, he was doing all this stuff. Dr. Oz was everywhere a few years ago. At the same time, he was doing 200 open heart surgeries a year. How the heck did he do 200 open heart surgery a year while doing all that? It’s because he wasn’t cutting people open on the operating table. In reality, he wasn’t clamping their vessels, he wasn’t putting the anesthesia or whatever into their blood, he wasn’t doing anything. He was an expert, he was the one guy at that hospital that could do one specific thing, one cut. That cut is what his job was. He would walk in there and be ready to pick up the knife, do the cut, walk out. That was it. Somebody else would sew the person up and then the person would be healed, because he was so good at that thing.

So the question I had to ask myself and I want everyone here to ask themselves is what is your Dr. Oz cut? In other words, a great leader is somebody who recognizes what is that one or two things that you absolutely need to be doing? Everything else you need to find somebody who their Dr. Oz cut is doing their thing.

Break: [00:19:42][00:22:39]

Brandon Turner: Number three, a caster. I’ll admit, this just rhymed. I wanted to go with a kind of a cough sound here… But what I mean by caster the vision caster. When I left the Best Ever Conference a couple years ago, I took a plane ride home to Hawaii where I just moved, to Maui. I read this book The Vivid Vision or Vivid Vision by Cameron Harold. It changed my life in that I was like, “Okay, I need to set a very clear vision of where I’m headed.” If you haven’t seen my vision, remind me during the Q&A; I can tell you more about it and even show you, it’s on my wall. I wrote down exactly where I wanted my company headed. I came home and I show my friend Ryan, I said “Ryan, this is where I want to go. It said $50 million of real estate, 1000 rental units, a bunch of mobile home parks, blah, blah, blah.” The first thing Ryan said was, “I want to be a part of that.” Because as a leader, my job is to inspire and to lay the vision out, to say “This is where we’re headed.” And it worked. I attracted a ton of people to my side, both interns, partners, employees, because they saw the vision, and my job is to propel the vision forward.

Number four, my job is to be a coach. A leader is a coach. A coach is somebody who sees what other people are doing and doesn’t necessarily yell at them like “You’re an idiot. You’re not doing it right.” But a coach, in terms of like asking the right questions. I did get a performance coach. My coach Jason rarely tells me what to do. It’s always “Why do you think that way? Is that really the best way to do that? Can you think of another way to look at that problem?”

So by being a coach, I’m asking my team questions, I’m helping them become the best version of themselves; even getting my own ego out of the way that says “No, do it this way.” I need to make sure I encourage and coach them so that they can become leaders themselves.

Number five, a great leader is a talent scout. Probably my number one job, my Dr. Oz cut, more than anything else is my ability to find talent, to go out there and look for talent, to sort and find out who’s going to be good. That didn’t come easy. I made a lot of mistakes. I’ve hired a lot of people that I shouldn’t have hired, I’ve dealt with partners I shouldn’t have brought in. Not that they’re bad people, just that they didn’t fit. I’m still not amazing at it but I realized that that is probably my number one and most leaders number one job, is to become a talent scout.

Number six is to become a student. In other words, to recognize that I don’t know what I’m doing most of the time, and I need to continually learn and grow. In the beginning, I read only real estate books; it’s all I wanted to read, was real estate books. What I’ve realized though, is that real estate books – I already know that information. I don’t need real estate books, I need business books, I need leadership books, I needed to go to leadership conferences, I need to interview people on our podcast who are amazing leaders, because that is a skill that’s going to take a syndicator to billion-dollar level. I need that skill set, but it can be learned.

Now, a couple of, just real quick, how I lead. I want to give you guys some specifics today, some tangible stuff, and then we can talk more about this in the Q&A later. A couple things. Number one, we follow the EOS model from Traction at Open Door Capital. By the way, just in case I didn’t mention this; I don’t think I did. That goal that I set not even two years ago, the 18 months ago or something like that, that I said I wanted $50 million of real estate, 1000 rental units. So I went from the 100 that I had roughly then, I had roughly 100 units. Half of that was in one property. I think the ones we have under contract will be over 1,500 within a few weeks from now. There are 1,500 units over $50 million of real estate. I have the exact size team that I had seen with my friend Seth, it’s there, we do life together. We went out the other day, we all went on paddleboards, and went and looked for whales out in the ocean. We got within like 20 feet a whale that came up next to us. I was on Lanai with one of my guys last night, just chatting, drinking, and talking. My kids get watched by one of my team members families, his family watches my kids, I watch their kids. In other words, I built the exact life I was looking for when I saw my buddy, Seth.

Just to let you guys know some context of how this worked. Today I work less than five hours a week at Open Door Capital. That might surprise people. But I’ve got a team of five or six people, I’ve got partners, Brian Murray and Ryan Murdoch, I got team members that are in there… And everybody is so, so, so good at what they do; it irritates me sometimes. My buddy Mike Williams, he’s my investor relations guide. How can he be so likable? How can everybody like him? And why does he like phone calls so much? I don’t know. I can’t stand phone calls, he loves them; and he’s the best person at that job because he’s doing his Dr. Oz cut.

Anyway, so a couple of specifics of how I lead. By the way, somebody, I know I’m on a timer here somewhere. I have no idea where I’m at, cut me off whenever. Number one, integrator versus visionary. Oh, I’ve got a minute and a half left, good. We follow EOS, EOS is from the book Traction. Traction talks a lot about that there are two roles in a business, two leaders in a business. The visionary cast the vision, the integrator does the work. For the first time in my life, the last 15 years of struggling through leadership, I realized that always the problem was that I was trying to be an integrator, and that is not who I am. I am not an integrator. I was an integrator at Bigger Pockets for years to Josh’s visionary. But then when Josh left, I tried to be an integrator still, and it just didn’t work. I had to learn to be the visionary.

Number two, my job is to align everyone’s goals. We do quarterly goal setting with annual goals, we have a seven-year goal. I take our goals down to weekly benchmarks, like we’re really specific on the goal alignment. Everyone knows what their goal is, what their rocks are, and that’s kind of my job. We have a weekly meeting every single week, very, very structured, but it’s fun. We do one hour once a week. That’s primarily what my job is, is that meeting, and I keep the meeting going. I don’t even run the meeting anymore, my integrator does, Walker, but I’m there. This is one of my favorite things, I brainstorm and clear roadblocks. I love that stuff. They got a problem, like “How do we get more off-market mobile home parks?” “Hey, let’s launch a website called bringbrandonadeal.com where we offer like 100k finder’s fee.” We’ve had 400 submissions from that one source. That’s what I love doing, brainstorming ideas.

Again, everything I do, I say “How can I make this better for my team?” I’m constantly trying to find ways to make their lives better, their lives easier, make them more money, find ways give them more. That’s a little bit of how I lead.

Finally, just some additional resources if you want. Again, I don’t think there’s a ton of great books on leadership. Someday I’d love to write one, once I’m a good leader; I’m still working on it. But here’s five things that changed my life and that guided a lot of what I talked about today. Traction by Gino Wickman, I love that book. The Four Disciplines of Execution by Chris McChesney, one of my all-time favorites. If you’ve got a big goal, that book will get you there, it’s amazing. Good to Great by Jim Collins. Of course, everyone loves that book. The whole idea of getting the right people on the right seat on the bus, changed my life. 80/20 Sales and Marketing by Perry Marshall. That book made the idea of an executive assistant so clear and the idea of the Dr. Oz cut so clear that there are very few things you should be doing, that book, it changes everything. Finally, of course everyone knows Extreme Ownership by Jocko Willink, just that concept of taking complete ownership and the leadership lessons in that book are fantastic. That is the lesson that I’ve learned in becoming a leader over the last couple years. I no longer say I’m a terrible leader. I’m a former terrible leader, today I’m a leader. That’s my identity, I’m continuing to learn. I’m not a great leader, I’ll say that, yet because I don’t think I’ll ever become a great leader. I think there’s always going to be another level that I can aspire to. But I am a leader today and I hope you will be as well.

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JF2671: 6 Benefits of Tokenizing CRE Assets with Shannon Robnett

Have you ever thought about tokenizing your assets? For Shannon Robnett, it’s a no brainer; these smart contracts help provide transparency on the asset, minimize issues with liquidation, and overall are easier to manage. In this episode, Shannon shares the benefits of tokenizing your commercial real estate assets.

Shannon Robnett | Real Estate Background

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TRANSCRIPTION

Ash Patel: Hello Best Ever listeners. Welcome to The Best Real Estate Investing Advice Ever Show. I’m Ash Patel and I’m with today’s guest, Shannon Robnett. Shannon is joining us from Puerto Rico. He is a multifamily and commercial developer and has done over $350 million of development. Shannon has also personally transacted over $160 million as either a buyer or seller. Shannon, thank you so much for joining us. How are you today?

Shannon Robnett: Good, man, yourself? I appreciate you having me on the show.

Ash Patel: I’m doing great. It’s our pleasure to have you. Shannon, before we get started, can you give the Best Ever listeners a little bit more about your background and what you’re focused on now?

Shannon Robnett: Yeah, I grew up in a construction and development family. My dad was a builder, my mom was a realtor, I watched them do deals at the kitchen table. That was kind of how I grew up, on the job sites on Saturday and Sunday… And I thought I wanted to go to college and be something different, but the real estate game just kind of pulled me in and I’ve been happily doing that for the last 28 years. I had a lot of ups and downs, but I wouldn’t trade it for anything.

Ash Patel: That’s incredible. So did you not have a natural inkling to go into real estate? Or were you just so bombarded by it that you wanted to get away?

Shannon Robnett: I think that was kind of it. I was so sick of hearing about it and I was so sick of cleaning up job sites. We’re recording this right around Christmas time… I even remember going out one Christmas day, Ash, to go fix a problem on a job site with my dad. And I was looking for anything normal other than real estate. And I got out there, I’m going to college, and my little brother’s making $45,000 a year in 1993 with no college degree, no nothing, and I’m just sitting here going, “I can’t believe I’m actually doing this.” So I quickly reversed course and went back into real estate. It was very short, “I think I’m going to be different than everybody else.”

Ash Patel: What did you want to go to college for?

Shannon Robnett: Computer information systems. There was this guy, Bill Gates was doing some pretty crazy stuff, and then this other guy was doing stuff with a fruit company… And I just thought that would be the path to riches, because computers were everywhere.

Ash Patel: Let me share my story. ’93, I graduated from high school, and that’s when the tech bubble was booming. So I actually went into computer information systems, that was my major. I had like a 15-year IT career, and then I’ve found commercial real estate. So congrats on finding the fast track to get to where you are now. I took a long way–

Shannon Robnett: It just [unintelligible [03:00] knots on my head than you do, because I got into it early.

Ash Patel: Alright. So, a family business… Did you just walk into that business? Or did you start out on your own?

Shannon Robnett: That’s the funny thing about family… Everybody’s business is your business or your business is everybody’s business. But I got done with the whole “I’m going to go to college” phase of my life. I told my dad I want to build a house, and my dad said, “Okay, go get the backhoe.” I’m like, “What do I need the backhoe for? We could just hire a guy to dig the hole.” Literally, by the time I get done building that first house, I had dug the hole, I put in all the utilities, I poured all the concrete, I had hired two of the guys, we’d framed it, we sided it, we painted it inside and out, we built the cabinets… I literally built the house, and it took about 70 days to do that. But at the end of that time, I knew how to do all those different aspects of it, and I realized that I hated every single part of it. So I had to figure out a way that I could be involved in the real estate business without actually being involved with the building of the house. That’s where I kind of settled on the commercial field, and started dealing with that, and then worked through building police stations, fire stations, schools, hospitals, and going that route, but always on my own and always just trying to find the next opportunity to hone my skills, until I finally just realized, “Why am I working for everybody else? I need to be doing this for myself”, and started going down the path of investment building.

Ash Patel: Well, you learned how to build a house, but then you started building commercial buildings. Why not stick to what you know and just keep building houses?

Shannon Robnett: Have you ever met homeowners? [laughter] The reality is when you look at it, when you’re putting in a foundation on a house, it’s the same as putting in a foundation on a police station. It’s one aspect of the job, but it’s much, much larger. I was able to find that by doing 10 large commercial projects, we could do 25 million dollars a year, and in order to do 25 million dollars a year in volume at a 7% margin, I would have to build a lot of houses. So it allowed me to condense time into different projects, and I then took that into the multifamily space and the triple net industrial space and started to run away with that stuff.

Ash Patel: And how many years did you continue to focus on building commercial and industrial?

Shannon Robnett: I still do. We’ve got a couple of opportunity zone developments going right now with warehouse. A triple net warehouse is such a fabulous thing, because like apartments, it’s the incubator space. You get out of your mom and dad’s house, you go get an apartment, then you save up your money, you go buy a house… It’s kind of the same thing. You start a business in your garage, or you and your buddy are going to become window tinters or whatever, you go rent a small incubator space, and then you go build your own building. It’s the same kind of thing, but they’re parked a little bit longer.

We even saw in 2008, when the market was crashing, people were paying their rent before they were paying their house payment, because if they didn’t have a place to do their business, they couldn’t pay their basic bills. So that’s just always kind of been a bread-and-butter slice. And as cap rates continue to heat up on multifamily, it’s still a little bit more lucrative to do the industrial right now.

Ash Patel: And when you say industrial, is that more flex space? I love that space, because it’s so easy to rent.

Shannon Robnett: It is. We’ve got little requirements. You put a 10 by 10 office in the front, a bathroom in the back, a roll-up door, about 2000 square feet, with some basic heating and electrical requirements, and everybody fits in there, from the guy that makes gelato ice cream, to a guy that manufactures bullets, cabinets, tables, or whatever. We’ve got all different types in there.

Ash Patel: Yeah. And if somebody wants more office and less warehouse, just put a wall up; if they want the opposite, move a wall.

Shannon Robnett: Exactly.

Ash Patel: That’s incredible. Is that primarily what you’re building now?

Shannon Robnett: No. We currently have about 500 units of multifamily going, and only about 80,000 square feet of industrial space. So we do what pays…

Ash Patel: So you pivot on whatever asset class is being overbought.

Shannon Robnett: Correct. Currently, we just broke ground on a 190-unit apartment complex, we’ve got a 35,000 square foot supply house in Florida, and 375 single-family homes that we’re doing in a subdivision in Florida as well. We’re kind of asset agnostic, as long as it makes money.

Ash Patel: I love that. I try to get investors to look at that, as well. A lot of people, their best advice is to be hyper-focused on one niche. I’m the opposite, man; find what’s paying, find out where the deals are, where the money’s at, and continue to pivot.

Shannon Robnett: Everybody talks about multiple streams of income, and everybody looks at that and says “I need to be in four apartment complexes.” But the reality is if you’re in apartment complexes, and you’re in notes purchasing, and then you’re in industrial space, and then maybe you’re in a mobile home park, you’re in multiple asset classes, but then you can also diversify that even further if you want to. And I agree with you, I think diversification is good; I think you need to be good at what you do. And real estate is not rocket science, or brain surgery, or even as complicated as tech. So it’s something that you can become pretty good at with a little bit of home study.

Break: [00:08:12][00:09:51]

Ash Patel: Do you do any remodels, or is it all new construction?

Shannon Robnett: It’s funny you asked… Actually today, I’m closing on my first value-add, and it’s an office building. I’m buying an office building that’s a brand new 1980, that we’re going to completely rehab the inside of it; we’ve got the FAA as a tenant and some other space in there, but coming out of COVID, office is in an absolute toilet… So it’s a great buy, it’s a power play at this point; we’re buying it for a lot less than we could even think about building it, and remodeling it… And I think that we’ll learn; we’re going to do our first remodel in 2022.

Ash Patel: That’s great. So why not continue to pick up other assets cheaper than you can build them? So strip malls, retail, industrial…

Shannon Robnett: We are. We’re looking at thatm because it’s been easy — I think there’s been plenty of fruit for everybody in the value-add, [unintelligible [00:10:44].28] got there with the multifamily, everybody’s kind of looking at different stuff… Strip malls are now coming front and center because retail is dying, but they’re in phenomenal locations, so to pick those up and repurpose them… We’ve got one of those under contract. We’ve got some other stuff that we’re looking at. But I completely agree with you. And if you’re stuck in one mindset of “I only do value add multifamily in Southwest United States”, then you really got a small bowl to pick from. Whereas, if you’re willing to look at exactly what you talked about, you’ve got the opportunity to see how you can work all over the nation and continue to pick up where there is still value to be had.

Ash Patel: Agree. If you’re looking for multifamily that’s value add in Southwest Ohio, the penalty is you’re paying three and a half caps.

Shannon Robnett: For a 1972 model.

Ash Patel: Yeah. And you’re competing with 10 other people that have the same mindset as you.

Shannon Robnett: Exactly. And as you know – we’re about the same age – that late 1970s model is starting to show its wear.

Ash Patel: You’re not kidding. So what’s on the horizon for you? What’s next?

Shannon Robnett: One of the things that we’ve started doing lately, just because we were bored, is we’re actually beginning to tokenize real estate. We’re moving that intersection of blockchain into the real estate asset class. One of the things that everybody confuses is they say, “Oh, you’re in crypto.” We’re not. But the technology is so much similar to, let’s say, title chain, that it allows for so many opportunities and so much liquidity for syndicators and developers to bring that to the forefront where people can actually own fractionalized digital currency, that’s asset-backed with hard assets like real estate, and then make that tradable and transferable in a distributed ledger that really opens it up to everybody.

Ash Patel: Can we deep-dive on that?

Shannon Robnett: You bet, buddy. Let’s go.

Ash Patel: Alright. And what I love about this podcast is we have no preset questions criteria, except the Best Ever lightning round. So we can talk about anything we want. For our Best Ever listeners that maybe have heard the term tokenizing real estate, what does it actually mean?

Shannon Robnett: A lot of people confuse tokens and coins. A coin is a blockchain, and that blockchain is digital information that has the first piece encrypted with the information into the second piece, and the third piece. Let’s bring it back to real estate. Like the title, you can go find out how long this property has been in the family, where it was a full section, where it got divided down and became a subdivision… All of that is in a title chain. Blockchain technology creates the same ability to give that information for you, but it also puts that in a distributed ledger, so that you can see it, I can see it, somebody in Tallahassee can see it… Everybody has the ability to see what’s going on here. That creates some transparency. When you do that, you create a digitally transferable asset.

When people talk about tokenization, you’re really just taking what we would normally have as a share in a syndicated model and you’re making it a digital hashtag that contains all the information, the PPM, the offering memorandum, all the waterfall instructions – everything there is tied up in a smart contract. Then that information is put on the distributed ledger, and then how many shares are owned by each individual or each named entity. So it creates some anonymity at the same time that it creates transparency as to who owns what pieces of this. Then what it does the most is it allows for that transferability to start happening. Because one of the things that syndicators hate is trying to find a marketplace for you to try and sell your piece of their pie after two years, when their deal is a five-year deal. This allows that liquidity for that transfer to happen, because it’s a digital transfer, and we’re actually creating the marketplace for that, so that now you can have that liquidity to sell or do other things with your particular digital asset.

Ash Patel: Yeah. And it’s an immutable ledger, so you can’t go back and change things. You can add to it, but you’ll see all the additions on the ledger. The beauty of that is the liquidity. So for the syndicators out there, if you have somebody that says, six months in, “I’m getting a divorce. I’ve got to get out of this. I need to liquidate right now.” You don’t have a lot of options, unless you can find a buyer for that share. Whereas if you tokenize this and there’s a marketplace, it always has a value. So within six months, you might have already gotten 10 to 15% appreciation; you can cash out and get some gains, versus the syndicator saying, “Fine, we’ll cash you out, but it’s a 15% penalty.”

Shannon Robnett: Right. The reality is there’s a lot of products that are coming into the market. But basically, these are all tied up in a smart contract. And that smart contract – it’s really not smart, but it executes on its own. So if you’re doing this liquidity play and you have people that want to move around, as a syndicator, that becomes a headache, because then we’ve got to track the paperwork, and we’ve got to do all this stuff. But with the blockchain technology, it takes care of all of that thought process. It tracks all of those things. So then when you’re sending your distribution out, you’re sending it down the line, like a Plinko machine. It just goes to the lowest piece of the chain and says, “Here, this is your distribution for these chairs or these tokens”, and it creates that ledger. So then it’s really easy to track who did what, who gets the K1s, for how many shares, for how long, and what level they sold at. It allows for royalties to be paid to syndicators when people sell; it allows for a lot of really cool things that people haven’t really thought about. But most importantly, it allows syndicators to begin thinking in an infinite state, where I’ll never have to sell this because I can still get the reward that I would normally get by getting it to this next level without actually having to liquidate the asset.

Ash Patel: Yeah. And how do you equate that to an NFT? NFTs are not really tangible. But in this case, your token is tied to a tangible asset. But in some cases, it works in a similar fashion. You can buy and sell, trade royalties.

Shannon Robnett: I think you could go either way. I liken the NFT as to taking the Mona Lisa, and we all want to own a piece of the Mona Lisa. But then I look at digital securities like Apple or Microsoft. Microsoft doesn’t really have anything that it makes. It makes the surface, but it doesn’t really make anything. It’s all about intellectual property and programs. So everybody understands that you’re not going to buy an NFT, a piece of Microsoft; you’re going to buy a share of Microsoft, but you’re going to buy ownership in the one and only Mona Lisa. So I kind of separate them out that way. The reality is the NFT is one of a kind, and while my apartment complex is one of a kind, there’s a lot of us in there that own it, and we own those digital ownership shares.

Ash Patel: It makes you wonder, why don’t they do fractional shares of the Mona Lisa, fractional shares of NFTs?

Shannon Robnett: Because it doesn’t sound near as cool as non-fungible. [laughter]

Ash Patel: Yeah. [laughter]

Break: [00:17:59][00:20:56]

Ash Patel: I had Neal Bawa on a few weeks ago, and he stated that one of the driving tailwinds for real estate prices is tokenization. Because once overseas investors have easy access to American real estate through tokens, it’s just going to be on fire.

Shannon Robnett: I think that that’s true, and I think that the one thing that tokenization does is it takes out the liquidity question. When people are looking at that — I think that syndication is very popular, and it’s getting more popular all the time, especially as prices increase and yields decrease. But I think the fact that you’re able to create that liquidity so that I’m making a commitment to you for as long as I want to, not as long as you, the GP, want me to – I think that that’s going to change a lot of it as well, and give people more reason to look at parking money or parking capital in syndications, and then knowing that they can get out whenever they feel like.

Ash Patel: I’ve got to ask you… So you started in your family business – did any of your family come with you to the development side?

Shannon Robnett: Well, my brother builds custom homes in a resort area. My dad – he retired when he was 50, having plenty of incubator space that’s kept him and mom happily motorhome-ing and around the world… So my brother does something very similar. We’ve worked together for a period of time, but he’s an exceptional high-end home builder, and I really can’t stand homeowners.

Ash Patel: I love it. Shannon, what’s your best real estate investing advice ever?

Shannon Robnett: I think the fact that you’re doing it. I see so many people that spend so much time analyzing this and analyzing that. If you’re going to get involved with real estate, get involved with real estate and make sure that you’re in it for the long haul. So if you buy a house, hold onto it for 20 years, and you’ll see the value of it. Don’t look at real estate as something you invest in for the short-term. I think you’ll really see where it becomes a really solid asset that gives you incredible tax benefits.

Ash Patel: What was the hardest lesson you’ve learned throughout your incredible 20-year run? Whether it was about partners, finances, transactions, assets, anything; just a really tough lesson that toughened your skin.

Shannon Robnett: I think that the thing that I’ve had to learn multiple times is that you need to often be the answer to your own problem. You can get somebody that can either be a partner or part of your business that can do what you need to do in that business better than you. And that’s always great. But if Tim doesn’t show up today, who’s going to cover that role? You need to at least be able to function in that area. But I see a lot of people, they’re coming into the space and they go, “I only do this part of it. I don’t know anything about the rest of it.” And then all of a sudden, partnerships come apart, as partnerships do, and that person knows nothing about the rest of it. So I think you need to be a master of something in your business but you need to understand to be able to do all of your business to some fifth-grade capacity, in order to not get stuck hanging out in the wind.

Ash Patel: I think that’s what your dad was thinking when he made you do the siding, the windows, the paint.

Shannon Robnett: You know what? You don’t have to agree with him… [laughter] But I completely agree with you. That was exactly his thought process. If you know how to hang the cabinet when the cabinet guy doesn’t show up, you just take care of it.

Ash Patel: Yeah. Shannon, are you ready for the Best Ever lightning round?

Shannon Robnett: I am.

Ash Patel: Let’s do it. Shannon, what’s the Best Ever book you’ve recently read?

Shannon Robnett: I think the one that I’m reading right now is The Creature from Jekyll Island. It’s all about what has happened to our currency and what’s going on with the dollar. It plays out so incredibly strong into what’s happening with inflation right now. It’s really an eye-opener. Where we’re at with what’s happening with the dollar in the world currencies has been 150 years in the making.

Ash Patel: Assuming there’s this massive inflation on the horizon, how do you prepare for that?

Shannon Robnett: You borrow as much money as possible. The reality is if you can pay back today’s loan with tomorrow’s dollar… We’re all experiencing 16 to 20 percent rent increases due to no fault of our own. Why wouldn’t you take that profitability and borrow and acquire other assets that you’re going to pay back in future dollars that are inflated?

Ash Patel: Great advice. Shannon, what’s the Best Ever way you like to give back?

Shannon Robnett: I love my community and I love to be involved in it. As we’re coming out of COVID and you see a lot of businesses that have been struggling, and things have happened, I really make it an effort to buy local and to make sure that I’m contributing to my local charities. I get it, there’s a lot of national charities out there, there’s a lot of national chains that provide great food, and great shopping experiences… But giving to your community, and make sure that when you have the opportunity to be charitable, that you are, and that you do it in a way that benefits your direct community.

Ash Patel: Shannon, how can the Best Ever listeners reach out to you?

Shannon Robnett: The easiest way to do that is just at shannonrobnett.com.

Ash Patel: Awesome. Shannon, thank you so much for sharing your story with us. 28 years in this business, starting out as a residential home builder, quickly pivoting, and now 28 years later, continuing to pivot. Incredible story and thank you again.

Shannon Robnett: I appreciate the time, man. It’s great to share with your audience.

Ash Patel: Best Ever listeners, thank you so much for joining us. Have a Best Ever day.

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JF2670: Will Interest Rates Be Higher In 24 Months? ft. Ryan Smith, John Chang, Hunter Thompson, and Neal Bawa

We’re sharing the top ten sessions from the Best Ever Conference 2021 as we gear up for the second Best Ever Conference at the Gaylord Rockies Convention Center in Colorado this February 24-26th.

In this episode, Ryan Smith, John Chang, Hunter Thompson, and Neal Bawa have a lively debate about whether interest rates will rise over the coming year.

Register for the Best Ever Conference here: www.besteverconference.com

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TRANSCRIPTION

Joe Fairless: Welcome to another special episode of The Best Real Estate Investing Advice Ever Show, where we are sharing the top sessions from the best ever conference 2021. This year, the Best Ever Conference is back in-person, February 24th through 26th. Come join us in Denver, Colorado; you’ll hear all the new keynote speakers, you’ll meet some new business partners, you’ll learn some insights from the presentations and from the people you meet, that you can apply to your business today. Here is an example of a session from last year that is still relevant today, and will be beneficial for you.

Ben Lapidus: We are on to the most exciting part for me where I get to participate in the intellectual debate. This year, we’re talking about interest rates, which is a scintillating subject matter, because John Burns hinted that interest rates are going up to 1.8% in the next year, and others have hinted they could go down. There are negative interest rates and other countries around the world. Will US interest rates be higher 24 months from now? We’re going to find out. I’d like to introduce our speakers, one at a time.

First, I’d like to welcome back Mr. Neal Bawa from Grocapitus; he’s got an amazing Udemy course, he is a makeshift economist in his own right. And interestingly enough, he raises a million dollars a year just from the tomatoes in his backyard. Welcome, Neal. I asked him how, and he wouldn’t tell me. He said, “You have to ask after the show.” If you didn’t have a question for Neal, now you have one. Neal will be debating for interest rates being higher, he’s for the motion.

On the other side of the queue is Mr. Hunter Thompson. Welcome back from Asym Capital, this is going to be your second debate with the Best Ever conference as well. What’s awesome about Hunter is that he seems like he is a powerhouse. He’s always running a marathon in his work, but he does it in a slow, smooth way. How does he do it? Apparently, this mastermind can run a three-hour and 10-minute marathon, which just shows his endurance. He will be debating against the motion for interest rates either being at or lower, where they currently are today.

Joining Neal will be Mr. John Chang from Marcus and Millichap. Again, the chief economist of Marcus and Millichap. Interestingly about John – I know his life shifted drastically with COVID. He did 62 presentations last year that he otherwise would have had to travel to, but hasn’t stepped on a plane since COVID started. So good for you, John, welcome to the club. I also enjoy not traveling, which isn’t very good for acquisitions. But I suppose it’s why we’re growing teams.

Then joining Hunter, against the motion, is Ryan Smith from Elevation Capital. He’s been in the business for multiple economic cycles. He’s looked at mobile home parks, self-storage, and plenty of other asset classes, and he is keeping his pulse on the market. Like Neil, he eats a million dollars of tomatoes a month, but his interesting fact is that he is a size 18 shoe. So watch out Neal and John, he might step on you.

With that said, I’d love to get this debate started. Will US interest rates be higher in 24 months? We’re going to have three phases here. The first is going to be opening arguments from each of these gentlemen over the next two minutes apiece, then followed by some scintillating debate, followed by closing arguments, and we will see who has influenced the most minds. How are we going to measure the winners? You, as the audience members are going to vote. You’re going to vote once right now, and you’re going to vote a second time. The winner won’t be who gets the rawest percentage points of participants to agree with them, but rather who has influenced the most minds. Who has created the most spread between the starting and ending percentage rate.

So I’m going to open a poll right now. 60 seconds on the clock. It is now open. Will US interest rates be higher in 24 months? You can answer yes, no, or undecided. You have 60 seconds. And just maybe in that time frame, we can get Neal to fill the 60-second void with how he raises a million dollars a year with the tomatoes in his backyard. Can I get you there, Neal?

Neal Bawa: You want me to tell you now? Very simple.

Ben Lapidus: Yes, please.

Neal Bawa: I install LED lights in my backyard, and they’re very bright. They’re two different colors. My neighbors, as they’re walking past… It’s a very rich neighborhood, everyone has million-dollar mansions… So they’re walking and looking at what I’m doing with my tomatoes. I leave the lights on 24 hours a day, so my house has this Halloween-like glow all year. When the tomatoes are grown in the summer, I go with a bag to all of my friends, and they want to know everything about the tomatoes because they’re so curious, they’ve been walking past the entire year. So, of course, that call lasts about an hour, and during that hour they asked me what I do. Of course, the story starts, and before you know it, they’re asking to be investors. So each year my yield has been higher than a million on the tomatoes.

Ben Lapidus: I expected nothing less from that answer Neal, that’s amazing. It’s a great story for debates that are virtual in a world like this. Thank you for helping me fill the time. So we’re going to do five, four, get your answers in now, three, two, I see a couple more, one… And we are going to hit the right button this time and pull — oh, you snuck that last one in there. So the folks who are debating against the motion, will the US interest rates be higher in 24 months? The answer being no, at, or below, have their work cut out for them, with only 15.4% of respondents thinking that that will be the case. 74.4% of respondents believe that US interest rates will be higher in 24 months, leaving a very small slice of the audience who is undecided to have their mind shifted. Hunter, Ryan, you guys have your work cut out for you. 10.3% undecided. Let’s go. We’re going to start with Mr. Neal, with your opening remarks. Two minutes on the clock, and I am timing you.

Neal Bawa: Anyone that thinks that interest rates will not rise over the next 24 months is quite simply delusional. We’re going to hear phony arguments, like the Fed has promised to keep interest rates low, or that the underlying economy is too weak to raise rates, or that the Fed is afraid of a double-digit recession, so they will not raise. Our team, John and I, will prove to you that all of these arguments come from just one source. They come from our inner desire as syndicators and apartment owners to see ever lower interest rates so our cap rates keep going down. We love drinking the Kool-Aid, we love smoking the opium, and we end up looking at only one side of this argument. And then we use social media to spread that one-sided argument to the point that we actually think that everyone is saying it so it must be true nonsense. Nonsense. Throughout today’s debate, we will present tangible, fact-driven arguments that will prove that not only are interest rates going to rise, but that there is already evidence that they will need to go up, already.

Our esteemed colleagues are going to spend a lot of time pointing to a year-old statement from the Federal Reserve as proof that rates will stay low. What they will fail to tell you is that the Fed also mentioned in the same statement that there are a data-driven organization and they will change their stance as necessary. At the time the Fed made that statement in Q2 last year, that pandemic was the greatest threat that the world economy had ever faced, ever. And that statement did its job already. The stock market bounced back, interest rates went down, real estate when ballistic, the US economy came out of the recession much faster than anyone had thought; it did its job. Now the Fed has to do what’s right for the US economy. Stocks are at an all-time high, real estate is going insane, one Bitcoin costs more than a luxury car; asset bubbles are everywhere. The Fed’s watching carefully, patiently. But folks, 24 months is a long time. The Fed does not have 24 months. They will have no choice but to start raising rates a year from now, and we will prove this to you beyond any shadow of a doubt. Thank you.

Ben Lapidus: Perfect two minutes, with inflammatory language to get Hunter and Ryan all riled up. Hunter, I’d love to hear that response. Two minutes on the clock, sir. You are good to go.

Hunter Thompson: I’ll keep it as brief as possible. Just for context, in terms of how we anticipate this is going to go… We’ve got John Chang, who on my podcast mentioned they spend about five million dollars a year in terms of proprietary economic data. We’ve got Neal Bawa, who is literally known for his ability to analyze economic data. Three years ago, I was asked to be a debater at this stage, but I was shortly told after that I was not the first pick. In fact, I wasn’t the second pick, or third pick, or fourth pick. I was the 13th pick to be on the debate stage just a few years ago. They had me paired with Ryan Smith, who for my understanding is a previous baseball player. So I’m looking forward to understanding how this is going to play out. Now, I was told to throw bombs; maybe I shouldn’t throw bombs at my teammate. But alright, just so we’re just we’re on the same page, let’s get into this.

I think that this is an important discussion, because a lot of people think that real estate is a great bet, regardless of what interest rates do. That’s pretty much the totality of their understanding. It doesn’t matter if they’re low or high, real estate is so good we should be participating. But the decisions we make based on interest rates are very consequential. There are some very savvy fund managers that made incorrect decisions, specifically to exit multifamily, with the intention of thinking that interest rates would rise and cap rates may similarly expand. And hundreds of millions of dollars of managers refuse to take floating rate debt, because they anticipated that interest rates would rise. Going back to 2010, that was the same question everyone was asking. When are they going to rise? How quickly is it going to happen? Look at the debt to GDP ratio; eventually, there are going to be some headwinds. And this whole time, they’re asking the wrong question. Really what the question needed to be was, how low can they go, and how quickly are they going to go negative? That’s the question that I’m seeing more and more as being much more important for us to ask as real estate investors, and what does it look like, and what real estate investment should be pursuing if that’s the case.

So my goal for this is to paint a very clear picture. When we look at the macroeconomic picture, we see where interest rates are headed. If you look up the 100-year or 200-year interest rates of the United States, it’s a very clear picture down and to the right, especially the last 40 years, down into the right. I’m not going to get up here and tell you that this time it’s different, and that this next decade, or next two months, or anything like that is going to be anything other than that. Now, the 24-month period is a short timeline. But from my perspective, this is like pocket aces versus pocket kings. Pocket kings can win sometimes, but that down and to the right trajectory is not going anywhere.

I’m also going to talk about the Bank of Japan, European Central Banks, all industrialized countries that have moved to zero or negative rates, and how the US political system, the incentive alignment associated with that, and the Fed working hand in hand have painted themselves into a corner that even in the most robust economy of the last 50 years cannot substantiate rate increases. That’s what we’re going to talk about today.

Ben Lapidus: Thank you, Hunter. Just so everybody knows, Hunter was my first pick this year, because of his amazing contrarian views on his podcast over the last few years. Thank you for joining despite the amazing competition you have on the other side of the aisle. John, two minutes on the clock, your opening arguments debating for the motion, interest rates will rise in the US, 24 months from now.

John Chang: Alright. Hunter actually ran off into left field for a little while and then he came back and argued that it’s down and to the right over the long term. But I want to pull some different context and some different data into the conversation. When the pandemic hit the US, our economy shut down like someone hit a light switch. We’ve only partially recovered from that. And when vaccinations reach a critical mass, likely in the second half of this year, economists are forecasting the economy is going to come roaring back. A new roaring ’20s, if you will. So the governments already injected 3.1 trillion dollars of stimulus into the economy, it looks like another 1.9 trillion is on tap; that’s five trillion dollars of stimulus, which is basically the equivalent of the entire economy of Japan being injected into our economy in cash. That is a lot of money. On top of that, the US money supply is over 19 trillion dollars; that’s up 25% in the last year to the highest level ever. As I mentioned this morning in my presentation, economists are forecasting growth in the 5% to 7% range in 2021, the strongest growth in more than 35 years. When the global economy reignites, it’s going to spur a surge in commodity prices, like oil. We’re also going to see growth in consumer good pricing, and that means inflation.

Part of the Fed’s mandate is to control inflation, so they cannot allow it to take off. They’ll need to do two things – raise the federal funds rate, and mop up liquidity. Now I’ve got to point out – back in 2013 after the financial crisis, when the Fed just mentioned the idea of reducing liquidity, Fed Chairman Bernanke’s remarks sparked the taper tantrum. That drove the 10-year Treasury up by about 100 basis points in about 100 days. So even a hint that the Fed plans to walk back into an accommodative stance could spark a flood of capital coming out of the bond market, which will push up interest rates. As my partner Neal pointed out, the Fed is a data-driven organization. Back in 2018, Chairman Jay Powell demonstrated that he has the backbone to go up against popular opinion and raise rates. So the Fed will not stand by, risk runaway inflation, and let the economy overheat at a record pace. So there you go, there’s my two cents.

Ben Lapidus: Thank you, John. Thank you for those nuggets of wisdom. To close out our opening arguments, debating against the motion that US interest rates will be higher in 24 months, Mr. Ryan Smith from Elevation Capital. Two minutes on the clock.

Ryan Smith: Awesome. Well, since nobody’s used a movie quote… When Neal was talking, I was disappointed. I was hoping he would end by saying “sexual chocolate” and just drop the mic, because that was just pretty thematic. Second, there’s going to be a lot of facts, figures, and numbers shared; I’ll just remind the audience that about 87.32% of all statistics are made up on the spot. With that in mind, I will also remind, to start, that the burden of proof really isn’t ours, meaning Hunter in mine. If all prevailing trends continue as is, unabated, we’win the argument. Their side will have to prove that if this, if that, and sequential ifs happen, then they’ll be correct. To that end, I’d have anybody go back and watch the debate last year in Neal’s position around cap rates, and should I buy or should I sell. I think there’ll be a similar outcome this year. But with all that being said, I remember back to 2014, talking to a number of limited partners that were interested in certain things, and the general thought was interest rates have to go up. In 2014, interest rates have to go up. Inflation is right around the corner. I heard talk of hyperinflation and the question I would ask is why. And there’s a sense that, well, it has to. But why? Well, it has to. And they were wrong, to Hunter’s Point.

Similarly, in about 2017, there was a lot of discussion around cap rates. Cap rates are at historic lows, they can’t go lower. Again, why? Because they can’t. Well, why? Because they can’t. Those folks, to Hunter’s Point, were wrong. So there’s a sense of nostalgia that I detect in the market, where there’s this sense that equilibrium… We’re going to go back, return to this point of equilibrium where everything’s just hunky-dory. But when you look at the data, things move in long-term trends; it’s either moving up or down. The trends that we’re going to be talking about, which is supportive of our motion, which is supportive of our position against the motion, is that since the year of my birth, 41 years, interest rates have been declining. For the last more than 10 years, the Fed funds rate has been declining. The Fed is actively and currently growing its balance sheet through Treasury purchases, which puts downward pressure on treasuries.

Similarly, the money supply has increased 250% since 2010, and 20% in the last year. There’s a flood of liquidity, which John alluded to, and his “if they mop it up” – that’s a pretty big if; there’s a lot of liquidity in the marketplace.

And lastly, when you look at transaction volumes, they are flat and declining over the last several years. So you have downward pressure that will likely remain. On the Treasuries you have thinning spreads that lenders are charging over the Treasuries, as there’s more supply of capital than there is demand for it, due to declining transaction volume.

So the last point, just to speak quickly to Neal, I’m actually in favor of inflation. I like inflation. We have members of our team that were operating in the real estate sector in the ’70s, when interest rates were 16% and things generally performed pretty well at that time. So I’m not in the camp of lower interest rates are better. That being said, I think it is a reality that will happen.

Ben Lapidus: Amazing. Thank you, Ryan. I wonder how many people got the movie reference. Thank you for that. Nobody got to see me laugh behind stage.

Break: [00:17:17][00:18:56]

Ben Lapidus: John, I want to start with you. And folks, because of our time, I know that we’re virtual so it’s a little bit weirder to kind of corral everybody… Do please keep your preambles to a minimum in answering these questions. Do feel free to answer each other, but I will intervene if I think we’re going off course.

John, I want to start with you, and I want to refer back to Ryan’s point. Ryan is saying that the burden of proof is not on Hunter and Ryan’s side. Interest rates have been declining for decades. And you’re mentioning a 7% growth rate, but Hamad Khan on our chat is suggesting he’s concerned with GDP and unemployment. Isn’t a 5% to 7% growth rate just recovering from a massive drop? Is hyperinflation something to be concerned about? Or is Ryan’s point valid?

John Chang: Okay, so you covered a lot of territory… There is that long-term movement. It’s been coming down, interest rates have been coming down for a long time. But we can’t count on that trend. If you look at the last 10 years, it’s been hovering right around 2%, and that seems to have been the balance. But you can only push things so far. The money supply is almost 30%, the Fed balance sheet is off the rails; it’s up 80% since the beginning of the year. So you see all these numbers and you say, “Okay, we can continue to do this. We can continue to stack it up. We can continue to pile into our debt and our overload.” But eventually, you start to hit a point where it breaks down. And if you look at the liquidity and the bubbles that have been forming… The stock market’s up 21% in the last year, and we went through a pandemic; it doesn’t make sense.

The problem is there’s too much money pursuing everything, there’s too much cash in the marketplace, there’s too much debt, and the interest rates are so low, it’s fueling that. That’s why there’s so much fear of an uprising of the interest rates, is that it’s going to create a contraction in the liquidity and cause some companies a lot of brain damage.

So I just really don’t think that the idea of long-term growth is going to hold out with regard to hyperinflation. It’s possible, but that’s exactly what the Fed wants to avoid. They’re going to let it run hot. If it gets into the two-and-a-half percent inflation rate, they’re okay with that. If it gets up to 4% and 5%, they’re going to hit the brakes; they’re going to hit them hard. And then they’re playing catch up, and that’s when you really start to run into some problems.

Ben Lapidus: Awesome. The against team, do you have a counterpoint to that?

Ryan Smith:

A couple of things. Again, it’s the if, if, if, if, if scenario. Again, it’s things can’t go lower. Why? Because they can’t. Why? Because that reaches a breaking point. Well, that breaking point wasn’t just described, it wasn’t articulated as “Here is the set of factors.” It’s this comment, which I agree with John, there’s likely going to be, some call it a number of names, call it inflation this year, for a number of reasons. I would at least submit that maybe a proper term would be reflation, not inflation, as the economy kind of comes back to its natural life, I think, to the gentleman who made a remark in the online interface.

But again, when you go back to the historic measures, when you look at inflation, John just said 4% and 5%. Well, there are two things that are problematic with that. One, there’s been only one time in the last 12 years that inflation hit 3%. That’s the peak over the last 12 years. It hit 3% one time, for less than half a year, and that’s the peak. That’s the highest inflation that has hit roughly in the last 12 years. Then the second, seen in advance of what I believe we’re talking about, which is this inflation/reflation argument, the Fed has modified their policy stance, which I find personally intriguing, for reasons we can discuss at another time. But the point is, late summer, I think early fall, the Fed announced a policy shift where their target is 2% inflation. However, they’re now considering it in the aggregate. And that simple little shift is a pretty big departure. And what that says is, simply put, that they will let inflation or reflation run without moving the Fed funds rate at all.

And to put one last data point on that, when you look at the trailing two years, which if you add that two years to now, you’ll find that we’re right. But if you go back for the last 24 months, the moving average for inflation has been 1.14%. If inflation, to John’s point, or reflation, does come and tick up to 3% for a year or more, the average would be barely more than 2%. Again, it’s a nonsensical argument, because I don’t think the possibility of that would even occur by the time the two years happens, which would, again, give us the victory in this debate.

Ben Lapidus: I appreciate that, Ryan. So Neal, Ryan is saying that the Fed has shifted their monetary policy, Hunter is suggesting that there is precedent globally in more developed countries… Not more developed, but more socialized countries, for interest rates to go to zero or negative. President Trump, during his time in office, exuded jealousy over that fact. So you suggested in your opening arguments that there is, “evidence that the Fed needs to increase those rates.” Given those arguments, what is that evidence?

Neal Bawa: Well, I want to start out by saying that Ryan is completely wrong when he mentioned that the burden of proof is on our team. All Ryan has to go out and look at is past recessions. The Fed raised interest rates after the 2008 recession. In fact, the Fed has raised interest rates after all recessions end. There is actually no proof of the Fed not raising interest rates after a recession ends. Show me that proof, Ryan; show me that proof.

And by the way, Ryan’s been reading stuff from a year old. He needs to actually go hit the newspapers, because on January 27 this year, the Associated Press reported that the Federal Reserve removed certain statements from their December statement that had said that the pandemic was pressuring the economy in the near term and posed risks over the near term. Why did they remove that phrase? Well, according to Jerome Powell, the most powerful man in America… It’s not the president that’s the most powerful man in America, it is Jerome Powell. According to Jerome Powell, the Fed now, today, sees the pandemic increasingly as a short-term risk, that will likely fade as vaccines are distributed more widely.

There are short-term risks that happen in the US economy all the time. We don’t even need to go into recessions; with the Fed changing its stance to the pandemic being a short-term risk – Jerome Powell’s words, not mine – there is now clear evidence that the Fed has changed its stance. Now, the Fed, when it changes its stance, takes time to move people from A to B, because they don’t want markets to crash. But if you simply read what the Fed is saying, look at what the Atlanta Fed is saying, look at what the St. Louis Fed is saying, it’s clear over the last two months that they’re changing their tune. And keep in mind, to win this argument — this argument is not whether interest rates will change in the next six months. In fact, John and I are not arguing that at all. We are saying that it’s impossible for the Fed to keep the rates this low for 24 months. If they raise rates 23 months from today, we would win the argument. What is the chance of that happening when the Fed is already talking about it, already backing away from its arguments? There is abundant evidence, Ben, that this is already happening. We just need to read the articles that are out there.

Ben Lapidus: So Neal, you invoked Ryan’s name. Ryan, I want to give you a chance to respond to that. Then I’ve got a question for you, Hunter, from the audience.

Ryan Smith: Neal, I’m a big fan of yours, by the way. I love the banter. But I would say similar to the fact that Neal grows tomatoes and ends up convincing people to invest in securities at the same time, it’s similar trickery. He just conflated two facts that are not to be interposed. So I’m familiar with what he’s saying, and I read generally publications with words that are longer than four characters… But in short, the conflation that he just made is the difference between the Fed’s shift in recognizing that the pandemic is a short-term impact, which I 100% agree with him, and recognize that with my point, which is still actually enforced… And the point I’m making is the Fed has made a policy shift and still maintains that policy shift. And what that shift is – it’s fundamental and it’s pretty seismic, in that they’re saying that, yes, inflation may kick up in the short run; they’re acknowledging that. Again, we can call it reflation, inflation, we have a debate on that.  But the point is, they are fundamentally — and historically, if inflation was to kick up at all, they would run in advance of it, raise rates, to Neal and John’s point, they would get ahead of it, try to pool in inflating situation by raising rates and kind of cooling things down as quickly as they can. Realizing some of the policy missteps in the past and some of the fundamentals in the economy currently, they have modified their policy stance saying “We’re actually going to let it run and consider inflation in the aggregate.” This is a really big shift, because now they’re not considering it at present value as it’s ticking up, they’re considering it to a degree a moving average of what it might be. So the point is, they’re going to likely let it run above 2%, and they have clearly stated and have not modified their stance that they will keep the Fed funds rate at zero until 2024, and also let inflation run, if it were to pass or come to fruition. So I would say, I’m not disagreeing with Neal’s point, but Neal had made a different point than I was making.

Ben Lapidus: Understood. I appreciate it, Ryan. We have a question from the audience for Hunter. You talked about the precedent of 0% or negative interest rates in other countries, particularly in Europe, I imagine. Can you reference those and try to draw a line for us as to why that might be a bellwether for the future of the US?

Hunter Thompson: Oh, it’s not just Europe, it’s all over the world. We’ve got Norway, Denmark, Sweden… Look it up. Industrial countries all over the world have zero or negative interest rates. So what I think people make the mistake of thinking is that how low can they go? That window is drastically different than what most people believe. It’s the same thing with how high can the debt to GDP ratio go before people are unwilling to purchase our bonds? Well, we have a tremendous amount of historical context and economic data to kind of discuss this. The the topic that I’ve talked about frequently, and I definitely want to talk about during this debate, is Japan. They have none of the advantages that we have in terms of the dollar being the reserve currency; they have about a 266 debt to GDP ratio. For those that aren’t familiar, they experienced basically an 80% collapse of real estate and stock market, it initiated a multi-decade-long, endless money printing. That’s the model that the United States is going after, that’s the model that Europe is going after; it will never end. The quantitative easing will never end. And because the debt burden becomes higher and higher and higher, the implications of actually raising rates become so burdensome that it’s absolutely crippling.

So when you look at the way the political system is set up to basically incentivize people to work on a four-year type of basis, and the Fed is certainly not set up to blow up the global economic picture… You just see this prolonged low interest rate environment. Now, the conversation about inflation is interesting, but I’m just not seeing it. So the question is, how much money printing can we have before this starts to happen? Again, look at Japan. Over the last three years, they’ve had half a percent inflation, -0.1% inflation, most recently and heading into 2021, 0.3% inflation.

So with all this money printing – and I’m interested to get both Neal and John’s perspectives on this – this does not result in CPI shooting through the roof. This results in the financial sector basically getting it and people purchasing bonds. So the negative interest rate bond market is about 16 trillion or 17 trillion dollars. That number is just going to go more and more and more.

The question about — and I’m assuming you’re talking about Europe… It’s much more widespread, and the reason it’s taking place doesn’t really make sense to me. These countries are buying their own debt, which suppresses their own interest rates. But I think people look at this and say, “Hey, Japan lost 80% of its stock market, 80% of its real estate market, and they’ve figured it out. They unlocked the ultimate key, which is that if you print enough money and keep interest rates lower, you never touch 10% unemployment.” Imagine that. Imagine the United States if you had an 80% collapse in the stock market and unemployment peaked out at 5.5%, which is what happened in Japan. People who are proponents of this theory view Japan as “We’ve unlocked it.” It’s like taking the power source and plugging it back into the power source. We got unlimited money now, and it’s never going to end.

Ben Lapidus: Hunter, I want to interrupt that, because I’ve got a fantastic question from the audience… And time flies when we’re having fun. So we are going to move to closing arguments after this. The question from Matt is if the US interest rates go negative –Mr. Matt Mopin, excuse me if I’m saying your name incorrectly– the dollar would be dethroned from the world currency… This is important to the point that you just made, Hunter, because the only reason we were able to execute quantitative easing is that we were the global currency of the world. So this is an open question for anybody. If the US interest rates go negative, the dollar would be dethroned from the world currency. True or false, and how does that impact your argument?

Neal Bawa: I’d like to take that on because, I’ve talked about this in the past. When Hunter tells this scary story to compare our interest rates with Europe, he makes what is known as a false equivalence. Then he compares us with Japan, which is an even more false equivalence. He fails to point out that the eurozone and Japan’s negative rate policies are in fact creating a massive, unprecedented flow of money into the United States. The Germans are sending us money, the Swiss are sending us money… When this money flows into our economy, it creates inflation, because it’s money that comes in here, and we have a fixed number of assets. When that fixed number of assets is presented with this money, it causes asset inflation. Because Ryan is confusing the Fed policy with saying rates stay lower for longer, with the Fed saying they will not raise at all. In fact, the Fed raises rates regardless of whether inflation is rising or not. Go back and look at when the Fed raised rates the last five times. They have raised rates when inflation is low. The biggest reason that the Fed raises rates is that interest rates are their weapon against a bad [unintelligible [00:32:55].22] They will raise rates whenever they can. They want to raise interest rates, because they lose this weapon if they simply never raise interest rates. Go back and look at the history of the last three or four recessions and you’re immediately going to notice that the US does not follow the world, and that is what gives us the privilege as a reserve currency of the world.

Ben Lapidus: Amazing. Hunter, he invoked your name, so I’m going to give you the last word here before we move on to phase three of this debate. Do you have a response?

Hunter Thompson: Sure. I’ll quote two of my favorite economists. This is from Larry Summers. “We are one recession away from joining Europe and Japan in the monetary black hole of zero interest rates and no prospect of escape.” Here’s another one. “It’s a good thing that we’re at positive yields. But our politicians want to go Germany’s route. Why? Because they can lend and basically borrow more money. The Treasury is financing our ridiculous trillion-dollar deficits with these kinds of Treasury bonds. So if you have a 10-year treasury bond that goes from 2% to 0%, now we can borrow so much more money. That’s the way the politicians are always thinking.” That’s from my favorite economist, Neal Bawa

Ben Lapidus: [laughs] Amazing final words. Ben Andrews, [unintelligible [00:34:10].13] I am going to get your question. I think it’s an important question, but it’s not substantial for the direction of this debate.

Break: [00:34:17][00:37:13]

Ben Lapidus: We’re going to move into closing arguments. Neal, I’m going to give you the last word. Ryan, I’m going to give you the first word in closing arguments here. Two minutes on the clock. Let’s try to get to that time folks.

Ryan Smith: First, let me say thank you, Neal, John, Hunter, and Ben. This has been lot of fun. I have a lot of respect for you. I’ve made my points in that, the trend is your friend. There’s a statement, “The trend is your friend, and don’t fight the Fed.” Both of those statements have us winning this debate, in that interest rates and both of those things happen, interest rates will be equal or lower two years from now.

Again, to my opening comment, I actually am rooting for inflation, against Neal’s assertion, because inflation can be incredibly positive in the asset classes that I play in. So for me, I’m actually a fan of inflation, but do not expect it. I actually think our position will be true in spite of my hopes.

And lastly, this whole debate that’s taking place – and if I may, I parked on the if’s. Let me interject my first if, which should tell you something about my stance. My first if – this is all presuming no global conflicts, which would cause central banks to seek flight to safety, which again wouldn’t create bond-buying of US Treasuries, depressed yields, and everything else.

We are in one of the greatest periods of peace in US history. And if you referred to a great book called The Fourth Turning, which is a regressive study of the market cycles for every industrialized population – it’s about 450 pages, and if you struggle with sleep, you should read it, it’ll cure what ails you… But in short, there’s a significant chance of global conflicts in the period of time that we’re in. So my position is interest rates will be lower, the same if not lower two years from now; I’ve made my case. All of that presumes no conflicts with China, Iran, Russia, or any of their surrogates, which I think is seemingly likely in the coming year. Anyway, I think we’ve got a good position, I feel good about it, and I’ve got a great teammate in Hunter.

Ben Lapidus: Awesome. Thank you, Ryan. The Fourth Turning, now on the reading list. John, final words.

John Chang: Alright. I want to tie up a couple of loose ends here. First of all, Japan has had negative treasury rates, but they’ve also had no economic growth. Their average economic growth over the last five years or so has been under 1%. So we’re not in that kind of a situation.

When you look at a willingness to raise interest rates – first of all, the 10-year treasury has gone up 30 basis points so far this year, and it’s already trending upwards, so there’s a basis going on right there. We also know that Jay Powell will raise rates. In fact, there wasn’t even that much pressure for him to raise rates. But when he took over as the chairman, he came in and just kept swinging. So in 2018, Jay Powell was raising rates, and he actually had to reverse course as the pandemic hit. So he’s one of the few chairmen of the Federal Reserve that I think would actually just go in there and just start hitting it.

The next piece is that we already have inflation. Just one thing for the real estate industry – construction costs for materials have gone through the roof. Lumber is already at a peak level, it’s up about 15% for materials on a year over year basis right now, and overall construction costs are up about 11%. So I wanna toss that out there to start… And the only circumstance that I can think of where interest rates don’t rise is if something bad happens to the economy.

If the vaccine doesn’t work, or if the vaccine actually starts the zombie apocalypse, or if we have a major economic setback – something like that could cause the Fed to ease off. My fingers are crossed that that doesn’t happen. The good news is that rising interest rates mean the economy is accelerating and doing very well, and that’s good for real estate. As Ryan was pointing out, a little bit of inflation is a good thing, and growth is a good thing. So we want those things, and we want the Fed to actually raise rates as we go forward, because that means things are going well.

The last piece I wanted to say is – pull it back to real estate. Look, take action. If you’re looking at refinancing, get it done. Yeah, rates can possibly come down in a short blip, but if you’re refinancing, refinance now. If you are buying an asset, lock in your rates. And if rates go down and you miss it a little bit, you’re probably okay. I don’t know anyone ever who complained that they locked in an interest rate at three and a half percent. So ultimately, we’re in a good place right now, it’s a great time to invest, and the opportunities are out there. But I still think interest rates are going to rise.

Ben Lapidus: Amazing. Thank you, John. Hunter, I will give you two minutes on the clock for your final words.

Hunter Thompson: Sure. I’ll try to keep it brief. I can’t see the clock, so give me the yank.

Ben Lapidus: You’re good.

Hunter Thompson: Agreed, interest rates rise when things are going well, and… Things are not going well. I think the metaphor is that we’re on morphine, so it feels like it. That’s not the right thing. I was injured, I had to get surgery on my shoulder; morphine doesn’t make you feel like this. This is adrenaline. This is adrenaline, but we’re just sitting at the desk, working like it’s normal. It’s not like being super productive, it’s just that we’re at the desk, we’re working, we’ll be able to keep our head off the desk because of the amount of stimulus.

There was a $1 trillion deficit in 2018, which was about 4.8% of GDP. That was the highest percentage deficit in GDP not in war times, in 2018, while we have the lowest unemployment rate of 50 years. That’s the type of situation that we’re in, where we have peak, peak, peak, peak debt, peak, peak, peak, peak deficits, all-time low-interest rates; if you sneeze, you create a massive economic collapse, and no one’s going to be on the front of that. Don’t bet against politicians acting within their best interest. Don’t bet against Janet Yellen being Paul Volcker all of a sudden; don’t make that mistake. I anticipate a similar to Japan low-interest rate, low growth, low inflation, kind of stagflation type of environment that continues on and on. That’s the way that I’m going to be investing.

Ben Lapidus: Thoughtful words.

Hunter Thompson: By the way, it can be quite lucrative for the real estate investor.

Ben Lapidus: Thoughtful words from Hunter. See, Hunter, that’s why you’re debating here for the second time with Best Ever. Thoughtful words that we can wrap our heads around. I appreciate the metaphor. And the king of metaphors and strong language, Neal – two minutes on the clock to make the most influence on our audience and this debate. Take us home, sir.

Neal Bawa: Ryan Smith said to Neal Bawa, “Show me the money.” And I said “Ryan, take a look. This is the greatest, the most super-heated stock market ever.” Ryan said, “I don’t see it.” So I said, “Take a look at the real estate market. This is by far the greatest, most mega-heated real estate market of all time.” Ryan said, “I don’t see it.” I said “Look at Bitcoin. One and a half-trillion dollars produced just in the last few months.” Ryan Smith says, “I don’t see it.” I showed him John Chang’s number of five trillion dollars injected into the US economy in the last 12 months, and Ryan Smith says “I don’t see it.”

The truth is, if you choose to ignore everything massive in the economy and base it on some old argument that has worked in the past, you’re not data-driven, you’re simply saying “It didn’t happen in the past so it’s not going to happen in the future.” Hunter says, “We see where interest rates are headed over 100 years.” We are not debating that, Hunter, we’re talking about the next 24 months. In the last 100 years, rates have gone up, rates have gone down half a dozen times. It takes our listeners less than five seconds in a Google search to prove you wrong.

I asked Hunter and Ryan, “When has anyone injected five trillion dollars into the US economy? When has anyone injected one third of that amount?” We are creating an asset boom the likes of which have not been seen since the roaring ’20s. The truth is our friends are confused. They think that because millions are hungry in America, we cannot have a booming economy. They think because half a million are dead, that we cannot overheat. This is an emotional approach, it’s an empathetic approach, it’s a good person approach, and I sympathize with them. But the truth is, folks, when the Fed makes decisions, it does not count the dead; it does not feel the hunger. It’s going to look at cold, hard facts. And our friends are choosing to ignore a mountain of evidence, and that is why they can see that interest rates must rise in the next 24 months. They absolutely must.

Ben Lapidus: There you have it, folks. Neal, your punditry is always a pleasure. So is the feature of interest rates based off of the adrenaline of the stimulus, as Hunter has suggested? Or have we over-compensated with the stimulus and interest rates need to go up to bring it back down to Earth?

So poll is going to be opened, we have two minutes to answer. Will the US interest rates be higher in 24 months? You get to decide what the answer is. Are you going to be voting for a future that hundreds to thousands of people will be seeing, predicting the future interest rates going up? Or will they be staying the same or going down in the next 24 months? You get to decide. The poll is now open. Yes, no, or undecided.

While we are doing that poll, John, I do have a question for you. This whole conversation is fantastic. I appreciate all of you guys. But what’s the “so what” here? We have a question from Ben Andrews. What are the implications for real estate investors just starting out if rates go up? Same question for if they’re going down. I’m going to couple that with a comment from Ryan [unintelligible [00:46:27].21] “John Chang showed the spread between a cap and US Treasury rates. at which point spread will investing in real estate not be worth it? Are interest rates and cap rates uniformly tied together? How much does this conversation matter for real estate investors?” If we have time for a second answer, I’ll let you guys jump in, but I want to direct this to John first.

John Chang: Okay, so I’m going to take the last part first. If you look at the trends on the cap rates and the Treasury rates, both have been going down to the right for a long time. But when you look at the short-term movements, it widens and it comes together, it widens and it comes together. Right now, it’s very wide, and that is good. We anticipate and I expect personally that interest rates will be rising. But I will also quote Mark Zandi, the head economist of Moody’s who said, “Forecasting interest rates is a fool’s errand and nobody ever gets it right.” So we have this window, and this is the “so what?” The window that we have right now is that the cap rates have been stable for the last two years or so. The interest rates have come way down, and the spreads from the bankers have tightened up over the last six months or so. So you can get financing on assets today. There’s a lot of liquidity, you can borrow money on just about anything, except for maybe a hotel or a big shopping mall. Outside of that, you probably get financing and it’s going to cost you less than it ever has. So the window is here; looking forward, those things can tighten. But I’ll tell you, even when they’re super-tight, investors make lots of money. People who bought real estate in 2007, when that spread was the narrowest ever, and held it, if they held it all the way until today, made a fortune on that real estate. So there is opportunity, and it’s just a question of how long it takes to get their perspective.

Ben Lapidus: Perspective appreciated. We’re going to close the poll in 20 seconds. Does anybody want to fill the space answering that question, with 20 seconds? Ryan.

Ryan Smith: Quickly, on the first part of the question, with is it good or is it bad? The answer is yes, unfortunately. There are two sides to the coin. You have cash flow, you have the value of cash flow, or the capitalized value of the cash flow. Generally speaking, there are trends like the one we’ve been in, where cash flow has been reduced on assets, but the value of that cash flow has been inflated on those assets. The opposite trend is increasing in cap rate, a decline in multiple, with increasing cash flow. There’s a lot of opportunity around market pivots, to my point earlier about inflation, if we’re able to lock-in. We did this rate lock two weeks ago on a mobile home park we’re buying in the Washington DC Metro next month, at 2.77%, 30-year in, 10-year fix, one-year IOO, non-recourse, fully assumable yada, yada, yada. The point being is if inflation does run and I can pass inflation on to the customer, then that means I have tremendous cash flow growth in the near term. So there are two sides to the coin, and you’re always deficient in one. You have too much here, not enough here, but over the long run, it’s kind of a ratchet system, if you’re on for the long run. It’s really, to John’s point, [unintelligible [00:49:20].13] get in the game.

Ben Lapidus: Thank you, Ryan, for the perspective and ownership. Sorry, Neal, I’m going to have to cut you off. We are going to go to close the poll, three, two, one… Poll ended. And what is amazing – let’s go over what the results were from the beginning. Will US interest rates be higher in 24 months? 74.4% of you answered Yes, not leaving a lot of room for Neal and John. This is what their answers were at the beginning, Hunter. They’re not leaving a lot of room for Neal and John to move a lot of minds, with 74% in agreement with them. 15.4% said no, they will be the same or lower in 24 months, and 10.3% were undecided. Not a lot of folks to bring home into your basecamp. What’s interesting is that the undecideds went up to 11.1%, almost a full point of people being more confused…

John Chang: We did such a terrible job. [laughter]

Ben Lapidus: Congratulation’s gentlemen, that’s a singular takeaway.

John Chang: Hey, that’s what you pay for.

Ben Lapidus: And those that believe that US interest rates will be higher in 24 months moved from 74.4% down to 66.7%. Seven points were gained by the team that suggested rates will be at or below where they are currently in 24 months. So Hunter, Ryan, congratulations. You have 12 months of bragging rights until the next Best Ever Conference. All four of you, congratulations on participating. This was a heated debate. I appreciate the spunk that all he brought to it, and I can’t wait to see y’all next year. Thank you. I’ll bid you adieu so we can keep this moving. I appreciate you guys. Thank you, gentlemen.

Joe Fairless: I hope you’ve gained some useful insights and actionable advice from this previous Best Ever Conference session. Remember, if you’re looking to scale your investing in 2022, we look forward to seeing you in Denver. Get 15% off right now with code BEC15 at besteverconference.com That is code BEC15 for 15% off at besteverconference.com.

Website disclaimer

This website, including the podcasts and other content herein, are made available by Joesta PF LLC solely for informational purposes. The information, statements, comments, views and opinions expressed in this website do not constitute and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action. Neither Joe Fairless nor Joesta PF LLC are providing or undertaking to provide any financial, economic, legal, accounting, tax or other advice in or by virtue of this website. The information, statements, comments, views and opinions provided in this website are general in nature, and such information, statements, comments, views and opinions are not intended to be and should not be construed as the provision of investment advice by Joe Fairless or Joesta PF LLC to that listener or generally, and do not result in any listener being considered a client or customer of Joe Fairless or Joesta PF LLC.

The information, statements, comments, views, and opinions expressed or provided in this website (including by speakers who are not officers, employees, or agents of Joe Fairless or Joesta PF LLC) are not necessarily those of Joe Fairless or Joesta PF LLC, and may not be current. Neither Joe Fairless nor Joesta PF LLC make any representation or warranty as to the accuracy or completeness of any of the information, statements, comments, views or opinions contained in this website, and any liability therefor (including in respect of direct, indirect or consequential loss or damage of any kind whatsoever) is expressly disclaimed. Neither Joe Fairless nor Joesta PF LLC undertake any obligation whatsoever to provide any form of update, amendment, change or correction to any of the information, statements, comments, views or opinions set forth in this podcast.

No part of this podcast may, without Joesta PF LLC’s prior written consent, be reproduced, redistributed, published, copied or duplicated in any form, by any means.

Joe Fairless serves as director of investor relations with Ashcroft Capital, a real estate investment firm. Ashcroft Capital is not affiliated with Joesta PF LLC or this website, and is not responsible for any of the content herein.

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JF2664: 4 Ways Passive Investors Can Find Better Deals First with Judy Brower Fancher

Judy Brower Fancher knows how to find killer deals before anyone else. From staying on top of market trends, to being a wanted repeat-investor, Judy has developed a strategy for getting exclusive access to competitive deals. In this episode, Judy breaks down her methods into four parts so that you can find better deals first as a passive investor.

Judy Brower Fancher Real Estate Background

 

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TRANSCRIPTION

Slocomb Reed: Best Ever listeners, welcome to The Best Real Estate Investing Advice Ever Show. I’m Slocomb Reed. This is the world’s longest-running daily real estate investing podcast. Today we have Judy Brower Fancher with us. How are you doing, Judy?

Judy Brower Fancher: I’m doing well. Thank you for having me.

Slocomb Reed: Great to have you here. Judy is the founder of Brower, Miller, and Cole, a private research firm. Her current portfolio includes 20 senior living multifamily, one industrial, one self-storage, and two multifamily properties. She is a passive commercial real estate investor who just sold the assets of her 27-year commercial real estate marketing firm, where she represented more than 100 commercial real estate companies. She’s based in Newport Beach, California, and you can say hi to her on LinkedIn. She is Judith Brower on LinkedIn.

Judy Brower Fancher: Judy Brower Fancher on everything.

Slocomb Reed: Judy Brower Fancher on everything, great. Judy, tell us about yourself. What got you into marketing for real estate firms?

Judy Brower Fancher: Growing up in Southern California, one has pride in where they live. I think a lot of commercial real estate started here. My dad worked for an architectural firm when I was growing up, then he worked for two large landowners, and he was their public relations person. So I went into my dad’s field, but I like to say that he also has three normal children. That’s how I got started. When I decided to start my own company after working for other firms, commercial real estate was truly what I loved. I like to say I love a building when I’ve known it since it was a hole in the ground.

Slocomb Reed: That’s awesome. Tell us about – you were working in marketing and research for 27 years. Did you have a specialty within that for your clients?

Judy Brower Fancher: Specifically on commercial real estate companies, which is how I got my background, which I hope is helpful as an investor to me now. We’ve done everything from television advertising, to public relations, to putting on investor relations meetings for institutional investor companies, to working with syndicators on getting attention from both the opportunity side and from the investor side… So we’ve worked on every product type, think everything. We’ve done land, we’ve done self-storage, industrial office, multifamily, retail – huge. And the company still exists. I did sell the assets to someone I trained for 10 years. So if anybody wants to reach out to find out about that, I’m just saying that’s a thing. But that’s actually not what I’m doing now. Now I’m trying to make money off the money I earned.

Slocomb Reed: Absolutely. That makes you a pretty well-informed passive investor, right?

Judy Brower Fancher: Hoping so. I’m not as smart on the finance side as I think I am on probably the product and market. The company worked nationally, so I have a really good feel for a lot of the markets. I actually started investing with my clients; I asked permission, they didn’t come after me. I asked a few of my clients if I could invest with them and that’s how I got my feet wet a long time ago.

Slocomb Reed: That’s awesome. Judy, with you focused on your own passive investing now, making money with the money you worked hard to earn, and given that you have a very solid understanding of the assets themselves and of markets, what advice do you have for other passive investors and the research that they should be doing into a market or into an operator before they invest their hard-earned money?

Judy Brower Fancher: I’ve had a really lucky path with being able to invest alongside my clients. Also, I think what you need to do is use all the parts of your brain. You want to look at what are the environmental factors if you’re investing in certain parts of the country? Are you in flood zones? And yes, the sponsor should know that too, but if you’re trying to weigh risk and say, “What can I do that’s more sure?” Because that’s what, as an investor, I want to do now, more sure things… It’s to look at each market and maybe environmental things. I was just in Louisville, Kentucky which I love and I want to maybe do some PR for them. It’s a great city, but it is not growing. I don’t know why. They have the Derby, they have bourbon, it’s not horrid weather, everything about it seems right. But I think if you’re investing now you want to look for cities where there’s tech, because that seems to attract the young families, and that makes it grow. They don’t seem to have tech there. They have Humana, it’s one of the largest health things in the country, but that’s still not the young people coming in. So that’s how I try and look at things.

Another thing that I have done, because I work with companies that are investing, is to look where are my big clients investing and what are they seeing there in the markets? That can help me understand what I might see. I hate to say that anything’s a sure bet, but I have a great story from yesterday…

Slocomb Reed: Go for it.

Judy Brower Fancher: I’ve only done one crowdfunded investment; all the others, I’ve known the people personally that I’ve invested with. But I went to try and do another crowdfund one yesterday. It’s an obvious win. They’re buying properties to take care of all the trucks and all the supply chain stuff. They have huge properties and they’re all over Houston, which I guess they know they’re going to flood to. But they have identified and gotten five properties under control, they have five more that they’ve identified that they’re trying to get under control… The Invest Now button went live, I clicked on it, it said numbe 127 in line.

Slocomb Reed: Wow.

Judy Brower Fancher: Uh-huh. Then I got a thing saying, “Okay, go ahead and get your paperwork started.” Because I’d worked with them before, bang, bang, my [unintelligible [00:06:56].08] They’re like, “Okay, documents will be available at five o’clock.” At [5:01], I went in, I got my documents and started working on them. At [5:50] I got an email saying you’re too late.

Slocomb Reed: Wow.

Judy Brower Fancher: So when you have a sure thing… Like now where everyone thinks industrials, it’s the flavor of the month, above multifamily I believe… If you can get in on it, go; you’re going to win. It’s correct. Right now, industrial, they’re saying they’re going to need 10 times as much. These guys are supply chain support for industrial. I think that’s going to work.

Break: [00:07:30][00:09:10]

Slocomb Reed: It seems like in 2021 and 2020 too here soon, that sense of urgency is vital for getting to the right deals, regardless of which seat you’re sitting in. If you’re on the buy side of anything right now, that sense of urgency is really helpful. Judy, what is it about this opportunity that you pounced on, but were still a little bit too late for? What was it about that opportunity that makes you think that it’s a home run?

Judy Brower Fancher: Because I talked to people from all over the country about what’s going on, I try and read. I don’t think you can buy any industrial right now that’s not a win, literally. I don’t think that’s possible right now, because I think the statistic is they need about three times as much as exists right now. Now, I do look at the timeline because I think things change. You never know what’s coming down the pike. Anything that’s in industrial that’s within five years’ timeline, I’m good with it. I wouldn’t go on to a 20-year industrial, I’m not sure if something’s going to change, where all of a sudden people wouldn’t need industrial and 20 years. But the quicker the better for me, that’s what I look at in all of them.

I got into a multifamily in Sacramento. This is guys that I know, and they wrote back and said, “We can only take part of your money, because everyone wanted in on this.” So it was sort of the same thing. But this is a 12-unit building in Sacramento that was 90% vacant, absentee owner, just hadn’t taken care of it. They’re going to fix it up and flip it within 12 months, and we’re all going to make money.

I’m going to say that having friends in the right places is almost what you need right now. For people that are investing, if you know people in the business, just let them know that you’re interested, because they would rather have people they can come back to repeatedly and get money from than have to go out and find new investors. So if you can make friends with a company that knows that you will send your money pretty quick, that gives you access as an investor.

Slocomb Reed: Judy, thank you; that’s very helpful. Talk to the Best Ever listeners who are high net worth individuals looking to invest passively. They also have very busy, professional, and personal lives… They want to spend one to two hours a week — beyond listening to our podcast and the other podcasts they listen to, they want to spend one to two hours a week studying or doing the activities they need to do to get access to great deals. What are the one or two things that passive investors can do on a regular basis that will help them recognize and take advantage of great opportunities right now?

Judy Brower Fancher: I would think that LinkedIn is a good thing to spend half an hour on. Look at the stories, look at what’s being bought, who’s buying it, and maybe reach out to them. Because LinkedIn is a professional tool that works very well. If you say “Hi. I’m a passive investor. Can I link in with you? I’m interested in your company.” That’s going to be a welcomed outreach. And then honestly, looking at just the trade news, just keeping in touch with what’s happening, and other kinds of news. If you can think up topics about — if you find out where tech’s going and all that, like I’m seeing things that make the economy move that are attractive now, that look like growth things… Healthcare, and I think healthcare and tech are the biggest ones… That seems like the best way to do it. And then depending on how much you’re willing to place, I’m going to sidewind on your question really fast and say that my idea–

Slocomb Reed: Sure, go for it.

Judy Brower Fancher: People talk about that they have a diverse portfolio. They mean they have small and large cap stock, and the stock market just goes up, and down, and up. It doesn’t matter what company you’re in, it doesn’t matter if it’s foreign, or local, or anything… I don’t understand, that’s not diverse. That’s probably the other thing that I would say – if you want to be diverse, that I do have multifamily, self-storage, industrial, and senior housing, and I have stuff in the Northeast, and I think I’m going to buy something in the Southeast now… But I definitely have things in the West, and I have something in Tennessee; that’s where the industrial opportunity came up. It’s an Amazon building so it’s great. I think that’s more diversification. That is another place you want to spend your time, is making sure you’re not just chasing one asset class. Or if you’re going to be a passive investor, there’s no reason not to spread your risk by going in some into a bunch of different product types and different geographies.

Slocomb Reed: Do you think, Judy, it’s important for the sake of diversification, to invest with a broader number of general partners, or should passive investors be finding the one, two, three people they know, like, trust, and can place their money with?

Judy Brower Fancher: I am a fan of experience. So I did a couple of little toe-touch deals, just tested people a little bit. I mean, not to be saying I tested them, but to try and get comfort level. But I definitely like repeat investing with people that have a good track record, that I’ve seen them performing on what they’re doing. They’re like, “Hey, we have this other one. Do you want to go in on that?” “Yes, thank you.”

For me, there’s no reason to put all of my investments with one party. I don’t have anything against putting investments with the same party if they’re doing different product types or different geographies; I think that’s great, because then you do have that comfort level with the people you’re investing with. I like that when you have a question, you can get an answer. That’s the great thing about actually knowing these people that are running the businesses, that you can get hold of if you have a question.

Slocomb Reed: Totally. As competitive as it is right now, to get invested in great deals, do you suggest that newer passive investors do the toe-touch and invest the minimum, or the safe, smaller amount of their capital the first time? Or should they really just be pouncing on the great opportunities they find?

Judy Brower Fancher: If you have an industrial portfolio and you have a bunch of money, you may as well put a bunch in there. One of the things I try and look at, when you’re talking about being busy and everything, is that it’s going to take you some amount of time to get the materials back to them and get everything put in order and everything. And if you’re going to put your money out, and you put in a small amount, and it’s going to take you five years to make $10,000 – is that the best use of your time today? Maybe in your own business, you can make more money than that, faster. Alternately, because I did have a service business where I was worknig by the hour, and I had employees, so net profit at the end of that minus taxes… When I first invested in real estate, and I put in – I don’t know, 20,000 bucks, and I got back 28,000, I couldn’t stop laughing. I’m like, “I didn’t even do any work. This is amazing.” It’s kind of fun, someone else’s doing it. So it’s a little bit of time to do it, but I’m just saying that if you think about the time period and everything, you don’t want to put in so little that the return is a waste of everyone’s time.

Break: [00:15:43][00:18:37]

Slocomb Reed: Let’s say you, Judy, identify a great operator, a great GP – do you go ahead, connect with them, and get preliminary paperwork and stuff done before they have a deal to present, just so that you can get on it faster?

Judy Brower Fancher: I haven’t needed to do that outside of the crowdfunding thing that I tried. The others, they’ll ask for interest and they ask you how much you’re interested. Then they start slotting people in. The smaller ones – I’ve seen that they are doing it on a more personal basis… I guess I’ve filled out things on their website, of what accounts and different stuff like that. But then when it’s an investment opportunity and they email you, then you click in and put in how much you’re wanting to do, and they tell you the “Yes, great.” Or like I said, in that one case, they got oversubscribed really fast and they came back to me and said “Sorry, but we’ll take it.” It was about 50% of what I wanted.

Slocomb Reed: Gotcha. What crowdfunding platforms do you recommend?

Judy Brower Fancher: I am investing with self-defined benefit plan many, like IRA. I have to move it into an IRA account to spend it on real estate. And I have found that Crowd Street has more deals that accept that.

Slocomb Reed: Crowd Street.

Judy Brower Fancher: Realty Mogul didn’t seem to have as many deals that were okay for investing through that. So that’s the platform that I have used. They answer their emails. I don’t know them personally, but they do answer their emails.

Slocomb Reed: Awesome. We’re going to do a Best Ever lightning round. Are you ready for some quick questions?

Judy Brower Fancher: I am.

Slocomb Reed: Awesome. Judy, what is your Best Ever way to give back to the community?

Judy Brower Fancher: I am the vice chair of membership for an Urban Land Institute National Product Council called The Entertainment Development Council. I’m also on the board of my local ULI. It’s another way that I meet and learn things from people that I guess I should have mentioned. If you have a local ULI chapter, that’s a good way to get knowledge on real estate.

Slocomb Reed: What does ULI stand for?

Judy Brower Fancher: Urban Land Institute. It’s the people that own all the real estate in the United States, and the world. It’s an international group.

Slocomb Reed: What is the Best Ever book you’ve recently read?

Judy Brower Fancher: I just read a book called Small Giants, which is by Bo Burlingham. It’s about companies that stay small on purpose. They make a ton of money and they stay small, which is my taste. It’s my taste for running a business and for investing.

Slocomb Reed: Tell us about the deal you’ve lost the most money on.

Judy Brower Fancher: I invested — the most money I’ve ever invested into was a high rise in Phoenix to be built. I think it was in the early ’90s. The owner walked away from it. I was a limited partner, passive investor, no choice; just kind of jaw dropped. It’s like, “Oh, my money’s gone.”

Slocomb Reed: What happened? Why did they leave?

Judy Brower Fancher: They didn’t build it. I think that Arizona or the country went into a big recession, and they didn’t move forward on it and they let it go. They turned the dirt back over to the bank, I guess, that they’d taken the loan from.

Slocomb Reed: Wow. Tell us about the deal you’ve made the most money on.

Judy Brower Fancher: It’s coming up. I actually invested in an industrial park in Orange County, California, also in the ’90s. I well doubled my money in 15 months.

Slocomb Reed: You said it’s coming up. That deal went full cycle; what’s coming up?

Judy Brower Fancher: The Sacramento multifamily one is going to probably double my money, I think. I’m about to get out of a fund where… Is it okay to have a second to tell? My client let me in on the friends and family, and I didn’t quite understand what he meant at the beginning; I wasn’t as sophisticated in my investing, I guess. I am in on the people that are syndicating, we — because I’m passively in it– tie up the property, and then syndicate it, so we only have a 90-day exposure before it’s owned by a…

Slocomb Reed: Oh, okay.

Judy Brower Fancher: And that is going to close sometime at the beginning of next year, and I assume that means that we get a bundle all at once. That will be good.

Slocomb Reed: Nice. You said it should double your money. How long is the hold period for that?

Judy Brower Fancher: The one in Sacramento, the hold period is going to probably be 12 months. They said maybe two years, but it’s going to probably be 12 months.

Slocomb Reed: Doubling your money in 12 months to two years is not bad, for sure. Especially when you can do it passively.

Judy Brower Fancher: Yeah. They’re doing it for me.

Slocomb Reed: What is the best way, Judy, to reach out to you if any of our Best Ever listeners have questions?

Judy Brower Fancher: Finding me on LinkedIn is easiest. I guess I probably am Judith Brower. But I think if you search Judy Brower Fancher, you’ll find me.

Slocomb Reed: Search Judy Brower Fancher and you will find Judy.

Judy Brower Fancher: On LinkedIn. Yeah, that is the best.

Slocomb Reed: Awesome. Judy, we appreciate you being here on the podcast, telling us your story of growing up into commercial real estate, spending your professional career supporting commercial real estate investors, getting into investing passively with your own clients, and now being on this podcast is part of it. Thank you. You’re helping other passive investors identify great opportunities. Best Ever listeners, we hope you have a Best Ever day. Judy, thank you again for sharing your story with us and giving us some Best Ever advice. We will see you again tomorrow.

Website disclaimer

This website, including the podcasts and other content herein, are made available by Joesta PF LLC solely for informational purposes. The information, statements, comments, views and opinions expressed in this website do not constitute and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action. Neither Joe Fairless nor Joesta PF LLC are providing or undertaking to provide any financial, economic, legal, accounting, tax or other advice in or by virtue of this website. The information, statements, comments, views and opinions provided in this website are general in nature, and such information, statements, comments, views and opinions are not intended to be and should not be construed as the provision of investment advice by Joe Fairless or Joesta PF LLC to that listener or generally, and do not result in any listener being considered a client or customer of Joe Fairless or Joesta PF LLC.

The information, statements, comments, views, and opinions expressed or provided in this website (including by speakers who are not officers, employees, or agents of Joe Fairless or Joesta PF LLC) are not necessarily those of Joe Fairless or Joesta PF LLC, and may not be current. Neither Joe Fairless nor Joesta PF LLC make any representation or warranty as to the accuracy or completeness of any of the information, statements, comments, views or opinions contained in this website, and any liability therefor (including in respect of direct, indirect or consequential loss or damage of any kind whatsoever) is expressly disclaimed. Neither Joe Fairless nor Joesta PF LLC undertake any obligation whatsoever to provide any form of update, amendment, change or correction to any of the information, statements, comments, views or opinions set forth in this podcast.

No part of this podcast may, without Joesta PF LLC’s prior written consent, be reproduced, redistributed, published, copied or duplicated in any form, by any means.

Joe Fairless serves as director of investor relations with Ashcroft Capital, a real estate investment firm. Ashcroft Capital is not affiliated with Joesta PF LLC or this website, and is not responsible for any of the content herein.

Oral Disclaimer

The views and opinions expressed in this podcast are provided for informational purposes only, and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action. For more information, go to www.bestevershow.com.

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JF2662: 5 Evolutionary Ideas for Your Business with Joe Fairless

We’re sharing the top sessions from the Best Ever Conference 2021 as we gear up for the second Best Ever Conference at Gaylord Rockies Convention Center in Colorado this February 24-26th.

In this session, Joe Fairless will help you identify your liabilities, maximize your opportunities, and accelerate your growth for your business.

Register for the Best Ever Conference here: www.besteverconference.com

 

Click here to know more about our sponsors:

Deal Maker Mentoring

 

PassiveInvesting.com

 

 

Follow Up Boss

 

TRANSCRIPTION

Joe Fairless: Welcome to another special episode of The Best Real Estate Investing Advice Ever Show, where we are sharing the top sessions from The Best Ever Conference 2021. This year, the Best Ever conference is back in person, February 24th through 26th. Come join us, Denver, Colorado. You’ll hear all the new keynote speakers, you’ll meet some new business partners, you’ll learn some insights from the presentations and from the people you meet, that you can apply to your business today. Here is an example of a session from last year that is still relevant today and will be beneficial for you.

Everyone, looking forward to our conversation. I’m grateful to be here and I’m grateful that it’s remote, it’s virtual, but we’re all here, we’re all learning, we’re all looking to improve ourselves. I have a lot of respect for you because you’re putting a priority and an emphasis on growing. That’s ultimately what it’s all about. Coincidentally, that’s what this conversation is about. It’s about the evolutionary ideas that I have for you. It’s based off of things that I’ve learned for the last 12 months, it’s based off of things that I’ve come across. I thought “You know what? I’m going to document these five evolutionary ideas and I’m going to share it with the community because it was helpful for me personally.” Anytime I go to an event, anytime I hear a presentation, I’m not looking to apply all of the items that I hear from someone presenting, I’m not looking to meet everybody in the room. I’m simply looking for one substantive relationship if it’s with an individual, or I’m looking for one item that I can apply to my business. That’s what my recommendation is for you for this conversation. I have five ideas for you but if one of them is applicable, then it’s a win.

Let’s talk really quickly about my background, just for some context, in case you’re not familiar. $1.2 billion worth of assets under management, I’m the co-founder of Ashcroft Capital. In addition to that, I’m the founder of the Best Ever platform. With that platform, we have the conference, clearly, we have Best Ever causes which is near and dear to my heart. My wife and I have personally donated to over, I believe, 36 nonprofit organizations for the past 36 plus months, we do one organization a month. Apartment syndication book and a couple of other things. As you can see in this picture, I’m married, and I have a two-year-old named Quinn who is ever so active, and more so by the day. Let’s talk about the five outcomes for our conversation today.

The first outcome is, first and foremost, that I want to have a conversation with you about an area that I suspect is not being paid attention to enough, and is actually your largest liability as it relates to building a business. That’s number one. Number two is I want to make sure that we’re all getting the most out of our team members, but also our team members are fulfilled, and they have the right sense of direction for what we’re looking to do. So I have a tip for you there. Number three, a big challenge, is finding the right deals, that pencil in a compressed cap rate environment, also ensuring that we are still delivering on the expectations that our investors have, from a profitability standpoint, and then also maintaining sanity and protecting against anomalies that might come up whenever we’re doing deals. By anomaly I mean, if you have 25 deals, then you might have 23 that are performing but maybe two are struggling. How do we protect our investors against that and then ultimately, how do we also protect ourselves and the company against any anomalies that might come up?

Number four is a suggestion that I have based off of what I’ve experienced as it relates to thought leadership platforms. I am not going to talk about that you need a thought leadership platform. Holy cow, we were talking about that at the first Best Ever Conference. I’m not going to talk about that. I’m going to assume that you already know you’ll need a thought leadership platform. What I’m going to talk about is what’s the evolutionary next step from the thought leadership platform. The fifth is I’m going to talk about the success paradox. The success paradox is something that you likely have come across, but perhaps haven’t consciously paid attention to, some consequences of the success paradox, and a solution for that. So let’s dig right into it.

The first is the current situation. How I’ll structure this conversation is we’ll talk about what your current situation might be. Again, each of these five things doesn’t necessarily have to apply to you right now. Perhaps you will come across this current situation, and again, if you can pick one of these five things out, then I think it’s a good thing, and hopefully apply even more than that. For anyone who knows me, besides family and business, I’m currently obsessed with chess. For the last two years, I’ve been obsessed with chess. I went from the Chess With Friends app, to now and phasing that out, and I’ve graduated to chess.com app, so I’m playing people all across the world at all hours of the night. I tend to play more foreigners than Americans because I play at, again, all hours of the night. Americans are all asleep and I’m playing chess. So I am currently obsessed with chess. There’s a lot of parallels between real estate and chess. We’re not going to get into that in this conversation. I will mention one aspect of how there’s a carryover.

In chess, there are three ways to describe a mistake, basically, when you make a bad move, and they’re very kind about it. The first is inaccuracy. If you make a move and it’s inaccurate, or it’s an inaccuracy, you could have made a better move but it’s okay, there’s plenty of time for you to redeem yourself. So one isn’t an inaccuracy. The second is a mistake, they just flat out call you out, “Hey, that’s not an inaccuracy. That’s a mistake. That was a bad move. You shouldn’t have done it.” But not all is lost. But the third is called a blunder. If you blunder, you’re pretty much done, you’re pretty much going to lose the game unless there’s some miracle that takes place. As I was researching chess in my spare time, I came across this blog post. It really resonated with me as a real estate investor. As you can see, it’s what are the main reasons you blunder in chess? The number one reason is they were just careless, they weren’t thinking through things, and perhaps they were overconfident. It got me thinking, what is an area in real estate… I’m specifically talking about commercial real estate because that’s what we’re talking about at this conference. And even more so, perhaps, syndication. It doesn’t have to be multifamily, syndication across any property type.

I was thinking, “Where does that really apply and where could I and other real estate investors perhaps have a vulnerable point where we are perhaps careless?” I would recommend that right now, just for a moment, just think. Where might I be a little careless in my real estate business that it could cause a blunder? Where might that be? I have all points of vulnerability, due diligence, or maybe not underwriting properly, or maybe don’t have the right team. But what could cause a very large blunder where I’m not paying particular attention to enough? What I came across it and when I thought of this, my guess is that if we were in person and I asked that question to a roomful of hundreds of attendees, my guess is that there wouldn’t be one person who would mention what I’m about to call out as an area of vulnerability that they might be too lax in. That area is compliance.

Break: [00:08:51][00:10:30]

Joe Fairless: If there are any issues from a compliance standpoint in the syndication industry, then it could very well cause a blunder for your business. The thought process here is… I have a picture here as you can see, with Patrick Mahomes, I went to Texas Tech guns up, he’s getting crushed right there, I feel so bad for him. I bring that up because we’re essentially the quarterbacks of our business. If you look at NFL salaries and those multi-billion-dollar organizations, they know the importance of protecting your blindside. I would say that compliance, for 99% of the people who are listening and participating in this conference, is a blindside. You might be thinking, “You know, Joe. Not me, I’m not part of 99%. I’ve got a securities attorney.” The thing that I’ve noticed, not all securities attorneys –I have a very good one– but most securities attorneys and attorneys in general, we have the same challenge with them as we do accountants.

When you ask an accountant, securities attorney, or real estate attorney a question, they give a great answer, direct to the point, you got your answer. But the problem with that is if you’re not asking the right questions and if you’re not asking them enough times as you’re progressing through your business, then you’re not covered. With the NFL, I’ve seen that the left tackles are actually paid three times more than running backs on average, and two times more than receivers. You might be surprised by that. I was thinking, with our syndication business, are we not prioritizing compliance enough, and generally speaking, across the industry? I would say yes, we’re not. My solution is twofold for this. I’m not just saying, “Hey, it’s important to be more aware of it.” But I have two solutions. One is, if you have more than three syndications in your portfolio that you’re managing, that means you’ve got some momentum, you’re building a business, you have built a business, and now it’s time to get serious about having someone dedicated to ensure that you and your team are being compliant.

My suggestion is to hire someone, an in-house compliance person. If that’s not in the budget because if you look on Glassdoor, it’s between 80 to 250 to $300,000 salary for an in-house compliance person. If that’s not in the budget, then bring someone on part-time and then transition them into full-time, maybe as a contractor, transition them into full-time later. That would be one solution. The other is, I would recommend getting the proper insurance directors and officers for insurance. If you don’t have it, I recommend doing that. This is simply to cover our blindside as real estate investors who syndicate deals. If you’re not syndicating deals, then it’s not as relevant to you because you’re not doing any securities. But maybe you actually are, but you mistakenly think you are not. I would recommend having more protection and more oversight on your team. That would be protecting your blindside.

Number two is that you’ve got team members and right now, clearly, they’re mostly remote, if not all of them are remote. They might not have been remote in the past, but now they are. How do you, as a business owner, feel good about that work is being done and that you’re maximizing the potential of your team members? On the other side of the fence, as a team member, how do you help them be set up for success so that they can take the ball and run with it versus not being clear on exactly what the responsibilities are? Because that’s the main thing I’ve found as a challenge for me personally is with remote team members. You’re not there in the office, you can’t look them in the eye, you can’t talk to them and get some nonverbal cues on how things are going. That’s very challenging. The solution that I came up with, it’s not a revolutionary solution, but it is an evolutionary solution, certainly, if we’re not doing this already. That is to identify a single KPI per team member, that way you know what they’re on the payroll for. If you haven’t done this already, it’s a beautiful exercise.

Not only for you, because it gives you confidence and comfort, quite frankly, that “Hey, they’re on the team and this is the way that they make more money than I pay them.” Not only that, but I found that when you give team members clear direction like this, it’s very much appreciated. It helps them feel better about what they’re doing because they know they’re going towards the direction that you both want them to go towards, that helps the business, they grow, you grow, and everyone benefits. But I want to mention that sometimes when someone is farther away from the money source, what I mean by that is a salesperson, for example. I have some sample team members of mine, I have just one through five, just for sample team members, I want to give you some different examples. A salesperson, for example, it’s very clear, ROI. How much are they compensated? How much XYZ do they bring in? Then there’s the simple compensation structure. But what about, for example, a team member number four who has multiple responsibilities? What about that team member?

That team member is the one that oversees my Best Ever brand. That team member is ultimately responsible for the profitability of the brand. Think about when you’re coming up with the one KPI per team member, think about how you can as closely as possible connect that KPI with profitability for the company. That will help you sleep better at night knowing that you are setting them up on a course to help you grow the business, also to help them perform. You might come across –you will come across I should say– a team member who might be say, an executive assistant or a project manager. In those cases, it’s harder to associate one KPI for that team member. If you can’t do one KPI for that team member, then my suggestion is to have a one-sentence description of what their role is that way they can use it and you can use that, at least, as a way to identify what their focus is and what their role is.

The third thing I’d like to suggest to you is that if you are in a current situation where it’s tough to find deals, I think that’s a common occurrence on finding deals, tough to find deals. Two is even if I find the deals, I’m not sure if they’re going to be generating the returns that my investors are looking for. That’s a challenge because we’re a compressed cap rate environment. Three, as I mentioned earlier, protecting against anomalies that might come up on deals where you’re performing across the board, but there might be a couple of deals that aren’t performing as well as you’d like. How do you protect against that? We’ve talked about this throughout the conference. I say “we” I mean other people. Today, have talked about this throughout the conference, that is the fund model. I would say that with the fund model, what I found is that it’s a beautiful, beautiful solution to solve those three challenges. I’ll get into specifics because that’s what this conference is all about, it’s about getting into specifics. I’ll back up what I just said with some points to illustrate it a little bit more.

With a fund versus doing single asset purchases, what it will allow you to do is it will increase the deal flow. The reason why it will increase the deal flow is that, right now, you ideally have identified a specific property type that you’re going after. Based off of that property type, you have a narrow window of deals that you can look at. When you do a fund, you could be more flexible with different properties that offer different types of returns as long as you ultimately average out to where you need to for your investors. For example, if you have historically been looking at say Class-C properties. Class-C properties tend to have better-projected returns, although you want to get out of them before the CapEx starts coming at you and buildings start falling apart. If you were doing Class-C properties before and you have a hard time finding Class-C properties, but you happen to come across a Class-B property, but your investors were looking for more of the Class-C returns.

If you had a fund, then as long as you’re getting your Class-C properties, you can mix in a Class-B property. It could have lower projected returns but because with the fund, you’re averaging out the returns, you’re able to still deliver for your investors but you’re also able to increase your deal flow. If you’re having a hard time with deal flow, consider a fund because you will open up the types of deals that you can buy while still staying within your area of expertise. I’m not saying go outside of your expertise, I’m simply saying that you can have lower projected returns on one deal, combine that with a higher projected return, and perhaps that lower projected return deal wouldn’t have been able to be purchased by you in the first place if you didn’t have a fund because your investors wouldn’t have gone for that, but combining it into a fund all as well.

The second way that it could potentially provide better investor returns, the second advantage, I should say, is that it could potentially provide better investor returns. The reason why is because you can commingle money in a fund, whereas single asset purchases, you clearly can’t do that. With a fund, if you buy say deal number one and the Capex is $6 million, then in that fund, you are now six months into it, and you’re now ready to buy deal number two for the fund. If the first deal was requiring per year projections, six million dollars, but as you’re into it, as you’re doing the renovations, and as you’re looking at the Capex budget, you’re coming in under that six-million-dollar mark. You’re thinking “Man, we’re actually doing really well. It’s going to cost four million or four and a half million, not six million dollars.” When you’re raising money for deal number two, you don’t have to raise as much money because you’ve already got one to one and a half million dollars in savings from deal one. Because you don’t have to raise as much money as you would have if you’re doing single asset purchases, you’re going to be coming out ahead from a return standpoint.

Break: [00:21:48][00:24:41]

Joe Fairless: The third thing I’d say is its better sanity. Because if you have a deal or two that is not going as projected and you have a lot of other deals that are… As a limited partner, if you’re in those deals that aren’t going as projected, that sucks because you’re in a deal that’s not going as projected. But as a limited partner, if you are in a fund with that operator, now those returns are averaged together. You’re in a fund where the other deals that are performing are picking up the slack from the deals that aren’t. As a general partner, that’s a beautiful thing too because now you have one fund that is performing, assuming that you’re hitting projections versus individually reporting on a single deal. From my standpoint, we looked at it extensively. It’s a win-win for the operator and the limited partner. I would recommend looking at that.

Here’s something for thought leadership and challenges that, I can tell you, I’ve personally faced. I’ve got the Best Ever podcast and it’s been going daily for 2500 or so days, literally every single day. I haven’t been doing all those interviews, especially over the last 12 months or so. Theo Hicks has been doing a lot of the interviews, but I’ve still been doing interviews. What I realized is that the more the syndication business, Ashcroft capital, the more that company grew, the less I focused on the thought leadership platform. The result was not good. By the way, it has nothing to do with the interview style that I was doing or Theo was doing. But there wasn’t a dedicated person solely focused on the brand and on all the content across all the different types of mediums within the platform. I recently hired an editorial director and she’s overseeing the entire brand now. So now we have someone in place for that. When she was doing an audit of the podcasts and of other platforms, there weren’t a lot of positive reviews as of late.

It is because that I wasn’t putting the time that I needed towards it and, really, no one was, even though it was one of the most important foundational pieces of the brand. We’re fixing it. I bring this up because the podcast has 2500 plus interviews, you will come across this as you continue to grow. Ultimately, you want to spend time where, just like in real estate, you build the highest and best use on a piece of dirt. In business, you want to be in the highest and best use areas where you make the most money, and it’s fulfilling for you. As you grow your syndication business or commercial real estate business, your attention is going to go towards that, and your thought leadership platform can become stagnant if someone isn’t dedicated to paying attention to it. What I suggest is slowly transition it once it becomes mature. How I think about it is The Tonight Show where you had multiple hosts, Johnny Carson, and then a bunch of other people that have come since then. It’s a platform but then you can transition it to other people.

What you’ll find with my platform now is we have Theo Hicks who is a rock star and has been doing interviews, and he’ll still be doing some. Then we’ve got a show with Travis watts who you’ve heard from during this conference today. Then also Ash Patel, who a lot of you know is a commercial real estate investor who focuses on office and retail. He is going to be doing a lot of interviews for the podcasts. That way, I have the ability to focus on the stuff that makes me the most money. But then also, I’ll still be doing about three interviews or so a month in order to continue to be in the mix. Because I found it’s a great way to stay sharp, but it’s also not the highest and best use of my time. You also see that we’re transitioning from just Best Ever, to Best Ever commercial real estate, to triple downing exclusively focused on commercial real estate. I’ve talked to a lot of people who have thought leadership platforms that are mature, this is ultimately what they’re trying to do. So I’m just letting you know, this is what’s going to happen for you and that’s something to keep in mind. Identify some people who can eventually transition that over for you so you’re not as focused on it.

Lastly, I’ll say that once you implement these four things, if you do implement these four things or any of the four things, you might look like Mickey Mouse right here where it’s just like, “Hey, everything’s good,” whistling a tune. The challenge is what I call a success paradox, which is that the more successful you become in business, the more money you make in business, the less likely it is you’re going to receive constructive criticism from team members. Unless you proactively encourage that. It’s paradoxical because, in order for you to have become successful, you will have received, as you know, all sorts of constructive criticism, with some of it not constructive along the way. So how do we reconcile that as you become more successful, we get less feedback, which we would normally use to implement and become even better? The solution is fairly obvious. I was reading the book Mastery by Robert Greene. He talks about this exact scenario. What he suggests is to identify an event, say two to three months ago, that way, it’s not fresh from an emotional standpoint. You can think about it more as a third party involved, not necessarily personally involved. Think about an event that didn’t go according to plan and then think about how were you responsible for that taking place?

Something that happened to you that you didn’t like, what role did you have in that? What that does is it puts us taking more ownership in what we do, and it helps us get better feedback. The other thing I’d say is, who are the three people in your circle who will give that feedback to you? It’s necessary to have at least three people always in that circle to have that feedback for you. I can tell you, one, you saw the podcast review, the “Meh, so-so,” review. A team member shared that and I love it. I want that type of feedback. So that’s one for me. Two is, Ben actually, recently when we were talking about a welcome video for the conference. I was going to record it and he said, “Great, please record it. But can you do something better from a background standpoint? Because the last time it looked really unprofessional?” I was like, “Thank you for that. Yes, it did look unprofessional. I was kind of thinking that but no one mentioned anything to me. Thank you for that.” He ended up recording the welcome video in the studio to make sure it is professional and reflected the conference brand.

The third is here’s a quote from… It’s not a full quote because the full quote is Rated-R. I’ll let you read it. He said it looked like I was squinting in the sun. This is actually a friend, Ash, who’s going to be doing interviews. He said I was squinting in the sun or it also looked like I just saw one of our friends naked. I won’t mention the friend’s name. He said “That’s just a bad picture of you.” I said “Man, thank you. No one mentioned that to me. I appreciate that candid feedback.” So have three people on your team who will give you that candid feedback. With that, I’ll go ahead and wrap up.

I hope you gained some useful insights and actionable advice from this previous Best Ever Conference session. Remember, if you’re looking to scale your investing in 2022, we look forward to seeing you in Denver. Get 15% off right now with code BEC15 at besteverconference.com. That is code BEC15 for 15% off at besteverconference.com.

Website disclaimer

This website, including the podcasts and other content herein, are made available by Joesta PF LLC solely for informational purposes. The information, statements, comments, views and opinions expressed in this website do not constitute and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action. Neither Joe Fairless nor Joesta PF LLC are providing or undertaking to provide any financial, economic, legal, accounting, tax or other advice in or by virtue of this website. The information, statements, comments, views and opinions provided in this website are general in nature, and such information, statements, comments, views and opinions are not intended to be and should not be construed as the provision of investment advice by Joe Fairless or Joesta PF LLC to that listener or generally, and do not result in any listener being considered a client or customer of Joe Fairless or Joesta PF LLC.

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Joe Fairless serves as director of investor relations with Ashcroft Capital, a real estate investment firm. Ashcroft Capital is not affiliated with Joesta PF LLC or this website, and is not responsible for any of the content herein.

Oral Disclaimer

The views and opinions expressed in this podcast are provided for informational purposes only, and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action. For more information, go to www.bestevershow.com.

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JF2658: 3 Ways Land Investors Can Find Better Deals with Brent Bowers #SkillsetSunday

CEO and Land Coach Brent Bowers believes that anyone can get into land investing with little to no money or risk. It only took him nine months to become financially free, and he’s continued to use his strategy throughout his career. In this episode, Brent shares how he made some of his greatest deals, and three ways you can source better land investment deals.

Brent Bowers | Real Estate Background

  • Career: CEO of Zech Buys Houses LLC, and Land Coach at The Land Sharks
  • 12 years of real estate investing experience
  • Based in Colorado Springs, CO
  • Say hi to him at www.thelandsharks.com

Check out Brent’s other episode with us here: bit.ly/JF1490BrentBowers

 

Click here to know more about our sponsors:

Deal Maker Mentoring

 

PassiveInvesting.com

 

 

Follow Up Boss

 

TRANSCRIPTION

Ash Patel: Hello, Best Ever listeners. Welcome to the Best Real Estate Investing Advice Ever Show. I’m Ash Patel and I’m with today’s guest, Brent Bowers. Brent is joining us from Colorado Springs, Colorado. He was a previous guest on a couple of episodes. If you Google Joe Fairless and Brent Bowers, the episodes will show up. Brent, we’re glad to have you back. Thank you for joining us and how are you today?

Brent Bowers: Thank you so much for having me, Ash.

Ash Patel: Awesome, man. Hey, today’s Sunday, so Best Ever listeners, we are doing a skill set Sunday where we talk about a particular skill that our guest has. Brent is the CEO of two companies, and today he’ll be showing us how anyone can invest in land with little to no money or risk. He’s also a land coach for Wholesaling, Inc. Brent, before we get into your particular skill set, can you tell the Best Ever listeners a little bit more about your background and what you’re focused on now?

Brent Bowers: Yeah. My background – I started in real estate in 2007, got my real estate license in 2007, because I thought that to be a great investor, I need to have a real estate license. Well, we all know what happened in 2008-2009. I kind of took a little break from real estate for a few years while I joined the military and went back to school. The military actually sent me to school in 2013, and I started house-hacking before I even knew that was a term. I was renting out the rooms and that kind of gave me my start. Then I started wholesaling houses, and then ultimately stumbled upon wholesaling land. In my second land deal, I created a passive income note of $400 a month. I was like, “This is too good to be true.” Because I just covered my car payment, is what I did. Then I did it again and again and again. Before I knew it, I now have 114 notes pay me every single month on vacant, raw, unimproved land. Most people drive by land every day and they don’t even look twice at it. I’ve virtually had no competition. So I’ve been shouting it from the rooftops, I’ve been teaching people how to do this, and having a lot of fun.

Ash Patel: You’re blowing my mind. So vacant land is somehow paying you.

Brent Bowers: Yeah, absolutely.

Ash Patel: Let’s dive into that. I’ve got to hear more.

Brent Bowers: Yeah, let’s keep it super simple. It’s as simple as it sounds, really. What I’m doing is I’m buying stuff at a massive discount. It’s just like houses, apartments, or mobile homes, 99 out of 100 sellers are not going to need your discounted price for your speed and your convenience, and all the things you offer. But there’s that one out of 100 that’s going to need to get that monkey off their back or speed, or convenience, or they’re about to lose it, or they inherited it, no emotion tied to it. So we just need to talk to the right amount of people, and before we know it, you have someone that’s like, “Yeah, I’ll sell it for…” “Shoot me an offer,” or “I’ll take $200.” I’ve gotten land for free, that I’ve made $27,000 profits on. So it’s just one of those things. It’s so real. We just got to talk to the right people.

Ash Patel: Brent, everybody says don’t buy assets that are not cash-flowing. Not only is your land not cash-flowing, but it’s also not improved and has no way of cash-flowing. How is the money coming in?

Brent Bowers: That’s why I never bought land myself, honestly. I looked at these parcels of land and I’m like, “There’s no way I can buy it.” Because I started as a landlord. I just started accumulating rentals, and before I realized it, they really were cash-flowing, they were paying for themselves. Then every time I got a little bit of a profit, something broke. Something always breaks on a house when you have tenants. You’re guaranteed two things in life when your landlord – to die and to fix things for tenants.

So how does my land cash flow? Let me just give you a quick example. That second land deal that I did, I purchased for $500 from a lady that was pushing 91 years old. She was the sweetest, kindest lady. She was like, “Look, my husband bought this thing 20 years ago.” We were sitting on her front porch in Denver, Colorado; her porch was bigger than my entire house, so I’m not buying it from a poor person either. She was educated, she was very well-spoken, and she said, “Look, it’s yours for $500. I don’t want it. I’ve been paying the taxes on it for 10 years now. My husband bought it 20 years ago, yada yada.”

What I did was I wrote her a $500 check for this piece of land. It was not buildable, because it was not accessible. Actually, it was encased by state land so, technically, we had to figure out how to get an ingress-egress or an easement through the state. So there was going to be some attorney and some legal work done there. But I wasn’t going to mess with that. What I did was I went on Craigslist that night when I got home. I had actually stopped by the land, took photos, put it on Craigslist, disclosed everything I knew about it… Not accessible, not buildable, 4.7 acres, $500 down, $400 a month. And I sold that property the next day on a Sunday. The guy literally brought me the cash and brought me $400 every single month. That’s where I was hooked. I was like, “There’s no way I can keep doing this.”

Ash Patel: Was that essentially a land contract?

Brent Bowers: 100%. I sold it on a land contract or a contract for deed. I had my attorney draw one up; and I even offer people mine that I use for free. But I just ask “Have your attorney check it out that way you can use it across state lines.” But yeah, that land was cash-flowing. And by the way, Ash, I got my investment out of it the next day. My rental that I bought in 2007 – I didn’t get my investment out of it until I sold the darn thing 12 years later at the same price I purchased it for.

Ash Patel: A couple of things. I love the analogy with single-family houses, because it’s fun to do those proformas, but you don’t take into account the plumbing problems, the HVAC going out, the roof leak even though the inspection went well. There’s a lot of what-ifs. Right now, you sold this land for $500 and $400 a month; your car payment is taken care of, you’re feeling good, and you want to repeat this, I’m assuming?

Brent Bowers: Yeah. I remember sitting down with my wife and I was like, “Wait a minute, this is financial freedom. We’ve got to figure out how much we owe each month.” It was almost like $6,000 a month at that time, this was 2016, and we spent about $6,000 a month. We just had our first baby, we moved across the country. So what we did was “Okay, what is our water bill? What is our electric bill? What is our house payment?” And then each land deal, I would check something else off the box. Before we knew it — it took us almost nine months actually to become financially free. I was like, “Hey, I can get out of the military now.” I’m not bashing rental properties. I love buying buildings with the cash that I get from my land cash flow, because buildings give me three things – appreciation, depreciation of the building, so it gives me a tax write-off, and then mortgage paid out. So all those things combined create wealth in the long run, but not cash flow for me; they pay for themselves.

Ash Patel: So at this point, did you pursue additional real estate or strictly land?

Brent Bowers: I did both, actually. I really, really heavily pushed the land, because my goal was, I was trying to hit $100,000 a month in payments coming in for the land. I have not reached that goal yet, but I did hire a coach that he actually was way past that. So I paid him the one-on-one coach me and I’m getting there. We’re getting closer every single day. I’m not there yet, but yeah, I still bought houses. Because here’s the thing, at the end of the year, they tell me what my tax bill was, and I pay a CPA about six grand a year to tell me, “Hey, here’s how many houses you need to buy to pay very little in taxes.” Because I would rather buy a house with that tax money, than send it to the IRS.

Ash Patel: Your coach, was he or she a land flipper, or just a general business or real estate coach?

Brent Bowers: I would say land dealer is what I would put a tag on him as. He’d been doing this for 20 years. I think I did 10 or 12 land deals before I hired a coach. I was almost at $200,000 and I was like “There’s got to be a way I can systematize this and structure it and turn it into a business.” Now I have a team running the whole thing for me. So it’s just purely a real business.

Ash Patel: I’m still trying to grasp my head around this. You used the typical wholesaling approaches – the mailers, the mass marketing – and you tried to buy land instead of single-family houses or multifamily.

Brent Bowers: You hit it on the head. Absolutely.

Ash Patel: And what’s your typical seller? I get the person who bought the land, it’s been in the family forever, they want to dispose of it. What other types of sellers do you run into?

Brent Bowers: I run into that seller… And these don’t have to all be behind on taxes or out of state. I’ve had people that live in the same county, the same city, that – they just want to offload the property. Lately – it’s actually really sad to say – we’ve been mailing across the country and some people have lost loved ones, that that was their land, and they inherited it. Sometimes it was like a husband or wife purchased it, sometimes the seller is “Hey, I bought this land in Colorado. Me and my wife went out on vacation here 20 years ago. We never did anything with it. We wanted to build a cabin; we actually had plans.” I’ve had sellers who show me the plans that they had drawn up for like a cabin or a dream second home. Who else…? Neighbors that bought the lot next door to them, they never did anything with it. They vary, they really do.

Ash Patel: I get that. A lot of my friends, and me included, are looking at land to buy just to run four-wheelers. Some of the guys want it for hunting, but I don’t think they realize all the things that come along with it. You’ve got to keep it groomed to some extent, the taxes, any trespass signs, survey… I mean, there’s a lot that goes with it. But on the surface, it’s just appealing. “Hey, you know I’ve got 20 acres to go [unintelligible [00:09:57].06]”

Brent Bowers: Oh yeah. It’s the American dream. I sell to a lot of people that just want those 20 acres to go out and ride those four-wheelers. Now, they weren’t all $295 or $500. They’ve gotten bigger. But yeah, it’s totally the American dream. That’s my buyers and my sellers.

Break: [00:10:14][00:11:47]

Ash Patel: Brent, do you focus strictly on land or do you still try to wholesale apartments and single families?

Brent Bowers: I would say probably 7 out of 10 is land. We pick up deals like mobile homes and houses, we will wholesale them, we will assign the contract to the house. I try and do like a renovation or a flip on a house once a quarter… Because those come. This business works hand in hand with houses and land and multifamily. It’s just given me the ability to scale on a level I didn’t realize. But it’s funny how I ran into land – it actually started with houses, and then it kind of flopped more towards land and less towards houses, but the houses still come along. So a little bit of everything. I’m an investor in a 19-unit apartment complex, and we bought our office building, so more moving into commercial as well…  Because you got to do something with the land profits, because you cannot depreciate land. So it’s really taxed at a higher tax rate, ordinary income.

Ash Patel: Are there a lot of people doing what you’re doing?

Brent Bowers: I don’t feel like there is. I still say there’s virtually no competition in this business, and I told you why. The same thing with you, Ash; you said land doesn’t cash-flow. That’s what most people think, and that’s what I used to think as well.

Ash Patel: I love that contrarian approach, man. Go where no one else is going. I’m going to push you for a second. I’ve tried to convince a lot of wholesalers over the years who’ve strictly focused on single-family homes to go into commercial. And again, my definition of commercial is non-residential buildings. So strip malls, mixed-use buildings, medical… And there’s just nobody doing that. So for the last 10 plus years, I’ve been a commercial real estate investor and I’ve only gotten one postcard where somebody said, “Hey, quick cash offer for your building.” I knew it wasn’t a mistake, because they wrote the word “building” instead of “house.” So one wholesaler I’ve ever come across in 10 years that wants a commercial property. So it sounds like people should be looking at land as well. But at the same time, why don’t you look at commercial properties? What would it take to get you to dive into that?

Brent Bowers: I actually hired Dolf De Roos, the king of commercial, to help me. Dolf has helped me one on one. [unintelligible [00:14:00].23] Dolf De Roos, king of cash flow, is mentoring me on commercial. Also, another guy Ken Van Liew, who builds skyscrapers in New York. It’s funny you say that, because I’m looking more into diversifying into commercial. I love commercial, because it’s more contract-based and not people-based. That’s why I love land, because my land buyers don’t call me when there’s a problem. I call them usually and say “Hey, you’re late. You now have a $75 late fee that was automatically tacked on.” Because at the end of the day, I love people, but I don’t want to deal with people. And with my house rentals, that’s what the property manager does. But the best part about commercial, for me, is it’s more contract-centric, not people-centric.

Ash Patel: And Brent, how can new investors get into what you’re doing?

Brent Bowers: For the land or the commercial?

Ash Patel: For the land.

Brent Bowers: Alright. So for the land, I just started a YouTube channel about five months ago and I have a video going out five days a week, Monday through Friday. I highly recommend going to my YouTube channel. Go to YouTube and just search Brent Bowers. But there’s a payment; you’ve got to pay, you’ve got to subscribe. That’s the only way you’re going to get to see these videos and they’re actually going to work for you. You can watch them, but if you don’t subscribe, they won’t work for you. [laughs]

So that’s probably the way I would recommend. Start this with a very small barrier of entry. The first land deal – I bought for $285, sold it to a realtor the next day for five grand. It’s a realtor, that realtor knew that area. So it’s a very small barrier of entry, and that’s why I love it so much. My father’s done about 35 of these land deals now. I’ve got my dad doing it… So I can’t say enough great things about it.

Ash Patel: Let’s take the wholesaler. They search for maybe people that are behind on taxes, or they look for properties that are not well kept. What can they do to start getting land?

Brent Bowers: Let’s get granular with this. Let’s talk about how we can start right away. So in the beginning, I started with the tax delinquent list. Now I’m starting to notice counties are charging for those, and they’re really a pain in the butt. They scan this PDF, and it’s like schedule numbers or APN, the assessor’s parcel number, and you’ve got to put that into the assessor site to get the name, and the address of the mailing… Then if it’s got a property address, then how big is it… That was a really big pain in the butt for me. I’ve found that there are easier ways. You can go to PropStream and download a list of landowners in a county in five minutes. I could even give a link with a free seven-day free trial and you can go get a list for free right now if you’d like for me to do that.

The second thing is you want to communicate with this list. I recommend sending a postcard or an LOL, a land offer letter. Send them an exact offer letter of what you would offer on this land, or a postcard just saying — just like you said, “Hey, I’d like to buy your building,” but it’s “I’d like to buy your land. If you’re interested in a quick cash offer, a fair offer, call me.” That’ll get your phone ringing; and you can start individually looking at these parcels of land, seeing what the least amount of money the seller would take.

Then go and figure out what it’s worth by calling a realtor, looking on Zillow, seeing what stuff’s sold for in the area; Redfin, another favorite, or landwatch.com. How do you figure out what lands are worth? Well, I just gave you three: Redfin, Zillow, landwatch.com. And you want to compare apples to apples, one-acre parcel, two-acre parcels, or quarter-acre 8,500 square feet. Compare apples to apples within the same area; if Zillow or Redfin says the lands are worth 10 grand, and you can get the thing under contract for $4,500, you now have an asset under contract at 50 cents on the dollar. I literally have a student that just got a piece of land under contract for $95,000, 36 acres in Park County, Colorado. Guess what they figured out was on it? A cabin, an off-grid cabin, with solar that sleeps almost nine people. He already had the land under contract for 50 cents on the dollar, because it’s worth almost 200k, and it had a cabin too. So you really get lucky when you go out and work every day at this.

Ash Patel: Can we go over some land parcels that are super attractive? And I would ask you if there’s anything you wouldn’t touch, but you already touched a property that had no access to it. So I’ll still ask it… Is there anything that is off-limits when it comes to land?

Brent Bowers: No. If it makes a profit, if I can get it at a crazy discount, and/or I can change the zoning, or kind of like with commercial, you change the zoning, you could probably pay a little bit more… If I can figure out a way to make the profit on the land and it doesn’t take a ton of work, I’ll do it. I don’t generally like subdividing or changing the zoning, and I don’t like cleaning up junk cars. I will answer one thing I won’t touch – I’m not going to touch on environmental issues. I don’t want to mess with environmental stuff, and I haven’t really run across too much of that.

Ash Patel: What if you buy at the side of a hill? A steep hill? Would you buy it?

Brent Bowers: Heck yeah. I have a friend that bought a piece of land, it was a cliff. He bought it for like nothing. Guess who’s renting it from him? Someone out in Hollywood; they film with it. So he didn’t have to sell it.

Ash Patel: What’s really in demand?

Brent Bowers: You know what’s really in demand lately? Buildable infill lots, things that spec home builders or developers can build on. Also what’s in demand – recreational land where people can go just outside the city, park their camper or their RV, go camp with their kids, create memories, get out of the city; not go to Disney World, but we’re going to go on a camping trip. COVID really changed the land business for me. I remember we didn’t even know what COVID was. It was February; I purchased the lake house, we come home in March, and what is this COVID-19 thing? I was like “Oh my goodness, we just spent almost all of our money on this lake house. My land buyers are going to stop paying.” One stopped paying, and actually, we just modified his loan. Then I actually had a lot of land inventory for sale. Then about April and May, we sold it all, because there was just more of a demand.

Ash Patel: What’s an example of where you did not make money?

Brent Bowers: On a piece of land? I got a little cocky on my first five or six land deals. And as Tony Robbins would say, “When you’re winning, when you’re making a lot of money, you’re partying. When you lose money, you ponder.” So I was actually an army officer, I was working 12 or 13 hour days, had my new baby at home, wanted to spend time with my wife, and I was doing these land deals left and right. When I could get a chance away from the army stuff, I would take my lunch break, and I would buy these lots. I kind of bought a few of them right off the bat. I wasn’t running title searches, I wasn’t doing owner incumbrances, and I didn’t realize what a treasurer’s deed was. Basically, what that is – I’m sure you know Ash, but when someone’s not paying their taxes, there’s something called a tax lien investor and they come in and pay them for you. Well, if you pay for enough years, it becomes deed eligible, and you can foreclose on that property and take it from that seller. Well, I bought a few of those as well that came on treasures deeds. And when I turn around to flip them, my buyer was going through a real estate agent, and I list it with my realtor, we figured out “Oh, there’s a cloud on the title.”

On one particular property — I was able to pull it off on most of them and still make money by offering seller financing. Seller financing and buying at a massive discount gives you the biggest margin of safety you’ll ever realize. It gives you such a buffer. But this one particular property that I purchased with a treasures deed – I didn’t do a title search, and it sounds so stupid for me to say it… But in the beginning, I was “I can’t mess up. The county says is worth 35,000, it’s assessed at $3,300, I’m paying half the assessed value… I can’t mess up, right?” Well, this one particular parcel, I didn’t even go and look at it. I just knew it was in a great area. Well, I come to find out there’s like a huge crater in the ground, plus the treasurer’s deed… And I finally did sell it for exactly what I paid for it, but with owner financing,

Break: [00:21:57][00:24:50]

Ash Patel: I think a lot of us have that humbling experience and I think we need it. Because when things are going well, it almost feels like everything you touch turns to gold. And I had people say that to me, and I actually believed it. And I had the same humbling experience… So that’s very valuable. So somebody starting out and they’re contemplating single-family homes, multifamily, maybe they have a full-time job… How do they start with this? Can they just get on Craigslist, get on the MLS, try to find land, call the sellers, and try to negotiate a deal?

Brent Bowers: No. When you’re first starting out and you have that full-time job… I teach people how to do this, like, “Hey, I just quit my job and dived into this full time.” I don’t recommend that, because you can’t go out in your backyard today and plant an orange tree and live off of it tomorrow. You’ve got to cultivate it, you’ve got to get that thing off the ground, you’v got to start building the business. So what I recommend is pick your playground; that’s your area. I started in my own backyard. It was a two-hour radius; so I could get there on a weekend if I needed to. I picked that area, then I went to PropStream, and I started pulling the entire county land list. Then I went to Zillow, Redfin, and LandWatch, and I wanted to see where the volume was. Where’s the land selling the most? What size? Then I noticed it was a certain size, and then I went after that first. This was after I exhausted the tax delinquent list. Because that list is so small. The tax-delinquent list, you run out of it very quickly. So you can start there, or you pull the entire county list, and the tax link will be in that county list as well.

Then start mailing them that postcard that I talked about. Get your phone ringing; return those phone calls on your lunch break, or in the evenings. Then have a great call with those sellers, listen to them, understand what’s going on, and solve their problems. At the end of the day, it’s not about us buying land at crazy discounts, it’s about solving that problem for the seller – usually it’s the land – and then getting it under contract. Then either assigning your contract to a builder or developer, or buying that thing, and selling it on Craigslist, or Facebook, or with a sign. I sold so many of my parcels of land with signs. I moved a lot in the army, side a lot of boxes at home. I couldn’t afford the signs, so I would write on these boxes and staple them to a tree, or put them on a stake. As soon as it rained, my box was trashed. But I sold so many parcels with free boxes that I got from moving all over the country in the army, or all over the world, honestly.

Ash Patel: Very underrated. Craigslist, Facebook, and signs. Amazing what they can accomplish. On Facebook, not only on Marketplace, but hit the local towns; get onto the pages of what town your property is in, and engage with the residents of that town. That helps a lot.

Right now industrial is on fire. Two of the biggest landlords in the world are operators of industrial or logistics land. Are you doing anything with that?

Brent Bowers: No, I’m not.

Ash Patel: Let’s push you again. Anything near airports or intersecting interstates where there’s a workforce – super-hot. We’ve done a few deals near airports and interstates for large multi-million square foot industrial buildings. These large companies often don’t have the resources to go out and scout their own land; they rely on others to bring them deals. So it might be something for you to look at.

Brent Bowers: That’s incredible. I actually just watched Amazon build a 20-acre building right outside the airport in Colorado Springs. Imagine that land seller, how happy they were.

Ash Patel: Yeah, and how hot it is. Amazon now has realized that they’re making a lot of landlords very wealthy. So they’re now getting into buying the land, building their own infrastructure, and keeping it on their books, versus just leasing it. Yeah, man, I love your story. I can’t imagine where you’re going to be in six months. Let’s keep in touch and see what you’re working on later on. What else do you have for the Best Ever listeners? What advice on getting started?

Brent Bowers: First off, thank you so much for that tip as well. That’s amazing. That’s worth millions of dollars. That’s going to lead me to answering your question right now, Ash. Between you and I – we just talked about so many things that can create a millionaire in the next two, three, four, or five years. It’s just taking action; you’ve got to take action and do it. At the end of the day, you can listen to a thousand podcasts; if you don’t take action… And how do you take action? When do you take action? How to take action? Well, time-block it; put it on your schedule. When I’ve got to get something done, I block out my schedule, turn my phone off, turn my email off… Delete Facebook off your phone, don’t scroll. Create. Don’t consume, create. You’ve got enough knowledge to go ahead and pull the trigger. You’ve got all the answers for today, and tomorrow’s answers will come to you tomorrow, when you need them. So just take action.

Ash Patel: I love that. And your time blocking and leaving your phone away – I just started separating myself from my phone. You do it in baby steps. Walk out of your office and leave your phone behind, or leave it in the kitchen while you go into your office. It’s amazing how free you feel. So start out with five minutes. You think, “Oh my god, what if I miss a call? Okay, not that big of a deal.” Then go 20 minutes, 30 minutes, and you’ll be amazed how you can unleash yourself from your phone. Great advice, man.

Brent Bowers: Digital noose. I used to call it a digital leash, but I think it’s a digital noose. Monday, I filmed 20 videos for my YouTube channel. I did them all in one day, and I didn’t look at my phone from nine to five. Most people think “Oh my God, it’s going to take me forever to get caught up.” Well, I was able to return all those calls and all those text messages from nine to five… It maybe took me 20 minutes.

Ash Patel: Yeah, and the world didn’t collapse while you didn’t have your phone.

Brent Bowers: No. Exactly. In 20 minutes? But think about it, what if I answered it, checked it, and replied all day long? That would have kept that text message communication going, that 20 minutes would have turned into an eight-hour day.

Ash Patel: I love it. Brent, how can the Best Ever listeners reach out to you?

Brent Bowers: Find me on YouTube. You definitely have to subscribe though… As well as, if you’re interested — thanks for mentioning it. I’m a Wholesaling, Inc. coach. Head on over to wholesalinginc.com/land. If you’re interested in booking a call with me and my team, we’ll see what your goals are. If you want to jump in the land, I’d be honored to coach you.

Ash Patel: Brent, thank you for a great conversation today. Starting out in 2007, going into the military, house hacking, and then just accidentally getting into land, and going full speed ahead on it. What a great story, man. Thanks for sharing.

Brent Bowers: Thank you, Ash.

Ash Patel: Best Ever listeners, thank you for joining us, and have a Best Ever day.

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JF2650: How One College Grad Grew His Portfolio to 359 Units in 1.5 Years with Braeden Windham

During his senior year of college, Braeden Windham wasn’t sure what he wanted to do with his career. It wasn’t until he met his future partner at an event that he found direction. Handed a pile of books and a list of podcasts about CREI by his partner, Braeden spent the rest of the semester studying real estate investing and syndication. Fast forward a year and a half, and now Braeden is the Founding Partner of multifamily investment firm Well Capital. In this episode, Braeden talks about how clarity and transparency guided his success over the past year, along with a few lessons learned along the way.

Braeden Windham Real Estate Background

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TRANSCRIPTION

Ash Patel: Hello Best Ever listeners. Welcome to the Best Real Estate Investing Advice Ever Show. I’m Ash Patel and I’m with today’s guest, Braeden Windham. Braeden is joining us from Dallas, Texas. He’s the founding partner of Well Capital which is a multifamily investment firm. He has one and a half years of real estate investing experience. Braeden has 359 units across three apartment complexes. Braeden, thank you for joining us and how are you today?

Braeden Windham: Thank you for having me. I’m doing well. How are you?

Ash Patel: I’m doing very well. It’s our pleasure. Braeden, before we get started, can you give the best of listeners a little bit more about your background and what you’re focused on now?

Braeden Windham: Absolutely. First off, thank you for having me. I’m excited about the conversation today. How I got into real estate… First work experience – I was a ranch hand at 16 or 17 years old. I really learned what it looked like to work really hard for my money, and I never really wanted to do that again. Fast-forward to college, I had an internship with a company that bought other healthcare companies. That was kind of my first, I guess, exposure to purchasing assets and what that could do for you. I guess I didn’t know how it really applied until my senior year of college. I really didn’t have a clue what I wanted to do professionally. I figured I didn’t really want a boss, but I thought maybe being a real estate agent was the closest thing I could get to that. I met my business partner actually at a church event, and he dumped five or six books in my lap and a bunch of podcasts. He was like “You need to go learn about real estate investing and syndication.” I had no idea what that was, but I just went all in, because I didn’t have much else to do. I think I had like two or three classes in my last semester. That’s kind of how I got started.

Since then, he hired me on out in Florida to actually do construction management work, where we were basically taking government grant money and managing on the construction of 500 or so projects. We really learned where our strengths and weaknesses were in our partnership. Since March of this year, I left that to just be syndicating full-time and investing in real estate. That’s a little bit about my background. Now we’re just focused on acquiring and repositioning assets in the southeast and the Midwest. Really anything over 100 units at this point.

Ash Patel: What a story. What the hell were you going to college for?

Braeden Windham: I was actually in finance, with a real estate background. I went into it and I had no idea what I wanted to do. I actually went to my real estate teacher to ask him about syndications, and he had no idea what it was. So I filled my ears with a bunch of podcasts at that time, just to self-motivate and learn about the industry.

Ash Patel: You should go back and teach a class on syndication.

Braeden Windham: They actually do have a syndicator that’s teaching the class now. If I could just go back three or four years, that’d be great.

Break: [00:03:20][00:04:53]

Ash Patel: Alright, so let’s back up a little bit. This person that you met, who was then your partner later on, you guys partnered together immediately and started working on these projects?

Braeden Windham: Yes. He had had a few Airbnb experiences, he had invested in some Airbnb properties, and then also had been exposed to development from a really young age, and his family had been involved in real estate. So he was a little bit ahead of me in that sense, and really knew more about the syndication space. I guess when I jumped in, I was gung-ho about it, and I was like, “Let’s go to the next event, if possible.” Because I was listening to actually Rod Khleif’s podcast, and he was having an event in LA. We flew out within three months of me learning about this stuff and I just invited them out. That was the first time we had ever hung out together, been in the same room together, was at that event. Just since then, we’ve been able to work together for probably close to a year just outside of real estate so we’ve really gotten to learn. He likes to say that he’s the gas and I’m the brakes, and I think that’s a really good metaphor for our partnership.

Ash Patel: Is he still a partner in your syndications?

Braeden Windham: Yeah, we founded Well Capital together. The origin of Well Capital is we were both giving to the same charity just on a personal level, and we woke up one day and we’re like, “Why don’t we make this a company-wide thing?” Because we gave to charity water and, basically, they take funds overseas to give people clean water who have never had it before. So we were just like “Why don’t we rebrand our company as Well Capital and just make it more about that than syndicating apartments?” I think that’s an easier conversation to have with whoever, passive investors or anyone you’re going to talk to. It’s an easy way to make the intro and make it more than about yourself, it’s more about other people.

Ash Patel: Braeden, what was your first syndication?

Braeden Windham: That was a 47-unit in South Texas. It was in Rockport, actually.

Ash Patel: What were the numbers on that deal?

Braeden Windham: We bought that for 2.3, we put about 1.2 million into it, and then right now, we’re going through a refi. A lot of lessons were learned on that first deal. We as a GP probably aren’t going to make much, but it’s a huge learning lesson. I think the appraised value was around 4.4 or 4.6, and that was 18 months ago, which is insane. So it just taught me a lot about what I should be doing, and what I can move forward and do better. I’m super thankful for the first deal.

Ash Patel: Why are you not going to make money? I see over a million dollars…

Braeden Windham: That’s a good question. That’s a loaded one. I think it really just comes down to — for me, it’s a lot of angst. First off, we just had a lot of, I would say inexperience, and we partnered for that inexperience, which is what a lot of people tell you to do. I completely agree. But you have to ask very tough questions up front, if I had any advice on that. So we got into it and just the rehab budget expanded, almost doubled. So we really shot ourselves in the foot when it comes to what we were going to make on that deal. And just not having the people in place to actually know what that rehab was going to cost… So we definitely learned from it.

Ash Patel: What were the hard lessons that you were talking about on this deal?

Braeden Windham: I repeat it all the time, it’s making sure that everything is in an email, everything is agreed upon, that there aren’t any “Oh, I thought you said this, or you were going to do this.” No, everything is in an email, everything’s clear and written out. And just having professionals walk with you on the front end is very important, in my opinion. Because me walking a unit at 21 or 22 years old, and a general contractor that’s done this for 50 plus years, walking in on the front end and telling me there are things behind these walls, or there are structural issues, or there are termites, those are things that I wouldn’t have unknown otherwise. I think just having professionals walk with you and asking the tough questions of those professionals… Whether that be co-GP, whether that be contractors, whether that be whoever that you’re going to have walk with you on a property, just making sure that they know what they’re doing and that their track record speaks for itself.

Ash Patel: With putting things in writing – is that more directed towards investors, contractors, lenders?

Braeden Windham: From my perspective, and where we have gotten I would say misled sometimes is definitely with co-GPS, and just making sure that whatever roles and responsibilities are spelled out, and if you’re going to be boots on the ground, you’re going to be boots on the ground. If you’re going to be doing all the asset management, then that’s going to be in writing. If you’ve got something in writing, then you can basically stick to it. Of course, just having the right documents in place for passive investors and any type of agreement with brokers or that type of thing, of course. But mostly that’s co-GP opportunities.

Ash Patel: In your deals, do GPs put investment capital in as well?

Braeden Windham: Yes. Every deal that we do, we aim to put in 10% of the capital, just to show that we have some type of skin in the game. I think that’s important, just to align interests more than anything.

Ash Patel: And what specific examples have you had with co-GPs when things weren’t in writing?

Braeden Windham: I think capital raise is a big one. I guess, on the front end, knowing who’s bringing what or who has the bandwidth to bring what to the deal, I think that’s important.

Ash Patel: Did you guys just kind of assume, “Hey, we’ve got a great team of GPs. We’ll get this done.”

Braeden Windham: Yeah. You’ll have somebody come in and tell you that they’ve done X amount of properties or X amount of units, and that they can raise the full thing, and take more of the equity for it, but that’s not always the case. So having something in writing definitely, looking back, would have helped to say, “No, no, no, this is what you said on the front end, and you’ve got to stick to it.” That’s definitely the biggest area.

And then just minor roles and responsibilities. Like, on our properties, we always believe that you should have somebody that’s in the area or boots on the ground. So just having what that actually means in a contract, just for that person… If that means going to the property once a week to take pictures of progress, then that’s what that means. And you put it in writing. Or if it’s just quarterly pictures, which for me, I would prefer weekly, especially if it’s a deeper position.

Ash Patel: Weekly pictures of the units?

Braeden Windham: Yeah. If we’re doing a major rehab, I would want to see from boots on the ground, that they’re actually in the area, that they can actually drive there within 10 to 15 minutes and take pictures with progress. If we’re doing construction on 10 units, we want to see updates, because you can’t always trust if a contractor is going to tell you that it’s complete or halfway complete. Their complete and your complete is not the same thing. Rent ready and complete is not the same thing. In my book, at least.

Ash Patel: Braeden, dealing with investors, what are some of the lessons you’ve learned with that?

Braeden Windham: I think the most important thing that I’ve learned is just being completely transparent with them. A lot of people will tell you that there’s a line that you should and shouldn’t say certain things. But I think if you have a good relationship with your investors and you let them know on the front end that “Hey, I’m going to give you the good, the bad, and the ugly”, then I think being transparent is the most important thing, at least for passive investors.

Break: [00:12:18][00:15:11]

Ash Patel: Have you had any issues with investors and you guys not being on the same page?

Braeden Windham: No. I think within Well Capital, our goal, moving forward at least, is to come out with a monthly update for investors, which I think is even better than quarterly, because a lot can happen in a quarter, especially when you’ve first taken over a project. But I think we’ve been pretty clear, I would just like to give them more updates than less. So that’s why we’re kind of going into a monthly more than a quarterly.

Ash Patel: One of the things you could do is — Joe Fairless does this. He gives us a one-pager for each investment, and then there’s a link for people that want to deep-dive into financials. Click on that and there’s a whole bunch of more information behind there. But for people that just want the high level, don’t waste my time, just give me “Are we good? Are we bad?” I like that approach a lot.

Braeden Windham: Is that a monthly or is that…

Ash Patel: He does it monthly.

Braeden Windham: I like that.

Ash Patel: He tells us what the occupancy is, how many units have been renovated, any notable highlights, good or bad, about the property… Then there’s a hyperlink at the bottom, and then there’s a portal where you could get as much information as you want.

Braeden Windham: I think that’s a great idea.

Ash Patel: Not everybody wants to read two-pagers.

Braeden Windham: No. I know some investors that don’t want to know the bad side. So maybe they just… There is a bad side on every property; whether or not you know it, there is. There are things that come up that you didn’t know are going to come up?

Ash Patel: Do you guys have a portal? Or is this just handwritten emails?

Braeden Windham: No, we have a portal now. When we started, we didn’t. But now we use InvestNext for our investor portal. That’s kind of where all of the information goes into.

Ash Patel: What bottlenecks were you experiencing that led you to use a portal?

Braeden Windham: I think it’s just efficiencies of having — for one, I guess every quarter, I’d have to sit down and make a handmade whether it be Canva or PowerPoint, handmade newsletter to go out. It was just kind of inefficient for the time I wanted to spend on it, and having something all on a portal where emails go out and distributions go out – it’s a pretty streamlined process. I think just the time it would take to get it all together, figure out what we wanted to say, and have the right type of documents in there… Just having everything in one place is awesome.

Ash Patel: What is your best real estate investing advice ever?

Braeden Windham: That’s a good one. I think I already said it, but putting it in an email is one of the Best Ever real estate advice that I have. Either put it in an email, or just make sure you’re asking tough questions on the front end of every transaction you do. Because I’d rather have tough questions upfront, than tough lessons on the back end.

Ash Patel: Yeah, and that’s a great example. I’ve got a broker that I’ve been dealing with on a deal. This guy literally doesn’t email at all. Everything’s on the phone. And then they’ll ask the same questions over and over again. It’s like, “Wait a minute. I know I told you, we’re good, move forward.” “No. You never said that.” “Oh my God. Please just use email.”

Braeden Windham: Sometimes it’s not even about not trusting somebody, it’s just a good thing to go back and look at. If roles and responsibilities were carved out in an email, then you can always go back and look at it. That would be the best advice I have for the audience.

Ash Patel: Braeden, are you ready for the Best Ever lightning round?

Braeden Windham: I am. I’m ready.

Ash Patel: Braeden, what’s the Best Ever book you’ve recently read?

Braeden Windham: Free to focus, by Michael Hyatt.

Ash Patel: What was your big takeaway?

Braeden Windham: For me, it was a weekly review, and just time-blocking, and making sure that you are very intentional with the time you’re spending… Because you can just get wrapped up in a ton of calls or something that you didn’t even mean to start working on, and then your day is gone, then your week is gone… Then you’re like, “Whoa, what do I do?” So just kind of keeping control of your time is the biggest takeaway from me.

Ash Patel: Braeden, what’s the Best Ever way you like to give back?

Braeden Windham: The best way I like to give back is through our co-sponsor charity. We give 10% of our gross income to Charity Water, where they take it overseas and give people clean water who’ve never had it before.

Ash Patel: Braeden, how can the Best Ever listeners reach out to you?

Braeden Windham: Two ways. Our website, which is wellcapitalinvest.com, and then we are also hosts on the Wealth and Water podcast; that’s on our LinkedIn. You can tune into that every Thursday.

Ash Patel: Awesome. Braeden, thank you so much for joining us today. From being a senior in college and not really having any direction other than not wanting to work for somebody, being a ranch hand learning how to work hard, to being a very successful real estate investor in a very short amount of time. Thank you for sharing your story.

Braeden Windham: Absolutely. Thank you for having me on. It was definitely a great conversation.

Ash Patel: Best Ever listeners, thank you for joining us and have a Best Ever day.

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JF2645: How This Mindset Change Turned a $41 Million Loss into a $100+ Million Success with Cowboy Joe Marques

When he set out to make his first deal on a 472-house subdivision, Joe Marques — better known as Cowboy Joe — thought he’d selected the right team for the development. As it turned out, the group was using him with the end result costing him $41 million. Today, Cowboy Joe shares with us how that first deal actually set him up for success, discussing the importance of building good relationships and how your self-worth affects your net worth.

Cowboy Joe Marques Real Estate Background

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TRANSCRIPTION

Ash Patel: Hello Best Ever listeners. Welcome to the Best Real Estate Investing Advice Ever Show. I’m Ash Patel and I’m with today’s guest, Cowboy Joe Marques. Joe is joining us from Gulf Shores, Alabama. He has invested in numerous development projects across the US, ranging from resorts, commercial buildings, multifamily, and full subdivisions. Joe is currently involved in unique projects in the Caribbean, ranging from 1.2 million to $100 million. Joe, thank you for joining us, and how are you today?

Joe Marques: I’m doing well, Ash. Thank you for inviting me on the show. Looking forward to it and hoping to add some value to your listeners as we go through.

Ash Patel: Joe, it’s our pleasure. But I have to ask you, why do they call you Cowboy Joe?

Joe Marques: You know, Ash, people have been calling me that for 20 years and I’m still trying to figure out. I don’t know if it’s the hat and the boots or what. But, in all seriousness, I was raised on a ranch. I pretty much have been a cowboy most of my life. I think the first five years of my life I wasn’t. A lot of the wisdom I have comes from my grandfather, who was a true almost like off-TV Western cowboys. He built multiple ranches, and a lot of my wisdom comes from that. When I started branding, Cowboy Joe was what stuck. People said I was already that, no sense trying to brand something that I wasn’t, and brand what I was, so that’s what I did.

Ash Patel: Best Ever listeners, if you see a picture of Cowboy Joe, he looks the part. Joe, before we get started, can you give the Best Ever listeners a little bit more about your background and what you’re focused on now?

Joe Marques: My background is I was a big government contractor, I did a ton of different government projects, I’ve always loved working with dirt. My granddaddy was constantly improving pastures, improving timber, things like that, so I had a love for working with dirt at a young age, and just basically came back to it.

As far as my real estate experience, I’ve been involved in real estate investing for right about 35 years now. I started with the traditional fix and flip. Our original mentor was Charles J. Givens; that’s a name not too many people know because that’s way back. He had the whole subject to how to do owner financing and the fix and flips. So I started doing fix and flip, but just truly enjoyed the bigger projects from the government contracting side, enjoyed the bigger project, so just naturally gravitated back to land development. And I’ve done some absolutely amazing projects over the years.

Ash Patel: You said government contracts – is it for ground-up development?

Joe Marques: The government contracts I did were in Saudi Arabia, [unintelligible [00:03:15]. I did a lot of environmental remediation. I did also emergency watershed protection, which is basically going in after storms and making waterways whole again. For example, when New Orleans had Katrina and levies broke, emergency watershed protection was fixing those levies, clearing out waterways… I did a very interesting project with the Coast Guard and FEMA combined, getting all of the vessels and everything that ended up in the waterways and [unintelligible [00:03:45] surrounding New Orleans after the storm literally removing those vessels. One was a barge with paraquat drums sunk in it, and paraquat is a pretty nasty agent that isn’t used anymore.

I love challenges, I love solving problems. Basically, when I got out of government contracting and went back into development – that’s what I love to do, see how can I solve problems. It’s also why I love consulting and coaching people in land development, and mindset of high-performance thinking as well. It’s because our biggest problems are caused by that real estate right there – the six inches of space between your ears, that real estate there is the most important real estate you’ll ever develop. That’s why I work a lot with mindset and high performance thinking with my students.

Ash Patel: Joe, what kind of development did you start out with after your government contracts?

Joe Marques: The very first development that I did after government contracts was a 472-house subdivision turnkey. That’s from knocking the trees down to turning over the keys. I learned a very valuable lesson on that. The reason I focus on building relationships, knowing the people that I’m involved with, and not just chasing money, is because that project –a lot of people would say it broke me, but it actually made me. It’s what gave me the knowledge and the drive to teach others to dodge some of the mistakes I’ve made. I was in that project strictly for the money. Long story short, there were people that didn’t have the best of intentions, that cost me a little over $41 million on that one project alone, which was a cascade effect that bankrupted me. It didn’t bankrupt me, but it broke me. I didn’t file bankruptcy, I paid every bill; it just took a while. I went from being worth –depending on whose number to use– between 77 million and 98 million dollars to worth about negative 450,000 overnight, and have started building back from there.

But that project was valuable, because I learned a ton of lessons, and learned how to use capital structures, which are critical. It’s also what tested my mindset, because I thought I had a good mindset, but if you get hit hard enough, then that’s where you find out what your true mindset is. There’s an old cowboy saying – you only know how good a watermelon or a man is until they’ve been thumped. I got thumped, and I learned a whole lot about myself in the course of rebuilding back.

Ash Patel: Joe, what was it that went wrong on that deal?

Joe Marques: People got greedy. We worked a deal that was basically third partnerships. The other two thought that they could do my part, because they were the money people; I wasn’t involved in it money-wise. But I was furnishing all the equipment, all the labor, and actually building out the project. They figured that they could approach my material suppliers, my subcontractors, and basically cut my percentage out of it, which it didn’t work out really well for them. That’s neither here nor there, because it really didn’t work out well for me at that particular point in time. It cost me literally everything I had. But then again, the universe is always in balance. What I thought was the worst thing that ever happened to me, was the best thing ever happened to me. Because I had relationships that were pretty much in it for what I could do for them. I was in a very bad marital relationship that basically I was staying around for the kids, and once I went broke, all of that went away.

Now I’ve got a circle of friends that truly inspire me; I’m just grateful every morning I wake up that I get to hang out with people I hang out with. I’ve got an awesome wife that – I scare the hell out of her because I’m an entrepreneur. I make the joke of the entrepreneur mindset, employee mindset… Well, she was way worse. She was a high-level government employee mindset. That’s a whole other level. Two different brain wirings entirely. But she loves me, she supports me, and on the flip side of that, if I get too far off my rocker, she will challenge me as well. So she’s a perfect balance for me.

Break: [00:08:15][00:10:07]

Ash Patel: Joe, what were some of the hard lessons that you still carry with you today? What are some of those learning lessons from that deal?

Joe Marques: The biggest lessons from that deal are number one, the value of relationships, and knowing who you’re in business with. Number two is capital structures. There’s a ton of, I’ll call them gurus –for lack of a better word– out there that are teaching people that you’ve got to deploy every cent. If your money is not working, it’s dead money, you’re not doing anything. But one of my mentors, George Anton, has taught me the value of capital structures, and the value of reserves, and what opportunity cost is. The biggest reason I went broke is that I was over-leveraged, I had credit lines, I had over half a million dollars of credit lines available and able to use. This is also along the same time when the bubble burst, and banks just closed credit lines. Credit lines are not reserves, because a bank can close them for any reason at any time.

So here I was, saying I had a half-million dollars to work with, and didn’t. Factoring in debt, equity partners, and reserves… Relationships are the key to life. If you’re building relationships, you can pretty much accomplish anything you want to. If you’re trying to do it all alone, you may get away, you may be able to get there fast, but if you want to get somewhere a long way and it lasts, build relationships, build up equity partners, do things together, and don’t try to be a tower for yourself.

Ash Patel: Joe, you’ve mentioned capital structures a few times. What does that mean?

Joe Marques: A capital structure is how you structure the underlying capital around any asset. You have debt, you have equity, and you have reserves. To tell you the value of it, you can take two investors, each one of them buys a 100-unit apartment complex right next to each other, side by side. Exact same areas, exact same resources, but one of them financed it with too much debt, and the other one has it balanced properly between equity, debt, and reserves. When you do have something like what happened in 2008, the one that has too much debt will lose it; not only will the other investor be in good shape and keep his building, he’ll probably be in a position to buy that one building that other investor lost.

If you structure your capital properly, you can pretty much survive anything. And as we know, real estate over the long term is going to do well. Short-term dips, if you’re over-leveraged and have all your capital deployed, where you don’t have reserves to handle those downturns, is when you lose everything. Kind of like when people talk about losing money on a stock. Well, if they bought it high and sold it low, then they lost money on it.

Amazon’s a classic example. Amazon had some 90% drops during the course of its climb. People have lost money on Amazon, only because they bought it at one point and sold it at a lower point. If they’d held on to it long-term, then it would have made them money. The same thing with real estate, that capital structure is critical on being able to number one, grow your wealth, number two, preserve your wealth.

That’s another thing that most investors don’t focus on; they focus on returns. The first thing you focus on is the protection of your investment. Your return of investment, versus your return on investment. You want to make sure that you’re having the best odds possible of getting your money back first; then next you focus on what is the return on your investment, and how much money is that money going to make me. Kind of like Warren Buffett. Warren Buffett says rule number one, never lose money.

Ash Patel: Joe, after this apocalypse, how did you rebuild?

Joe Marques: To be quite honest with you, I had about a year and a half there that I was in a tailspin. That’s why I said about getting thumped and testing my mindset. I was actually homeless. I probably wasn’t homeless, I like to say that was my couch surfing years, because I did have a few true friends. Basically, I’d stay on one couch for a while, then go to another couch for a while. After about a year and a half, I said “Alright, enough feeling sorry for yourself. You built all this once; you can build it again.”

I started out and was doing the exact same thing that I did the first time I became a multimillionaire. And it was like I was beating my head against the wall or hitting the glass ceiling. That’s when I met another mentor of mine, Dr. Trivedi. That’s where I truly learned the importance of mindset. But more important about mindset is people call it mindset, but it’s one thing to intellectualize it up here, but none of that counts until you get it in here. Until you believe it in your heart, none of that up here helps you. And I didn’t believe it in my heart until doing Dr. Trivedi’s processes. The minute that I started believing in my heart, I went from a net worth of negative 50,000 to a net worth over a million dollars in just a little over a year and three months.

Ash Patel: What was it that you did to earn that net worth?

Joe Marques: Doing the same thing I was already doing. It’s just things started working for me, because I believed that I was worth it. I didn’t look at everything as being in the way, I looked at it as on the way, and knowing that everything works for you, nothing happens to you. Happening to you – that’s a victim mindset. I can look back over the worst periods of my life – at the time I was going through it, I thought that’s the worst thing ever happened to me, things like that. But when you look back over and see what all you learn from it, what it helps you to achieve, it’s the best thing that ever happened to me.

Ash Patel: What were some examples of asset purchases or partnerships? Because you didn’t have any money at this time.

Joe Marques: No, I had no money. I partnered with actually a friend of mine from high school that was a GC and a builder, and then we used equity partners; and we still use equity partners. We’ve got money now and could do a lot of these projects that we do without bringing on equity partners. But if you hold on to that money as reserves, and you keep that money, you can do multiple projects… Versus being tied up in one and you’re locked down. If it gets marked down, then you’re stuck, you can’t grow it. Whereas if you use equity partners, you still have money tied out there to where you can invest in other projects, you can have multiple projects all at once. That’s what’s called opportunity cost. That was something I had no clue about until George Anton. It’s that money sitting in a checking account is not dead money. When that’s on your balance sheet, and when that’s on your personal financial statement, you can qualify for multiple projects.

Let’s just use $100,000. If you put $100,000 in a million-dollar project, then you can get that project done. But if it drags out six to nine months and you could have done three other projects in that timeframe with that 100,000 sitting in the bank account, then your opportunity cost was the profit on $3 million worth of additional projects, versus that one profit on the million dollars. I’d much rather create a pie factory where I’m only getting 50 to 60% of each pie, versus owning 100% of one pie. It’s basically using the velocity of money in multiple projects and keeping the money working in multiple areas, is the reason why we were able to build up that fast.

Ash Patel: On your bio, I see a resort. What did you do with that?

Joe Marques: We have built out several waterfront properties in Gulf Shores, Alabama. I also consulted on the Silver Sun Gallery in the Dominican Republic, which is a big, huge –I don’t know who’s got the flag on it now, but it’s a resort, hotel, and casino, with retail space. I’ve consulted on projects in St. Lucia, as well as Tulum. One of my clients currently is in Puerto Rico, that we’re consulting on some stuff with.

Break: [00:18:16][00:21:37]

Ash Patel: What are you today? Are you primarily a consultant, a developer, an investor?

Joe Marques: Primarily, I am a coaching consultant and investor. I still do hands-on development, but I’ve stepped away from the actual doing part. I work more on the business than in the business. I help qualify the properties and I help get them approved entitlements. But as far as hands-on development, I’ve stepped back from that. I’ve got one project that I’ve still got some hands-on development that I’m involved in. But once that one’s done, it’s pretty much on the other side of it.

Ash Patel: What have you learned in all of your years of coaching and consulting? What’s the biggest hindrance to people moving forward? You’re going to say mindset, but what is it about the mindset that keeps it from moving forward?

Joe Marques: The biggest thing is self-worth. People don’t think they’re worthy of having that kind of money. People will argue when I make this statement, but you can do empirical data and pull it up. Your net worth will equal your self-worth. If your self-worth is down, your net worth will go down. Now, can somebody temporarily make a lot of money? Yes. But if their self-worth is not up there, they won’t keep it. They’ll give it away to things that they feel guilty toward. They feel guilty toward the children and wife because they’ve taken too much time business-wise – they’ll spend money that they really don’t have to cure their guilt toward them.

It’s something that until you truly buy yourself, it’s hard to have long-term wealth. And wealth is a whole nother thing; wealth is not money. Wealth is all seven areas in your life where you live an inspired life. If you’re chasing money, you’re not going to have a wealthy life, because you’re going to destroy other areas of your life chasing money. One thing my granddaddy said that took me years to catch on to was, he said “Money is a lot like cats. Have you ever chased a cat? They’re kind of hard to catch. Whereas if you start doing something that the cat’s interested in, it won’t leave you alone. It’ll get in your way. Money is a lot like that. If you’re chasing money, it’s hard to catch. But if you start providing service to the universe, start doing what you enjoy, what’s in your values, and you’re providing service to the universe, the money’s the easy part.”

Ash Patel: Joe, what is your best real estate investing advice ever?

Joe Marques: Well, that’s going to be two parts. First, don’t do real estate investing if that’s what somebody told you to do because that’s the way to make money. Do real estate investing because that’s what you want to do and you enjoy doing it. Some people won’t enjoy land development, some people enjoy fixing and flipping. If that’s what you enjoy, do it. If you enjoy wholesale and you like the art of the deal, getting things under contract, and then somebody else that wants to do the work, do that. If you like land development, do that. But figure out what it is you truly enjoy and become the best that you can at it. The second part is to take action. You can read, you can study, you can take nine million courses, but if you don’t act on it, you’re not going anywhere. Coaches and mentors are very valuable. They help you short-circuit the timeline drastically but you still have to take action. Because you can spend money on a coach and mentor but if you’re not going to take action on what they tell you to do, you’re still not going anywhere.

Ash Patel: Do you use a coach now?

Joe Marques: I have five coaches right now. I will pretty much invest in coaching and mentorship pretty much till the day I die because we’re all living beings. Every living being is either growing or dying, there is no in-between. I do everything I can to challenge myself in the seven areas of life to where I am growing. For example, you’ve seen people I’m sure that within a year of them retiring, if they’re not dead, they’re out of shape, despondent, and not accomplishing anything. But a lot of people die right after retiring because they don’t have anything to live for, they don’t have anything to challenge them. I’m not going to be in that position. Einstein said, “A problem cannot be solved from the same level that was created at.” I pay for mentors that are higher level so when I create a problem, I’ve got higher level people that can help me solve it.

Ash Patel: Joe, are you ready for the Best Ever lightning round?

Joe Marques: Definitely.

Ash Patel: Let’s do it. Joe, what’s the Best Ever book you recently read?

Joe Marques: Best Ever book I’ve read recently is Chasing Success by one of my mentors, Dr. Alok Trivedi. Because it truly helps you figure out that it’s not about chasing money or success, it’s about figuring out what you want out of life and living your life.

Ash Patel: What’s the Best Ever way you like to give back?

Joe Marques: I love doing impact investing, that’s where you’re giving. Most people listening to the language give back. I don’t give back. I give because I’m truly grateful. When you say give back, a lot of people give out of guilt. That’s the same thing. I give because I truly am grateful for everything I have. I have the ability to make money, and I give because I’m grateful and I believe in that cause. I truly love helping single women and children. I help with one of my students who has an excellent cause for battered women, I help with that. Then impact investing is where, not only are you doing good for the community, such as building foreign student housing on different campuses, to where foreign students have other foreign students from the same country, to where they feel like they’re at home and they’re not alone, and can assimilate into the university life. But not only are you doing good, but you’re also making money in the process. Residential assisted living is another thing. You’re able to help families take care of their loved ones without being in full-blown nursing homes to where they can have a little bit more of independent life. A lot of the residential assisted living facilities, those little communities become like family, there are friends that play cards, they actually have a connection to where they can develop relationships, and not feel alone versus an institutional nursing home type thing.

Ash Patel: Joe, how can the Best Ever listeners reach out to you,

Joe Marques: The best way to reach me is www.cowboyjoe.me. You can learn more about me and you can schedule a 20-minute call. I do a 20-minute consultation call to help you see if it’s something interesting. You want to learn land development or if you have a project that you need some help on. I give 20 minutes of consulting for free to determine whether or not we’re a fit and I solve your problem. I did a 20-minute call recently that I actually saved you two ladies for making a $600,000 mistake and didn’t charge them anything. Now, of course, they took that knowledge, they’re looking for additional projects, and the minute that they’ve got them lined out, they’ll be calling me back. But I truly do love teaching people about this.

Ash Patel: Awesome. Joe, I got to thank you for being on the show today, sharing that tough story about your downfall, all the lessons that you learn from it, and how you bounce back. Thank you again for your time today.

Joe Marques: Ash, it was an absolute pleasure. Again, I hope I added some value to your listeners because I truly do love reaching out and connecting with people.

Ash Patel: Thank you again. Best Ever listeners, thank you so much for joining us and have a Best Ever day.

Website disclaimer

This website, including the podcasts and other content herein, are made available by Joesta PF LLC solely for informational purposes. The information, statements, comments, views and opinions expressed in this website do not constitute and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action. Neither Joe Fairless nor Joesta PF LLC are providing or undertaking to provide any financial, economic, legal, accounting, tax or other advice in or by virtue of this website. The information, statements, comments, views and opinions provided in this website are general in nature, and such information, statements, comments, views and opinions are not intended to be and should not be construed as the provision of investment advice by Joe Fairless or Joesta PF LLC to that listener or generally, and do not result in any listener being considered a client or customer of Joe Fairless or Joesta PF LLC.

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JF2644: What One CRE Investor Did to Survive — and Conquer — the 2008 Recession with Jerome Maldonado

Jerome Maldonado was nearing the end of his retail center construction and about to start developing office condos when the 2008 recession hit. Overnight, his bank stopped all funding, leaving him without the remaining $300,000 needed to complete the project. Jerome takes us through his journey of navigating the recession and how he managed to pull through and succeed with his property.

Jerome Maldonado Real Estate Background

    • Full-time commercial real estate investor
    • 20+ years of experience
    • Portfolio consist of 400 real estate transactions between buy/hold, flip, development, and more
    • Based in Albuquerque, NM
    • Say hi to him at: www.jeromemaldonado.com 

Check out our previous episode with Jerome, JF2562: $7M in Less Than 2 Years with Jerome Maldonado.

 

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TRANSCRIPTION

Joe Fairless: Best Ever listeners, how are you doing? Welcome to the Best Real Estate Investing Advice Ever show. I’m Joe Fairless. This is the world’s longest-running daily real estate investing podcast where we only talk about the best advice ever, we don’t get into any fluffy stuff. Today we’ve got a special segment. We’re bringing back Jerome Maldonado. Actually, we brought him back. He’s here with me, and we are going to talk about a tough situation that he was in, and that should you come across this situation, which some of you might, because the market isn’t always going to be as rosy as it is… Should you come across this situation – well, you’ve got a blueprint for how he handled it and navigated it, should you choose to follow that same blueprint. We’re going to talk to him about what happened during the recession, whenever he had developments for retail and office buildings, and then boom, 2008 and 2009 hit. First off, Jerome, welcome back, and glad you’re here.

Jerome Maldonado: I really appreciate you having me back, and really appreciate you guys taking the time to get me back on the show. Thank you, I’m excited to be back as well.

Joe Fairless: This the first time we’ve talked; you spoke to Ash last time, so I’m looking forward to learning from you through this conversation as well. Best Ever listeners, if you recognize Jerome, you probably are a loyal Best Ever listener, so I appreciate that. It’s episode 2562. That’s the episode that he was on. It released September 7th, 2021.

He is a full-time commercial real estate investor, 20 plus years of commercial real estate experience, completed a bunch of transactions. He is based in Albuquerque, New Mexico. His website is his name, easy to remember, JeromeMaldonado.com, and that’s also in the show notes. With that being said, Jerome, take us back. No need to go through your story like you might have with Ash, because we’ve got that episode already. Let’s go directly to what you were doing leading up to the recession, and then what happened that was challenging for you from a lending standpoint.

Jerome Maldonado: We’re at a high market right now, so the reason this topic becomes very interesting is because I know that there’s people out there that think that this market will sustain itself over the course of the long haul. If you look at history, history can depict exactly what’s going to happen in the future if you just kind of watch market trends. We’re sitting on the high end of the market right now. Now, I never discouraged people to buy at any point in the market. If you’re really in this game, you got to be buying in all market cycles. Top end of the market, median market, or bottom end of the market. Those who do it correctly will always be successful. It’s proven through the test of time. But in 2008, it was my first time going through an aggressive market cycle. When I got started in the late ’90s, we were at the bottom of the market cycle and we were coming out, so I didn’t have to worry about going through that big dip. 2008 was my first real head-on experience, and I was in denial like a lot of people.

When I got into projects in 2006 and 2007, leading up to 2008, I didn’t think about a downturn in the economy. I just thought about what my ROI would be when the project was completed based on the current conditions, which is what a lot of investors do that are new to the game, or have even been with the game for a duration of time but haven’t gone through an aggressive market cycle… 2008 being one of the most aggressive financial market cycles, where the financial institutions themselves were annihilated, so to say, with the collapse of Lehman Brothers, AIG, and what was happening nationwide.

So we had retail centers that were under development… I owned a construction company, we developed our own product, so they were our retail centers. We had office condo complexes going up, they were also our projects. And I had subdivisions going up of single-family residential dwellings. I thank the good Lord that the residential dwellings we facilitated with cash out of pocket, we were debt free on those, so that saved us.

But the commercial sector we had financed through institutional money. We went in, we put our down payments, we acquired the land, we went to an institution, and got a construction loan to build out the asset. Then when 2008 hit, we had a large retail center that was under construction nearing completion, and we had a new office condo complex that was also getting ready to break ground, which we had done all entitlements. So for those of you guys who don’t know what entitlements are, it’s when you do all of your engineering, you do all of your utilities, curb and gutters, you do your water models, your architectural work, and all of the stuff that you need to retain permits to build a project out. A few hundred thousand dollars is what it cost us to do the entitlements on that project, and that was all cash out of pocket. So obviously, we were committed to the game, had a lot of money out of our own pockets, and the institutions were funding us through construction loans.

When 2008 hit, we had never missed a payment, we were never even delinquent on a payment. So we got to October of 2008, the banks called us up, and they didn’t want to fund the last $300,000 of our retail complex. When we asked them why they, just said that the market had changed, they didn’t know if the valuation of the assets still sustained itself, they wanted to see leases from tenants, and we were losing tenants faster than we could obtain them. People by this time were aware that the financial sector was under attack due to the Lehman Brothers collapse, so they just halted our funding, $300,000 shy. So we had to tally up that money in-house and finish that product. We did so successfully; a little bit of stress involved, but we did so successfully. The office condo complex we pulled from, we still own the land today, and we pulled from it. So $250,000 worth of entitlement costs went down the drain. It was good a tax write-off, it was the best part of that.

Break: [00:06:13][00:07:46]

Joe Fairless: Educate me on going down the drain, because I’ve never done development. If it wasn’t titled previously, does that not carry with the land for the foreseeable future?

Jerome Maldonado: Yes and no. As you guys know, the office sector of development has changed substantially since 2008. Office and retail are, I would consider, more of a distressed asset in certain most areas. There are still big developers that are doing office and retail, obviously. This area was in an area that was migrating in that direction. At the time, Intel was downsizing; that was the biggest employer of that area. The recession halted things. So for city development, this progressive plan was moving directly towards the area that we were developing in. When the political sector changed and the mayor changed in that municipality, they shifted completely, 180 degrees. They migrated where their development plans were, and moved in entirely different direction. So it changed the development outlook of what is viable in that area.

When you do entitlements, you’re entitling that set of plans, that set of architecture. As far as the water models, the utility models, that type of stuff, the hydrology, the civil engineering that tells you the lay of the land, and the soil test – that stuff can be transferred, so that stuff is not dead in the water. But as far as the architecture fees, the engineering fees that are attached to those architectures, fees like the structural engineering, all of the mechanical engineering, the sprinkler for fire sprinklers, that engineering, all of the civil engineering for that pad site, that exact project, all of that is awash. You lose 100% of that when you don’t do that development. Unless you do it down the road, which we aren’t; so we lost 100% of that portion of the entitlements.

Joe Fairless: Why wouldn’t you do that development now?

Jerome Maldonado: Because the market sector changed, the city’s progressive growth plan migrated and changed entirely. So in that area, office isn’t really needed in that area anymore. At the point time we were building it, we were one of the first guys in, but it was supporting the growth towards the new downtown area, or the projected downtown area. The city that we were in…

Joe Fairless: What city?

Jerome Maldonado: It’s the city of Rio Rancho, where Intel is… Which is very similar like Chandler is to the Phoenix Metro area. It’s not in Phoenix, but it’s where Intel is, so Chandler is growing because of Intel. Same thing in Rio Rancho. But when the city development plans shifted, they had to. They didn’t have infrastructure, so the city had to make a radical change to accommodate public infrastructure for roads and for drainage. And since the recession changed the migration of housing and housing development, they no longer had impact fees and housing and property taxes that they were banking on to develop out that area. So what they did is they migrated and focused their development into where the city of Rio Rancho actually attaches to the city of Albuquerque, and they focused their development off of the City of Albuquerque progressive growth plan, so it was able to utilize the City of Albuquerque infrastructure to help the growth of the city of Rio Rancho, at a time where they were hurting financially, just like everybody else.

Joe Fairless: I’m looking at a map now. Rio Rancho is just north of Albuquerque.

Jerome Maldonado: Correct.

Joe Fairless: Alright. So did that end up being a good thing, that you didn’t carry through the development, since it’s no longer the highest and best use of the land now?

Jerome Maldonado: Yes, it was. We would have gone bankrupt; that project would have taken us down. That would have been our demising factor, that project. It was a godsend that we didn’t take that one down; and it was our decision. It’s funny, there’s different sectors of banks – and this is what’s important for people to understand right here. As we go through this, we’re on the height of the market; there’s some of you guys that are super aggressive, and have started moving forward on projects, as I am right now as well. But the way we do it now is entirely different. In 2010, Bank of Oklahoma was calling, blowing up our phones, telling us we needed to get appraisals on our retail centers, and on projects that we were never delinquent on, that we had never missed a payment on, that we work extremely hard to make sure we were servicing our debt.

They knew that we didn’t have the leases to sustain the value of that building, so they wanted to ensure that they had a good debt to income ratio. So they were leveraging us to get annual appraisals on the property, which were costing us about $20,000 a pop. Plus, they were doing forced underwriting on us, which also costs us about $5,000 each time they did that.

Joe Fairless: Will you explain what forced underwriting is?

Jerome Maldonado: You have a clause in your loan docs that states that you will pay all fees associated with servicing your loan. Anything that the bank feels you need to do to service the loan, you’re responsible for any fees. In their terms, for my loan to be serviced, I had to have underwriting done financially on our businesses and ourselves to be able to make sure that we were sustainable enough to continue servicing that loan, and that our financials were strong enough to do so. So that was a little loophole that the bank has that requires us to manage those fees. Another one of those fees being the appraisal, to see if the appraised value is still sustainable, so that the debt-to-income ratio for the bank still fits their business model. If it doesn’t, they either balloon your payment or they make you come to the table with a variance of the appraised value, so that they still sit in a 70% to 80% debt to income ratio, so that they’re not over-leveraged on the property either.

So in spite of being a good Samaritan, a good paying customer, these are little things that commercial lenders do to developers that press them. I know a lot of other developers were going through this at the exact same time. And not only developers, commercial real estate investors. For those of you guys who are apartment syndicators, doing multifamily, those of you guys who are just in the commercial sector, all of you guys are subjected to the exact same thing that we went through back in 2010. It didn’t happen overnight, it did take a couple years… But at a time that we were already pressed financially to be able to make these payments, we were still working on stabilizing the property. Two years later, they were also going in and forcing us to come to the table with additional fees. So it became very stressful.

Joe Fairless: These aren’t on the two deals that you were talking about. These are on other commercial deals that you had at the time.

Jerome Maldonado: No, this was on the retail center… And on other deals, but this was on the retail center itself. At the time that we were going through this in 2008, the thing that was ironic was I had two loans from Bank of Oklahoma. One of them was being halted, and they were telling me that I had to come to the table with the last 300,000. Then a different sector, a different department was calling me, that underwrote the second construction loan for the office condos, and they were pressing me to get going on phase one. Phase one was an $8 million dollar project. So I’m sitting here taking one phone call on my left hand, they’re telling me “Halt. We’re not giving you more money.” And then on my right hand, I’m taking another phone call from the exact same institution saying “Hey, you need to get going here. We’re ready to fund your loan. It’s go time, start turning dirt.” I’m sitting here confused, going “Okay, one sector is telling me stop, the other sector is telling me go.” [00:14:54].07]

I threw my hands in and said “I’m done. We’re going to fund the 300,000. We’re pulling the strings on the new development, cancel the loan.” It was the best decision we ever made. Hence two years later, I had the Bank of Oklahoma so far down my neck that it was extremely stressful so we had to make some big pivots and made some changes in 2010.

Joe Fairless: Like what?

Jerome Maldonado: In 2009 they did the same thing to us. In 2009 when they made us do the appraisal, I kind of just tallied up the money, scratched my head and said, “Okay, let’s do this.” And I thought it was the end of it. They did an underwriting in 2009, I dealt with it. 2010 came around and I got the same exact phone call. As you can imagine, I was upset and frustrated with them, and I expressed that to them… And it got to a point where I had the lenders calling me in a very insulting, demising way, kind of laughing and joking; they were nasty.

Joe Fairless: What did they say?

Jerome Maldonado: Profanity, back and forth. We were cussing each other out back and forth on the phone. We had a lot of four-letter words, they were using them back and forth with me, they were telling me that I was just a broke ass, to tally up the money, and come to terms with stuff… Just aggressive; just super aggressive, just nasty on the phone. So much so that – for those of you guys listening, I don’t care if you work with Bank of Oklahoma, I’ll never do business with those guys again.

Joe Fairless: Clearly.

Jerome Maldonado: [unintelligible [00:16:04].03] never do business with those guys ever again. But anyway, I was lucky enough to be in communication with a lot of people that are in the industry. So really important is to be well connected and well networked within your industry, to know other professionals that do the exact same type of business you do. Because in times like this, those contacts and connections come through with great resources. At the time, I had a really good buddy, did the same type of development I did, we used to go to lunch randomly once every three months, every four months. I told him the story and he said “Don’t put up with that [bleep [00:16:41] because I have a guy, his name is Jason; go to this credit union, they’re doing commercial lending, they’re very loan friendly right now. Get out from underneath that loan.” At the time, interest rates for commercial lending were between 6.5% and 7%.

When we got to 2010, the credit union opened up, it’s when interest rates finally started to go down a little bit. I was able to retain a new loan for 4% interest from a credit union that embraced the property, embraced my loan, and was substantially more professional.

We facilitated the underwriting, and I was able to utilize the appraisal that I had just spent almost $20,000 on, to utilize for the credit union. They accepted that one and we were able to go through underwriting, and with a little bit of nominal fees, I was able to switch over the loan and make up the difference on the interest savings, as opposed to staying with the same bank. It was a blessing.

So for those of you guys that are sitting on projects right now, exercise your contacts wisely, and diversify your relationships with lenders, know who they are, know where your relationships lie, and make sure that you follow the lenders, not the banks. The biggest problem I had is that in 2008 and 2009, the lenders that we had relationships with, that drug us to these banks, they moved.

A lot of variances in employment at that time – the construction industry, the mortgage industry, everything. Anything that had to do with construction, real estate, and banking, all three of those sectors got hammered. It was something that there was a lot of migration of employees all over the place. Those relationships no longer existed, so I landed up following people, not banks. Through that, we were able to stabilize our assets, and it was a huge blessing.

Break: [00:18:24].12] – [00:21:15].12]

Joe Fairless: I’d like to go back to the office condo complex where you said “We didn’t do it. But if we didn’t do it, we would have gone bankrupt, because there’s not a need for it now.” What about your assessment then was incorrect, or were you not looking at, that if presented a similar opportunity right now, you would now know to ask XYZ question or look at a certain data point or data points?

Jerome Maldonado: Here’s what I used to do. I would go in and I would find out where other developers that were larger than me had purchased land and were proposing projects. The projects were not coming out of the ground yet, they hadn’t gotten their own entitlements, and then I would go in and piggyback that; but I usually did it before them. So I was always in front of the big developers, looking at progressive growth patterns where other big investors were going. Now what I do is the opposite, I no longer go in before them. I go in, I do the exact same thing where I’m studying market trends, city development plans and projections, and I watch the exact same things. I just don’t pull the trigger on stuff as quick as I used to. I wait for them to come out of the ground with their projects then I piggyback it on the back end instead of the front end. There’s another big piece to this…

Joe Fairless: Slightly less upside, but significantly less downside,

Jerome Maldonado: Substantially. You’ve got to call the shots. But one of the big things that I do now… I used to purchase my land in advance, and then I would start my entitlement process once I retained the land and had ownership of it, thinking that I had to do it this way. I got substantially smarter, both on my residential developments and my commercial development. This is the way I do it now, so listen up everybody, because this is the key. I take control of the property, but I don’t take ownership of the property until I have all my entitlements done. Okay, I’m going to say that again. I take control of the property, but I do not take ownership of the land until I have my entitlements done.

For the sake of example, I have a 350-unit, 10-acre development project going on right now in Port Orchard, Washington. I am in the middle of working on entitlements for the property. We’re working on architectural work, we’re working on all of our engineering, we’re working on our zone changes, we’re working on all of our entitlements, all the pre-development stuff that needs to go on, we’re working on right now.

I control the land, but I don’t own the land. I go in and put an offer in on the land, I work out terms, and what I do is I retain the land with just a modest deposit, and I put all the terms in advance. Then I work with a seller, letting them know that we have our due diligence period. During that due diligence period, we work through all of our entitlements. When those entitlements are nearing completion or fully completed, then we go in and close and retain the land, which substantially decreases our liability. If a time like 2008 ever happened again, we can dust our hands off with a couple $100,000 loss, take the tax write off and walk from it, as opposed to going into a multimillion-dollar project, that being like a $55 million project that we’re doing, and then being stuck in the middle of it, and the bank calls your note and then you’re just between a rock and a hard place. So this allows us to work through entitlements in a much safer way and be able to protect our assets and our money substantially better.

Joe Fairless: Jerome, I know why you were invited back. Thank you so much for being on the show. This has been awesome. I am jealous that Ash had the first conversation. I wish I also was in on that. I appreciate you sharing your specific examples of how you navigated a challenging time, because as you said, challenging times are going to come up again… And it’s better not to be scrambling to find information like this when that happens, but rather listen to it now and just expect for it to happen and have a plan in place when it does happen. Thank you. I’m incredibly grateful for this conversation. How can the Best Ever listeners learn more about what you’re doing?

Jerome Maldonado: We’re really easy to find. My name is obviously in the podcast. If you just Google my name, go to any social media platform from Facebook, LinkedIn, Instagram, Tik Tok, any of them, and just put in Jerome Maldonado, you’ll find me. On Instagram, it’s @jeromemaldonado1, or you can just go to our URL which jeromemaldonado.com. Anybody who has questions, any outreach from people that need help and assistance, to be able to save you guys headaches, or save you guys money, or prevent you guys from going the wrong direction, we’re always happy and I’m always here to help assist and help people grow. At the end of the day, if we all work together, we’ll all make more money, we’ll all live better lives, so I’m here to help and serve.

Joe Fairless: Grateful for this conversation. Hope you have a Best Ever day and talk to you again soon.

Jerome Maldonado: Thank you so much. God bless you and have a great day as well.

Website disclaimer

This website, including the podcasts and other content herein, are made available by Joesta PF LLC solely for informational purposes. The information, statements, comments, views and opinions expressed in this website do not constitute and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action. Neither Joe Fairless nor Joesta PF LLC are providing or undertaking to provide any financial, economic, legal, accounting, tax or other advice in or by virtue of this website. The information, statements, comments, views and opinions provided in this website are general in nature, and such information, statements, comments, views and opinions are not intended to be and should not be construed as the provision of investment advice by Joe Fairless or Joesta PF LLC to that listener or generally, and do not result in any listener being considered a client or customer of Joe Fairless or Joesta PF LLC.

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JF2643: The 5 Secrets to Closing Your First Deal with Michael Blank

Starting off on your first deal can be daunting. How big of a deal should you aim for? How do you build a good team? Where can you find a good network? Host Joe Fairless and guest Michael Blank share their top five secrets to closing your first deal.

Michael Blank Real Estate Background

    • Entrepreneur and investor
    • Helped investors purchase over 9,500 units valued at $445M through his training programs
    • As CEO of Nighthawk Equity, he controls over $200M in performing multifamily assets 
    • Based in Atlanta, GA
    • Say hi to him at: www.themichaelblank.com

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TRANSCRIPTION

Joe Fairless: Best Ever listeners, how are you doing? Welcome to the Best Real Estate Investing Advice Ever Show. I’m Joe Fairless. This is the world’s longest-running daily real estate investing podcast, where we only talk about the best advice ever. We don’t get into any fluffy stuff, and we’ve got something for you today. And I’m sure you are wanting to dig in, because you probably read the title of this episode. So I’m going to just tell you right now, The 5 Secrets to Closing Your First Deal. That’s what we’re going to talk about today with Michael Blank. How are you doing, Michael?

Michael Blank: Hey, Joe. I’m doing great.

Joe Fairless: Well, I’m glad to hear that. Five secrets to closing your first deal is what we’re going to talk about. You know, Michael Blank; either you’re a loyal Best Ever listener or you’ve come across him in other circles, but I’m just going to give you a quick refresher and then we’ll get into it.

He has helped investors purchase over 9,500 units valued at $445 million through his training programs as CEO of Nighthawk Equity. He controls over $200 million in apartment communities. He’s based in Atlanta, Georgia. His website, themichaelblank.com, you can go to it, it’s also in the show notes.

So, today we’re going to talk about The 5 Secrets to Closing Your First Deal. And just a quick personal note, that is the most important deal, the first deal. There’s so much power and momentum when you get one deal done, and I know Michael subscribes to that same philosophy, and that’s why we’re going to be talking about this.

So with that being said, Michael, how should we tee this up? What have you found are the five secrets to closing your first deal?

Michael Blank: Yeah, I’m going to use the first one of five. We only go for five, right? But the first one is you’ve got to operate with total integrity. Here’s what I mean by that. You’ve got to stay true to yourself. Integrity means different things to different people. What it means to me is you’ve got to stay true to yourself; don’t try to be someone else… And that includes, for example, looking at your strengths and weaknesses. What are you good at, what do you love to do? …and focus on those things. For example, maybe partner with someone who doesn’t have those strengths.

It also means, obviously, doing what you say. That’s one of our company’s values, is always do what you say, and it’s amazing how many people don’t do that. And the third component real in operating total integrity is serving other people; looking for ways to serve other people. Because I’ve started this whole entrepreneurship thing from more of a financial aspect, like how much money can I make, so I can quit my job. It was financially-driven. There was really no element of service in there. And what we’re doing getting into the syndication business is we’re literally building a multi-million dollar business. It’s a foregone conclusion. But how in the process can you serve other people? How can you serve your passive investors? How can you educate them to this asset class, right?

So the bullet number one for me is operating with total integrity, not only for yourself, but also as you evaluate partners, for example, or support groups, or anybody else. So that’s number one for me.

Joe Fairless: Yeah, and I’m glad it’s number one, because people are smart and people have emotional intelligence, and most people can pick up on if someone is not being true to who they are, if they’re trying to fake something. And I’ve always said, I have a great amount of respect for bands, artists who write their own lyrics. I might not agree with what they’re singing, but man, they’re writing it, and that’s what they’re feeling. That’s who they are. Same with this. Be true to who you are. People might not like it, and they might not agree with everything you say, but most importantly is just be true to who you truly are, versus trying to be someone else. What’s number two?

Michael Blank: Number two, is to follow a specific, proven process. When I got started, and when you got started, there wasn’t a lot out there. There was maybe one person doing a seminar, there was one book. In the meantime though, so many years have gone past by, that there’s actually proven processes out there. So find a specific proven process that has been shown to work – I just call it the dealmaker blueprint – and then just follow that process. You wrote a great book about syndication, you’re outlining steps that lead to a deal. That’s a great process.

So in other words, educate yourself. Don’t do what I did, trying to figure this thing on my own. You’ll eventually get there, but it’s super painful… Versus instead, why don’t you try to follow a process that already exists, that’s maybe worked one or two times?

Joe Fairless: Makes sense. Number three?

Michael Blank: Number three really is purchase large properties, and you probably don’t disagree with me on this. It’s just because that is just they’re more profitable, they’re more stable, you achieve your goal faster, and it’s also more fun. Now, having said that is a caveat, because I’m not necessarily a go big or go home kind of guy. It’s not like that, like, “Well, if you’re not going to do 100+ unit deal, then you might as well not even get started.” That’s not what I’m saying. What I’m saying is you should do the largest possible deal that you can, and normally, that is limited by your comfort zone, by your mindset. I’m not even saying it’s limited by your resources or who you know; it’s actually not the case either. It’s really your comfort zone or your mindset.

There are ways that you can expand your comfort zone, to get into larger and larger deals. So you want to figure out ways to do that, to push your comfort zone so that you can get into the larger deals. Regardless, if you don’t do 100 units right out of the gate, they’re going to progressively get larger anyway. All I’m saying is to really make an impact, you want to do the largest possible deal that you can, because that is the most impactful, and there’s various ways we can do that, which really leads me to point number four, which is to build a team.

Joe Fairless: Before we get into number four – do the largest deals possible, and it’s limited by comfort zone. But what if someone has a comfort zone or a mindset of, “Michael, I’m good. I have a mindset. I want a 250-unit deal. I’m comfortable doing a 250 unit deal, but I only see this sixplex that is available. Should I invest my time and money doing the sixplex, and have there be an opportunity cost where I won’t have the time to look for that 200-plus-unit deal? What should I do?”

Michael Blank: Yeah, that’s a temptation, right? You get a lot of people who have invested in single-family houses that deal with this temptation to just do another house, to just buy another house, flip another house. But like you said, there’s an opportunity cost because for every hour that you spend, on flipping the house, it’s an hour you can’t spend on actually doing what you really should be doing, which is an apartment building deal… Meaning, looking at deals, analyzing deals, talking with investors. So the opportunity cost is enormous. Is a six-unit a lot easier to do than a 250-unit? Yes, that can be true, but it also huge opportunity costs if you do that.

So if you have your comfort zone around a large deal like that, like you did. You somehow develop this confidence that, “Oh my gosh, I can do 176-unit.” So  if you have a confidence around that, you’re also going to have a plan around that. Therefore, you should avoid shiny object-itus of flipping another house or buying a sixplex.

Break: [07:19] to [08:51]

Joe Fairless: Let’s change a sixplex to a 15-unit. Is your advice still the same way for that 200-plus unit, don’t do that 15-unit?

Michael Blank: No, it’s not. It’s really that value of the first deal that you mentioned earlier. I call it the law of the first deal; that’s so powerful, because once you do that first deal, everything changes and the second and third deal basically come to you automatically. People also [unintelligible [00:09:16].27] you that want to invest with you. So, the value of that first deal – it far exceeds any kind of money that you can make. Therefore, the goal is not to do the possible largest deal you can, but the goal is to do a deal. And I kind of give myself 12 months to do it. Twelve months gives you enough time to do a deal that is achievable, but also meaningful, and you’ve got to pick whatever that is for you. If you can’t wrap your head around anything bigger than a duplex because my gosh, you’re only making $2,000 a month, and it’s going to take you a year to pull that off – my gosh, a duplex is the right size for you, because that is far outside your comfort zone.

On the other hand, if you’re a high-income earner, a 15-unit or 25-unit might be a great first deal for you, because it’s not a no-brainer, and it’s going to take you a while to raise the money. On the other hand, you don’t want pick something so big or so specific that it’s going to take you three years to get that deal done. Most people don’t have that kind of runway.

Also, don’t make your criteria so specific. Don’t say, “I want a 45.5 unit in this sub-market, in this city.” Don’t be that specific either. Be a little bit opportunistic. Also, be more open to different kinds of partnerships. For example, do you always have to be the lead operator out of the gate? Or could you be a junior partner, for example? So being a little bit optimistic, but making sure that you get yourself into the largest possible situation you can first in the 12 months.

Joe Fairless: Okay. Segueing into number four, I think, right?

Michael Blank: Yeah, which is building a team. I never understood this in the single-family house, even though I had people working with me and for me. It’s not really a team approach, and it took me a while to wrap my head around that. You understood this right out of the gate, for some reason, Joe. It took me a little while to learn that, but multifamily syndication specifically is a team sport. It’s highly unusual to find just a lone wolf out there. They do exist, but if you study them closely, they take a lot longer to scale their portfolio, because they’re doing everything themselves… Versus if you have joint ventures with two or three partners for example, that one plus one far exceeds two, which means that the joint ventures that work really well are complements of each other. For example, we talked about operating with total integrity; be who you are. What are you strong at doing? “Well, gosh, I’m a numbers guy. I’m very detail-oriented, but I’m kind of an introvert.”

Well, that kind of person would be more attractive to finding deals – finding deals, analyzing deals, making offers, doing the due diligence, possibly managing the asset… But there’s another kind of person in relationship to people. They’re extroverts, and the sight of a spreadsheet makes them break out into a cold sweat. Well, those people are great for raising capital.

So those two, for example, make fantastic partners; unbelievably great partners. So one plus one is by far greater than two, because now one person is focusing on what they love to do and what they’re really good at, and so is the other, and that becomes very powerful.

So building a team is very, very powerful, and also now, it gets you into larger deals, because if I’m like, “My gosh. I’m struggling with finding capital”, but there’s surely someone out there who has the opposite problem. They have a network of dentists or attorneys or whatever, professional athletes, but they don’t have deal flow. But getting with those guys, and now you can raise $1 million or $2 million, and now you’re in the game as well.

But the other thing also is credibility. You need to have a team around you to get credibility with brokers and investors. If I just call them up and I’ve got no track record, they’re going to ask me for proof of funds, they’re going to ask me for my resume, they’re going to ask all those qualifying questions. But if I have a property manager, a lender, an SEC attorney, a CPA, an advisor, and a pigeon—I don’t why [unintelligible [00:12:40].20] I was thinking carrier pigeon… But you have this team behind you, you have a lot of credibility. So point number four is to build a team around you.

Joe Fairless: Let’s go back to the example of the introvert who is really good at underwriting and perhaps finding deals; maybe they’re really good at some sort of system that attracts owners’ interest, and they can find a lot of deal flow in the market. How can that person find the complement to his or her business?

Michael Blank: It’s about networking. I think a lot of people—

Joe Fairless: Where? Where do you network to find those people?

Michael Blank: There’s a variety of lists. Now, with COVID, there’s actually in-person conferences like yours or ours, and now we all have virtual components, probably, to attract more people. So there’s literally conferences that you can join. It’s great way to meet people. There are now meetups that are online as well. There’s different online communities. BiggerPockets has some online communities, we have online communities; you can use LinkedIn to search for specific people.

I remember interviewing one person, we get on these virtual conferences, and they would write down everybody in there on the Zoom call, and they would reach out to them later, and then they would set off one on one zoom calls after that. This was a couple that lived in the UK, American couple, and they raised literally $750,000 and bought property remotely by using this thing.

So you can do this virtually. It’s just a matter of being a little more systematic, and being more intentional when you go out there. You have to know what your strengths are, and who you’re looking for. “Man, I’m a deal finder, I’m a hustler, I can find deals, but I really struggle with finding capital”, then go find someone who’s strength is people and finding capital.

The other one is signing up with some kind of educational programs. There’s a variety out there; we have one as well and when you get into those ecosystems, there’s also a network inside of them. So there’s a variety of different ways that you can meet people, you just have to be intentional about what you’re looking for.

Joe Fairless: Number five.

Michael Blank: Number five is invest in mentoring, and at minimum, a support network of some sort. There’s different support networks. One is a peer-to-peer support network. Those are people that are around you; imagine like a mastermind. These are people that are at around your level, they’re trying to do what you’re trying to do and you’re basically just supporting each other. That’s super valuable, right? That’s part of your support network. And number two, we talked about partners. That’s part of your support network. And the third one is advisors and mentors. And this is very, very powerful. If you study professional athletes or successful leaders, a good number of them have coaches or mentors.

And this is a mistake I made, Joe, is when I got started in both restaurants and apartment buildings, I had no mentors at all. And as a result, it took me 10 years. Well, in the process, I lost over a million dollars, almost lost my house, and delayed my journey by a decade. Imagine what would have happened if I had a mentor back in 2005 when I quit my job; that mentor probably would have talked me out of restaurants and possibly talked me into something like multifamily. Imagine if you and I got started 10 years earlier with what we did; that would be crazy.

On the other hand, you hired a mentor and fast-tracked your success; you didn’t lose a decade and lost a million dollars. In fact, I did a 12-unit deal. That was my first deal. And that was basically me, myself and I doing the best I can, learning on the job… And you’re like, “Yeah, that’s for the birds. I’m going to invest in a mentor” and did a 176-unit.

Joe Fairless: Those are for the pigeons.

Michael Blank: Those are for the pigeons. This is the difference in mentorship. And the thing is, the problem with mentorship is that of course it costs money, and it does. And if you don’t have money for mentorship, then obviously it’s not for you. But there’s a good number of people who have money. For example, they want to invest a certain amount of money in their first deal. “Oh my gosh, should I use this money to invest in a deal? Or should I buy this mentorship program?” Or whatever. And the answer is always the same – investing in yourself is far better than investing any one deal, because the ROI is much, much higher.

So if you’re watching or listening to this and can afford mentorship, then align yourself with someone that you resonate with; and there’s a variety of them out there, everyone’s a little bit different… But if you can do that, what it does is, it kind of fast-tracks your outcome. Number one, it does push your comfort zone, because if you’re working with a mentor who’s done this before, well, they’re probably going to try and talk you out of doing a duplex, and they’re also going to help you avoid the big mistakes. For you, clearly, they must have done something to your comfort zone, because you didn’t come out of the womb going, “I’m going to get myself 176-unit old apartment building.” You know what I mean?

Joe Fairless: Right. When you say “invest in mentoring,” is there a point where the investment is, “Wait a second. That’s way too much”, or would you say, “A million dollars for a mentoring program”, because if that mentoring program teaches you how to do 300-unit plus properties, then you will likely make that back within two deals. At what point is it too much or is it not too much? Is it always just an ROI thought process that, based on your opinion?

Michael Blank: Well, to be specific here… If you do a million-dollar deals, we pay ourselves, let’s say a 3% acquisition fee of these deals, which is pretty normal, and you have no other partners because you’re doing a million-dollar deal. That’s $30,000. A lot of people with some education, especially with a mentor, can probably raise $250,000, $50,000 from five people. That is in the realm of possibility, to get do your first deal. Therefore, if your mentoring program cost $30,000, you get that back in your first deal, not your second deal. But that doesn’t include the experience you get coming through that first deal, it doesn’t include the asset management fees, the equity, and certainly not the profit in 3-5 years when you sell the [unintelligible [00:17:59].22] thing. Therefore, even on your first tiny deal, you already get an ROI, and that doesn’t even count a second or third deal. So it’s a pretty basic kind of math, if you look at it that way.

Joe Fairless: That makes sense. Very easy to think of.

Break: [18:13] to [21:06]

Joe Fairless: When evaluating mentoring programs or mentors (maybe they don’t have a program), you just think, “Hey, that person knows a lot. Maybe I should approach them to see if they’ll be my mentor.” How should we look at evaluating how to pick which mentor to approach or go with?

Michael Blank: That’s a good point. You don’t always have to pay for mentorship either. If you can convince someone to meet with you take your underwing, that’s fantastic. There’s a lot of experienced syndicators out there who would love to mentor someone else.

On the other hand, I’ve found a lot of syndicators don’t want to mentor someone else. Or they wanna teach other people, it’s just not something that they’re passionate about… So you don’t have to necessarily pay for mentors, but either way, you want to look for someone, and there’s really five points that come to mind… One is you do want to find someone who operates with total integrity. I think that’s super important as well as you bring on new partners.

And number two, you want to find someone who has done what you want to do, meaning – they have, of course, done their first deal, but more importantly, because you’re on a path of financial freedom, ideally, you want to work with someone who’s actually quit their job… Because the mindset around actually transitioning from a full-time job to full-time real estate – there’s a lot of mindset things going on, and you’d really like to know someone who has actually started at least a scalar portfolio. So working with someone who does this full time would be something that would be important. Also, you want to work with someone who’s focused on results, and not necessarily a cheerleader. A cheerleader is more like a little bit like a coach, like “Yes, you can do it. Here’s some ways you can hack your mindset.” And that’s useful, but I want to work with someone who’s focused on my results, who really knows how to get results.

And then number four, someone who follows a proven system. I wouldn’t just hire a mentor who just kind of a good guy or a good girl, who’s done this before, but is there a methodology or system that we’re working?

And then number five, what would be important is if I’m going to invest in a mentoring program is I’m investing in an ecosystem, right? So what does that network of peers, what does that network of partners or capital raisers or deal finders – what does that look like? So, when you’re looking at mentorship programs or even just aligning yourself with a volunteer, those are some of the things to consider.

Joe Fairless: I have three comments on that. One, you said you don’t have to pay for mentors. I would argue that is the exception.

Michael Blank: Yeah.

Joe Fairless: Because from my experience, if you’re not paying a consultant, then question number one, question number two, question number three that you send them might go answered, but question number four is likely going to be a slower period of time for them to get back to you. And then question number 5, 6, 7, 8, 9, 10, it comes to a point where unless they’re a family member or a very close family friend, you’re taking, taking, taking, taking, and you’re not giving them much if you’re not paying them. And at minimum, it’s going to trigger some sort of guilty feeling on your part. It’s like, “Man, I keep asking this person all this stuff.”

And the other part and perhaps more bottom-line oriented, is if you are feeling guilty that, “Hey, I’m not giving them anything”, then you might second guess asking them questions, and then your growth is stunted, because you haven’t been giving them stuff. So I would argue there are some exceptions where you don’t pay for mentors, but by and large, in real estate, I think you pay for mentorship, from my experience.

The second thing I want to mention is – I remember listening to Tim Ferriss, and he talks about how it’s great if someone who’s great at something is great at it, but can they teach others how to be great like they are? So you mentioned a proven system as the fourth thing here. I agree, they’ve got to have a system in place where, yeah, they’ve done it before, but they know how to replicate their results. I remember Tim Ferriss specifically talking about that on one of his episodes, and I think that’s a great point.

And then the third thing I want to mention is that you talked about the “invest in the ecosystem.” Whatever value someone thinks they’re getting as a result of the mentorship program and the education, they likely do not understand, because it’s nearly impossible to understand the value of the network of the peer group that they’re going to be plugged into, should there be a peer group within that mentoring program.

So I would say whatever mentoring program you decide on, I would implore you to make sure that there’s lots of others in that group that you can connect with… Because probably, that’s going to be the biggest value of the mentoring program, and it’s the most overlooked value.

Michael Blank: I can’t disagree with anything you just said. So I’ll let you keep talking.

Joe Fairless: Well, those are my three things. So do you have a mentoring program? I know personally, from people that worked with you, that it has proven to be successful for them… But I’d love to just quickly have you talk about what’s an overview of your mentoring program for anyone who might be interested.

Michael Blank: I appreciate that, and again, there are variety of quality mentoring programs out there. The thing that is a little bit different around us is that if you value mentorship, you have the ability to actually work one on one with a full-time syndicator. We don’t have any part-time syndicators. And these people are really hard to find, to attract and to keep, because they don’t really need a job in many cases, and the only reason they’re doing is because they share my passion for helping other people.

Number two, we do actually follow a proven system, which we call the Dealmaker Blueprint, and we’ve had hundreds of people go through that. It’s just—I wouldn’t say cookie-cutter, but it’s a very methodical way to get to your first deal and scale your portfolio. And then not only do we focus on results, we actually guarantee results as well. So the bottom line is look at ours, of course—

Joe Fairless: What’s your guarantee?

Michael Blank: Well, it’s a guarantee that you’re going to do your first deal in the first 12 months—

Joe Fairless: Or what?

Michael Blank: —and if not, we’re going to continue supporting you until you do.

Joe Fairless: Got it. How can the Best Ever listeners learn more about what you’re doing?

Michael Blank: Yeah, we’ve set up a special code to find out more about our mentoring program. If you text the word “Joe” to 66866, we’ll send you a quick link, and you can just check out our mentoring program and see what it’s about. You can set up a call, see if it’s right for you. So that’s a great way to do that. So, it’s “Joe” to 66866.

Joe Fairless: Michael, thanks for sharing the five secrets to closing your first deal. Thanks for getting into the specifics of each one of those, and then also highlighting the mentoring aspect of it, which is, by and large, you know, having that community is one of the most important parts of the process. And quite frankly, it makes the process much more enjoyable when you’re doing it with a lot of other people, versus trying to be a lone ranger. So thanks for being on show, hope you have a Best Ever day, and talk to you again soon.

Website disclaimer

This website, including the podcasts and other content herein, are made available by Joesta PF LLC solely for informational purposes. The information, statements, comments, views and opinions expressed in this website do not constitute and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action. Neither Joe Fairless nor Joesta PF LLC are providing or undertaking to provide any financial, economic, legal, accounting, tax or other advice in or by virtue of this website. The information, statements, comments, views and opinions provided in this website are general in nature, and such information, statements, comments, views and opinions are not intended to be and should not be construed as the provision of investment advice by Joe Fairless or Joesta PF LLC to that listener or generally, and do not result in any listener being considered a client or customer of Joe Fairless or Joesta PF LLC.

The information, statements, comments, views, and opinions expressed or provided in this website (including by speakers who are not officers, employees, or agents of Joe Fairless or Joesta PF LLC) are not necessarily those of Joe Fairless or Joesta PF LLC, and may not be current. Neither Joe Fairless nor Joesta PF LLC make any representation or warranty as to the accuracy or completeness of any of the information, statements, comments, views or opinions contained in this website, and any liability therefor (including in respect of direct, indirect or consequential loss or damage of any kind whatsoever) is expressly disclaimed. Neither Joe Fairless nor Joesta PF LLC undertake any obligation whatsoever to provide any form of update, amendment, change or correction to any of the information, statements, comments, views or opinions set forth in this podcast.

No part of this podcast may, without Joesta PF LLC’s prior written consent, be reproduced, redistributed, published, copied or duplicated in any form, by any means.

Joe Fairless serves as director of investor relations with Ashcroft Capital, a real estate investment firm. Ashcroft Capital is not affiliated with Joesta PF LLC or this website, and is not responsible for any of the content herein.

Oral Disclaimer

The views and opinions expressed in this podcast are provided for informational purposes only, and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action. For more information, go to www.bestevershow.com.

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JF2641: Don’t Make These 4 Mistakes as a New Passive Investor | Actively Passive Investing Show with Travis Watts

“What mistakes did you make in your career that I should be on the lookout for as a new passive investor?”  Travis Watts answers this listener question by sharing four mistakes he made starting out as a passive investor that you can learn from:

  1. Location, location, location: You cannot overcome a bad area with good management.
  2. Understand that management is key.
  3. Make sure you understand the underwriting.
  4. Don’t do a deal just for tax reasons or because you see a lucrative fee split structure.

Want a more in-depth look at how to vet a team, a market, or a deal? Then check out our three-part miniseries starting with episode JF2396: Passive Investing Strategies | Actively Passive Investing Show With Theo Hicks & Travis Watts.

 

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Follow Up Boss

 

TRANSCRIPTION

Travis Watts: Hello, everybody, and welcome. It’s Travis Watts with another exciting episode of The Actively Passive Show. This week, the topic came from actually a conversation I was having with an investor, and this investor asked me, being that I’m a full-time passive investor, he asked “What mistakes have you made, and what should I look out for?” He just basically, was looking to avoid some newbie mistakes, and I thought that’s an excellent question and I want to do it justice, I wanted to better articulate my point, so I made an episode out of it.

I want to share this information because it’s important you guys to balance the risk conversation with the reward conversation. Of course, everybody’s always out there talking about whatever it is they do, whatever their investment is, how awesome it is, and how great it is, and that’s fine. It’s also important to have the conversation about what risk you’re taking on or what mistakes could easily be made. So with that, I’m just going to walk you through four things I made mistakes on early on and mid-career so to speak, in regard to being a full-time passive investor. So we were talking about multifamily, private placements, syndications, being a limited partner.

So without further ado, let’s dive right into number one. Location, location, location. We all know the saying, we all know the phrase, it is a classic real estate line, but here’s the deal. I made a few investments early on. I say a few—well, yeah, it was a few. It was probably three, total. These were C-class properties, first of all. So the class of property, meaning, A class is new development, new construction, or not that old, very high end, luxury, very high creditworthy tenants, stuff like that. So we’ve moved down two spots on the spectrum down to C. This particular place that’s coming to mind right now  didn’t even have a pool, didn’t have a gym. This was just kind of living in the unit and paying the bare minimum rents in an area that we all found out wasn’t such a great area. And I will point out why that is so important.

You cannot overcome a bad area with good management. So at first, this operator was pointing the finger at the property management company. They had hired a third-party property manager, and then things weren’t going well, there was lots of problems, stuff wasn’t getting addressed at the property level. So they fired him, and then the whole quarterly update was how excited they were to bring in this new property management company. Well, guess what? The new property management company couldn’t really do any better. The same problems existed, and when I say these problems, what I’m talking about is there was a shooting on the property. Fortunately, nobody was even injured, but still there was a shooting, so obviously, people don’t want to live in an area like that. There was a stabbing, there was vandalism… They had put up a gate to make it a gated community, and someone ripped the gate apart and broke it. So it wasn’t even functional. There were squatters on the property in the vacant units that hadn’t been leased up. There was just so much stuff, and it all came back to the fact that we had bought a property in a bad area. Just straight up. It was probably a C-minus, D-plus kind of sub-market, and the property itself was probably a C property. So it wasn’t the worst. I think it was built in the ’70s.

But anyway, my point is that of all the deals I’ve done A, B, C – I have never done anything under C – the C properties just notoriously have a lot of problems. That’s just my experience. I’m not saying you’ll have the same experience with a C property; it depends on a lot of factors… But I’m just letting you know.

B class is my sweet spot. I like the 1980s, 1990s, early 2000s built, good markets, good areas, surrounded by good neighborhoods with a high price of single-family homes, high wages in the area, all that kind of stuff, and we’re just taking an older property and we’re improving it. We’re bringing it back to the market standards in the business model.

A class, very rarely have any problems. However, less cash flow associated. So I’ll leave it at that. The mistake I made was investing in bad area. So whether you’re active or passive and you’re looking at a real estate deal, single-family, multifamily, syndication, GP, LP, whatever it is, pay attention to location. Look at school ratings, look at the surrounding neighborhood metrics, look at the jobs in the market, read the stats, look at the crime stats.

Number two is understand that management is key. Now, I just alluded to that you can’t overcome a bad location or area with good management, but in a general sense, the profitability will come from the key management; their ability to advertise and screen for quality tenants, and take care of issues on the property. A lot of deals that are being purchased – not always, but a lot – in the syndication space, and this is probably true with anybody buying, often the management hasn’t done a good job, therefore, they’re not leased up properly, or the rents are well below the market, or maybe it is a mom-and-pop operator and they just refused to ever raise the rents wedge… It’s usually management-related. Or you get on Google, you type in the property and you look at reviews and you just see zero stars and one stars, “Management’s not doing this,” “Management that,” management, management, management.

Back when, even before this – I was talking about single family real quick – I had a property and, come on, guys, quite frankly, I was a bad property manager; and when I say that, I mean, I didn’t know what I was doing. So I was making mistakes. It wasn’t like I was mean to people or doing things that were illegal. I’m just saying, I wasn’t effective. I would rent to a tenant, and let’s say they worked at my company. So, they were more of like an acquaintance or a co-worker, and they were going to rent my property. Sometimes I would just forego the screening process. “Ah, I know you. You work where I work. It’s all good.” Well, huge mistakes came from that.

I had a couple tenants that would always pay their rent right at the deadline, if not a day or two late. I wouldn’t be an enforcer of the late fee. It’s like, “Ah, it’s the 6th or 7th; at least you paid it, we’re all good,” and then notoriously, they would do that then every month thereafter, knowing they’re not going to get penalized. So why not pay it on the 8th instead of the first, because there’s no repercussion. Bad idea!

There was one property I had that was so bad, I hired a property management company to take it over, I was fully transparent about the issues and the tenants and what was happening to this point and why I had hired them in the first place, we signed the contract, we moved forward, about 2.5, 3 months later the property manager quit. They quit on me, because the tenants were so bad; and I take full responsibility for me putting them in there in the first place. But I’m just telling you, if you don’t have good management, you will not have a good performing asset.

So when you’re looking at these pro formas, and these overviews, I rarely hear a lot said about the management. It’s all about the deal, the deal, the deal, the deal, this structure, and it’s made of brick, and it’s in this neighborhood, and it was this many units. Talk to me about the management; ask questions about the management.

If you’re going to invest with a firm that’s what we call vertically integrated, meaning that they manage their own properties, just take a look at their track record or their current performance on the existing properties that they’ve acquired – totally cool to be vertically integrated. Lots of great reasons to do that. But if it’s a brand new group, and they’ve never managed properties, and they’re like, “Oh yeah, we’re vertically integrated. We’re just going to wing it and try to manage our own stuff,” probably a bad idea. You probably would want to start with a more experienced group to come into the picture, help you out, learn from them, and then possibly go vertically integrated later.

Again, not telling anyone to do that specifically, but be aware as an investor of who the property manager is, whether it’s third-party or in-house, and what their experience is in managing that kind of asset.

Break: [08:31] to [10:04]

Travis Watts: Number three mistake that I made is not understanding the underwriting. And here’s the thing – not all of us are underwriters, not everyone wants to go stare at Excel sheets and find the misnomers… And one word of caution upfront, don’t get caught in analysis by paralysis. So many people do this. I’ve done this… Where you’re just digging and digging and digging and thinking and thinking and thinking, to the point where you miss out on the deal altogether, right? It fully subscribes or you don’t have a chance to even participate.

So, here’s my philosophy. You and I, and anyone listening – we’re never going to know 100% of everything to make a decision to move forward. So if I can know, maybe 60%, 70%, ideally more like 70% of the details and the data and the underwriting, at that point, I’m comfortable myself moving forward with a deal. I’ll learn the rest along the way, and I’ll never get to 100 anyway.

But here’s the mistake I see most commonly made is – look, you and I and anyone else can make underwriting look good on paper; just the difference in saying, “Well, we were going to take a 70% loan-to-value mortgage on the property, but let’s move it up to 80%.” Well, now the numbers look a lot better, don’t they? But now we’re possibly overleveraging the property.

Another thing I’ve seen is a group’s going to come in and buy something at say a 5 cap, and then they’re going to underwrite to sell it at a 4 cap. So they’re going to go very aggressive with the exit strategy, when in reality, that’s in none of our hands, okay? The way cap rates are fluctuating and interest rates – that’s not going to be in our control. So I like to see the opposite – you’re buying at a five cap, you’re going to exit at potentially a six. You don’t actually want that to happen. A higher cap rate means a lower purchase price. So that’s not a good thing. That means the market has softened up. There’s many ways and reasons that could happen. But what I’m telling you is when you’re looking at the pro forma, ask the question, if it’s not already preemptively stated in the overview, what cap rate are you buying at? And what cap rate do you anticipate selling at? In my opinion, as an investor, I’m always looking for a higher exit cap rate, not a lower one, for underwriting purposes, so that I know this is conservatively underwritten.

Another thing when it comes to underwriting that I see is aggressive rent pushes. And yes, we’re seeing it now and over the last maybe 6-12 months we’ve seen a big uptick in rent; some markets are 12%, 13% 14% year over year rent increases, which is incredible… But guess what? It’s also not the norm. So, if I see that — just making this up, for example, purposes, but let’s say Tampa, Florida. That’s one of the really hot markets right now. Let’s say, it’s got a 10% year-over-year rent growth, at least for the last 12 months. Well, what you don’t want to see in the underwriting is a new deal being purchased in Tampa, and they say, “Yeah, we’re going to get 10% year over year rent increases for the next 5-7 years.” No.

When you see big spikes, like we see right now, there’s usually a leveling off, sometimes even a slight sinking; I’m not saying that will happen. I’m just saying that can happen; you’re not likely to see 10% a year or year after year for the next decade.

So what I’m looking for is either very little rent growth in year number one as they do renovations, or maybe just a conservative 2% or 3% a year rent growth in the projections. Again, you don’t really want that to happen. You want a higher number than that, and hopefully, you get it, but you’ve got to be conservative too, because if you’re basing your overall return, which is most people are investing based on the overall return projections, you want to know these are conservatively underwritten, or else that’s not going to happen.

And the last thing I’ll say about underwriting is take a look at the capital expenditures budget. If you can, try to get a line by line, and ask questions about it. Why is the landscaping $300,000 per year? Why is it $8,000 per unit? And then look at the breakdown –