JF2161: Two Losses and One Big Win With John Stoj #SkillsetSunday

John has battled with failure throughout his journey to starting a successful business and has gone from having a business to completely losing it 2 times over. He shares how he pivoted and took those lessons to implement it into a business providing food to universities. He gives advice on how he scaled his business and eventually sold it for a profit.

 

John Stoj Real Estate Background:

  • Spent 14 years on Wall Street from 1992-2006 
  • Raised $300 Million for a distressed hedge fund
  • Has started and grown multiple businesses
  • Based in Atlanta, GA
  • Say hi to him at  www.verbatimfinancial.com  

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Best Ever Tweet:

“First thing you need to think about when it comes to scaling is, what do you want to do, what do you want to make and what can you make?” – John Stoj

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JF2156: Institutions vs Entrepreneurial With William Walker

William has experience from both the institutional side of real estate investing and his personal experience of the entrepreneurial side. This unique perspective allowed William to dive into the differences between the two and some of the lessons he has learned from each to help him be more successful.

William Walker Real Estate Background:

  • Co-owner of 4M Capital Real Estate Investment
  • 5 years of real estate investing experience
  • Portfolio consists of 1650 units, built & sold 10 single-family homes
  • Based in Nashville, TN
  • Say hi to him at: www.4mrei.com 

Click here for more info on PropStream

 

 

Best Ever Tweet:

“Sometimes knowing what not to do is very beneficial” – William Walker


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 of that fluffy stuff. With us today, William Walker. How are you doing, William?

William Walker: Doing well, Joe. Thanks for having me.

Joe Fairless: Well, I’m glad to hear that; it’s my pleasure. A little bit about William – he’s the co-owner 4M Capital Real Estate Investments, his portfolio consists of 1,650 units, he’s built and sold approximately 10 single-family homes, he’s got five years of real estate investing experience. So how did he get to this point within five years? That’s one question I want to ask. He’s based in Nashville, Tennessee. So with that being said, William, do you want to give the Best Ever listeners a little bit more about your background and your current focus?

William Walker: Sure. I’m originally from Nashville, didn’t come from any real estate family or multi-generational company type deal, but started getting into real estate in 2014, really studying the business and trying to learn as much as I could. Through college, I studied accounting and finance and continued to learn real estate just whenever I could, educating myself, getting involved, going into meetings, that sort of thing.

In about 2016, I had acquired two rental properties, single-family and I positioned myself to get into a group within the organization I was working for at the time, Ernst and Young. I started out as an auditor, CPA route, but moved into their transaction real estate practice in 2017 in Atlanta, Georgia. Got a lot of great experience there and worked on some larger multifamily acquisitions from a consulting standpoint, doing things like commercial appraisal, quality of earnings analysis and due diligence. When Mid-America purchased Post Properties in 2017 – it was about 20,000 units – we were very involved in that acquisition, and that was a great learning experience for me.

Another big part of my background was getting involved in a coaching and networking mastermind for multifamily and just getting around operators that weren’t in the institutional level that I was used to seeing from my corporate days, but more boots on the ground, putting deals together. So that was a great experience as well. It was key to some of the relationships that I made in those groups to where I am today.

Joe Fairless: A lot unpacked. First, what coaching group are you referring to?

William Walker: It’s ARI Mentor. It is ARI Mentor.

Joe Fairless: ARI Mentor. Okay, is that Dave Lindell?

William Walker: Yes, that’s correct.

Joe Fairless: Cool, and you mentioned that it was interesting to see the difference between non-institutional, more boots on the ground investors compared to your EY experience where it’s very institutional and working on an acquisition of 20,000 units. I’d like to learn more about some things that you have learned from more boots on the ground that perhaps, institutional players could either implement or it’s just interesting to from your institutional experience.

William Walker: Yeah. The best way I can describe it or how I’ve described in the past, with the institutional side, it’s more of a top-down approach and very future-oriented and projection-based. As you know, there’s all kinds of assumptions that go into a multifamily model, and when you’re dealing with that larger portfolios, I think a lot of the underwriting and decisions are made on data you have and just fine-tuning those models for maybe 100 to 200 basis point yield difference. But in more the boots on the ground, the entrepreneur level, I would say it’s more of a bottom-up approach, and you’re really looking at more of an operational side of things, and what’s this property going to take to run today. If I took over today, where would I deploy troops? Where would I deploy capital? Construction’s a big thing that a lot of people, I think, in the finance world don’t necessarily know well. Maybe they have national averages that they can plug into the model, but I think really getting on-site and understanding construction and understanding where you can save money and where you can be taken advantage of is critical, and that typically, from my experience, wasn’t learned at the institution side. More on the entrepreneurial, boots on the ground side. I’d say more so managing the asset.

Joe Fairless: Thank you for that. It was a poorly worded question and you answered it very well. So I appreciate that.

William Walker: Oh, thank you.

Joe Fairless: So let’s talk about what you just said – knowing construction well, where you can lose money or save money, and you tend to see the entrepreneurs, local owners, just non-institutional groups and guys and gals do that better. What are some specific examples that you can talk about?

William Walker: Specific examples that I could talk about is cap ex. That’s a big thing that– it’s one of the largest assumptions going into an acquisition and I think it’s very rarely talked about. So coming up with a number that you know is going to enable you to execute your value add plan and knowing that you can get those renovations done for that cost and breaking that down on a painful detail is very important. Again, if you’re not really plugged into construction, you’re not communicating with GCs regularly, you’re not involved in projects like roofing or replacing 200 windows or any of the things that go into these value add renovation plans, then it’s difficult to know– okay, can I really execute my plan with this cap ex amount of money, have reserves left over? And I think those are things that are really learned from getting experience on job sites or talking with GCs constantly… And maybe some of the more private equity guys side of the business were doing that, but I just didn’t see that a lot on the institutional side. So not that you can’t still execute a successful acquisition and plan, but I think when you break out and you’re putting together money and raising deals on your own and doing it more on an entrepreneurial scale, and you don’t have quite the budgets that Mid-America has or Cortland has, then it’s very important to one, be able to know your cost, know that you’re not being taken advantage of and they’re doing a lot more work than really needs to be done because contractors want to do more work. Sometimes knowing what not to do is really beneficial.

And then, just working with GCs, it’s difficult to find good general contractors that you can trust. You can give them enough lease to work and not get into trouble or have change orders all over the place. So it’s a dance with the construction side of the business and that’s in the 60s, 70s, 80s built space. That’s one of the biggest components, I would say, to running a successful plan, is executing that construction in a cost-effective way and with minimal overspend.

Joe Fairless: It’s interesting when you mentioned knowing what not to do is as important as knowing what you need to do. Do you have an example of that, that you could just drill down a little bit?

William Walker: Yeah, real specifically, I can think of when we were pricing window replacement on – I think it was 150 units, 160 units – and we were walking the property with the window contractor that we were going to have install on the property, and he was telling us all of these different things, that we got to replace the window seal and redo this and redo that, and my partner at the time was just giving an example of “What if we just did this, as far as not replace the window seal and pop it in from the back?” and it was a dumbfounded look, and I’m not sure if he just didn’t think of that or he wasn’t expecting someone to know… But basically, it cut the work in half on replacing a window, and you extrapolate that over 150 units, call it four windows a unit, it’s a big cost saving. So that’s what I mean when knowing what not to do… Because sometimes a GC will look at a job and they might do more than what’s absolutely necessary.

Another recent example I could provide was we were doing a simple turn at a property we own, and our maintenance supervisor was thinking that we needed to replace the subfloor based on one little area, and instead of ripping up the toilet, ripping up the flooring and the sub-flooring, we cut out a piece of the flooring and replaced that subflooring, and then laid over our floor and it wasn’t brand new, but it probably cut our costs in half, if not more… And just did daily decisions like that, that are hard to catch from afar. Within big projects, there’s decisions made on the ground a lot that are difficult to come up with if-then scenarios to anticipate every time, and just having that construction knowledge to be able to make that right call and say, “No, we don’t need to do this. We can do it a different way and save a lot of money,” is very important… And coming back to that capex budget and maintaining that budget and getting the work you need done.

Joe Fairless: You studied accounting and finance in college and then you were an auditor shortly thereafter, it sounds like, and then you moved into transactions with real estate. How did you get this background in construction and knowing it well? You seem to really go back to hey, this is a part of the business that you’ve got to be an expert on. So how did you get that expertise?

William Walker: That was really developed through my partner who’s stronger in that areas than myself and learning through some of the acquisitions we’ve done over the past several years. Growing up, I started working from an early age for my dad at different types of work like that, doing some work with your hands… So I think it was instilled in me, and something that I wasn’t scared to get involved in and doing it; I was e comfortable doing it, from a labor standpoint, but really just getting involved in some of these transactions… I was also involved with a couple of partners doing some single-family builds, as you mentioned, in Nashville, and on one of those projects, I inserted myself as a project manager. I wasn’t swinging hammers or executing on the labor side, but what I was doing is scheduling and coordinating all of the different trades to come in and build that house, and that gave me a really accelerated understanding of once you start tearing down drywall, okay, what are the components of the house or the apartment unit. Once you start breaking down behind the drywall, it really opens people’s eyes and it becomes a lot easier to visualize “Okay, how is this built?” and take that moving forward. But there’s a gradual stepping stone type deal, just one project after another, getting involved in construction, not necessarily executing, but getting involved, getting on-site, understanding what’s going on, that sort of thing.

Joe Fairless: Five years, almost 1,700 units, and approximately 10 single-family homes being built. How’d you do that in such a short period of time?

William Walker: Well, I definitely didn’t do it by myself. I had some good partners. I had some people that I was lucky not to partner with along the way as well. Going back to– sometimes it’s things you don’t do or knowing what not to do. So surround yourself with the right people being relentless, and I think educating myself when I finally did get opportunities to get deals done and put them together and be a part of that, knowing what I’m talking about and being able to add value in any way that I could.

Joe Fairless: So let’s talk specifics. What’s the largest deal, unit-wise, that you own?

William Walker: That would be the 208 units that we acquired in December. It was 80% occupied, got it from a longtime owner who had built the property, fully paid it off, fully depreciated it and it needed some real good TLC.

Joe Fairless: Where at?

William Walker: That’s in South Georgia. Columbus, Georgia.

Joe Fairless: Okay, and you are not there, you’re based in Nashville. So first off, you said you have a business partner who’s stronger at construction than you are. Who’s on the team and what are their primary roles?

William Walker: Morin Miles is my partner who’s leading the charge, but we have a property management company that manages our internal properties; we don’t do any third party. There’s approximately 49 people working operationally across the properties in management, maintenance, sales, regional managers. We also have a construction company that’s headed up by an individual who is a construction expert, supervisor. He manages all the cap ex projects across our portfolio, and we’re working with two virtual assistants that help us as well, but we’re pretty lean and mean. We work virtually as well, to a certain degree. We have a controller that sits in Nashville and helps us with our financial reporting and tax preparation, and we’re trying to build more of an office in Nashville, but with our current economic and health situation, that put a little bit of a kink in the chain on building a presence in Nashville from an executive standpoint and building out that back-office support, but we’re still communicating and working virtually and able to carry on.

Joe Fairless: The largest is 208. If you can just quickly go through some other large deals that you’ve got. I just want to learn more about your portfolio.

William Walker: Yeah. Starting July 2018, we bought a 160-unit property in Georgia, and then we went on to buy close to a little over 1,400– 1,490, I think, was the final number, by that next year. So I had a really big year in 2019, but I ran through those acquisitions of the 160 units, bought a 58-unit that was at auction, all-cash transaction. The next one was a 108-unit in Atlanta, Georgia. After that, we bought a portfolio with an 88-unit and a 107-unit property that were real close together; 70s built. Closely after that, we closed a four pack of deals. That one was 165 units in Georgia. Another was 172 units in Indiana. Another 88-unit complex, a 50-unit complex that was all purchased together. I’d say we’re opportunistic. We’re not so big that we’re going to scoff at something under 100 units. But in order for us to buy a smaller property, it’s really gonna have to make sense and be a juicy one as we say, and probably have somewhat of a presence in that market already where it’s not a huge burden on management, it can be absorbed in our current management infrastructure in that market. The largest deal that the company has done in the years past has to be 270 units.

Joe Fairless: Okay.

William Walker: 272, I think it was.

Joe Fairless: When did you exit that one?

William Walker: 2019, we sold 1,100 units and picked up about 1,490.

Joe Fairless: So I’d love to learn more about what you’ve learned from buying units between 50 to 100 size properties. Some people stay away from those; you and your business partner do not. So what are some things to keep in mind that we should be aware of when we’re purchasing that size of property?

William Walker: The stereotype, I guess, that the smaller ones can be more difficult than the larger ones; that’s definitely true. In the 50 unit that we purchased – that’s the smallest one we’ve done – there was some HUD issues that we had to jump through all kinds of hoops. It was a mom and pop owner, their records were poor, they weren’t in compliance with HUD, HUD hadn’t been doing inspection… So we had to coach the seller through getting all of this information; we had to deal with HUD. This was back during the government closed down of last year as well. So that’s the latest.

But I would say the smaller properties can be more difficult to run because you don’t have revenue to cover a full-time staff or cover that overhead. So a lot of time is spent on those units. If you don’t have that larger management presence, if you have a couple hundred units in the market, and you have a property a mile down the street, that’s a completely different conversation than saying, “Hey, I want to move into a new market and buy this 50 unit property. By the way, I’m five states away.” That might not be a winning solution. I’m not saying it can’t work, but that would be my best advice.

Joe Fairless: How does it work? If you don’t have that three miles away… You just said, “It’s not a winning solution, but I’m not saying it can’t work.” So how could it work?

William Walker: It would work if you bought it off-market in a distressed situation at a very good price per door, and it didn’t really matter because you had enough room in that deal to execute the plan, hire somebody to manage it and still make money on the back end.

Joe Fairless: Got it. What are some ways that you found effective to find those 50 to 100 unit deals?

William Walker: Working with brokers that aren’t necessarily on the national platform. The guys that are not new to the business necessarily, but maybe have a smaller brokerage shop and aren’t doing the national marketing blast with the CBRE’s and the Cushman & Wakefield to the world. Typically, they’re attacking some of those smaller type units in secondary and tertiary markets.

Joe Fairless: How do you find those local brokers since they’re not on the national stage?

William Walker: It’s a combination, I think, of networking, trying to get our name out there, tracking deals that have been closed and seeing who the brokers were on those deals, and getting in touch with them that way. But I think it’s getting out there. Being in this business is very much to me a long term game, and it takes a little while to build a reputation. I think a lot of people get in it and within six to 12 months, you never hear from them again. So in my eyes, there’s almost a testing period where you’re not really taken serious by any of the brokers until they know you’ve either closed the deal or they’ve seen you come around for more than 6 to 12 months kind of thing… And also with brokers, they go in and out of the business as well. But I just go back to just network as much as you can. I’m more involved in operations and acquisition to the business nowadays, but in the beginning, when I was first getting going and cutting my teeth, I would talk to anybody I could find, go to any event I could find and build those relationships. And over time, when you’re able to look back and say, “They remember meeting you a year to a year and a half ago,” and you can call back on those same people and refer to deals that you’ve done and ask them what they’ve been doing and what have they got coming up kind of thing, it completely changes the conversation from cold calling a broker that you have no prior relationship with, you’ve never met before, and telling them that you want to buy an eight-cap deal in this market and you’ve got the money to do it, kind of thing. So I think it just takes time and diligence and persistence and networking.

Joe Fairless: What software program, if any, do you use to track the deals that have closed and see what brokers were representing the seller?

William Walker: We use ActiveCampaign for CRM management tool; it’s one of the tools we use. And then good old fashioned Excel spreadsheets. I definitely have many spreadsheets and lists tracking different deals that we’re interested in, and try and be selective and instead of taking a shotgun approach; maybe more of a rifle approach and really being targeted about who we’re speaking with, who we’re building relationships, which deals we’re targeting that maximize our game plan, and what we believe is we’re best suited for in our competitive advantage, if you will.

Joe Fairless: So ActiveCampaign, to the best of my knowledge, is a CRM that reminds you to follow up with people and sends out messages. What I was referring to is, how are you getting that information to put into ActiveCampaign? So tracking deals that have closed and seeing the brokers that represent them. Is it just speaking to other people and talking to them, or do you have some software subscription, or what?

William Walker: Yeah. We’ll call brokers that we’re talking to. We see closing announcements that are passed out and going to the Secretary of State website, obviously, where all real property information is saved and stored in public record. A lot of research is done there.

Joe Fairless: Based on your experience, what’s your best real estate investing advice ever?

William Walker: Hang in there. Sometimes when you’re on the bull, you get the horns, but get back up and time heals all wounds in real estate if you can hold on long enough.

Joe Fairless: Spoken like a person from Nashville. Thank you for that analogy. We’re gonna do a lightning round.

William Walker: Be conservative in your underwriting [unintelligible [00:23:10].23]

Joe Fairless: I want to ask you a follow-up question regarding your bull by the horns thing, but I’m gonna ask it in the lightning round. So first, you ready for the Best Ever lightning round?

William Walker: Yes.

Joe Fairless: Alright.

Break [00:23:24].03] to [00:24:22].13]

Joe Fairless: Alright, William. So on that note, what deal have you lost the most amount of money on?

William Walker: Knock on wood, haven’t lost any money on any deals yet. Looking for some wood to knock on right now.

Joe Fairless: What’s a mistake you’ve made on a transaction?

William Walker: I would say, maybe not doing the deal. I was a little conservative on one that I should have pulled the trigger on. I got hung up on a delinquency charge that I thought I might have to pay to an HOA board. But looking back, I should have done that deal.

Joe Fairless: You can’t think of a mistake you’ve made on a deal?

William Walker: Maybe not requesting an updated survey from the attorney when I should have. So we had to do a rush charge on the new survey, [unintelligible [00:25:03].11]; that’s something I can think of.

Joe Fairless: What’s the best way you like to give back to the community?

William Walker: Anonymously. I typically look for opportunities that pass me by and do what feels right. An organization that I’ve donated to lately that I think is a great cause is Operation Underground Railroad.

Joe Fairless: How can the Best Ever listeners learn more about you and your company?

William Walker: Through your typical social media platforms. Instagram is my one of choice. And through our website, at 4mrei.com.

Joe Fairless: That will also be in the show notes link, the website URL. William, thank you for being on the show, talking about the importance of knowing construction and capex projections and giving some specific examples; one of them being replacing the subfloor– No, no, no, just a piece of the flooring, and cutting costs in half at least just through that, and you mentioned other examples as well. And then talking about the importance of partnerships, as well as talking a little bit about the 50 to 100 unit transactions and what to look for from a team, and if you don’t have the other properties in those areas, then here’s what you do need in order to make the numbers work off-market, good price per door, and then you’re going in a good basis. So, thanks for being on the show, really appreciate it; I enjoyed our conversation. I hope you have best ever day, and talk to you again soon.

William Walker: Thanks, Joe.

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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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JF2154: Understanding Your 401k and LLC Management With Jennifer Gligoric

Jennifer is the Co-Founder and COO of Leafy Legal Services, she has a great backstory, going from homeless to owning her own company. Her goal is to protect investors who are growing their business and to prevent them from getting sued and losing it all. She gives tips on what you should do to protect your assets and how to utilize your, LLC, to invest in future deals and she also shares how you can utilize your 401k to your benefit.

Jennifer Gligoric Real Estate Background:

  • Co-Founder & COO of Leafy Legal Services and co-host on Leafy Podcast
  • 20 years experience in real estate
  • From Galveston, TX
  • Say hi to them at: https://www.leafyassets.com/

Click here for more info on PropStream

Best Ever Tweet:

“Treat your real estate investing like a business” – Jennifer Gligoric


TRANSCRIPTION

Theo Hicks: Hello, Best Ever listeners. Welcome to the best real estate investing advice ever show. I’m Theo Hicks, today’s host, and today we’ll be speaking with Jennifer Gligoric. Jennifer, how are you doing today?

Jennifer Gligoric: I’m doing great. It’s really wonderful to be on the show.

Theo Hicks: Absolutely, and thank you for joining us. I’m looking forward to our conversation focused around the legal aspects of real estate. So Jennifer is the Founder and COO of Leafy Legal Services, based in Galveston, Texas, and she has been helping entrepreneurs and real estate investors get started for over the last 20 years. She has a very harrowing back-story; she found herself homeless as a teenager and managed to put herself through college and become a successful business owner despite the odds against her, and she attributes her success to a mindset of abundance and paying it forward as the means to happiness. If you want to learn more about Jennifer and her company, you can go to leafylegalservices.com. So Jennifer, before we get started, do you mind telling us a little bit more about your background and what you’re focused on today?

Jennifer Gligoric: Yeah. Well, I actually have a pretty long background. My background started in crisis intervention for businesses. Well, I say that… I worked as a young kid. My mom had the longest-running employment agency ever type here in Houston, Galveston Metroplex. So I was the kid that would set up the secretaries that had cigarettes hanging out of their mouths, because that’s how they did it back then, instead of my [unintelligible [00:04:10].17] typing tests and things like that. So I already knew how to interview for a job, how to do the paperwork to get a job, which, if you’re a parent, teach that to your kids. They’re not teaching it in school, and I gotta say that that’s pretty critical. So I already knew how to do basic secretarial stuff and that, but the money was in sales. The money’s always going to be in sales. So I was very driven by the money. So I went into telemarketing and sales, and long story short, I ended up into crisis intervention for businesses.

With a heavy background in HR, I would get in and they would hire me to fix their widgets or, “Oh, we need more brochures. Our pitch is crap, redo it,” and then I’d get in there and it was never that; it was always HR that was tanking the company. They were hiring people at the wrong rates, putting them in the wrong positions, having them do the wrong things. So that was my career, is going in and fixing companies, but really I was fixing small business owners, teaching them how to be better managers, teaching them how to have better systems, how to hire people they can trust and let run to take a break every now and then.

Many small business owners, you ask them, “When was the last time you took a vacation?” or real estate investors, and they just give you this blank look, because they really are always working. Well, that’s not good. Some of your biggest breakthroughs in life are when you take a little bit of a break. You’re just going to run yourself into the ground and you’re going to drive everybody around you nuts when you do that.

About a decade ago, my specialty turned into helping companies scale using entirely remote workforces, but top talent; not $3 an hour VAs, people that had left the corporate world, and for whatever reason, they needed to be at home. Sometimes they wanted to raise children at home, sometimes they survived an accident that they were never meant to survive, or an illness that would’ve kill them five years ago, and they can’t be in commute. And I thought what’s better for the environment than helping people not clog up our roadways, adding to carbon emissions, to not having to build and do this sprawl. People can stay in their own houses. And it’s better for the local communities, it’s better for local businesses, and it’s better for the economy as a whole.

So I did some big scale-ups. I actually met the person I brought on to be my CEO because he hired me to scale up a very large digital marketing firm, and during that time, he was a real estate investor; I was getting into real estate investing because we were dealing with the likes of Than Merrill, Kevin Harrington; we were working with people that were putting them on stage, we were working these huge events, and scaling up very large, well-known marketers. Our first company, we took from three people to 221 people in 21 countries within 18 months, and that’s the power of virtual workforce when you don’t have the ridiculous overhead that you have with offices and everything else, and when you’re hiring the right talent; that’s also key.

Then about three or four years ago – I lose track of time – I was tasked to scale an asset protection law firm. Having already been in the real estate space, and working with some of the top names, it was a natural fit, and as I did that, I realized, “Wow, there is just a lot better way to do it. It can be a lot more cost-effective,” and I have a love of real estate investors and entrepreneurs that are just starting out, but also, there are people that grow and they start getting 10, 12, 13 houses, and they’re getting them all in their own name, and then they lose everything because of one lawsuit. So we have a mission to help unburden the nation’s court system from these vexatious lawsuits, which really piss me off. The idea that someone’s making money by suing other hard-working people really grinds my gears. So if I can stop that and make it very difficult for those people to operate, I want to do that.

So then we started Leafy Legal, and now we have this amazing team. We have attorney relationships across the country and we have the best paralegals with 98% of our clients are real estate investors; the other 2% are entrepreneurs, and we help them hide their assets, protect their assets, have the right structure in place so that they’re operating compliantly and legally, and they’re able to scale in structures that are meant for real estate investors, and then we help them tie that into some incredible estate plans. Plans that are made for people who are young and working, not something you slap together for 50 years from now or if you ever pass away. And then we help them become their own bank and think about money differently by having solo 401ks or SDIRAs. So that’s what I’m doing and I love it.

Theo Hicks: Okay. So let’s focus on the first part first, which is the asset protection and you mentioned how it really grinds your gears about the fact that people make a living off of suing other people. So what are some of the top tips, top strategies that people can start implementing or should start implementing, that maybe most people don’t necessarily know about? What are some of the hidden gems?

Jennifer Gligoric: Well, I think that most people know they’re supposed to have an LLC, at least, but yet they’re still doing things in their own name, and their name is on the LLC. Well, if your name is on an LLC, I can look it up. It’s public record, I can see that you’re a member of that. You want to operate using anonymous structures, and then you want to hold your assets in structures that are not tied to you. You want to have an asset holding company that has arm’s length agreements away from you; that you’re holding in another structure, and the way you operate and you do business and where you hold your assets are two separate places that someone can’t get to.

Theo Hicks: Okay, because I know when I was making an LLC for a property, I was like, “Well, I can just google the LLC, and then my name comes up,” and I don’t understand how that protects me. So can you explain that process for us from A to B? So I create an LLC, and then what am I supposed to do?

Jennifer Gligoric: Well, you’re supposed to go to a company that helps you create an agent trust that is listed on the LLC so your name is not a part of it. You are a beneficiary of that trust, which is a private document, so that’s not filed with the state. So [unintelligible [00:10:41].24] the name that you can find on the state is the name of your anonymous LLC, and you can do it in almost any state. Real estate investors, what you’re going to hear of most, you’re going to hear of Delaware, Wyoming, Nevada and Texas; those are the top four. Most real estate investors, if they’re any bit savvy, you’re going to live events and you’re talking to asset protection people, it’s going to be one or if not all those states. So we create entities in any of those states.

The way you scale your business depends on a couple of things. You need to write down “This is where I live, this is where my homestead is, my house, and this is which state or states I have property in, and this is where I want to grow my business, and this is what type of real estate investing I want to do.” Depending on your answers to all five of those depends on what structure is best for you and it’s different for everyone. Because there’s a million different ways to skin a cat for someone, depending on of course, your budget and where you’re looking to scale and what you’re looking to do.

Theo Hicks: Okay. So I have my agent trust, and then I have the LLC that I buy a single-family home with. Do I use that same LLC to buy all my properties, or do I always create a new LLC for each property?

Jennifer Gligoric: No, you want to use your fundable entity, which I’m assuming is that LLC that you’re trying to create a professional borrow profile with that’s not tied to your social security number, as your professional entity. If you’re still buying in an LLC, but everything’s tied to your personal social security number, you’re defeating the purpose of why you’re using an LLC for that, and a lot of people do that.

So a fundable entity is an entity that you create with the idea that you’re going to have your own credit and you can walk into a bank and you can get a fundable business line of credit up to $500,000, a million dollars, and it’s not tied to your personal credit, and that’s something you need to work on. So we help people create fundable entities, and then your operating company is your anonymous LLC. And then when you get that property, you immediately want to transfer it out of your name and into a trust.

Theo Hicks: Okay, perfect. And then the other thing you worked on was about, you said, being your own bank, and you talked about the 401k. So do you want to walk us through that process as well, if I want to get started being my own bank today?

Jennifer Gligoric: So if you have a solo 401k, you cannot have any employees. So that’s very important; you don’t qualify for this. So this is a specific financial instrument that is available to self-employed individuals who do not have employees, but you are allowed to cover a spouse. And in 2020, you can make a contribution up to $57,000 into your solo 401k, which is five to ten times the normal contribution limit that is for a normal traditional 401k.

For the solo 401k products that we use, you can roll everything but an IRA into a solo 401k. The reason that you want to use a solo 401k if you’re in real estate investing is that you can be your own bank, you can loan money to yourself on your own favorable terms. Because you’re your own bank, you have to pay yourself back; you have to pay it. You have to make the payments, you have to make the payments back on time, but you’re keeping all the interest. You’re also the one that has checkbook control on this. So unlike being pigeonholed by someone else controlling the 401k, say, the reserve, the mutual funds you’re allowed to invest in, these are the stocks you’re allowed to invest in, and here are these limited amount of products you’re allowed to look at, with a solo 401k, you can invest in real estate, you can hold a property in the name of the solo 401k, you can give yourself up to $50,000 or half the total value of your solo 401k, whichever is less (because the cap is 50) and then you can take that money however you need it. So let’s say someone comes to you and says, “I want to start a marinate business, and I just need $10,000, but they want to charge me 13% interest.” Let’s say your rate’s 3%, you charge them 6%, you’re keeping all the extra interest, and now you’re investing in the business.

Theo Hicks: Okay. So I get the 401k to not only buy my own properties, but I can use it to invest in someone else’s properties.

Jennifer Gligoric: That’s right. You can do it in other properties. There are certain restrictions on it. It’s not just the gamut of what you’re spending money on, but considering what is left to a regular W-2 401k, it seems like you can do whatever you want. So there are some prohibited transactions and we have a list of those, and prohibited persons, but for the most part, you can pay off high-interest loans, and then use that same payment at favorable rate and then you keep the interest for yourself. You can bypass UBTI tax and unrelated business tax by using a solo 401k, which is a huge tax benefit. You can invest in other types of businesses, you can invest in Bitcoin. A lot of instruments are available for you that are not available. So it’s very powerful. I was on the Chris Naugle show, the Risky Builders, and he does a money show and he’s like, “Stop having your money sit on the couch,” and I’m like, “Yeah, it’s just eating Cheetos, getting fat doing nothing. You want to make your money work for you,” and that’s a mindset too. That’s the difference between that poverty mindset and then the mindset that really rich people have. They think about money differently, they use money differently. That is not a scary thing for them. They’re like, “Oh, heck, yeah, I’m gonna use that instead of this other one.” But we are given so many fear tactics on money throughout our lives that gives us limiting beliefs. “Pay everything off; you don’t want to have any credit card debt, you don’t want to have any debt at all; you just want to buy everything and pay it off.” And then you go to get a loan and you have this credit score of 820 or 840, and you can’t get anything over $3,500, and you’re like, “How come?” Well because you’re a professional consumer who they’re not going to make a penny out of. So the 80 algorithms that they track you with have said, “You’re not someone that they’ll give money to.” And then you’ll see 680 walk in, and that person walks out with a $200,000 line of credit. Because your credit score is meaningless; it’s your borrower behavior. So when you start to change that and you start using a fundable entity and you start thinking about things different, you have a better structure. With your real estate business, you’re protecting your assets. Those are borrower profiles that are tracked, that are very attractive for banks and lenders; tier one banks and lenders, which is the ones you want.

Theo Hicks: Okay, so we’re gonna cite everything you’ve said so far because I’m sure a lot of that stuff is definitely best ever advice and I’m gonna have to listen to this again because this is a lot of new information and I don’t know how much I can grasp, but I’m sure it’s normal in a 15-minute fitting… But besides what you’ve said so far, what is your best ever real estate investing advice?

Jennifer Gligoric: Treat your real estate investing business like a business. Don’t shirk in the very beginning by getting your entity and everything set up and protecting yourself. So it is a business that you plan on being successful. Because of that, you need to protect yourself because you’re a successful business person. The people who do that ahead of time and get things set up, and they don’t skip step A and go all the way to step F, those are the people that are less likely to lose later on, and they’re more than likely to get respect with different institutions and the people that you work with, and you’ll be more successful.

Theo Hicks: Alright, Jennifer, are you ready for the Best Ever lightning round?

Jennifer Gligoric: Okay.

Break [00:18:31]:03] to [00:19:27]:09]

Theo Hicks: Okay, Jennifer, what is the best ever book — well, I usually we say recently read, but what’s the best ever book to learn more about what we’ve talked about today? We’re changing that up a little bit.

Jennifer Gligoric: Okay. To learn about what we talked about today, go to my website, leafylegalservices.com; you get a free ebook and it tells you all about it.

Theo Hicks: Leafy Legal Services free ebook.

Jennifer Gligoric: Yeah, that’s right.

Theo Hicks: Okay, if your business were to collapse today, what would you do next?

Jennifer Gligoric: I would just keep the podcast. I have a really good podcast that I’m doing. I would probably monetize the podcast more, and I would keep my same team, because they’re amazing. I’d figure out a way to keep my same team. I don’t know; I’d just morph it.

Theo Hicks: What’s the podcast called?

Jennifer Gligoric: Leafy Podcast.

Theo Hicks: Boom, Leafy all around.

Jennifer Gligoric: Yeah.

Theo Hicks: What deal did you lose the most money on, and how much did you lose?

Jennifer Gligoric: Oh, it was a contracting deal, and the most I’ve ever lost was over $150,000. And the reason I lost it — and it was contracting with work with a client, and I lost it because I stayed working with someone that I kept thinking, “They’re not really going to screw me over. They won’t really do this to me. Look at how hard I’m working for them. Look at what I’m doing,” and I was waiting for months for them to be a different person than what they were showing me they were consistently, on a daily basis. Because they would give me these little hints of “they’re not evil”, and I think, “Oh God, you’d have to be evil to screw me over like this,” and the thing is they gave me every single red flag and I needed to go with my gut and I should have cut the cord a lot sooner. So my advice now is when you know it’s rotten, it smells rotten, it looks like rotten, cut the cord. Don’t wait for someone to automatically be a better person than they’re showing you that they are.

Theo Hicks: What is the best ever way you like to give back?

Jennifer Gligoric: Through work in jobs, like helping people with work in jobs, and then I give back– because I was homeless, so I give back to the homeless shelter that helped me so much – Covenant House. So anytime I can, I’m willing to help them.

Theo Hicks: And then lastly, what is the best ever place to reach you?

Jennifer Gligoric: leafylegalservices.com. You just go there you can set up an appointment with me. If you want to talk to me, I give a free consult to anybody. I just want to help people.

Theo Hicks: Perfect. Best Ever listeners, make sure you take advantage of that. Alright Jennifer, I really appreciate it. I don’t think I’ve ever learned as much in 15, 20 minutes as I learned today about asset protection.

Jennifer Gligoric: I get that a lot.

Theo Hicks: So first, you broke down your background and you’ve definitely done a lot. You started as a young kid working with your mother’s company and you talked about the skill sets that you learned, learning how to interview and do basic secretary work that you recommend parents teach their children because they’re not getting taught in school. You went to telemarketing sales, transitioned to crisis intervention for businesses, which is where you ended up meeting your CEO, and you talked about all the different companies that — basically, you’d go in there, you’d help them know how to run a business.

Jennifer Gligoric: Yeah, and that’s what I do now. Even what I’m doing with asset protection right now with real estate investors, many of them, I’m just helping them run their business better. All of these structures – yes, it’s money and it’s a structure, it’s boring, la-la… But once you get it set up and your accounting gets set up with it, the right structure will streamline a lot of things for the investor and protects them, and therefore it allows you to be safer to make more calculated risks, and that really can springboard you not only, but then the money things that we teach them as well. So yeah.

Theo Hicks: Yeah, we’ll definitely have to bring you back for a Skillset Sunday class. I wanted to talk about that today, but we ran out of time. So maybe we can bring you back for another episode to talk about how to scale a business more step by stepwise.

So then we talked about the asset protection, and go back and listen to what she said, but you want to make sure that you’re not creating LLC with your name on it. So you want to create that agent trust that is listed on the LLC, which is a private document that people can’t get access to and see your name. You talked about some of the top states for asset protection – Delaware, Wyoming, Nevada and Texas. You went through some questions that you need to ask yourself to determine what the best asset protection structure is for you – Where do you live? Where do you want to invest? What types of property do you want to invest in?

We talked about the fundable entity so that you can start working on building up a reputation so that you can get a line of credit that’s not tied to your personal name or personal credit. We moved on to talking about the solo 401k which helps you be your own bank. We talked about how it’s for people who are self-employed who don’t have employees, but you can cover your spouse contributions up to $57,000 a year. You can roll everything into that IRA, you can loan yourself money, and then you can pay yourself back and keep the interest, and then you have complete– well, not complete; there are some restrictions you said, but you have complete checkbook control. So you can invest in real estate, you can hold a property in the name of the 401k, you can take a loan against your 401k, and then use that to buy real estate, invest in other business, buy Bitcoin, you said, and you bypass that UBTI tax.

You briefly touched on the mindset and about limiting beliefs of thinking that “Well, I need to pay everything off and have this really amazing credit score, but then going into a bank and I can’t get a loan because I’m a professional consumer”, and the algorithms say, “This person cannot get money.” Whereas someone comes in with a credit score that’s 200 points less than yours and they get a massive loan… And I like what you said – the credit score is meaningless; it’s all about your borrower behavior.

And then you gave your best ever advice, which is to treat your real estate investing like a business and set up the asset protection from the beginning and have the mindset that I am a successful investor who needs his asset protection from beginning, and by doing so, you’re protecting yourself, but you’re also getting the benefits of getting more respect from different people you want to interact with. So that’s just brushing the surface of what we talked about.

Jennifer Gligoric: You take the best notes. That is incredible. That is amazing. You must have been so good in school.

Theo Hicks: I did okay. I appreciate it. I’m gonna do a podcast on the best ever way to take notes in an interview.

Jennifer Gligoric: Seriously, that’s great. That is like the bestest. I love that. I love that thoroughness.

Theo Hicks: Well, I appreciate it, and I appreciate you for coming on the show and giving us all this solid asset protection and being your own bank. Just really solid, just personal advice as well, with the limiting beliefs; I liked that as well. Best Ever listeners, as always, thanks for tuning in and listening. Have a best ever day and we will talk to you tomorrow.

Jennifer Gligoric: See you later.

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JF2135: Architects Point Of View In Investing With Joe Villeneuve

Joe is an Architect and real estate investor for over 40+ years. He has some unique perspectives on how you should go about planning your real estate goals, how to raise capital and a couple of thoughts on what you shouldn’t do with your seed money. 

Joe Villeneuve Real Estate Background:

  • Started investing in 1980
  • He is also a professional Architect owning his own firm for 40+ years
  • Currently, his portfolio consists of 10 properties
  • Based in Plymouth, Michigan 
  • Say hi to him at joe@3venterprises.ws 

 

 

Click here for more info on groundbreaker.co

Best Ever Tweet:

“Don’t spend your seed money” – Joe Villeneuve


TRANSCRIPTION

Theo Hicks: Hello, Best Ever listeners and welcome to the best real estate investing advice ever show. My name is Theo Hicks, today’s host, and today we’ll be speaking with Joe Villeneuve. Joe, how are you doing today?

Joe Villeneuve: Not bad, not bad.

Theo Hicks: Good. Thanks for joining us; looking forward to our conversation. Before we get into that, a little bit about Joe – he started investing in 1980, he is also a professional architect owning his own firm for over 40 years. Currently, his portfolio consists of 10 properties, based in Plymouth, Michigan, you can say hi to him at joe@3venterprises.ws. Joe, do you mind telling us a little bit more about your background and what you’re focused on today?

Joe Villeneuve: Sure. I’ve done a variety of different things; you’ve seen some of them. I consider myself a serial entrepreneur; and I spell cereal with a ‘C’ as a breakfast. Every day, I wake up that way and that’s when I focus. My background, because of that, is a variety of different things. But as far as real estate is concerned, I have taught at many real estate investment clubs as a featured speaker, one that I accidentally became an organizer in. That became exhausting because we did four meetings a month. It was all themed; our last meeting was on a particular topic and it was an all day. So the last Saturday of the month, in the morning, we talked about the topic; in the afternoon, I’d put together what I refer to as interactives, where students actually had to act out and perform what they learned during the morning. Our philosophy was always – we’re going to show you how to do it, we’re going to teach you how to do it, we’re going to grab you by the collar and drag you through it to make sure that you do it.

I think the biggest frustration I’ve always had whenever I’ve been to a lot of them is that they teach you how to do it, but then they leave you hanging in the dark and I didn’t want to do that. So that’s where the interactives came in. I want them to actually feel like they were doing it when– they had the experts there, the people that taught it, and their partners, potential partners and other students that are making the same mistakes and asking the same questions and finding out that they can do it, and do it the right way. So there’s a lot of other things, but that’s some of the biggest things– I enjoyed doing that. Burnt me out, but I enjoyed doing it.

Theo Hicks: So you said your portfolio consists of ten properties. What are those ten properties? Are they single-family homes, multifamily?

Joe Villeneuve: Yes. I don’t do multifamily; I hate multifamily. That to me, that’s a whole 30 minutes segment. I really hate multifamily.

Theo Hicks: Let’s condense your hate for multifamily down to maybe five minutes. So give me a rant. Why don’t you like multifamily?

Joe Villeneuve: Inconsistent. You have high cap rates, low cap rates. Usually what you find are the ones that have come up for sale with high cap rates because they just got to spending the year before all their money in the capital expenses. So now they can show the past cap rate for the past years being high because they don’t have any cap rate. Then in about five years, ten years, all of a sudden, a person who buys it and gets nailed with it. The misconception that you have, say, a 20-unit building and if one of the units goes vacant, you’ve got 19 other buildings to pay for it. What if you got 20 single-family houses with the same situation? The difference is if you got a 20-unit complex– so let’s say that there’s two 10-unit buildings. If a roof comes up on a single house, you got one roof to replace. You gotta replace ten roofs in a multi. You don’t patch driveways, you have to replace parking lots, commercial expenses, everything that’s associated with it. When you’re dealing with residential, you don’t deal with the landscape, snow removal; the tenant does. You do with the commercial side, the multifamily. So I don’t like it. So I learned real fast I don’t want to invest in it. I want to invest something I got more control in.

Theo Hicks: Is this from firsthand experience in multifamily or have you never done a multifamily deal?

Joe Villeneuve: Both. When I say both, I’ve done a multifamily, been associated with a multifamily, I watched it happen from an architect’s standpoint. I sat back, I watched it and I said, “No, this is not what it’s built out to be. There are better ways to doing it.” It’s just better ways of doing it.

Theo Hicks: I’m assuming the better way is investing in single-family homes, or it could something else… So if you could mention what this better way is [unintelligible [00:07:13].06]

Joe Villeneuve: Almost anything else. But just over the years, I’ve gravitated towards certain things. I’ve gravitated towards single-family, but not as a collection of a lot of them. It’s just simply a means to an end. The end really is triple net. I guess I’m physically lazy and mentally aggressive; I got this best way of describing it. I want my money working for me, I don’t want to be working for it, and it makes no sense that way, because you can always get your money back, but you can never get your time back. So I want my time to be an exponential return on it, and for me, that’s what the triple net does as much as anything else. The returns are not as high, but it’s a part of a system as you work your way from beginning to end; you can start with a single-family, work your way through to the end game being your cash flow game, being the triple net. You can truly retire off with something like that. Whereas it’s hard to retire off a single-family because in order to do that, you have to sell it, and then you get all kinds of issues – capital gains issues, surprises, there’s all kinds of problems. So I don’t look at any particular, other than triple nets maybe, any particular investment vehicle as a single or multiple ones, different ones that I look at as being the best ones to invest in. I look at them as a sequence of options, one leading into the next which leads into the next, and it’s more a matter of order of appearance than the fact that I just seem to look at each one of them as an end; they’re all a means to an end.

Theo Hicks: Interesting. So the single families, they’re a stepping stone to triple net leases.

Joe Villeneuve: Yeah, plan is everything. Most real estate investors don’t understand what a plan is, unfortunately. When I used to teach this, first thing I would ask is, “What’s your plan?” and they would tell me it was flip three houses a year and hold one house per year, and I said, “Well, that’s not a plan,” and then I would describe what a plan is, starting with your end game which is your ultimate financial goals and work your way backwards; reverse engineer it to where you’re at right now. Look at it the same way as getting a college degree – prerequisites working way all the way through, each one’s a stepping stone that leads to the next. There is no – I got this property. Now, what do I do? Where’s my next one? Every decision you make should be made on the entrance to a decision into entering a deal should be predicated on how the exit from that deal leads to the next entrance. So you already know where you’re going every time you make a decision, and that’s where the planning comes in. It’s laid out ahead of time. You just turn around and follow the breadcrumbs once you get back to the beginning.

Theo Hicks: I’m confused, because mentioned that you don’t want to sell the SFRs. So do you find it just taking the cash flow from those and putting that into a triple net lease?

Joe Villeneuve: No, no. I never said I don’t want to sell it. I said it’s a means to an end.

Theo Hicks: Okay.

Joe Villeneuve: Selling it as apartments. Let me give you one of my basic philosophies. One of my basic philosophies for single-family is I don’t want to hold a single family for more than five years, and the reason for that is I don’t look at the property as my asset. My asset is my cash and the property is nothing more than a temporary resting place for it until it moves on to the next vehicle. Whether or not I have $100,000 in one property or I have $100,000 in the bank, it’s still $100,000, but $100,000 in the bank, I can parlay a 20% deposit into $500,000. If I got the same 100 grand sitting in a property, it’s worth 100 grand; that’s it. It will never be worth any more sitting there. It’s dying. So once I can get that equity that I bought, let’s say 20% worth that I bought, up to 40% gifted to me, based on the tenant gifting it to me when they’re making the rent payments for me and making my principal payments out of that, plus depreciation, once I get to the point where it is now 40%, I get it out of dodge, and now that 40% becomes $200,000 instead of $100,000, and it just keeps moving up to $400,000. So the $200,000, it keeps going on and on and on; it just keeps moving. I look at my cash as a verb not a noun. When it becomes a noun, I lose.

Theo Hicks: Perfect. So what type of property are you going to do for the triple net lease?

Joe Villeneuve: It does vary over the decades. Right now, my favorites are dollar stores and anything to do with medical. They’re the most stable at this point. Medical will always be the most stable.

Theo Hicks: Do you own these currently or this plan further on down the line once you’ve turned, using your example, $100,000 to $200,000 to $400,000 to–

Joe Villeneuve: Right, right, right. I don’t own anything. I control, but I don’t own. My businesses own it. if somebody were to ask me where the properties were, I would tell them– well, I wouldn’t tell him anything. Part of the reason is because there’s nothing that’s owned with a single entity in other words. It’s all a matter of partnerships of some sort, and out of respect for my partners, nobody knows where anything is. So don’t ask that question because I won’t tell you.

Theo Hicks: So by partnerships, do you mean that they’re raising capital for these deals?

Joe Villeneuve: Yeah, usually partners are cash partners or money partners, one form or another.

Theo Hicks: Do you any money raising tips that you found to be very useful?

Joe Villeneuve: Yeah, I’ll tell you one huge one. I follow the principal formula of the number sequence of 1073741824. That’s the most important number. In fact, I’ve got it almost written on the wall in one form or another. It means everything to real estate investors. The basic premise for that number is more than most important philosophies. For real estate investors, it should be the most important philosophy they should follow. My first of two golden rules that I found. Under no circumstances, ever, no matter what wives tale, rumor, group setting, multiple people telling you to do otherwise, ever spend your seed money. Use it to infinity, but never spend it. You can spend your profits, not your seed money. Your profits is somebody else’s money that they’re giving to you. Your seed money is the most valuable thing in the world to you; never spend. Use it to infinity, but never spend it. Spend it means you get one use out of it. Using it means no matter how many times you try to spend it, every vehicle you put it in, it keeps coming back with friends; friends being profit and cash flow. So it’s the money’s friends that are importat; and every time those friends come back with it and into the next vehicle, and it keeps coming back with more friends and more friends every time I do it. That’s the goal. Once you spend your money, you start all over again from scratch; and once you spend your seed money. If you keep using it, it keeps coming back and you have an exponential return on it, and it doesn’t cost you anything anymore.

See, I can buy my seed money, as long as the cost of the seed money is self-sustaining. In other words, when I get that loan or I get the cost, the money itself that I get has a means of paying off anything associated with it, but not using all of it to do that. So if I only use half of it and I essentially control the cost of it completely, that means the other half is free money. That’s a cash like substance as far as I’m concerned, and I could use that forever. In a situation like that, no matter what the initial cost, it’s immaterial, because it’s self-sustaining. So it doesn’t matter what the cost is, I got free money. I focus on the free money, I use it over and over and over again, and I can go forever with that principle without having to get another loan. Let me just keep using the same money. It’s just a matter of how you use the money and how money works, and that’s one of the problems I see. Real Estate investors don’t know how money works. They don’t understand strategies, they don’t understand some of the keywords such as what risk is, they don’t understand what profit is, what actual cost is. They deal with percentages as answers, and percentages will lie to you every time. I never use a percentage in an answer when I compare one thing to another.

A great example isthe  stock market. I got into a discussion with somebody once on the stock market and returns, they said they had 15% return on the stock market and you could only get a 5% return on real estate, and I said, “Well, even if that were true, I could blow you away with that, but it’s not true.” He says, “First of all, you’re cheating. You’re getting the best that you can get and you’re saying you’re gonna get it all the time and you’re forcing me to get the average. I’ll tell you right now, I don’t buy average, but I’ll take the average,” and I showed him how it was in day one. He could take the same dollar amount, I could take the same dollar amount; he could put it in the stock market at 15%, I could put it in real estate at 5% and I’m ahead of him from day one, and I leave him in trail. Percentages lie; they focus on the interest rates. As long as the interest rate is reflected, the impact of the interest rate is reflected in the payment and the payment is covering it, if you have positive cash flow, the interest rate doesn’t matter. You’re not trading off interest rates.

When you look at the interest rates of a loan and the loan’s being paid off and you have cash flow, you’re not the one paying the loan off of it if it’s a cash flow property; the tenant is. Your only cost is the down payment; that’s it. As long as you have positive cash flow, down payment is your only cost. At 20%, you’re buying a $100,000 property with 20%. So it costs you 20 grand. So if you start at $100,000, you’re buying $500,000 worth of property. So if you have 5% return, that’s a $25,000 return in the first time, and the person in the stock market gets 15%; they get $115,000. They get 15% return and this spreads away from there. Not counting the cash flow– if it is a $4,000 return in cash flow, within five years, I get all my money back and I’m now living on free money on that investment. Stock market can’t say that. They got $100,000 still in it. So I was laughing so much. I was like, “Alright, this is a great time to invest in the stock market.” It’s never a great time. I must saying I’m not in the stock market, I am. But it’s never a great time compared to real estate. They’ll never be a better time to invest in the stock market than real estate, simply because you can’t compare the two together. They’re completely different. Somebody said, “Well, it’s like comparing apples and oranges.” No, it’s not. It’s like comparing apples and spaghetti. They’re both food, but that’s as close as they can be compared.

Theo Hicks: Alright, Joe. Besides all of the great advice you’ve given so far, what is your best real estate investing advice ever?

Joe Villeneuve: Don’t spend your seed money; that’s it. Don’t spend your seed money.

Theo Hicks: Alright, are you ready for the Best Ever lightning round?

Joe Villeneuve: You got it.

Break [00:17:54]:03] to [00:18:48]:07]

Theo Hicks: Okay, Joe, what is the best ever book you’ve recently read?

Joe Villeneuve: I got it right here. Excel 2016 Formulas.

Theo Hicks: There you go. Excel is super powerful. I think people don’t utilize it enough.

Joe Villeneuve: I tell people all the time, if I wasn’t married, I’d marry it.

Theo Hicks: Excel? [laughs] Yeah, that’s awesome. Alright, if your business were to collapse today, what would you do next?

Joe Villeneuve: Start a new one.

Theo Hicks: What would that new business be?

Joe Villeneuve: Don’t know. Never hit that spot yet. Remember, I’m a serial entrepreneur. I invest in real estate based upon the market and the timing with decisions, and same thing would be true with the business. When one business fails, a whole other industry opens up. It’s just you have to be able to see it and take advantage of it.

Theo Hicks: What is the best ever way you like to give back?

Joe Villeneuve: I’m doing right now. You and I. You can’t take it with you, so I figured I might just give it back before I leave. Otherwise, it goes useless.

Theo Hicks: Then lastly, what is the best ever place to reach you?

Joe Villeneuve: Email.

Theo Hicks: Again, that’s joe [at] 3venterprises.ws.

Joe Villeneuve: Correct.

Theo Hicks: All right, Joe. I really enjoyed this conversation. I’m looking forward to listening to it again because you’re spitting out advice so fast, I could barely keep up with my typing. So I’m sure I missed some while I was typing, but these are a few things that stood out to me was why you don’t like multifamily; I thought that was interesting. I’ve never heard it from that perspective before. So you said that it was inconsistent and you gave an example of cap rates where  someone will spend a bunch of money in one year, and then sell the property to someone else. Then five years later, that person gets nailed because the numbers were just based off of the previous owner investing a ton of money into the deal that year before. We talked about single-family homes – you can replace one roof as opposed to having a place or very, very large roofs inside of ten roofs on a multifamily; patching a driveway as opposed to replacing the entire parking lot, and you mentioned landscaping and removal.

I really liked your idea about looking at things in a sequence and you mentioned that a lot of real estate investors don’t understand how plans work and the whole entire idea is to have an end goal in mind, and then reverse engineer it and then follow the breadcrumbs. So when you’re entering a deal, you should be thinking about the exits. Does it allow you to enter into another deal at that point? So thinking more longer-term as opposed to a deal by deal basis.

You talked about one of your basic single-family philosophies being not wanting to hold on to a deal for more than five years and how the asset isn’t the property, but it’s your cash; the single-family home is just a resting place for that cash. So you can invest $100,000 into a single-family home with a 20% down, a 500k property, because the principal pay down and the residents paying the rent, you can turn that $100,000 into 200 grand and then you can push that into another deal and repeat the process.

You mentioned that your favorite triple net leases right now are dollar stores and medical because they’re the most stable, and then your best ever advice and your money-raising tip was – never spend your seed money, use it to infinity. By spend, you mean getting only one use out of it. So the goal is that you use your seed money over and over and over and over again.

I liked that you put it– you said that you’ll invest in a new property, and then you’ll get the seed money back with some friends, and then you put the seed money and the friends into a new deal and they make even more friends and so on and so on until you can get to your next step in the sequence, and that was just maybe 5% of what you talked about. So Best Ever listeners. definitely give this one a second listen through. I know, I sure will. Again, Joe, really appreciate you coming on the show. Best Ever listeners, as always, thank you for listening. Have a best ever day and we will talk to you tomorrow.

Joe Villeneuve: Great.

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JF2133: Anti-Financial Plan With Chris Miles #SkillsetSunday

Chris is the founder of Money Ripples, also the host of the Chris Miles Money Show, and has been featured on CNN Money and US News. He has had experience coaching people in the stock market, owning rental properties, and financial advising. At age 28 he was financially independent due to affiliations, and rental properties. He shares how he went from financial independence to losing everything and going back into the rat race and working his way back out.

Chris Miles Real Estate Background:

  • Founder of Money Ripples
  • Author and Host of the Chris Miles Money Show
  • Has been featured in US News and CNN Money
  • Has helped his clients increase their cash flow by over $200 Million in the last 10 years
  • Based in Salt Lake City, Utah
  • Say hi to him at http://moneyripples.com 

Click here for more info on groundbreaker.co

Best Ever Tweet:

“Cash flow creates options if you have more cash flow that creates freedom” – Chris Miles


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 of that fluffy stuff. With us today, Chris Miles. How you doing, Chris?

Chris Miles: I’m doing awesome, Joe. How you doing?

Joe Fairless: I’m doing well, and I’m glad you’re doing awesome. Looking forward to our conversation. A little bit about Chris – he’s the founder of Money Ripples, he’s the author and host of the Chris Miles Money Show, and he helps his clients increase their cash flow, has done so by a tune of over $200 million in the last ten years; based near Salt Lake City, Utah.

First off, Best Ever listeners, I hope you’re having a best ever weekend; because today is Sunday, we have a special segment like we usually do on Sundays, and it is Skillset Sunda. And because of that, we’re focusing our conversation with Chris on how to think differently about your financial plan, and as he calls it – prior to us having this recorded conversation, he would mention to me, he calls it the anti-financial plan. So we’re going to talk about his thought process and how to go against the grain, and why he believes in that, and what practical next steps we can take to act on it, should we embrace it as well. So first, Chris, do you want to give the Best Ever listeners a little bit more about your background, and then we’ll dive right into it?

Chris Miles: You bet. I started out in the business world. I was going to college, I was intending to become a business consultant, but I figured if I was gonna do that, I should have real-life experience. So I actually dropped out of college with one class to go for my bachelor’s, and I went into business, and the first business that became available was becoming a financial advisor. Little did I know at the time, I didn’t know that they would hire just about anybody. As long as you can pass a test and get a license, they’ll take anybody on, experienced or not. So I actually started doing that and I actually enjoyed it. I started doing that back in the early 2000s. So right after 9/11 is when I became a financial advisor, and did that for four years, but as time went on– I’m one of those people, I like to see evidence, I like to see that things work, and I don’t like to be out of integrity with anything. So I want to make sure I’m teaching truth and I’m doing things that are legit.

And as time went on, especially as I inherited old clients from advisors that had quit or moved on or whatever, I started to realize that people weren’t that well off financially; not the way I had envisioned and had been sold from everybody. Because if you look at all the financial advice that’s being taught to you out there, it all stems from financial institutions – banks, mutual fund companies, everything else, everything. Even the Suze Ormans, the Dave Ramseys of the world, they’re just little pawns in that little game of teaching you what they want you to do, which is save everything, spend nothing, save it forever, save it in crappy mutual funds, and then the last 30 years, the real rate of return of the S&P has only been 7.5%, and when you factor in fees and everything else coming out, you’re likely to get 6% or 6.5%, not 10% or 12% like I was teaching.

So when I started running real numbers as a financial advisor, I started to run, what if it’s like 6% or 7% instead, and what if inflation actually isn’t 2% or 3% like the government’s trying to tell us it is? What if it’s actually more like 4% or 5% or more? And then it got really depressing, and I realized I couldn’t tell anybody and give them any hope, because I’m like, well, even saving 10% or 20%, your income isn’t enough. In fact, in most cases, you want to have a 20-year retirement plan, for example, and you want to be able to live on a $60,000 a year lifestyle today, but do that 20 years, you’ve got to actually save up about $8,000 a month to live on $60,000 a year, on $5000 a month in 20 years. It’s frickin ridiculous.

So in 2006, I started to meet guys who were real estate investors and business owners guys that have become multimillionaires and even retired by the time they’re in their 20’s and 30’s, and I was like, “I want that.” So March of ’06, I quit being a financial adviser, vowed never to go back again. I was like, “I’ll never teach about money again. I’m just gonna be a mortgage broker and I’ll teach ballroom dancing,” because, a little known fact, I was one the nation’s top amateur ballroom dancers back in the early 2000s. That was my goal. But I started learning these things about creating real cash flow – acceleration, not accumulation – and I was actually able to become financially independent the first time when I was 28, back in 2006.

Joe Fairless: How did you define financial independence at 28?

Chris Miles: Same way that Robert Kiyosaki would – your passive residual investments and income is able to cover your expenses.

Joe Fairless: What were your expenses at the time?

Chris Miles: Oh, at that time, I only had two kids. So I have eight now with blended family. So only with two kids, it was only $4,000 a month, so it wasn’t that much.

Joe Fairless: On that 4k expenses at the time when you were 28, so you had $4,001 at least coming in on a monthly basis. Where was that money coming from?

Chris Miles: I had real estate. So rental real estate, things like that.

Joe Fairless: What did you have specifically?

Chris Miles: Just single-family homes.

Joe Fairless: Okay, how many do you have?

Chris Miles: Two.

Joe Fairless: Okay, two homes. what else do you have?

Chris Miles: And then I had residual income through business with affiliate and referral type stuff; not like the affiliate you see today, but it was very organic. For example– and this is something that actually one of those millionaire guys turned me on to. He said, “You’re doing mortgages, right?” I was doing mortgages actively and he said, “Well, Chris, if money were no issue, would you keep doing mortgages?” I said, “Well, no. I like teaching about it and I like helping them figure out the strategy, but I hate the paperwork.” So he said, “Well, why don’t you refer it to somebody who does like doing that?”

Joe Fairless: Oh, cool.

Chris Miles: In my mind, I never thought that was possible, because I was in that scarcity mentality before of just you try to earn everything and don’t farm out anything, don’t hire anybody, you take all the money you can; a do-it-yourselfer, which is do-it-crap. So I actually found a guy that actually was willing to the paperwork and I said, “Hey, what if we split it 50-50?” and he’s like, “Great, let’s do it.” And I’d spent a half an hour to hour on somebody and next thing I know, there’s about $1,000 or $1,500 bucks coming in from that one person I referred.

Joe Fairless: That’s a win-win for you and the business partner.

Chris Miles: Yeah, and it really became a win-win-win, because even for the client I referred then, I would tell them what to do with their mortgage so they could put in other investments so that those investments could then pay for their mortgage payment. This, of course, with real estate hard money and things like that. And when we were doing that, people say, “Cool, where would I get the mortgage?” I’m like, “Go talk to this guy,” and that was it. It was served up on a silver platter for him, so he loved it, and they loved it because they got serviced really well by him, because he was a good guy, full of integrity, did always what was best, which I really appreciated too, and it was great. It was one of those things I’d never fathom could work. Again, I didn’t have an official business. Remember, I quit being a financial advisor, I’ve vowed never to talk about money. The problem was there were still people asking me some questions, because they noticed that my life was changing from a financial standpoint as well, and I was just different. So it wasn’t the same person.

Joe Fairless: So when you were 28, you had the residual income from referrals with your clients that you sent to the person you were working with to actually fulfill the mortgages. On the single-family home, you had two of those. I don’t imagine those are spitting off a whole lot of income. How much per house were they?

Chris Miles: It was only about $1,000, total.

Joe Fairless: That’s still pretty good for a single-family house. $500 a month. Okay, and were any other income sources at the age of 28?

Chris Miles: That was it. I’m trying to remember if I had a hard money loan or not. I might have had something there but no, I mean, it was mostly just real estate, and then just those random referrals that I would send along… But it was like one referral a month, you’re adding up to a couple thousand bucks a month just there too, and so I was making $4,000 or $5,000 a month total between the two.

Joe Fairless: Wow. So you were making $3000 plus per month on just the referrals. Wow. Okay, alright. So that was 28; I know that’s not yesterday. So then what happened?

Chris Miles: Then, of course, I started partnering up with some guys that were also out of the rat race themselves. They said, “Hey, we want to start a company, teach people how to get out of the rat race.” This is the end of 2006. I was at that point– I was spending the last six months trying to find purpose, because most people don’t realize, when you actually get to the point where you’re financially independent, you start to ask yourself, “Well, now what? I got there, what’s the next thing for me?” I almost opened up some dance studios and stuff, but something didn’t feel quite right. My gut was telling me, “Don’t do that,” and then I had some guys say, “Hey–”

Joe Fairless: Just so I’m making sure I’m tracking right, if your expenses were about $4000, you’re bringing in about $4,000 to $5,000, it didn’t seem like you had much money to invest for dance studios or anything else… Or was there another chunk of money coming from somewhere else?

Chris Miles: When I got there, I was like, “Well, now what?” because I didn’t know what to do. At the time, I was also doing stock coaching, ironically, which I’m anti-stock market now… But I was teaching people about how to trade in the stock market at a hard time. So I was making $6,000 a month doing that.

Joe Fairless: Oh, there we go there. There’s that.

Chris Miles: So that’s where it became gravy. So that helped boost up money I can invest and use during that period of time. Yeah, I appreciate you saying that. I always forget that detail.

Joe Fairless: Maybe, you conveniently blocked it out because you don’t like stock investing.

Chris Miles: [laughs] Exactly. I’m grateful for because it gave me a lot of perspective, but it’s definitely not something like, “Oh yeah, I’m gonna totally do that again.” I was doing that because I didn’t know what to do next. So I just kept doing what I was doing before, but I was looking for something else, and that’s when that opportunity came up and they said, “Hey, why don’t you work with us? Leave your house, work with us in an actual office again.” I was like, “Ugh. Ugh, I’ve gotta work in an office? This sucks. Alright.” I see the mission, I see the vision, it sounds awesome, I love teaching; that, I feel like, is my calling overall, is to teach. So yeah, I did that, and funny enough, we were actually focused on people that were real estate investors, helping them get out of the rat race.

Well, 2007, especially when we hit about July, August, when everything starts tightening up in ’07, that’s when crap was hitting the fan. At the same time those partners said, “Hey Chris, we don’t like you making all these other residual streams of income. Can you focus just on this?” which was number one biggest mistake I could have made at that time… Because I should have said, “To heck with you guys. I’m gonna keep making my passive and residual income regardless,” but I didn’t, and so I cut those off, so and now I was  down to mostly just an active stream of income and some real estate. And of course, my real estate, because I wasn’t buying for cash flow as much, I was just hoping there’s more appreciation… I was cashing out all the equity I could. Well now, I’m upside down on some properties… I’m lucky I was able to get out from under them, but still it was painful.

At the same time, all those real estate investors couldn’t pay us either. So the active streams of income weren’t working because their money was locked up, my money was locked up, and I wasn’t tracking my money either. That was a big thing. Because there’s so much money coming in, it’s like, “Why track it, why even pay attention? I have an abundance of money coming in.” Well, now when I finally decided to look at my money, I realized I’m in the hole $16,000 a month, between my business and my personal expenses. So I went from out of the rat race to now deeply back in it and in the hole, and eventually ended up being over a million dollars in debt by 2008. So I had to dig out of that. I didn’t file for bankruptcy, but I had to claw my way back out without any savings or any credit.

Joe Fairless: What was the largest chunk of that million?

Chris Miles: Real estate. Mortgages on real estate was a big one. So getting upside down from that, having to sell those off; short sel or even foreclose on some of those, which was tough.

Joe Fairless: So you had a million dollars worth of loans, or the loans that you’re referring to within that million were upside down?

Chris Miles: Loans. Total in loans– I would say, because all assets I was able to sell off was maybe half a million. So I was still upside down about half a million or so.

Joe Fairless: Okay, got it. Because you could have a billion dollars worth of loans, but if it’s worth $10 billion then all good. But okay, so you were upside down by about half a million dollars on that.

Chris Miles: Yeah, so I had to turn in cars; I turned in my Mercedes. I was like, “Hey, you’re gonna take it from me anyways,” and they auctioned it off for $30,000 less than what I owed, and I had to pay that back, and everything else. [unintelligible [00:14:25].23] roughly about half a million of debt after everything was sold off. I had no assets left. Then I had to figure out how to get out of that hole, which–

Joe Fairless: What was the conversation like with your significant other?

Chris Miles: Oh, man, it sucked. It was hard for her, and this is my ex-wife, my wife at that time. It was really tough, because she felt helpless. She wasn’t working; she was at home with the kids. We had, at that time, four young children. So she was trying to take care of them while at the same time I’m trying to figure this out. So she felt helpless. There was even times she said things like, “Man, should I just take the kids and move in with my sister and you can figure stuff out?” I’m like, “That’s the worst thing you could do.” I’m already struggling mentally feeling like I was– I was out of integrity. I could no longer teach people how to get out of the rat race because I was now in it. So I stopped that; I had to start teaching people how to get resourceful, like I was being, which is what people wanted anyways, because most people didn’t feel like they had any money during the recession.

Joe Fairless: What tips would you give someone when speaking to their significant other if they’re in a similar situation?

Chris Miles: Definitely have a lot more empathy than I had… Because my ego was so butthurt. I was being defensive, which any guy naturally would do that. That’s a knee jerk reaction. That’s a natural thing, is that our egos want to feel like we can protect and provide for our families. But if I would have more empathy and say, “Hey, I know you feel helpless here. You feel like there’s nothing you can do. Honestly, the best thing you can do is just be there for me. I know it’s hard to support me, without losing faith, but that’s the best thing you can do, and just trust in me,” and that’s all I wanted to hear too. I wanted to hear that. Just saying that you trust in me that we’ll figure this out. “It doesn’t matter if we lose everything, we still have each other,” that kind of thing.

I had to take over the collection calls. I couldn’t let her handle the finances anymore because it was too hard on her, plus she felt she couldn’t have given them a good answer of when they’d get paid back. Cool thing is, when I started talking to them, I started to change my perspective around it. This is when things started to turn around; I stopped looking at it as a bad thing that collectors are calling, and instead I started calling them “I love you calls.”

Joe Fairless: [laughs] Okay, please elaborate.

Chris Miles: Because [unintelligible [00:16:26].18] they scattered. When they knew I was going through hard times, they weren’t there. I mean, there’s a few that stuck it out, that were true friends, but for the most part, everybody scattered when they realized I was in dire straits, but those–

Joe Fairless: How did they know that you’re in dire straits, your friends?

Chris Miles: Especially – if they’re friends, I would tell them; or they just knew, because for example, our house was one of those that foreclosed. I was able to sell off the investment properties and just walk away with a little bit in the hole, but I had to foreclose on my own house, which sucked… Partly because it was through Lehman Brothers. So [unintelligible [00:16:57].03] short sale offers, they wouldn’t accept them. So they end up foreclosing for $170,000 less than the short sale offers. So we had to move out of a big mansion, so to speak, move into a house that was less than half the size and a quarter of the payment. So they saw these lifestyle changes happening. I mean, I’m driving old cars versus a nice Mercedes. It was pretty obvious from the outside to see that I was selling things off quickly.

So from the outside, those people knew, and of course, the friends or family, especially in-laws, for example, they were saying, “Ugh [unintelligible [00:17:28].23] You should go back to school and get that bachelor’s because that’s the answer.” I’m like, “I have a friend right now, he’s got a Master’s. He can’t pay people for a job right now.” He wanted to become an accountant; accountants wouldn’t hire him even for free, because they’re saying, “Well, we have enough business. We don’t need you.” So he was two years unemployed with an MBA. It was just ridiculous. So yeah, there’s a lot of that going on.

Joe Fairless: How was it an I love you call?

Chris Miles: It was I love you call because the collectors, they call up regardless; they’re calling daily. Friends weren’t calling me daily. I needed friends, but they were calling me on a regular basis. So when they’d call, I would treat them like they’re a buddy. I was like, “Hey, how’s it going?” “Ugh, good. Just so you know, this call may be recorded. We’re here to collect a debt.” “Yeah, I know.” “Oh, great. You know when you’re gonna pay that debt?” “No.” “Alright. Well, when will you pay us?” “No clue, but you’ll get paid.” “Okay, well, we’re gonna call you again.” “That’s fine. Looking forward to it. See ya.” That went off for a couple of years, until I paid those guys off, one by one eventually. But that’s what helped turn it around, because instead of me being like, “Oh, send them to voicemail again.”

The worst was when I auctioned off the Mercedes – well, I didn’t, but the dealer did – and they were calling me to collect on that, the $30,000 bucks, and they would say things like, “Well, can you make payments of $1,200 bucks a month?” I said, “If I can make the $1,200 dollar a month payment, I would have made the $1,000 month payment on that Mercedes.” I remember one guy, he just said, “You know what? You’re the reason that we’re in such bad economic times right now. You’re the reason why we’re in this situation.” I said, “Are you kidding me? I’ve spent hundreds of thousands  of dollars hiring people like you to have a job, but now I can’t hire any more.” Well, I’m like, “I’m not the cause here, you jerk. I wanna smack you.”

So I mean, that was the stuff I was struggling with while trying to teach people about money and trying to financially prosper, and essentially try to prove that what I did the first time would work a second time. I struggled more with the mindset piece than I ever did with the strategy. Once I got over my ego and I just released all that expectation and just said, “You know what, however long it takes, it’s gonna work; I know it,” and I got to this place of not just hoping would work, to a place of knowingness. Once that happened, that’s when things started to turn around.

Joe Fairless: So what’s your approach now?

Chris Miles: My approach now – man, passive income, multiple streams of income is essential. Cash flow creates options and when you have more cash flow, that creates freedom. The worst thing you could do is be stuck with one stream of income, working a job or working your business or whatever it might look like; that’s the worst thing you could do. It’s good, I’m grateful you have it, and you should have it, but I will tell you from that experience, especially because I know everything ebb and flows. Eventually, we’ll have a recession at some point, there’ll be changing times, they’ll be hardships. Even if everybody’s prospering, you might have your own personal recession because you might lose a job or lose some income. What can you do to ensure that you have multiple streams of income coming in? I’ll tell you, financial advisors never talk about that. They’re always like, throw your money away from you, walk it up in someplace — you have to have essentially get your hand slapped with a 10% penalty for touching it before you’re 60. That’s horrible advice. Everything should be focused towards how do I develop multiple streams of income, whether it be residual, passive or both?

Joe Fairless: What are some of the main streams of income that you have now?

Chris Miles: Now, I actually go to more turnkey investments rather than trying to manage it myself like before. That was one thing I learned. I like to do turnkey, I like notes, syndications, things of that nature. For the most part, though, I’d say the bulk of my own personal assets, although I tell my clients do what resonates with them most and what feels right for them… I personally love owning real estate, whether it’s multifamily, single-family, whatever. I love owning and controlling it, because if there’s anything in the last recession I learned is that ownership and control is awesome. Syndications are cool too, and I like that. I like that there’s some downside risk protection, and those things can work out too when you have funds and syndications, but I personally love owning and controlling real estate, but have somebody else manage it for me.

Joe Fairless: So you do turnkey, notes, syndications… What is the most profitable within those streams, maybe a specific deal or a note that you invested in or syndication that you’re in?

Chris Miles: The most profitable have actually been my own turnkey properties, just because I’m taking all the depreciation — for one, I’m taking the appreciation. I can do that with syndications too, of course, with certain ones. But definitely with cash flow and growth potential, I’ve definitely seen the best with doing turnkey properties. Secondly, it would definitely be syndications.

I’ll give you an example, because you asked for an example. I had a Memphis property I bought a couple of years ago. I just had it reassessed to say, “Alright, let’s see how the return on equity is right now.” I bought it for $135,000 and now is worth $152,000. I don’t try to bank on appreciation; I learned that the hard way during the last recession, but it’s nice when you get it. Compared to the down payment I put on it, the cash flow that’s come in – the net cash flow, not gross, but the net after all costs are paid, plus the fact that the mortgage has been paid down… Already the property’s gained — out of the $32,000 I came out of pocket with closing costs, I’ve have already gained in the last two years about $26,000 bucks.

Joe Fairless: Any refinance ideas out there, or do you wanna keep it with the current loan?

Chris Miles: That was with the current loan. I looked at refinancing just recently, but the rates weren’t quite low enough to make it worthwhile.

Joe Fairless: Okay.

Chris Miles: Buying them now is awesome, just because the rates are even lower than they were when I got mine, which was around 5.25%. Now they’re in the 4%, which is awesome.

Joe Fairless: Anything about the mindset of how you approach your finances now that you’ve learned some hard lessons and now you’ve got these multiple streams of income, anything else that we haven’t talked about that you think we should before we wrap up?

Chris Miles: Yeah, a few things. One is the one thing I wasn’t doing was tracking my money. When you track money, don’t track like a saver, because savers are in scarcity and scarcity drives away money. Scarcity can never create financial freedom. You can’t live in fear and be financially free, regardless what the numbers say. So you can’t just focus on expenses, like all the savers out there will teach you, like the Dave Ramseys. It’s important to look at that, but look at the income too. Look at both sides of the equation. Look at “How can I increase income, but also be most efficient with my expenses?” and create that big gap between the two, which is what I refer to as cash flow or profit. While doing that, the biggest thing is that I see most people when I talk to them is– because a lot of people say, “Chris, I need an actual game plan or strategy to retire early. Not to do the same old crap that everybody else is telling you to do with mutual funds and 401ks and what not.” Which, by the way, I even did an episode on my show recently, a couple of months ago, that even [unintelligible [00:24:03].29] have the crap kicked out of it with notes, syndications and turnkeys, easily. Even with a [unintelligible [00:24:10].10] which is supposed to be free money, a no-brainer, you can still beat a 401k, especially when it comes to cash flow. So I look at things like saying, “Hey, let’s look at the whole situation. Look at your own numbers and see where do you have equity.” You have equity in your own home, which a lot of people do. Should we cash out, refinance and use that to invest, especially if it’s in something that’s a good legitimate place? I actually have a client who has actually invested with you, Joe, and they’re like, “Yeah, that’s one of my favorite investments, what Joe Fairless has.” I’m like, “I gotta look that guy up.”

Joe Fairless: Yeah, there we go.

Chris Miles: But that stuff, like can we liquidate assets? Can we sell off stuff that’s not doing well? You might have some properties yourself that aren’t– return on equity is low. Maybe we could sell that and make more money. I have a client in California right now, down in San Diego, he had a property in California, which already everyone’s like, “Okay, you have a property California. That’s not worth keeping.” Low cash flow and probably high equity. Between his personal home, which had about $400,000 equity, and this rental property which had about $400,000 in equity after we sell it – even though he’ll lose about $1,500 a month of cash flow, that’s 800k he can use. Now, even if you did the 1% rule, that’s $8,000 a month. So he still nets $6,500 bucks a month or just about 80 grand a year with the same assets he already had in place, and that’s what you want to look at. It’s like, what do I have in savings or in equity and different places that could be used to be more productive than where it is right now?

Joe Fairless: Yeah, I have a friend, he’s local in Cincinnati, and he moved from California and he had a single-family house. He sold it and he bought in Cincinnati, I want to say, a 30 to 50-unit in Cincinnati, and I think he paid all cash. It was just incredible… And it’s not in as nice of an area of Cincinnati, and it was distressed, but the point is, he bought an apartment community. That was a couple years ago, maybe three years ago, and he’s now since, I believe, refinanced and got all that money out and is doing great with it.

Chris Miles: That’s why I always tell people, don’t buy into the whole accumulation mindset of saving and letting your money grow and compound slowly over the next billion years, which it won’t do very well… If you focus more on cash flow and acceleration and utilizing assets to create the biggest bang for your buck… So you’re not asset rich and cash poor.. .Because I’ll tell you, I get so many people that are like Dave Ramsey poster children. People say, “Alright, I just paid off all my debt, and now I have nothing to show for it. I’m now asset rich and cash flow poor.” I was like, “That’s why we’ve got to shift that around. You’ve got to essentially reject some of the stuff that Dave Ramsey taught you. Not everything; a bunch of stuff is great, but everything else that he taught you about wealth and creating retirement and cash flow, don’t buy into it. It’s stupid. You’ve got to shift to a higher level, you’ve got to shift to a higher gear, and that’s when the possibilities in the world opens up.” If I can leave any message with you guys as a last-minute message, I’ll just say that there’s probably a bigger hope than you realize. You probably have a better chance of creating financial independence or financial freedom than you realize is actually possible. You’ve just got to be able to see it with the right set of eyes.

Joe Fairless: Chris, how can the Best Ever listeners learn more about what you’re doing?

Chris Miles: Check out my podcast, The Chris Miles Money Show. You can find it on iTunes or whatever podcast app you use, and also you can check out my website, moneyripples.com.

Joe Fairless: Focusing on multiple streams of income, diversification of those streams of income, and then talking about and learning from your lessons that you learned during the hard times financially, and some tips for should we come across that, or perhaps when we come across it, if we haven’t already, how to navigate that based on your experiences and what you learned. So thank you so much for being on the show. Grateful that you were on the show. Hope you have a best ever weekend. Talk to you again soon.

Chris Miles: Thanks.

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JF2119: Infinite Banking & Taxes With Mark Willis

Mark is a returning guest from episode JF1567. He is a Certified Financial Planner and is a #1 Best Selling Author, and in this episode, he will share with you the benefits of infinite banking and paying for your tax bills.

 

Mark Willis Real Estate Background:

 

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Best Ever Tweet:

We will provide you with what you need to know and what you need to do in order to increase your net worth.” – Mark Willis


TRANSCRIPTION

Joe Fairless: Best Ever listeners, how 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 of that fluffy stuff. With us today, Mark Willis. How you doing, Mark?

Mark Willis: Hey, I’m doing great, Joe. How are you?

Joe Fairless: I’m doing great as well and looking forward to our conversation. So first off, Best Ever listeners, Mark’s name probably sounds familiar because you’re a loyal Best Ever listener, and he was interviewed on Episode 1567 titled, Increase Net Worth and Have Your Money Working For You, talking about infinite banking. We’re going to be talking about the same concept, but with a different application, and that is how to use that to help pay for your taxes. A little bit of a refresher on Mark – he’s a certified financial planner, he’s an author and the owner of Lake Growth Financial Services, based in Chicago, Illinois. So first off, Mark, do you want to give a refresher on what infinite banking is, and then we can go into how it can be used to pay for your taxes?

Mark Willis: Sure. So as a certified financial planner, using the infinite banking, or we sometimes referred to it as the “bank on yourself” concept, is not generally taught or even encouraged among the classically trained CFPs out there. It’s buy term, invest the rest in paper assets on Wall Street. So the infinite banking concept is using a high cash value dividend-paying whole life insurance contract that you own the asset, the equity, the money, the cash value and the policy, and use it for all of life’s needs. We’ve talked elsewhere about how to use this for real estate, but today we’re talking about our life’s biggest expense, which is our obligation to the IRS.

So using the policy affords you a couple of things – one, it grows on a guaranteed basis every single year outside of the market; two, you can access that money without taxes due if you design it correctly; three, when you borrow from the polic– see, not all policies do it, but if it’s designed correctly, the policy will continue to grow, even on the capital you borrowed against. To say that another way, you borrow money out of the policy and it continues to grow as if you hadn’t touched a dime of the money. And then four, it is life insurance. So you’re leaving your family more than you could ever save for them, because every dollar you put into the policy is a multiple when you decide to graduate. So that’s it in a nutshell.

Joe Fairless: Yep, and I am a proponent and also I have moved forward with infinite banking as well. So let’s talk about paying for your taxes with bank on yourself or infinite banking. What do you mean by that and how does it work?

Mark Willis: Well, it’s funny. I say, they picked the right acronym, because you put the word ‘the’ and IRS together and you get the word, ‘theIRS’.

Joe Fairless: Never thought about that, yeah.

Mark Willis: It’s all theIRS. The IRS is pretty young, though. It’s only been around since 1913, but it’s fun to– well, fun is a relative word, Joe. But it’s fun to look back over history and see that the country did just fine without an income tax for over 150 years. In fact, they had surpluses. It was started as a temporary tax on the most wealthy people to cover the expenses of the Civil War and then World War I, but it became permanent when the government needed to replace other revenue sources with more permanent taxes on their own citizens. So that’s where the IRS got their start.

Joe Fairless: Thank you for that. I didn’t know that.

Mark Willis: Yeah, it’s interesting, and I’d say, as we look at our current situation, we’re in a very interesting season right now. So the next five, six years, we are all in a lower tax bracket than we will be — unless Congress acts, we’ll be in a lower tax bracket right now than we will be five years from now, and that’s the law. That’s literally the tax code. We all get a tax raise on us at the end of 2025, just five years from now. And most people aren’t aware of that, but I asked folks, “Do you think taxes will be lower or higher in the future?” Almost everybody I talked to, Joe, says, “Yeah, they’re going to be higher.” So the question is – Well, why is it that most of us and our CPAs included are recommending that we put money into tax-deferred vehicles like 401Ks, IRAs, that sort of thing? If we know there’s a day, a month and a year when we know that taxes will be higher, why delay or defer a root canal? The same question.

Joe Fairless: Well, their stance might be time value of money, because if I’m delaying it today and I’m investing it and I’m making a return, today’s dollar’s worth more than tomorrow’s dollar.

Mark Willis: That’s a great point, and I hear it too, but the math works out where it’s literally the exact same money, whether I pay tax on the seed or I pay tax on the harvest. We can get into the math if you want to, but literally, it’s the exact same.

Joe Fairless: Please do, yeah. We’ll get into that math, will you?

Mark Willis: Sure. So let’s say that you put a certain dollar amount into a policy, or let’s say you put a certain dollar amount into a tax-deferred vehicle, one or the other. So a life insurance policy is after-tax, similar to a Roth IRA or something like that, and a tax-deferred vehicle might be like, say, an IRA or a 401k. Let’s say you put in 1000 bucks, and let’s say you’re in a 30% bracket. So a life insurance policy or a Roth IRA will have 700 bucks at the end of the year after tax – 30% off of a thousand is 700 bucks. Let that money grow at the same rate of return, and it’ll be a smaller number after 10 years, 30 years, whatever; and in the meantime, the tax-deferred vehicle, you got to keep all your $1,000 in there growing on a tax-deferred basis. So it’s going to be a bigger number at the end of 10 years, 30 years, whatever it is. With me on everything so far?

Joe Fairless: Yep.

Mark Willis: Now the key is, what happens? How do we get the money out of that tax-deferred vehicle? Well, it’s going to get taxed, and if taxes are the same 30%, you’re going to take your money out of that retirement account and 70%’s gonna be left in your pocket and 30%’s going to the government. Again, it’s all about how much is the tax rate when you put the money in, and you take the money out. Mathematically, if the taxes don’t change, tax-deferred and after-tax dollars are exactly the same on a mathematical basis.

Joe Fairless: And then an outlier for this, I believe, would be a 1031, where if you just 1031 till you die, you’re never gonna pay taxes.

Mark Willis: That’s right. Yeah, and then that lovely step up in basis. Yeah. So the 1031 is a great option for folks that are looking to defer, defer, defer. I would say buy, borrow, die, as others have said. So that’s the strategy if you want to just avoid the tax completely, for sure.

Joe Fairless: Okay, cool. Now going back, we went off a little bit, but I’m glad that we went in that direction for a little while. Now coming back to using this to pay for your taxes – will you continue that thought process?

Mark Willis: Sure. So again, think about how powerful it is to let your money continue to compound even when you’re using it to make big purchases. We could talk about how powerful that is when you buy a car. Let’s keep it simple first, then we’ll talk about real estate, and then we can talk about taxes too.

There’s only a few ways to buy things in life. You can borrow from somebody else, you can finance it, you can pay cash for that car or you can use a policy. So in the first instance, you’re sending interest payments and control over to the bank down the street to buy that car, where they charge you interest and they could repo the car if you don’t pay them on time. If you pay cash for that car, that feels good in the moment, but you’ve lost all the opportunity cost to continue earning compound on that money, had you not bought the car and left it invested instead.

The power of this strategy is, when I borrow from the life insurance cash value, the insurance company sends me the money and I’m paying them back. I’m using my life insurance cash value as collateral, and while I’m paying the loan off, the policy can continues to generate a full dividend, even on the capital I borrowed, meaning no interruption of compounding.

So the eighth wonder of the world is uninterrupted compound growth. So that’s cool when it’s coming in cars and whatever, but let’s talk about what it means when we’re actually paying our taxes. Some people say, “Well, Mark, I don’t really pay a lot in taxes. I did the math.” Let’s say you’re a 35-year old who’s putting away and has to pay $6,000 a year. That’s just your payroll taxes. You’re a W-2, your payroll taxes… Most of us are paying a lot more than that. But if you’re single, earning 50 grand a year and you’re 35 years old, you never got a raise and if taxes never went up, you’d be paying six grand a year, over 35 years. That’s $210,000 to the IRS. But what if you could save that money? If you could earn a return on $6,000 a year for 35 years at 5% interest, that’s over half a million dollars, and that’s only up to age 70. Of course, government still charges you taxes in retirement too, especially on our 401ks and IRAs. So that’s half a million bucks. But what would happen if you move some of that money into a life insurance policy? Literally, warehousing your tax payment in your life insurance all year long, and then borrowing out that cash to pay your taxes as you normally would, and then paying off the loans on those policies and premium payments as you have windfalls in your real estate business. So here’s where things get, I think, pretty interesting.

So let’s imagine for example, a case study. Let’s give him a name. Let’s call him Tommy Taxpayer. Let’s say, good old Tommy’s got a $90,000 a year tax problem, and he knows– he knows the story of that case study I just mentioned, where if you’re paying six grand a year to the IRS, half a million dollars over your lifetime, it’s a heck of a lot more if you owe 90 grand a year to the IRS. I know a lot of clients that take a zero or add a zero to that number. Folks pay big checks to the IRS, whether it’s on April 15 or all year long, just total it all up.

So Tommy Taxpayer has a $90,000 a year tax problem. So what we did in these numbers – I’d be happy to share the numbers with any of your Best Ever listeners that want to see it, but let’s say that he puts away into a life insurance contract that’s designed for cash accumulation. 90 grand a year is as premium. Now, in order to be able to really build the policy well, we have to factor in that there is an insurance cost on any life insurance policy, but he also knew he needed to save for his own retirement eventually as well. So this business owner wanted to save and he didn’t want to use a 401k or an IRA. So to do that, he combines his tax payment of $90,000 with a retirement savings amount of 50 grand a year. That was what he felt like he could save, but wasn’t convinced that a tax-deferred or tax postpone retirement plan like an IRA or 401k was the best place to keep it.

Joe Fairless: So all in $140,000 putting towards this problem.

Mark Willis: There you go.

Joe Fairless: Cool.

Mark Willis: So day one, month one, he has a cash value of $95,000 and a death benefit of $3.3 million. Day one, month one. So he’s got more than enough in that cash value in the first year to pay his tax bill, which is the key; and let’s say that he does that. He puts the money in, retirement money plus tax money, borrows out 90 grand, and let’s say for whatever reason, he never pays off that tax bill, that loan against the life insurance policy. Well, again, if it’s a non-direct recognition company, Joe – and most mutual life insurance companies aren’t non-direct recognition, but if they are, if this was a non-direct recognition company, the policy will continue to pay you interest in dividends on the $95,000 of cash value, even though you’ve only got five grand left in there after you take the loan to pay your tax bill. So let that  sink in for a minute; that is tremendous. That is the eighth wonder of the world, as Einstein says.

Joe Fairless: What does non-direct recognition mean?

Mark Willis: It’s a good question. Talk about deep cuts vocabulary… What it means is, they simply don’t recognize that you’ve taken a loan. Now, there are two kinds of insurance contracts out there – one is direct and one is non-direct. A direct recognition life insurance loan is recognizing that you took the money out, and thereby reduces or penalizes you, reduces your dividend if you borrow against the policy. That to me is a non-starter. I wouldn’t use the direct recognition —

Joe Fairless: Is it a one to one ratio for the reduction and debit?

Mark Willis: Correct. They will reduce your dividend based on whatever’s left or noncollateralized in the policy’s cash value.

Joe Fairless: Okay.

Mark Willis: Whereas a non-direct doesn’t recognize that loan was taken, and it continues the compounding.

Joe Fairless: Why would there be any non-direct companies? Because it doesn’t make sense from a business standpoint to me?

Mark Willis: Well, it’s all about business model. So some insurance companies encourage loans and others think that they could do better investing in bonds and other fixed-income assets. So the insurance company that has a non-direct contract simply is making a statement that they encourage your access to the cash value, and they would allocate their general fund accordingly. Most insurance companies are going to be well reserved with funds and policy loans and term insurance premiums. All those are the profit centers of insurance companies. If it’s a mutual company, Joe, no doubt, you know this – like a mutual life insurance company, you’re getting the profits, the dividends from that portfolio. So it’s just a business decision. Non-direct companies think ” You know what, we’re going to let our policyholders have a benefit when they access the cash value. We’ll use that policy loan as a part of our overall investment returns.”

Joe Fairless: Okay.

Mark Willis: Okay? So back to Mr. Tommy – after 20 years, let’s imagine a world where he never pays that tax bill off. In fact, Joe, let’s say he takes a new $90,000 loan every single year for the next twenty years paying his tax bill; every year for 20 years. So he starts at age 45. So now he is 65 years old, 20 years later, and he’s got a massive policy loan of $2.8 million, because he never paid off that policy loan, and yet, he still has $1.2 million in cash value because the earnings and growth of cash, and a $5.8 million death benefit, even though he never paid off the policy loan… Which I don’t recommend, but it’s technically possible. So if he was to pass away, the death benefit would still be left to his family at $5.8 million, and if he wanted to, he could just spend down the $1.2 million in cash as a retirement income stream; and if we designed it correctly, it would come out income tax-free.

Joe Fairless: But the money that he hadn’t paid back, that would be deducted when he dies, right?

Mark Willis: Yeah, that $5.8 million already accounts for the loan balance.

Joe Fairless: Okay, so eventually the insurance company is getting that money back. They’re taking it out of the death benefit.

Mark Willis: Well said. Exactly right. So they collateralize your death benefit. Some people have compared this to a HELOC in some ways. If your house is worth a million bucks, and let’s say, you’ve got a HELOC for 300 grand on that house, your house is still growing in the neighborhood at a million bucks. It doesn’t matter if there’s a HELOC on it or not, Zillow still thinks it’s worth a million bucks. The same is true with non-direct recognition life insurance. If you have a million dollar cash value and you borrow 300 grand, that policy is still going to earn a dividend and guaranteed cash accumulation of whatever the dividend was on the full $1 million, without the loan notwithstanding. But you’re right. The insurance company knows they’re going to be paid back upon death or beforehand, which is why they’re willing to let us have any repayment schedule we wish… And our good friend Tommy Taxpayer went 20 years without repaying a penny of that loan. Now what I’d recommend again, but it’s totally possible.

Joe Fairless: Why wouldn’t you recommend that? Because it sounds like a pretty good scenario for Tommy.

Mark Willis: Yeah, he still ends up with a decent retirement. If he was to repay that loan, it would lower the loan interest rate. He’d have a lot more at retirement, which I’ll mention in just a minute, than what he’d have if he could pay that loan off every couple of years. But there’s a risk too if you never pay off a loan on these policies and the loan exceeds the cash value, [unintelligible [00:19:21].24] and you might have a taxable event, if there’s gains in the policy.

Joe Fairless: How would the loan exceed the value?

Mark Willis: Yeah. As the loan is earning interest, there’s a loan interest on policy.

Joe Fairless: Okay, so you’re paying an interest rate on the money that you borrow, and that’s what, 5%?

Mark Willis: 5% on a simple interest schedule. So if you never pay the loan off, it would be a straight 5%. If you pay it off– over four years, Joe, I’ve seen policy loans APRs at about 2% if you pay the loan off over, say, a four year period. Yeah, it a good question. So you do [unintelligible [00:19:59].13] or you leave your family less if you never pay off that policy loan. So I do recommend we manage the thing well.

I tell folks, these loans should be paid off over a reasonable period of time, and folks will ask me, “Well, what’s reasonable?” and generally, I’ll say, “It’s really, whatever a regular schedule would be for any other bank down the street.” A car loan? Maybe four years is reasonable to repay a policy loan to pay off a car. For a mortgage, maybe 10, 15, 30 years. Who knows? It’s just whatever is reasonable for the cash flow in your life.

Joe Fairless: I’m glad you walked us through this scenario. What else should we talk about if anything that we haven’t talked about already, as it relates to this situation?

Mark Willis: If I may, let me share one more alternate universe for our good friend Tommy, and then I can talk through what may be better than letting that loan just grow, grow, grow. So imagine now Tommy’s still doing the same $140,000 in contract premium and he’s borrowing the same 90 grand every year, but every five years, his business is profitable enough to send a windfall into his policy. Most business owners I work with, if they have a $90,000 tax problem, they’re making a profit somewhere. So where’s that money gonna live?

I think one of the key things a good financial planner should ask their clients, and we try to do that ourselves is – where do you want your money to live? Your money needs to reside somewhere, and I can’t find many places better than a high cash value dividend-paying whole life policy. But the problem is, for Tommy, he can’t pack more than 140 grand in premium into this policy. That’s the limit that the government set on his particular policy. Now you can have a limit as low as 14 grand or 140 grand or three-quarters of a million. Each policy has their own engineered limit; but we found a way with the policy loan to pack in way larger windfalls. In his case, every five years, he writes a check to his policy and repays his policy loan to wipe out that loan balance, and every five years that happens to work out to 490,000 bucks. That was the loan balance every five years, and he gets a profit every five years in this hypothetical scenario, and he wipes out that policy loan every five years. So he’s limiting the interest that’s charged when he does that. He’s also freeing up a huge bucket of cash that he could use for other real estate investments or anything else, and just to cut to the chase, Joe, at age 65, his death benefit is $8.7 million, and he has a liquid retirement fund, let’s say, or a cash value of $4.1 million. At that point, he stops funding the policy and he just takes that $4.1 million out as another tax-free retirement income stream.

Joe Fairless: When you explain the situation to someone other than me, what are some typical questions that come up?

Mark Willis: What’s the catch? Why haven’t I been told to do this by my CPA? I think one of the things is the CPA is really good at helping you find deductions this year. That’s how they keep their job. Life Insurance is after tax. You’re paying your taxes today on the seed, not the harvest. So they’re not getting your smiles and grins for the big juicy tax deduction this year. When you put premium into life insurance, it’s usually using after-tax dollars.

A lot of folks will say, “Well, Mark, how can I possibly save 140 grand into a life insurance policy?” and I say, “It’s not about Tommy’s numbers, it’s about your numbers. You’re already paying your tax bill somehow, either you’re using cash to pay for it every month, every quarter, every year – a lot of our folks have quarterly payments – couldn’t you be saving that somewhere? Where’s that money saved better than a savings account?” A lot of folks who can’t save at all, I wouldn’t recommend this policy to. You do have to still pack money into the policy. It’s not a magic pill, and don’t look to this policy to become wealthy overnight. If you’re looking for hedge fund-like returns, you’re going to be bored to tears with the internal rate of return of the policy. I think in previous episodes we’ve talked about; it’s low to middle, single digits, 4%, 6%-something present. So it also means you have to think a little different than the average taxpayer, which is a roadblock for some folks as well.

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

Mark Willis: Yeah, thank you, Joe. If folks want to find out more about this, we’ve done a few podcast episodes on this that dive deeper at Not Your Average Financial Podcast. Or if you want to reach out and connect with me or one of my team members, go to growmorewealth.com.

Joe Fairless: I enjoyed this different thought process about how to apply infinite banking. Thank you for walking through that example, and Mark, thanks for sharing this area of expertise that you have with us. So I hope you have a best ever weekend and talk to you again soon.

Mark Willis: Thanks so much, Joe.

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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JF2104: Financial Samurai With Sam Dogen

Sam Dogen is the founder of Financial Samurai and has been providing content to the world through his free blogs and articles around topics that will help you with your financial literacy and goals. He Has also been in the real estate investing experience for 17 years and shares some of his experiences with this and his personal journey.

 

Sam Dogen Real Estate Background:

  • Founder of Financial Samurai
  • Has 17 years of real estate investing experience
  • Owns multiple properties in San Francisco, Honolulu, and Lake Tahoe
  • Commercial real estate portfolio consists of 15 properties
  • Based in San Francisco, CA
  • Say hi to him at: https://www.financialsamurai.com/ 
  • Best Ever Book: Thinking in Bets

 

 

 

 

Click here for more info on groundbreaker.co

 

Best Ever Tweet:

“I love the green marble theory.” – Sam Dogen


TRANSCRIPTION

Theo Hicks: Hello, Best Ever listeners. Welcome to the best real estate investing advice ever show. I’m Theo Hicks, and today we’re speaking with Sam Dogen. Sam, how are you doing today?

Sam Dogen: Good. How are you?

Theo Hicks: I’m doing great, and thanks for joining us. A little bit about Sam – he is the founder of Financial Samurai. He has 17 years of real estate investing experience, owns multiple properties in San Francisco, Honolulu and Lake Tahoe; he has a commercial real estate portfolio consisting of 15 properties. He’s based in San Francisco, California, and you can say hi to him at his website, FinancialSamurai.com.

Sam, do you mind telling us a little bit more about your background and what you’re focused on today?

Sam Dogen: Sure. I actually grew up overseas, all across Asia and in Africa, because my parents were in the U.S. Foreign Service. I came to high school in the United States, and then I went to college at William & Mary in Virginia. Then I went to work on Wall Street in 1999. So I worked in finance, mainly international equities from 1999 to 2012, and in 2012 I decided to negotiate a severance and get out of there… Because after the global financial crisis in 2008-2009 it just wasn’t fun working in finance anymore. We were always the bad guys, even if we had nothing to do with the housing market.

Again, I was in international equities, specifically Asian equities, and it just didn’t feel good to work in that field anymore. Also, the pay wasn’t commensurate with the performance anymore. You could have done really well with your clients, generate a lot of business, but you wouldn’t have gotten paid commensurately, because Wall Street finance was busy subsidizing a lot of money-losing departments. So I decided “You know what – it’s been a good career.” Originally, I wanted to work until I was 40, but instead I left the industry when I was 34, and I decided to travel, spend more time with my wife, and focus on FinancialSamurai.com, which is a personal finance site I started during the depths of the previous financial crisis, in July 2009.

Theo Hicks: So Financial Samurai is like a blog where you post personal finance advice… Does that tie into real estate? Is your advice for people to go out there and buy real estate, or is it dependent on their personal situation?

Sam Dogen: FinancialSamurai.com is a personal finance site. I talk about everything from investing in stocks, to real estate, to early retirement, to career, to negotiating your layoff, to family finances, insurance and so forth. So I try to cover every aspect of what someone would think about in their lives. And money really touches upon all of us.

Real estate is about 40% of my net worth, and is something that I’ve been doing since 2003, in San Francisco… And real estate is my favorite asset class to build wealth, because it’s a tangible asset, it generates income; it’s pretty sticky on the way down during tough times, and you get to benefit from the upside, and it provides utility.  What an amazing asset class to be able to enjoy it, to provide shelter for your family, experience great memories, and maybe even make some money in real estate. So real estate has been my favorite asset class to build wealth.

Second has been stocks. I was in the stock market, in that business for 13 years. However, I think my favorite after stocks is online real estate, so owning web properties such as FinancialSamurai.com.

Theo Hicks: Nice, I never thought of it like that, online real estate; I like that terminology. Okay, so you have 15 commercial properties… Is that your entire portfolio? Are those the ones that are in San Francisco, Honolulu and Lake Tahoe?

Sam Dogen: No, the property that I owned in San Francisco, Honolulu and Lake Tahoe are physical real estate properties that I’ve bought, and that I enjoy, and I use, and I rent out, and I’m an active landlord there. And regarding my commercial real estate portfolio, it’s essentially through real estate crowdfunding, where after I sold one of my main San Francisco rental properties in 2017, because I wanted to simplify life and diversify out of San Francisco, I basically invested in a fund that had 17 commercial real estate investments, and two have exited, and there’s still 15 left.

So my thesis was to diversify across the heartland of America, because back then I was thinking to myself “Well, the cap rates are so low in San Francisco…” We’re talking 2% – 3% cap rates… And it’s just so expensive here, and I have so many investments already that I needed to diversify.

So with the proceeds that I got from the sale, I decided to diversify across the nation, and the thesis was that work from home would be more and more prevalent, telecommuting, people would be able to go to lower parts of the country to still earn a similar amount of income, but save a lot on costs. And with the lockdowns and the global pandemic I think that trend is definitely accelerating, and I’m excited to see what happens next.

Theo Hicks: How did the returns from that fund you invest in compare to your rental properties?

Sam Dogen: In San Francisco real estate has been going up; at least since 2012 it’s been a bull market. Real estate is about 80% to 100%, and now it’s probably plateauing right now… So San Francisco real estate probably increases by 6% to 7% a year. It has been. And that’s been pretty good. Obviously, let’s say with 20% down, so you have leverage… So a 6% return times five, that’s 30% return on your cash… So that’s great. But it slowed down in 2018, and 2019 was kind of “Meh…” and it started picking back up at the end of 2019. In early 2020 it was pretty good, until everything started getting locked down. So now everything’s in a wait and see mode.

In terms of commercial real estate, since about 2015-2016 when I started investing – because I invested before; I’d sold my main San Francisco rental property in 2017 – the returns have been around anywhere from 12% to 16% a year, which is great, especially if you don’t have to manage the property. And that’s one of the things that I like about investing in these properties – because it’s 100% passive income; you’ve got a professional manager there, you’ve got the lawyers and all those people doing the stuff, and  you just collect income and then you have to file the taxes.

Now, in 2020, things have obviously changed a lot due to lockdowns. So I will have some losses on properties that are in the hospitality space. For example a hotel. Surely, that property’s gonna be going down in value because nobody’s going at the hotel. It’s like an airport hotel, a Sheraton in Dallas. But the portfolio is 15 properties, so I’m assuming there’s gonna be some losses, but overall I think it’s gonna do well. If we can rebound and get out of this lockdown phase sooner rather than later, hopefully third quarter of 2020, I’m optimistic that things will get back on course.

Theo Hicks: Just to confirm – that fund of 15 properties, you’re getting 12% to 16% per year?

Sam Dogen: Yeah.

Theo Hicks: Wow. How did you find that fund?

Sam Dogen: Well, there’s a lot of real estate crowdfunding platforms. Financial Samurai is a relatively large website; it’s got about one million visitors a month organically… So there’s a lot of opportunity; you just have to go wade through a lot of opportunity. But there are many real estate crowdfunding platforms out there. I’ve been able to talk to a lot of the top ones and a lot of the big ones, and some of them don’t make it, frankly… But some of them do. And the assets they allow you to invest in are separate LLCs that continue to go on regardless of what the platform does.

So in the old days you would basically invest in a real estate fund through your network. You have a friend who’s in real estate development, he wants to raise some money, you participate, you’re a limited partner etc. Today you can go online, you can obviously buy REITs, you can buy private REITs, and you can go directly through these platforms that connect you with other sponsors.

Theo Hicks: So you’ve found this deal through your website. Someone came to you with the deal, or someone posted it on your website?

Sam Dogen: Yeah, through my website, for sure.

Theo Hicks: One thing that we stress a lot is about building a brand – our’s is a podcast website – for building a real estate company. You talk about personal finance. Is that something that — you also mentioned owning online real estate, owning websites… So what’s some advice you have for someone — well, I guess then you also have a million organic views per month… So what’s your advice for someone who wants to start getting into what you call the online real estate and owning a website? Should they build their own, should they invest with someone else’s website? What does investing in someone’s website even look like? …things like that.

Sam Dogen: I think one of the key things you have to do is own your brand and build your brand. You don’t want another platform to own your brand, for example Facebook, Twitter, LinkedIn, whatever. They are already huge companies, and they’re getting rich off your content and your brand. So instead of spending all your time tweeting about random stupid things on Twitter, build your own brand and start your own website, and start talking about all the things you care about on your website. It’s the green marble theory that I like to think about and say, and that is if you have a green marble, maybe it’s the ugliest green marble in the world; you put it on eBay and someone will find that green marble and wanna buy it. So if you put yourself out there, based on your own brand and what you care about, you’re going to find your tribe organically eventually. Google obviously has been around for over a decade now. They’ve done their algorithms very well. They’re gonna help people who are looking for stuff that you like, and connect. And that is really key, to build your brand and do it on your own platform.

The other thing is you need to be consistent. You can’t give up before the roses bloom. Too many people I see just work for six months, maybe a year, and then they stop doing it… But they stop right before things start getting good. So I believe the secret to success is to do something very consistently, for 5-10 years. After about three years you should definitely start seeing some results, but too bad people can’t stick with things for more than one or two years, because they just want instant gratification. But this is a long game, and if you plan to be alive for decades, then you have plenty of time to build your brand.

Theo Hicks: That’s really good advice about building your website, but specifically the 5-10 years, thinking in terms of decades rather than days and weeks and months. So you did mention about not going out there and tweeting your thoughts, as opposed to building your own website and then you’ll [unintelligible [00:13:37].23] organically. So do you recommend just posting on the website and that’s it, and then letting people find you on Google organically? Or should I still be sharing the content from my website on social media?

Sam Dogen: Of course, you create the hub. You create your pillar, awesome content, whatever it is you wanna talk about. If you wanna talk about real estate, go ahead. If you wanna be a real estate specialist, go ahead. If you wanna be a personal finance generalist, or just focused on stocks and real estate and family finances… Whatever you wanna do. The world is big enough; there’s billions of people on the internet. Focus on what you care about and you are best at. And then the spokes are social media; make sure what you’re doing on social media is helping you build your brand, not hurt your brand. A lot of people have blown themselves up on social media saying things and then just getting fired, or just crushed.

So think about the spokes after you build your hub, your own brand. So the spokes are maybe doing a podcast, getting on a podcast like this one. Social media. Maybe speaking at conferences, if they ever come back. But focus on the hub.

Theo Hicks: Okay, Sam, what is your best real estate investing advice? You can also apply it to personal investing advice too, but what’s your best ever investing advice?

Sam Dogen: In terms of real estate, I would say be patient. Every time you see an amazing property, it’s just human nature to get all excited and say “I’ve gotta buy this. This is amazing. Please, nobody else bid against me. I’ve gotta buy! Buy, buy, buy, buy!” But the reality is if you miss this one, it’s okay; there’s gonna be another amazing property that’ll come along. So I really stress patience and running the numbers, especially during a turning point where we don’t know what’s gonna happen with the economy, with 40 million-plus people unemployed. Is the government really gonna support us indefinitely? Are we gonna find a vaccine within the next 12-18 months? There’s a lot of uncertainty, so right now patience is a virtue. Don’t rush, don’t go panic-buying, don’t go panic-selling. You’ve really gotta run the numbers and think things through. If you miss out, it’s okay; there’s gonna be other opportunities along the way.

Theo Hicks: Alright, perfect. Are you ready for the Best Ever Lightning Round?

Sam Dogen: Sure.

Theo Hicks: Alright. First, a quick word from our sponsor.

Break: [00:15:53].00] to [00:16:42].07]

Theo Hicks: Okay, what is the best ever book you’ve recently read?

Sam Dogen: Let’s see… I have been recently reading Annie Duke’s “Thinking in Bets.” I think it’s an excellent book and an excellent way to think about investing. There’s never a 0% probability or a 100% probability. There’s always going to be some kind of grey area, and you’ve gotta think in bets, think in percentages.

So right now, with the S&P 500 at 3,000, for example, it’s rebounding by over 32% from the mid-March lows… What is the expectation or probability that it’s gonna go up back to its record high, another 10% up from here? I would say maybe 30%. But that also means 70% is not gonna get there. So in that regards, I position my portfolio according to the probabilities that I believe in. So thinking in bets.

Theo Hicks: If your website traffic were to collapse today, what would you do next?

Sam Dogen: Right now I have about 250k-265k in passive income, excluding my website, except for 50k. 50k comes from selling a severance negotiation book… So if my website collapsed today, I would have about 200k to 215k a year in passive retirement income. So that would be a 20% loss to my passive retirement income. Then I would basically look at my budget and make sure I’m spending within my means… Because that’s obviously the bottom line of personal finance – spend within your means.

Now, in terms of the active income I was making from Financial Samurai through advertising and so forth, I would first take a moment to grieve, because I’ve been working on this for 11 years, and then I’d take a moment to be thankful that it’s given me so much back in terms of community, in terms of learning from other people, in terms of doing something that provides me joy… And then I’d think about maybe taking a six-month break, and then I would think about maybe starting something else better or newer, and learn from my mistakes.

Theo Hicks: What is your best ever way you like to give back?

Sam Dogen: In terms of giving back, I think the best way to give back is to write on Financial Samurai. Every single article is free, there’s no paywall. I talk about highly, highly pertinent things in our lives right now, whether it’s “What should you do after the stock market has rebounded by 32% from the bottom? Should you buy, hold, sell?” I talk about “Should I apply to pre-school and spend $2,000/month? Yes or no. Should I save x amount in my 529 plan so my child can go to college in 18 years, when everything will be free and college will be completely not worth its value?” I talk about these important things for free, and to help people engage and to encourage the audience to share their perspective, so that we can all learn from each other… Because nobody knows everything, and we all only know from our experiences and how we can do things better.

So I think that’s the best gift – to share what you know, consistently, for free, to as many people as possible? Because so many people will just go through and live the same thing that you went through just the past 5, 10, 15, 20, 35 years, and they could avoid all those landmines if the experienced people spend some time sharing what they did wrong and what they did right. That’s my plan.

Theo Hicks: And then lastly, what’s the best ever place to reach you?

Sam Dogen: Oh, just financialsamurai.com. I’m always reading the comments, you can always leave a comment. It doesn’t matter how old the post is, I’ll see it. You can go on Twitter if you want, but Twitter is something that I try not to spend too much time on. Basically, those two places are probably the best.

Theo Hicks: Perfect. Sam, I really appreciate you coming on the show today and providing your best ever advice. I think the biggest takeaway for me was your advice on owning websites and your analogy of the wheel, and how you don’t want to let other larger online platforms own your stuff. So you don’t wanna just be posting on Facebook or LinkedIn or (as you mentioned) Twitter. Instead, you want to be the hub yourself, so have your own website, focus on what you care about and what you’re best at on that website. And then the spokes are the secondary outlets, things like social media, podcasts, getting on a podcast, speaking at conferences. So those things are not the hub. The hub is you and your own website. So start working on your own brand and building your own brand, and make sure you’re the owner of it.

And then how to actually grow that – you talked about the green marble theory; you’ve got a green marble, and even if it’s really ugly, you put it on eBay and someone’s gonna want that green marble. So if you put yourself out there and you talk about what you care about, and you do it consistently, and you don’t give up before the roses bloom — and by consistently you mean 5-10 years… Not giving up after a year or two years or three years – then eventually you’ll find your own tribe organically.

And then obviously you talked about your real estate portfolio, the types of returns you’re getting on it, how real estate is your favorite asset class to build wealth, followed by stocks, followed by owning real estate… So again, Sam, I really appreciate you coming on the show. I look forward to reading through some of your content. I really liked what you said about the college thing; I hadn’t thought about it like that before… But again, thanks for coming on the show.

Best Ever listeners, as always, thank you for listening. Have a best ever day, and we’ll talk to you tomorrow.

Sam Dogen: Great. Thanks a lot.

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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JF2101: What Does Financial Freedom Mean? | Syndication School with Theo Hicks

In today’s episode, Theo brings up the topic of what is important in life? He starts to question what does financial freedom really mean to you? He shares a popular blog post where a nurse interviewed her patients who were close to their end of life and asked them each the question “what did they regret?”. This episode will help open up your mind to discover what it really means to be financially free? 

 

Click here for more info on groundbreaker.co

 

 

To listen to other Syndication School series about the “How To’s” of apartment syndications and to download your FREE document, visit SyndicationSchool.com. Thank you for listening and I will talk to you tomorrow. 


TRANSCRIPTION

Theo Hicks: Hello, Best Ever listeners, and welcome to another episode of the Syndication School series, a free resource focused on the how-to’s of apartment syndication. As always, I am your host, Theo Hicks.

Each week we air two podcast episodes that focus on a specific aspect of the apartment syndication investment strategy. For a lot of these episodes we offer a free resource to you. These are free PDF how-to guides, PowerPoint presentation templates, Excel calculator templates, some sort of resource to help you along your apartment syndication journey.

All of these free resources from previous Syndication School episodes, as well as the actual episodes, are available at SyndicationSchool.com.

In this episode I wanted to review a blog post that was written by someone on the Ashcroft team about the top two regrets of dying, and how to buy more time. We might have briefly touched on what I’m going to talk about today in a Follow Along Friday actually, probably about a year ago… Those of you who are newer, this will be new, and those who are long-time listeners – this will be a refresher… But it was back when Joe was talking about how he was starting to volunteer at a hospice care.

In his blog post, Travis focuses on a blog post that was written by a nurse, all the way back in 2009. This nurse worked in a terminally ill care unit, with people who are living out their final days in life, so kind of like hospice care… And this nurse decided to ask her patients about their top regrets in life. She first published her results as a blog post, and it was so popular that she later wrote a book on the topic. If you wanna check that out, the woman’s name is Bronnie Ware.

Now, the top two regrets that people had on their deathbeds was 1) I never pursued my dreams and aspirations, and 2) I worked too much and never made time for my family. So the way that Travis was positioning this blog post was that people spend a lot of time focusing on getting a nice car, new clothes, or a really nice house, or a vacation home, which is obviously pretty awesome to have, but he categorized all of these things as “stuff.” And while stuff is nice, we only need a certain amount of stuff… And having stuff is different than having freedom. So he was saying that there’s a choice between having more and more things or having more and more freedom.

There’s a pretty cool quote in here from Susan Fussell. which is “You can have anything you want, but not everything you want.” So you can’t have both. You can really have freedom, or you can have more and more stuff. If you actually sit down to think about it and you focus your awareness on it, would you rather have more and more things, or would you rather have your own life? Because ultimately, having freedom comes down to being able to live your life and spend time on things that you love, and focus less on things that you don’t like doing, just so you can buy more things.

So the reason why he wrote this blog post was because — it was geared towards passive investors, so I definitely wanna talk about that in a second, but… Looking at those two regrets, 1) I never pursued my dreams and aspirations, and 2) I  worked too much and never made time for my family – number two is probably a better selling point for passive investing… And number one as well, “I never pursued my dreams and aspirations”, but that also applies to apartment syndicators as well.

This blog post, when you read it — it’s positioned and speaking to passive investors, but the same regret could apply to an apartment syndicator. You work a regular 9 to 5 job your entire life, you retire when you’re 70, you live off of your 401K, and you have a pretty comfortable life… But even if that’s the case, on your deathbed did you wish you would have bought in real estate? Do you wish you would have bought more real estate? Do you wish you would have decided to take the chance and raise money and buy larger deals? Whatever your real estate aspirations are, do you want to be on your death bed and regret not taking that leap into trying to (in this case) raise money for apartment deals? Obviously, it can be anything, but this is Syndication School, and a lot of people who are just starting out aspire to raise money, so that’s why we’re here, to help you learn how to do that. Obviously, if you’re listening to this, you’re already on the track to not have that regret.

But the second regret, which is “I worked too much and never made time for my family” – that’s something that you want to use when you are talking to people who might potentially invest in your deals. Because obviously, you can tell them “Hey, you can get 8% preferred return, or 7% preferred return, and you can make a 2x equity multiple”, and you can tell them of all the money that they’re gonna make from the deal, which might convince some people, but a stronger, more powerful story is to try to touch on this second regret.

Obviously, don’t go to them and say “Do you want to be on your deathbed and regret that you worked too much and never made time for your family? Well, if you passively-invest, you’ll be able to make money without having to work, and be able to do that.” I guess you could position it that way, but the whole point is to focus on the dollars that they can make by passively-investing, but also focus on what those dollars will do for their life.

So the moral of this story from Bronnie Ware and these two regrets is that passive income is not about money or obtaining more stuff, it’s about having freedom and the ability to spend your time on the things you love, and focus less of your time on the things you dislike doing.

So the first step – and again, this is your trying to position this to your passive investors, or at least understanding this, so that when you’re talking to your passive investors, you can position it in a way that gets this story across… But the first step towards any journey to financial freedom, as you well know, is having more income than expenses… But it’s not just any type of income, it’s actually passive income. So you wanna have more passive income than the expenses that you’re paying out. So that means you have more money coming in each month than your expenses; that money that’s coming in is coming in without you having to exchange your time or effort for it. So that’s the actual true definition of financial freedom. It’s having passive income that’s equal to or greater than your living expenses.

Now, when you put it like that – this is kind of a simple formula; it seems straightforward, but most people aren’t passively-investing in real estate. Most people aren’t involved in real estate in general, so what’s the reason why people are deciding to purse what Travis calls “stuff”, or pursue income that you have to get in exchange for time and effort, as opposed to passive income and choosing freedom over stuff. He believes it has to do with the fact that there’s not a lot of education on the topic of time freedom, which is what’s achieved through building passive income streams… Or as an apartment syndicator, doing these apartment syndications and building up a large enough team, so that you’re only working on your business for a few hours per week.

So I thought that was interesting, the whole concept of time freedom. Most people focus on financial freedom, but when you actually drill down into it, it’s actually time freedom. And I know when I first started working for Joe on his website, he had a big About Me section, which was about that time freedom. And the whole entire idea is that he believes that people are inherently good, so if people had more time, then they would be able to do more good. So by creating the syndication business and allowing people to passively invest in his deals, so they’re able to make more money without having to exchange their time and effort, they can have more time freedom to spend on doing more good for the world.

And the same applies, again, to the Syndication School, teaching people how to do syndications… Because that’s also gonna get people in the long-term more time freedom as well.

Next in the blog post he goes over some example numbers of “Hey, if you invest $200,000 at 10% passive income, you’ll get $20,000/year”, which is great, but obviously, you wanna have more passive income than your living expenses, so you should be figuring out “Okay, here are my expenses; they’re 100k/year.” Typical apartment syndications result in 10% — again, I’m just making these numbers up just for simplicity. So if I wanna make 100k from a 10% return on an apartment syndication, I need to invest one million dollars to make that 100k/year in passive income.

Now, this doesn’t mean — and this is something that’s important too, that maybe don’t maybe think about or don’t really talk about… There’s not just “Either work full-time, or you’re completely taking in passive income.” Because if you go back to those two regrets, it’s “I never pursued my dreams and aspirations” or “I worked too much and never made time for my family.” Obviously, some of your passive investors may want to eventually do nothing but make money through passive investing, but not every single person is going to have the same outcome for passive investing. Some of them may want to — rather than working for someone else, they wanna do their own thing, and having this passive income will allow them to not have any income coming in from a W-2 job for 6 to 12 months.

So figuring out exactly what it is your passive investors want from passive investing is important. Ultimately, they’re likely gonna be tied to those two regrets… Either “I’m working too much and can’t spend enough time with my family or doing things that I personally want to do” or “I never pursued my career dreams/aspirations.”

My point there is don’t just assume that every single person you talk to just wants to make $100,000/year and just do nothing. Most people that are high net worth are going to want to do other things at the same time, so maybe it means that they have 50% more free time, and then they work part-time. So rather than working 100 hours per week, they’re working 50 hours per week; or rather than 50, 25. Or rather than 20, 10. And then obviously, for some people the amount could be for retirement, and then just kind of doing whatever they want to and sitting on a beach.

Overall, when you’re thinking about how to position your conversation with passive investors, you’re gonna wanna keep those two regrets in mind, and you’re gonna also wanna understand the difference between having stuff and acquiring more things, as opposed to the time freedom. And also, understanding that whenever people are talking about financial freedom, what they’re actually talking about is time freedom. So having money coming in so that they’re not spending 20, 40, 60, 80 hours per week doing something they don’t necessarily like. Instead, they can spend that time either doing whatever, hanging out, chilling, or they can do that pursuing some other dream or aspiration that they have, so that they’re not like the patients that Bronnie Ware was meeting, that were full of regrets about not pursuing their dreams and aspirations, and working too much and never having time to see their family.

So that concludes this episode. Obviously, the entire purpose of this episode was for you as an apartment syndicator to think about what’s going on in a potential passive investor’s mind, but you also wanna apply this to yourself, too. I kind of talked about that in the beginning, “Why do you wanna do apartment syndications? Does it fall into one of these two categories of?” Do you wanna pursue a dream or aspiration, or you don’t wanna work a lot? Obviously, if you don’t wanna work a lot, then apartment syndications could eventually get to that point, but you’re gonna have to put in a lot of effort upfront in order to build up a large enough portfolio and team… So more than likely, it’s something that is a dream and aspiration of yours – to build your own company, to work for yourself, things along those lines.

So that concludes this episode. Thanks to Travis for writing this blog post. I thought it was very inspiring, and also very enlightening as well, and a very interesting take on the concept of financial freedom and acquiring things, versus acquiring more time.

I recommend reading his blog post. It’s called “The top two regrets of the dying. How to buy more time.” If you just go to the blog page on JoeFairless.com, it’s one of the top blog posts right now. If you’re listening to this way in the future, if you just search “Top two regrets of the dying” on the website joefairless.com, it will be one of the search results.

Until next time, make sure you check out some of the other Syndication School episodes that we have about the how-to’s of apartment syndication. Check out some of those free documents as well; those are all available at SyndicationSchool.com.

Thank you for listening, and I will talk to you 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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JF2095: Coronavirus Impacts On May 2020 Rent | Syndication School with Theo Hicks

Coronavirus has impacted the real estate market in many ways from home buying, selling, to collecting rent payments. In this episode, Theo Hicks will be sharing information on how May rent collection was with so many Americans out of work.

Click here for more info on groundbreaker.co

To listen to other Syndication School series about the “How To’s” of apartment syndications and to download your FREE document, visit SyndicationSchool.com. Thank you for listening and I will talk to you tomorrow. 


TRANSCRIPTION

Joe Fairless: There needed to be a resource on apartment syndication that not only talked about each aspect of the syndication process, but how to actually do each of the things, and go into it in detail… And we thought “Hey, why not make it free, too?” That’s why we launched Syndication School.

Theo Hicks will go through a particular aspect of apartment syndication on today’s episode, and get into the details of how to do that particular thing. Enjoy this episode, and for more on apartment syndication and how to do things, go to apartmentsyndication.com, or to learn more about the Apartment Syndication School, go to syndicationschool.com, so you can listen to all the previous episodes.

 

Theo Hicks: Hi Best Ever listeners. Welcome to another episode of The Syndication School series, a free resource focused on the how-tos of apartment syndication. As always, I’m your host, Theo Hicks. Each week, we air two podcasts episodes that focus on a specific aspect of the apartment syndication investment strategy, and for the majority of these episodes, we offer a free resource for you. These are PowerPoint presentation templates, Excel template calculators, PDF how-to guides, some resource to help you along your apartment syndication journey. These free resources as well as past Syndication School episodes are available at syndicationschool.com.

Today we are going to return to talking about the Coronavirus. So we’ve taken a break from that the past few weeks, but I wanted to do an episode that goes over how rent collection was during the month of May.

So I’m recording this on May 20, the data is in. Definitely check out some of the episodes that I recorded last month, either late April or early May, about the Coronavirus and how that is impacting apartments. Those are also at syndicationschool.com or if you just go to joefairless.com and search Coronavirus, you’ll see all the blogs and podcasts we’ve got about that topic. But today, we’re gonna talk about how the Coronavirus has impacted rent collection for landlords, more specifically how it has impacted rent collections for the month of May, because obviously, it has caused a lot of uncertainty for landlords, property management companies, really anyone involved in real estate in general, but we’re gonna focus on apartments obviously, and this is due to things that have to do with rent collections and people losing their jobs, and evictions, eviction halts and foreclosure halts.

So in an attempt to help tenants who may be struggling financially, many states have restricted evictions. It has been a scary time for a lot of investors, because that might translate to less income if you are not able to evict a tenant who can’t pay rent. So obviously, because of all these changes in the rent collections, we’re expecting a lot of people who are saying it’s gonna go down a lot, or it’s not gonna change a lot. Now we have data to support and determine who’s right, and fortunately, it seems like according to the recent rent collection data, landlords may not be as impacted as some people initially expected, and it shows that rent collection is down by only a few percentage points. So just because while the new eviction laws seems scary, the data shows that it’s not as bad as it seems, at least not yet. So let’s go over the data and see how rent collection has been impacted.

So first of all, well, rent collection is down. So it has dropped, but as I mentioned earlier, this was expected. Whenever you’re going into a recession, whether it’s caused by some financial instrument like it was in 2008, or a pandemic, like it is now, typically that means people are making less money, and when people make less money, that means they can’t pay the rent sometimes. But luckily, as I mentioned, the rent collection has not been affected as much as compared to previous economic downturns, and it really has not been as affected year over year either.

So this is for rent collection as of the 6th May. Basically, people who are paying their rent on time. In 2019, by April 6th, 82.9% of rent payments were made, and the next month in May, by the 6th of 2019, 81.7% of rent payments were made. So from April 2019 to May 2019, it was down about a percentage point.

Now moving to 2020, April 6th of 2020, the percentage of rent payments made was 78%, which was about a 5% drop year over year. However, by May 6, 2020, 80.2% of rent payments were made. So it actually went up from April to May. So obviously, April 2019 to April 2020 is down, and May 2019 to May 2020 is down very slightly, but a promising part is that April was lower than May. So rent collections actually went up from April to May. So this increase from April to May seems to be promising, and also for the time being, the spread of virus seems to be slowing down, additional steps seem to have been taken to get the economy rolling again. So in the short term, the worst may be over. April, May have been the worst month. Of course, we don’t really know for certain. Nothing is a fact yet, but what we do know is that rent collection is only slightly down. From April to May, it’s actually going up.

So why is this happening and will it get worse? Well, the obvious reason that the rent collection went up from April to May are those government stimulus checks hitting people’s bank accounts. People get their stimulus checks towards the end of April allowing them to pay their May rent on time if they weren’t able to pay their April rent on time, but of course, right now, as of this recording, this is the only confirmed stimulus check going out to Americans. With our talks right now, I just looked up today, they’re still talking about potentially sending out a second round of stimulus checks, which would obviously be very helpful for June rent, especially because data is showing that 63% of Americans will require a second stimulus check in order to pay bills within the next three months. Although we do know that people do pay their housing bill first, so this is just bills in general… But it’d still be helpful to these people.

So depending on whether the economy reopens, the next few months could potentially be unstable compared to April and May, but the good news is that many states are ramping up unemployment efforts since 15% of the country’s unemployed. So just because they’re not getting stimulus checks on a national federal basis, states are also helping with unemployment benefits. So with all this federal and state help citizens are currently receiving, it’s hopeful that rent collections won’t be fluctuating too much, but again, disclaimer, none of this can be said for certain.

So what about the evictions we’ve talked about earlier? What’s perhaps more important is to know when the current rent collection numbers might go up or down. So not all states have implemented new eviction laws, but many states have, and so it’s important to know which ones they are. For example, there was a recent case in Minnesota where a landlord was criminally charged for evicting a tenant during the pandemic. So states are beginning to require a landlord to allow tenants to live in their properties even if they cannot pay rent. Right now, 15 states have to suspended or changed their eviction laws until further notice with really no end date in sight. So each state’s eviction laws are a little bit different, so make sure that whatever state you’re in, you’re up to date on that. So if you go to Google, then you can set up a Google Alert to “evictions” and then your state name. Each day, you’ll get a Google Alert will send to your inbox, updating you on the eviction laws in your state or examples of landlords getting charged or whatever.

Most states have changed their eviction laws to require landlords to keep tenants in their homes even if they cannot pay rent. So in New York, for example, they declared an eviction and a foreclosure moratorium and prohibited late fees for up to 90 days, allowing tenants to use their security deposit to pay past rent.

So luckily, as I mentioned earlier with the April, May 2019, 2020 data, these eviction laws haven’t seemed to change rent collection too much, but the disclaimer here again is yet; it’s still something that might happen in the future, especially if there’s not a second round of stimulus checks, if these halts on evictions are extended for many months; it really just depends.

I talked about this on some of those previous Coronavirus episodes. Just make sure you’re trying to work with your tenants as much as possible during this difficult time, just because even if you’re allowed to evict them, it might be hard to find a resident currently. So just work with them, help them out as much as you can.

So the last thing I want to talk about is just because you got these eviction changes and rent collections seem to be down year over year, rent growth is slowing down, people are unemployed, everyone just keep in mind that this is going to be temporary. We don’t know when, but eventually, the economy will recover, things will get back to normal and we hope, and we’ve got an article on our blog about this, it’s called, Will Apartments be Stronger in the Post Coronavirus World? Ideally, apartments are going to be stronger after all this is over and we come out of this pandemic, recession, whatever you want to call it.

So overall, rent collections have been slightly affected, but it’s nothing too concerning as of now. Obviously, these are just average numbers. So some places aren’t affected at all, other places are affected a lot worse, but on average, these rent collections have been slightly affected. I should’ve just said on average a little bit earlier. So just be sure that you’re staying up to date on your state’s eviction laws, foreclosure laws, really any changes in laws to the Coronavirus pandemic, and then think of practically how that’s gonna affect rent collections come June, July, August, etc.

So that’s an update on the rent collections. Again, just to go over the data one more time, these are all percentages of rent payments made by the 6th of the month. So April 2019, it was 82.3%, May 2019 was 81.7%., April 2020 was 78%, May 2020 was 80.2%. So year over year, April was down about 5%, May was down about a little under 2%, but looking at the 2020 data, the rent collection in May was higher than it was in April. So we saw a bump, again, due to stimulus checks, but it’s still a good thing to see from a landlord, from a property management company, from a apartment syndication perspective.

If you want that data, it’s from the National Multifamily Housing Council. So you can find June data for there as well. And depending on how June goes and depending on if the Coronavirus is still top of mind topic, we’ll do another episode talking about the June 2019 and June 2020 rent collection data by the 6th of the month here in the next few weeks.

So a little shorter episode, but that could give you time to check out some of our other Syndication School episodes available at syndicationschool.com. We’ve also got our free documents there as well. Thank you for listening, have a best ever day and I’ll talk to you 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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JF2094: Everything You Need To Know About Waterfalls | Syndication School with Theo Hicks

In today’s episode, Theo will be sharing the ins and outs of waterfall structures. Waterfalls are also known as a waterfall model or structure, is a legal term used in an Operating Agreement that describes how money is paid, when it is paid, and to whom it is paid in commercial real estate equity investments.

Click here for more info on groundbreaker.co

To listen to other Syndication School series about the “How To’s” of apartment syndications and to download your FREE document, visit SyndicationSchool.com. Thank you for listening and I will talk to you tomorrow. 


TRANSCRIPTION

Joe Fairless: There needed to be a resource on apartment syndication that not only talked about each aspect of the syndication process, but how to actually do each of the things, and go into it in detail… And we thought “Hey, why not make it free, too?” That’s why we launched Syndication School.

Theo Hicks will go through a particular aspect of apartment syndication on today’s episode, and get into the details of how to do that particular thing. Enjoy this episode, and for more on apartment syndication and how to do things, go to apartmentsyndication.com, or to learn more about the Apartment Syndication School, go to syndicationschool.com, so you can listen to all the previous episodes.

 

Theo Hicks: Hi, Best Ever listeners. Welcome to another episode of The Syndication School series, a free resource on the how-to’s of apartment syndication. As always, I am your host Theo Hicks. Each week, we air two podcast episodes that focus on a specific aspect of the apartment syndication investment strategy, and for a lot of these episodes, we offer free resources as well. These are PDF how-to guides, PowerPoint presentation templates, Excel calculator templates, some free document to help you along your apartment syndication journey. All these free documents, as well as the past Syndication School series can be found at syndicationschool.com.

Today we are going to be talking about waterfalls. So a waterfall describes how, when and to whom funds are paid in an apartment syndication deal, and then the type of waterfall structure that you as the syndicator chooses will determine the returns that the limited partners and the general partners receive. Ultimately, you get to decide which type of passive investor compensation structure to choose, and if you remember, we’ve already done an episode where we talked about the different types of compensation structures, preferred return, profit splits, different types of thresholds. So I’m not going to go into a lot of detail in this episode on what those are. This is more going to explain what the waterfall structure is for each of those structures; and the waterfall structure, as I’ve already mentioned, describes how, when and to whom funds are paid in a partner syndication deal, but what it means is that money comes in and how is that money allocated. Who gets paid first and who gets paid second, who gets paid third, who gets paid fourth, and then each of those people, how much do they get, and how’s that cash flow going to be allocated. The same thing for any capital transaction like a sale, a supplemental loan or a refinance. So the waterfall structure will let your limited partners or passive investors understand 1) how much money they’re going to make, and 2) who gets paid in what order.

So in this episode, we’re going to go over the written description of the waterfall. So cash flow comes in based off of what structure you’ve created, who gets paid first and in what order. So we’ve got five waterfall structures to go over, and the last one is one that you might not have heard of before; it’s one that I’ve recently heard about. I know it’s a pretty common structure in apartment syndications, but I personally hadn’t heard of it before. So it’s a structure that you might like because it allows you, as a general partner, to get paid cash flow first, without having to wait for the profit split to come into play, or it allows you to have a payment accrue if you don’t receive payment because you can only cover the 8% preferred return, or whatever. So let’s dive into the explanation of the different waterfall structures.

So the first one would be if you have 8% preferred return only. So the waterfall for the cash flow is that the cash flow is distributed to the Class A partner, which is the passive investor, until they receive an annualized return of 8% based on their initial capital contribution. Of course, if you decide to update their preferred return based off of their ongoing capital account, then this would change a little bit. So to start off, being based off of their initial capital contribution, and then after year one, it would change and update based off of their new capital account if they received equity back via profit splits and things like that or with refinances, and then any remaining cash flow is distributed to the Class B general partners. So since this is only preferred return, the Class A partners made their 8%, and then the general partners get the rest of the cash.

Now what about a waterfall for the capital transaction, which is a sale supplemental or a refinance. So first, repay the unreturned capital contributions of the Class A investors, which since this is a preferred return, they’re not receiving an additional profit split, which is considered a return of capital typically. Then they are owed their entire initial equity investment.

Next, make up arrearages in Class A preferred returns, if applicable. So if you were not able to hit an 8% preferred return, then at the capital transaction, that is where that accrued amount is paid back. And then after that, any remaining cash flow is distributed to the Class B general partners; so you’ve got pretty straightforward structure. Preferred return only is what Ashcroft has for the Class A investors, and then this next one, waterfall two, is what they have for their Class B investors, which is a preferred return and a profit split.

So of course, you could see a deal where it’s just a preferred return, which is pretty advantageous to the general partners. So maybe not something that would be common right now, just because there’s not so much money out there, but in the future, who knows, maybe this is something that you can convert to, because this is definitely very beneficial to the general partners, because once they pay the 8%, they get the rest of the money.

So waterfall structure number two is a preferred return plus a profit split. First, you’re going to just– for simple math, we’re gonna go with 8% preferred return, and then a 70-30 profits split. So for the cash flow, first, cash flow is distributed to the Class A, the passive investors until they receive an annualized return of 8% based on their initial capital contribution or on their capital account, depending again on which way you decide to go, and then any remaining cash flow is split 70-30 with 70% pay to Class A passive investors and 30% paid to Class B general partners. So again, very simple.

Now what about a capital transaction? So first, unreturned capital contributions is paid to Class A, and so this is going to be either the initial equity investment; if the 8% preferred return or less was hit, or the reduced equity investment amount based on capital return from that profit split. And if it’s a second capital transaction – let’s say if we’re going to refinance, that would be the reduced equity amount based on the return on capital from the profit split and the finance or the supplemental loan. So equity gets returned first, second arrearages in Class A preferred returns, if applicable, again. So if 8% preferred return isn’t hit, then the accrued amount is paid back after the equity is returned, and then any remaining cash flow is split 70-30, with, as I mentioned, 70% going to the Class A and 70% going to Class B.

So if you remember, we have a simplified cash flow calculator available on the syndication school website, so syndicationschool.com. Or if you find the syndication school episodes about underwriting, just go to joefairless.com, search “underwriting” at the top, you’ll see that come up. We have a link to download the free simplified cash flow calculator, and on that cash flow calculator, this preferred return plus profit split is what is currently set up on that cash flow calculator. So once you input the preferred return and the profit split number, then it’ll automatically calculate returns to your Class A investors based off of this waterfall I just described. So you don’t need to do anything to that cash flow calculator if this is the type of waterfall structure you are doing. Obviously, if you’re doing any of the other ones, then you’re going to need to make some updates to that model, with the easiest update being the waterfall number one, which is just a preferred return. So the other ones are a little more complicated, like the next one, which is waterfall number three, which is a preferred return plus a profit splits with a return hurdle. So the waterfall for the cash flow is going to be the exact same as the waterfall for the previous waterfall we discussed, which is the preferred return plus profit split, because the hurdle’s typically not going to come into play until a capital transaction, most likely the sale being that capital transaction. So just as a reminder, for cash flow, first, cash flow is distributed to the Class A passive investors until they receive an annualized return of 8% based on their initial capital contribution or their capital account, and then any remaining cash flow is split 70-30, with 70% going to Class A and 30% going to Class B general partners.

The capital transaction is where it’s a little bit different. So obviously, unreturned equity is paid back to the Class A investors first. Next, any arrearages in the preferred return to Class A, and then cash flow is split 70-30 with a 70% paid to Class A and 30% paid to Class B up to a certain return hurdle. So a very common return hurdle is the IRR, the internal rate of return hurdle, and the internal rate of return isn’t going to be a positive number until they receive all their money back anyways, which typically, is not going to happen until sale. So that’s why you’re typically not going to hit your hurdle from ongoing cash flow unless you’ve had a really large refinance where they received 90% of their money back, and then maybe at year four, they received enough cash flow so that they’ve received all of their capital back, and then maybe ongoing cash flows change. But typically, it’s not going to happen until sale.

So it’s a split of 70-30 up to, say, 13% internal rate of return, and then once that 13% internal rate of return is hit, the remaining cash is split 50-50 between the Class A and Class B. Of course, there can be more than one hurdle. It could be 70-30 up to 13%, and then 60-40 up to 15% IRR, and then 50-50 thereafter. It could be really any combination of these things, whatever you decide to do. As I mentioned, this is something that is not on the simplified cash flow calculator. If you’re going to want to set up a hurdle, you’re going to need to download a hurdle Excel calculator; I’m sure you can find one for free online; or you can do more of an iterative process where you keep changing the sales proceeds to the limited partners such that the IRR equals 13%, and then after that, you can change that remaining number to 50-50. That’s probably the fastest and the easiest way to do it, but if you do want to update the simplified cash flow calculator to do it for you automatically, it is possible; it’s just some pretty complicated formulas.

Okay, waterfall number four, which is having two passive investor tiers. So this would be if you have, let’s say, Class A receives a preferred return only and then Class B receives a preferred return plus a profit split. So the waterfall for the cash flow would be cash flow is first distributed to Class A until they receive their annualized preferred return based on their initial capital contribution. So let’s go with 10%. So the money is first paid to the Class A until they achieve an annualized return of 10%, and then next, the cash flow goes to the Class B until they receive an annualized return of, let’s say, 7% based on their initial capital contribution, and these 10% for Class A and 7% for Class B is what Ashcroft currently does. That’s why I’m using those as an example. And then any remaining cash flow after that is split 70-30 or whatever, 50-50, 60-40, whatever you decide, with the 70% going to Class B. So Class B are the ones that get the profit split, not Class A; and then 30% going to Class C which, in this case, would be the general partners.

Now. the waterfall for the capital transaction would be repaying the unreturned capital contribution to Class A first. So Class A gets paid before Class B. And since Class A isn’t receiving a profit split, then their capital account isn’t reduced, unless there’s been some refinance or supplemental loan, next you repay the unreturned capital contributions to Class B investors, and this is going to be, again, like I said before, their initial capital contribution or their capital account based off of profit splits received, or refinances, things like that.

Next, make up arrearages in Class A preferred return, and then make up arrearages in Class B preferred returns, if applicable for both of those. Generally speaking, at least for Ashcroft’s deals, the Class A is going to get their 10% because they make up 25% of the actual investors, and so the deal itself doesn’t need to cash flow 10%. If they only make up 25% it needs to cash flow around 2.5%. to hit that 10% number on a deal level. But sometimes, the Class B investors might not make their entire 7% preferred return. So if that’s the case, then at the capital transaction that accrued amount will get paid. Then any remaining cash flow from a capital transaction is split 70-30, with 70% paid to Class B and 30% paid to Class C. Of course, for this same structure, we could add a hurdle as well, so that 70-30 split might be up to a certain IRR to class B, and then that profit split changes to a 50-50 or 60-40.

The last waterfall structure– so this is what I was talking about in the beginning, which is more beneficial to the general partners, because long term, I’d probably say, waterfall structure number one is the best, just because once they hit that 8% preferred return to their investors, they get the rest of the money.

Waterfall number five is a general partner catch up. So this is a waterfall structure where you are able to start receiving distributions starting from day one or start accruing distributions starting from day one.

So for the cash flow first, cash flow is distributed to Class A until they receive their annualized preferred return amount based on their initial capital contribution – so let’s go with 8% – and then cash flow is next, distributed to Class B general partners until they receive an annualized return of 3.43%, and this is gonna be based off of the Class A initial contribution. Now this 3.43% is based off of the profit split. So the profit split is 70-30 overall, and the Class A investors are getting an 8%. So that 8% to 70% is the same as 3.43% is to 30%. So it’s like an algebra equation where it’s 70 over 30 equals 8 over x, and when you solve for x equals 3.43%. So it’s just keeping the ratio of profit splits the same and applying that to the preferred return.

So the preferred return to Class A is 8%, to Class B general partners is 3.43%, and then any money remaining is split 70-30, with 70% going to Class A and 30% going to Class B. Then the capital transaction, again, is gonna be very similar to the previous one, which is the two tiers. It’s similar in all of these. So first is unreturned capital contributions to Class A, so equity is returned first, and then arrearages in Class A preferred returns is paid, arrearages in Class B preferred returns. So that’s it for the general partner. So the 3.43% preferred return accrues as well. This is why this is a beneficial structure for the general partners. And then any remaining cash flow is split 70-30, with 70% going to Class A and 30% going to Class B.

Now the entire point of this episode was to give you an explanation of what is happening on a simplified cash flow calculator, or really any cash flow calculator that you’re looking at, any underwriting model you’re looking at. When you plug in all these numbers and it spits out a five year ROI to your limited partners, and it spits out cash flow that goes to the general partners. And it’s great to see that and share that to your investors, but it’s also good to understand exactly how that is being calculated, and how that’s being calculated is the cash flow calculator is saying, “Okay, we’ve got $100,000 in cash flow. The first 8% goes to the limited partners, so $80,000, and then $20,000 is split 50-50 to Class A and Class B. So for that first year, Class A receives $80,000 in preferred return plus $10,000, in profit split, and then the general partners receive that last $10,000.

So that’s where that $90,000 and $10,000 is coming from. So it’s much better to understand that, and if you look into the formulas, you’ll be able to see that, but here’s just a written explanation of what those formulas are actually doing. So this gives you a better understanding of what’s going on on those cash flow models, so that if an investor asks you about it, you can answer and let them know exactly what the waterfall is.

So that’s really everything you need to know about the waterfall structure. As I mentioned on the simplified cash flow calculator, that waterfall structure number two, which is the 8% preferred return, and the 70-30 profit split is what’s currently set up on that model. If you want to do one or the other waterfall structures, you’re gonna have to do some manual manipulation. Really, all of them are pretty easy to do except for the hurdle, which takes a little bit of a more high-level grasp of Excel, which is why I prefer the iterative process, which is again, just changing the sales proceeds to the limited partners until they’ve hit that IRR hurdle. So let’s say $100,000 at sale, you send $30,000 to the LPs and see what the cash flow calculator calculates as the IRR. Oh, it’s at 10% IRR. Okay, let’s try $40,000, so now it’s up 15%. So you can keep going higher, lower, higher, lower, higher, lower, higher, lower until you hit that sweet spot of $35,275.16 that is exactly a 30% IRR, and then you know that the remaining cash flow above that will be split 50-50.

So okay, that concludes this episode. Thank you all for listening. If you want to listen to other syndication school episodes and check out some of the free documents we have available, that is all available at syndicationschool.com. Thank you all for listening and I will talk to you 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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JF2088: Pros and Cons of Securing A Supplemental Loan | Syndication School with Theo Hicks

In this Syndication School episode, Theo Hicks, will be going over the pros and cons of securing a supplemental loan. These episodes are to help you become a better syndicator so we hope you enjoy the help and let us know by sending us a message. 

 

To listen to other Syndication School series about the “How To’s” of apartment syndications and to download your FREE document, visit SyndicationSchool.com. Thank you for listening and I will talk to you tomorrow.

Click here for more info on groundbreaker.co


TRANSCRIPTION

Joe Fairless: There needed to be a resource on apartment syndication that not only talked about each aspect of the syndication process, but how to actually do each of the things, and go into it in detail… And we thought “Hey, why not make it free, too?” That’s why we launched Syndication School.

Theo Hicks will go through a particular aspect of apartment syndication on today’s episode, and get into the details of how to do that particular thing. Enjoy this episode, and for more on apartment syndication and how to do things, go to apartmentsyndication.com, or to learn more about the Apartment Syndication School, go to syndicationschool.com, so you can listen to all the previous episodes.

 

Theo Hicks: Hi Best Ever listeners, welcome to another episode of the Syndication School series, a free resource focused on the how-tos of apartment syndication. As always, I am your host, Theo Hicks. Each week we air two Syndication School episodes that focus on a specific aspect of the apartment syndication investment strategy, and for most of these episodes, we offer a free resource to you. These are free PDF how-to guides, free PowerPoint presentation templates or free Excel calculator templates, some free resource to help you along your apartment syndication journey. So all of the past free documents as well as past Syndication School series episodes can be found at syndicationschool.com.

In this episode, we are going to talk about the pros and cons of securing a supplemental loan. So on a previous Syndication School episode, I had gone over how to actually secure a supplemental loan, but I didn’t go into the pros and cons. I briefly mentioned how it’s different than a refinance, but I wanted to do another episode that went in depth into the pros and cons of securing a supplemental loan compared to, say, a refinance or a sale, because the supplemental loan falls into the category of when the passive investors in your deals receive a large chunk of capital back or a large chunk of money back. Obviously, one of those is the supplemental loan, another one is a refinance, another one is when you sale. So if passive investors receive all or a large portion of their equity back at sale, at a refinance and/or at securing of a supplemental loan. So in this episode, I wanted to just highlight what a supplemental loan is again, go over the pros and cons of the supplemental loan and then also briefly talk about why Joe and Ashcroft prefer to secure supplemental loans.

So first, what is a supplemental loan? It is a type of loan that is subordinate to the senior indebtedness. So it’s the fancy definition of a supplemental loan, but basically what it means is that the senior debt, which is the original debt used to acquire the apartment community, so the agency loan that was put in the property, that is the senior debt, and that must be paid first by the general partners.

The supplemental loan is a separate loan that is obtained, and then it is paid after the senior debt is paid. So year one, you pay your monthly debt service for the agency loan, and let’s say you secure a supplemental loan at the end of year one – you’ve got a new loan now. So the way that it works is you pay the same debt service you paid before first, and then the next portion of the cash flow goes towards paying the debt service on the new supplemental loan.

Now, a supplemental loan is only available if the original debt is a agency loan, so Fannie Mae or Freddie Mac. Those are the two that offer the supplemental loans. You’re not going to be able to get a supplemental loan on any other loan but those two. That doesn’t mean that you can’t take out equity in different ways, but the actual word supplemental loan only applies to agency loans, and it can be secured at 12 months after the origination of that original loan or the most recent supplemental loan.

You can’t get your first supplemental loan until after 12 months, and then you can’t get another supplemental loan if available for another 12 months after that, so 24 months after the first loan, and then supplemental loans are not the same as a refinance because a refinance is replacing the original debt with a new loan. So that agency loan is paid off entirely and then a new loan is put on the property for a refinance. Whereas for a supplemental loan, the original agency loan is still in place and an additional supplemental loan is also put in place. So there’s two loans, as opposed just one.

So let’s go over the pros. So there’s five benefits of getting a supplemental loan. The first is that it converts the equity created in the property to cash that can be distributed or used for further capital improvements. So the entire purpose of a supplemental loan or refinancing or selling is to access the equity that is created, and supplemental loans is one of the ways to do that. So you buy a property, you increase its value, and one of the ways to tap into that value without having to sell or get a brand new loan is to do a supplemental loan.

Another benefit of this supplemental loan is that it closes quicker and has less risk than a refinance.  So now we’re going into why the supplemental loan might be a better option than refinancing. So first, supplemental loans require less due diligence and underwriting than the refinance. So for a typical supplemental loan, the lender is gonna order an appraisal, a physical needs assessment, which is a property condition assessment or inspection, as well as reviewing the previous 12 months of financials. Whereas with a refinance, the same is required, but there’s also additional full underwriting of the sponsor and more due diligence required. So basically the same due diligence you did when you initially acquired the property will be done again by the new lender, but since you’re getting a supplemental loan through the same lender, all that has been done. They just need to make sure that nothing has changed during the first 12 months. So obviously, it’s faster because you have to do less due diligence, and there’s also a little bit less risk, because you’re not necessarily guaranteed to get that refinance, whereas you’re more likely to get the supplemental loan again because you’re getting it through the same lender that you’ve got your first loan. So that’s number two.

Number three is that supplemental loans are also less expensive. So since they’re faster and they require less due diligence, they’re also going to be less expensive, with lower closing costs compared to the refinance. Number four, the increased LTV that comes from a supplemental loan helps make assumable debt more attractive to a buyer. So what does that mean? So securing a supplemental loan increases the loan to value on the property, and the loan to value being — an 80% loan to value means that the bank hold 80% of the property value as debt, and then you have 20% in equity. So normally, agency loans are more stringent on their LTV requirements, and are capped at around 70% at origination, which means that they will lend up to 70% of the purchase price, and then you, as the general partner needs to put down the remaining 30%. And then as you implement your value-add business plan, you increase the value of the property. And when you increase the value of the property and the loan amount stays the same, then the LTV actually is reduced. So let’s say you buy a property for a million dollars, you put down $300,000 and the bank puts down $700,000. Let’s say you double the price of the property to $2 million. So the value of that property is $2 million, but the debt is only $700,000. So the LTV was originally 70%. Now it’s cut in half to 35%, and it’s calculated by taking that $700,000 divided by that $2 million number.

So now you’ve got the 35% LTV. Now generally suppplemental loans allow for up to 75% LTV. So going back to our $2 million example, now that the property is worth $2 million, the bank is willing to lend up to $1.5 million. So since they originally loaned $700,000, they loan you $1.5 million. The difference between the two is $800,000. So you could technically secure a supplemental loan for $800,000 and have an LTV of 75% as opposed to the 70% LTV at purchase. This allows you to increase the leverage. So now you’ve got 75% leverage as opposed to 70% leverage, which allows you to pull out more equity, but it also allows a potential buyer to assume the senior and supplemental loan with less money down. So as opposed to having to put down 30%, they can put down 25%. So the higher the LTV, the less money a buyer who’s going to assume that debt has to put down to obviously buy you out of the deal.

So if you’ve got 40% equity in the deal and  a 60% LTV, then they’re going to have give you 40% to buy the deal from you they assume the 60% loan. But if it’s 75%, then they need to put down 25% and buy you out and assume that 75% LTV loan. So overall, higher LTV makes an assumable debt more attractive to a buyer, and that’s accomplished by doing the supplemental loan, because it allows you to push up that LTV from 70% to 75%.

Then the fifth benefit is the ability to secure multiple supplemental loans. So I mentioned this a little bit earlier – so I get my first loan on May 13, 2020 from Fannie Mae, and I can get my first supplemental loan on May 14, 2021. So 12 months after the first loan. Now, Fannie Mae limits the supplemental loans to one, unless the loan is assumed, and then the person who assumed that loan gets another supplemental loan; so they can get their one supplemental loan as well. But for Freddie Mac, they allow unlimited supplemental loans as long as the most recent supplemental loan was secured 12 months or more before.

So I buy my property and I close and I get my debt on May 13, 2020 through Freddie Mac. I can get my first supplemental loan on May 14, 2021. I can get my second supplemental loan on May 14, 2022, or later, and I can keep repeating that process over and over again as long as obviously the LTV requirements are met. So those are the five benefits.

What about some cons of the supplemental loan? Obviously, it increases the debt service. So since you are taking out more debt, then the debt service, the monthly mortgage payments on the property increases. However, this is going to be the same case for refinance as well obviously. So it’s not just if you do supplemental loan, it goes up or if you do refinance, it doesn’t. Additionally, since these are amortizing loans versus interest only, monthly payments tend to be a little bit higher, even at lower interest rates. So there’s not gonna be an interest-only supplemental loan. You’re gonna have to pay principal and interest, so it’s gonna be a little bit higher compared to an interest-only refinance type of situation.

Another potential con is they’re only available through the agencies. So you can only get your supplemental loan if you’ve got Fannie Mae or Freddie Mac debt on your property. So only having two lenders available limits your ability to have lenders bid against each other to offer the best terms, but because both lenders are government-backed entities, rates are already generally going to be lower than private lenders. So it’s not that big of a deal, but the con here is that unless you have a Fannie Mae or Freddie Mac loan, you’re not gonna be able to secure a supplemental loan.

Number three is there’s limited flexibility with exit strategies. So agency loans are ultimately sold to investors as bonds. So they’re securitized and then sold to investors as bonds. So because of this, it adds a hurdle to the exit of the property. So a loan assumption [unintelligible [00:15:42].16] that the terms of the existing loan are better than market at the time of sale, so this is not gonna be a problem. So if your loan has a lower interest rate than the market interest rate at the time of sale, then it should be fine. But if the market rates are lower at the time of sale, a defeasance fee is going to be required to sell the property free and clear, which is a type of prepayment penalty, and this fee is typically paid by the seller. So if you want more information on defeasance and yield maintenance and prepayment penalties, check out everything you need to know about prepayment penalties on Syndication School. What it’s saying is that, sure, your loan can be assumed by a buyer, but if you need to actually sell the property free and clear and get out of that loan, you’re most likely going to need to pay a prepayment penalty, especially if you secure a supplemental loan.

Then number four is that interest rates can be higher. So the spread on floating rate supplemental loans tends to be higher than the spread on the same type of loan on the senior debt, making the supplemental loan’s interest rate higher. For fixed rates, senior and supplemental loans, the rate fluctuates with the market at time of origination. So compared to refinancing, you’re probably gonna have a higher interest rate. So these are the four cons.

Now why does Ashcroft Capital secure supplemental loans? Well, because they’re great tools for deals that have long term agency financing on them, because it allows Ashcroft and Ashcroft’s investors to get rewarded for executing the business plan by adding value to the property. So as I mentioned, typically agency loans are more stringent on their loan to value requirements, compared to private bridge types of financing. Those are normally capped at around 70%. But as Ashcroft continues the business plan and the overall value of the property increases, that LTV shrinks below the original 70%. I’ve already given an example of that by saying if you buy a property for $1 million at a 70% LTV and increase the value to $2 million, that LTV is now 45%; and since you can get a supplemental loan at 75%, that creates an opportunity to obtain a large amount of money back for investors.  So those are the pros and cons of supplemental loan. That is what a supplemental loan is, and that is why Ashcroft Capital prefers to secure supplemental loans.

That concludes this episode about the pros and cons of securing a supplemental loan. Until next week, make sure you check out some of the other Syndication School series about the how-to’s of apartment syndications. Make sure you check out some of the free documents we have available on there. All that is at syndicationschool.com. Thank you for listening and I will talk to you 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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JF2083: Understanding Loans With Christine DePaepe

Christine is a renovation loan division manager VP of mortgage lending at Guaranteed Rate INC. She has been actively involved in the mortgage industry since 1996 and her goal is to help those who may not have a large sum of money to invest in properties themselves without some additional funding. She shares her wealth of knowledge around the different types of loans available for many investors.

 

Christine DePaepe  Real Estate Background:

  • Renovation Loan Division Manager VP of Mortgage Lending at Guaranteed Rate INC.
  • From Chicago, Illinois 
  • Actively involved in the mortgage industry since 1996
  • Over the course of a 20+ year career has originated: Conventional, Fannie Mae Homestyle Renovation, FHA, FHA 203k, VA and VA renovation, commercial, Jumbo, new construction and Jumbo renovation. 
  • Noted by the Scotsman Guide in the top 20 FHA Volume Originators for 4 years consecutively
  • Guaranteed rate presidents club member for 7 years consecutively 
  • Say hi to her at: www.rate.com   

Click here for more info on groundbreaker.co

Best Ever Tweet:

“I love the 203k program for people buying in areas that are up and coming because it has the lowest down payment” – Christine DePaepe


TRANSCRIPTION

Theo Hicks: Hello, Best Ever listeners, and welcome to the best real estate investing advice ever show. I’m Theo Hicks today, and today we’ll be speaking with Christine DePaepe. Christine, how are you doing today?

Christine DePaepe: Great. Thanks for having me.

Theo Hicks: Absolutely, thanks for joining us. I’m looking forward to talking about mortgages today. She is the renovation loan division manager, VP of mortgage lending at Guaranteed Rate, from Chicago, Illinois. She’s been actively involved in the mortgage industry since 1996, and over the course of her 20+ year career she has originated all types of loans – conventional Fannie May HomeStyle Renovation, FHA, FHA 203(k), VA, VA Renovation, commercial, jumbo, new construction and jumbo renovation.

She has been noted by the Scotsman Guide in the top 20 FHA volume originators for four years consecutively, as well as a member of Guaranteed Rates President Club for seven years in a row. You can learn more about her at rate.com/christinedepaepe. We’ll have a link to that in the show notes.

Christine, do you mind giving us a little bit more about your background and what you’re focused on today?

Christine DePaepe: Yeah, thanks for asking. Really, today we focus on a lot of renovation, new construction, helping buyers get into properties with a little bit lower down payment for investing… And by doing that, we’re trying to help people that don’t have as much capital as some of the major investors get into properties and start their portfolio.

Theo Hicks: I’m familiar with the 203(k) renovation loans on the residential properties… What types of opportunities are there for the 5+ properties when it comes to getting a renovation loan?

Christine DePaepe: On the 5+ properties – I refer those out to my partner and we can do up to 30 units. So if you’re buying commercial property, they will be able to help renovate the individual units… So we have to look at the total of purchase price plus what they’re looking for on the renovations to come together with “Will it work?”, future value… There’s a lot that goes into it, but we can do up to 30 units.

It’s private money, so it’s gonna be a lot different than the FHA loan or the HomeStyle Renovation loan, but we will definitely have an outlet for any of the listeners who have questions on that.

Theo Hicks: Okay, so you specialize in the residential renovation loans.

Christine DePaepe: Right, I specialize in the residential. What we’re trying to do is obviously help investors who want to buy properties. We have it available for long-term holds… Or we kind of use our FHA programs. Those are owner-occupied, but the caveat is that FHA only requires you to live in them one year. So what we’re seeing is by educating the buyers they can get into a four-unit property with 3,5% down, which is very low for four units, as long as they live there for a year. After they lived there for a year, they’re not required to stay in the property. They can then rent out the unit they lived in and have a cash-flowing property.

And again, with 3,5% down, it opens up a lot to people who otherwise would not be able to do this. Because on your conventional 4-unit, you’re looking at 20% to 25% down, and most buyers don’t have that, who are trying to start their portfolio.

Theo Hicks: So if I do a FHA 203(k) loan on a property, I live in it for a year, I move out and I wanna use it as a rental property… If I wanna do another 203(k) FHA owner-occupied loan, can I just do that, without doing anything to my existing loan, or is there something I need to do first before going to do a new one?

Christine DePaepe: FHA only allows you to have one FHA loan in your lifetime, unless there’s expanding family or a job transfer. So you can’t continue to use the program like that. I have had in the past — if there’s an equity pick-up over a couple years, they can refinance into a conventional program, and then let’s say a couple years later they wanna try to do an FHA again; that is allowed. But it’s not gonna  be consistently allowed, in terms of just keep churning.

More so, if you wanna do another property, you’d have to do a different program, probably conventional, but that requires a higher down payment.

Theo Hicks: Is there a rule of thumb of how many times you can rinse and repeat the FHA loan? Is it 2, is it 3?

Christine DePaepe: Well, FHA only allows one FHA loan as a client. So as a borrower, you can only have one encumbered FHA loan. So really for the investment, if you’re buying it and you’re living there for a year, you can only do that once with the FHA program… Because it’s such a low down payment, it’s 3,5% down, so they  don’t allow multiple churns, meaning you can’t keep doing it every year. You can do one to start, and then if you want to do another property, with a renovation program you’d have to do a conventional, and that requires a larger down payment. So we would talk with the clients to see if it would fit their needs, if they wanted to do another one, but it would be a larger down payment.

Theo Hicks: Okay, so just to confirm – I can do one; even if I refinance my existing FHA loan into a conventional loan, I still can’t do another one. I have to go conventional.

Christine DePaepe: No, if we are able to do that, then yes, you can. As long as you are out of the FHA loan, which I have done for clients – I got them into a conventional – and then they’ve used the FHA program again. If we get you out of the FHA loan, then you can go ahead and do another one. That is correct.

Theo Hicks: Okay, so you can have one FHA loan at a time, basically.

Christine DePaepe: Correct, yes.

Theo Hicks: Okay. So if you get an FHA loan and you refinance that property or you sell that property and you get rid of that FHA, then you can technically do that.

Christine DePaepe: Then  you can do another one, correct.

Theo Hicks: Okay.

Christine DePaepe: And on the FHA 203(k), they also allow for mixed-use, which is very unique, because most mixed-use is considered commercial. So when I say mixed-use, I’m not talking anything greater than four units, I’m talking four units or under. So if you have a store front that houses an insurance office, and then you have 2 or 3 residences above, as long as you’re buying the property and you live there for a year, then you can put 3,5% down on that mixed-use property, which is very low for a mixed-use property.

You need to live there a year — you can either do move-in ready. If the property doesn’t need work, that’s fine; we can still use it on my FHA program at 3,5% down. But if  the residences above need updating, you can use our renovation money only on the residential units, to fix them up and gain more rental cashflow… And you need to live there a year. And again, after a year you can move out, and then you have a cash-flowing property.

So the key is just trying to help people who are willing to move into a property for a year, with a super-low down payment, start to build their portfolio of property.

Theo Hicks: Yeah, this is exactly how I got into investing. I didn’t do the 203(k) loan because I didn’t know about it at the time, so I paid for renovations out of pocket… But I did do the FHA loan 3.5% down, and got into a duplex, lived there for a year and then ended up selling the property.

So what are the major differences, besides obviously the renovation aspect of it, between the standard FHA loan and the 203(k) loan? Is it just doing renovations, I get the 203(k) loan, and if I’m not I’m doing FHA? Are there any differences in the rates, amortization, anything like that?

Christine DePaepe: So the FHA regular is for single-family, up to four units, as well as the mixed-use. They don’t do investment properties, second homes, or anything like that. It’s only primary residence. And there is a difference in the rate on the construction, which is the 203(k), because of the risk, there is gonna be about a 1% difference. So if the current FHA rate is at 3% on a move-in ready property, we’re probably at 4% on construction. And again, it’s just due to the inherent risk of construction. They have a building. But when it’s done, we can always do the Streamlined FHA Refi, and we can get a lower rate and payment if the market indicates that, at the market rate at the time the construction is done.

Theo Hicks: Okay. And another question I had is something that I’ve always been confused about, so maybe you can clear this up… PMI. If I get an FHA loan, will I have PMI forever, or will it eventually go away?

Christine DePaepe: That’s a great question. FHA changed their guideline on that. I don’t know the exact year or month, but it was in the past couple years. FHA — now PMI will never go away, unless you put 10% down. Now, remember, the minimum requirement is only 3,5%, and that’s what most people are doing. But in the cases where someone’s like “Well, I wanna put 10% down”, PMI stays on the property for 11 years, and then it’s automatically canceled. But if you do not put 10% down, it’s on forever, and that’s not a good thing. So those are definitely loans that we’re always reviewing 2-3 years out, to see if they’ve picked up enough equity to get them out of an FHA loan, to get rid of the PMI… Because it is on for the life of the loan.

That’s only new in the past couple of years. Prior to that, the PMI always fell off around year 11, automatically. So that is definitely a change in the FHA program.

Theo Hicks: So even if I put 3.5% down and then in 11 years I have 10% equity, I still have to pay the PMI.

Christine DePaepe: That’s correct. And PMI falls off with 20% equity on conventional loans, and they used to on FHA. But FHA now has it for the life of the loan.

Theo Hicks: Okay. So for a typical client who does an FHA loan, lives in it for a year, keeps it, rents it out, what’s the next loan that you recommend giving them? And then let’s do two scenarios. One where it’s gonna be a more turnkey property, and then one where it’s gonna be a property that requires renovations. And we’ll keep it 1 to 4 and mixed-use.

Christine DePaepe: Normally, if you’re gonna use FHA and you wanna do a long-term hold, I recommend doing the 3 or 4-unit. You wanna get the most property you can. After that, if we can’t refinance them out, which normally we can’t that soon – it’s not gonna have enough equity to go into a conventional loan – I would say most of my clients then had a two-unit conventional program, because on the two-unit conventional you can put down 15%… And that’s either for move-in ready, or renovation. So that would be the next step. They don’t normally go back to a three or four, because it steps up to 20%-25% down, and that can be a little bit too much… But some people are willing to do the two-unit, and that’s a 15% down.

Theo Hicks: And then for that, since it’s conventional, you said the PMI will fall off after 20%.

Christine DePaepe: Yeah, on the conventional — so if you go into that at 15% and have MI, the PMI will go away. I think it’s a minimum of five years, and then you just put in for the PMI to be eliminated.

Theo Hicks: So we order an appraisal to determine the value of the property at that point?

Christine DePaepe: No, if they’re on a very low rate and they don’t  wanna refinance, they call the servicer direct and say “Hey, I’d like to have my property reevaluated”, and the company will do a reevaluation to see if they can get rid of the PMI for them.

Theo Hicks: Okay, Christine, what is your best real estate investing advice ever?

Christine DePaepe: I evolved the 203(k) program for people buying in areas that are up and coming, because it has the lowest down payment, so it’s the least amount of cash out. I love that program for a buyer looking to move into something with a low down payment. When I meet with people, a lot of times they don’t have the capital, but they understand how important it is to invest in real estate… So we just educate them about the program and how buying in maybe an up and coming area you can gain a lot of equity.

They’re not for established high-end areas, because you’re trying to get into an area that is just up-and-coming with this low down payment… And FHA has lower loan limits, so we also have to watch that, depending on the area. Now, some areas have much higher loan limits, so we always have to go by the county. So that’s another thing I do wanna point out – the county dictates what we can do for each borrower; so when the borrowers call, because I’m licensed in 42 states, I first have to identify “Okay, what county are you looking in?” and then I help them understand the loan limits that they’re gonna be using, so they can buy their property. But if you were to say the best advice, I would say a four-unit or a three-unit and use the low down payment that’s available.

Theo Hicks: Alrighty. Are you ready for the Best Ever Lightning Round?

Christine DePaepe: Sure.

Theo Hicks: Alright. First, a quick word from our sponsor.

Break: [00:15:40].24] to [00:16:24].27]

Theo Hicks: Okay, what is the best ever book you’ve recently read?

Christine DePaepe: Best ever book I’ve recently read… You stuffed me on that one. Let me take a pass on that one. Let’s go to the next question.

Theo Hicks: How about best ever resource you use to stay up to date on your area of expertise?

Christine DePaepe: We just do a lot of internal training at my company. We have a lot of educational within our company, so I take a ton of training. Recently, I took a lot of VA training, because we have VA renovations, so I really needed to get in tune with that whole process. So just internal training. I’m always reading what’s going on and training myself, and I train other people… So it’s more about just I’m always reading what’s going on in the industry – what changes, what things are happening… Like we just talked about FHA – for years and years and years PMI went away, and then boom, FHA makes a change… So I have to keep up on that and the guidelines.

Theo Hicks: So I typically ask “If  your business were to collapse today, what would you do next?”, but I’m gonna change it up a little bit and say “If for some reason the FHA program just went away tomorrow, what would you do next?”

Christine DePaepe: I always try to stay with niche products. They have reverse mortgages out there, commercial, I love jumbo renovation… So I’m really in tune with everything different. I think there’s a lot of value when you understand just not the everyday mortgage. I do the everyday mortgage, but it’s really great to specialize in something; it just brings a lot of people to you, because of the specialty.

Theo Hicks: Okay. The next question – I’m gonna change it up a little bit, too. This may apply to you, but based on your experience, what’s the main mistake that investors make that result in their FHA or FHA 203(k) loan getting foreclosed on?

Christine DePaepe: That is a great question. What I see is when people call me they don’t even realize they shouldn’t do it. So one thing I look at is the total loan applications. Recently — I will give an example. A woman had never purchased a home, and she was (I would say) in her mid-50’s, and she was very honest; she was like “I don’t know what I’m doing, and I don’t have a lot of money.” So that right there concerned me, because she wanted to buy a four-unit major gut rehab; when I say that, we’re talking the property was maybe 150k and she was looking to do 250k worth of work… Without a lot of reserves, it’s a little nerve-wracking, because a reconstruction of that property is probably anywhere from 6 to 10 months… And we can only finance six payments. So my concern was she was gonna use every resource she had in her assets to put down on the property, and when the six months ran out, she would have to make this mortgage payment.

So after talking to her and explaining about that, she would have been a prime person that I think some loan officers maybe would not have really done the kind of diligence and education I did… And we both realized it wasn’t the right move. I’m like “This may not go well, and they will take your home. They definitely will foreclose if you can’t move forward with  your payments.”

So she bought a move-in ready where there’s no timeframe to not have your rent being paid. I think that’s the one thing on these four-units that people should understand. The first six months no one’s gonna live there on most of these rehabs. Now, some are just cosmetic, and we can get them done in 3-4 months, if they’re just gonna do kitchens and bathrooms… But some, they’re doing everything – new plumbing, new electric, kind of making it an effectively new home.

The cosmetic ones are easier, but gut rehabs – we’re definitely not in the home for six months. So it’s definitely important that they have a little bit of capital. The low down payment is great, but they should have a little bit of reserves. They require that on FHA, three months reserves. Then we try to roll in payments.

So where things can go wrong is when they don’t realize — they think, unfortunately, with HDTV and all these rehab shows, “I can do a whole rehab in 30 days”, and that’s a mistake. It’s not really reality.

Theo Hicks: What is the best ever way you like to give back?

Christine DePaepe: Oh, I love to give back to the community. We do a lot with Guaranteed Rate. We have a foundation and we give back to the community. We all contribute, we all help… I do a lot of work in my community as well. That’s just something I’ve always done. I definitely have a heart for kids, and we do a lot with women shelters and helping women with children that need to start over, so we give back in those ways.

Theo Hicks: And then lastly, what is the best ever place to reach you?

Christine DePaepe: Well, my office phone goes to my cell phone, because I don’t  ever like to miss a call. I basically work and I’m available every day, especially on weekends and nights… Because you’re seeing a trend in the workplace where people are more in open [unintelligible [00:20:55].03] environments and everybody can hear each other, so people don’t really like to talk when they’re at work, so I make it a point to always be available at nights and weekends, where they’re more comfortable talking about their finances.

I’m at 773-848-4144.

Theo Hicks: Well, Best Ever listeners, definitely take advantage of that. You said you cover 42 different states, so it’s most likely that she’s in the state that you’re at… So if you’re looking to get into real estate with the FHA or the FHA 203(k) loan, definitely take advantage of that.

Alright, Christine, great content. I really enjoyed our conversation. It’s bringing me back to when I was looking at my first property, it’s very nostalgic… Just to quickly go over what we’ve talked about – there are renovation loans for 5+ units. You will refer people to someone who works with units up to 30, and it’s private money, so it’s obviously gonna be a little bit different, but your focus is on the FHA loans.

The FHA loan – it’s gonna be owner-occupied; you have to live in there for one year. The major advantages is a 3.5% down payment, and a good strategy would be to buy it, live in it for a year, move out and then rent it out. If you’re capable at some point of refinancing it or selling the deal, then you can use the FHA loan again, but you’re only allowed to have one at a time.

Christine DePaepe: Well, we also have the HomeStyle, we haven’t touched on that a little bit… I did wanna bring that up, because our HomeStyle Renovation program is for long-term hold rental properties, and it’s for single-family/townhome/condo. We don’t do multi-units. But what we’re using that for are investors who buy a house and just wanna do some cosmetic updating to increase the rents, and they don’t wanna use their own funds. So that program is 20% down.

But if you’re buying a house for example for 300k and you just wanna update it to get a higher rental rate, you can get our money, 50k to 70k, to update it. Then they’re holding them to not pay capital gains for a couple years, and either they’ll flip them or they will repay them. But those are for investors. They don’t have to live there. It’s 20% down, but we’ll give them the money to do the renovations.

So if they’re buying for 300k, doing 75k of repair, we use that as a 375k start point, they give me 20%, and I give them back 75k to do the cosmetic updates. That’s been a great program as well for some of my actual true investors who do long-term holds.

Theo Hicks: Okay, and that’s the HomeStyle Renovation Loan.

Christine DePaepe: That’s correct. It’s also available for owner-occupied multi-units, but those have larger down payments. So I just fit the needs to whatever the buyer is trying to do. Basically, it’s a phone conversation to see what they’re trying to do, how is their credit… That’s another thing I work on. A lot of people do not have any idea how to help their credit scores, or what they’re doing wrong, or what’s affecting it… And we have a software that will help the indicated scores, if there’s something wrong that I can identify; it’s very easy for us to help get everyone ready to purchase, get their credit corrected etc. So I think it’s a totality of everything. You can be very good at mortgages, but it’s the whole package – reviewing the file, finding out their goals and strategies, reviewing the credit, what can we do to make their credit score better…

You want a 760 credit score, that’s really what you want nowadays. That gets  you the best rate and programs available… So that’s what everyone’s goal should be. Hopefully, everybody’s using Credit Karma, because that’s a  great app to monitor your score.

Theo Hicks: Perfect. We’ll make sure they get that Credit Karma to check that out as well. So we also talked about the major difference between the FHA and the 203(k) loan, besides obviously the renovation portion of it, is the 1%(ish) difference in the interest rate.

You also talked about PMI and how that has recently changed… And now the PMI will never go away, unless you put down 10% upfront for your FHA loan. After 11 years it will be canceled. Then after FHA, some of your options would be to get a conventional loan. You mentioned the two-unit conventional program that allows you to put down 15%, and that’s a move-in ready or a renovation loan. And I believe you said the PMI expires on that after five years… Correct?

Christine DePaepe: Yeah, on the 15% down that’s correct.

Theo Hicks: Okay. Then we talked about the processes. You call whoever’s servicing your loan and then ask them to have that property reevaluated to see if you’ve reached the equity limit.

Your best ever advice was to use the 203(k) loan program in an up-and-coming area, because it is the least amount of cash out of pocket. Then you talked about how there are gonna be some loan limits based on whatever county you lived in.

Then during the Lightning Round you talked about one of the biggest mistakes you see people make with these types of programs, that result in them either getting their property taken away, or if you stopped them, they would have gotten their property taken away… And that is them just falling into the HDTV trap of thinking that everything can be done in half an hour of their time.

You’ve also talked about the reserves that are needed, and you only give out six payments, and things like that. So again, Christine, I really appreciate it. Lots of great information about these loan programs. It’s a very good episode for people who are wanting to get into real estate and don’t necessarily know how.

Thank you for joining us. Best Ever listeners, thank you as always for listening. Have a best ever day, and we’ll talk to you tomorrow.

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JF2078: REIT Investing With Minesh Bhindi

Minesh started negotiating and selling real estate at 16 years old with his dad and since then he has helped his investors purchase £20m with this strategy. At a young age, he feels he was able to negotiate great deals because he had no fear of losing a deal. He discussed a useful strategy he used before the 2008 crash. Minesh shares his current strategy of focusing on REIT, real estate investment trust that helps him create cash flow.

Minesh Bhindi Real Estate Background:

  • Started negotiating and selling real estate at 16 years old, with his dad, they pioneered a unique no money down transaction in the UK
  • Helped investors purchase over £20m with this strategy
  • Based in London, UK
  • Say hi to him at http://perfectportfolio.com/ 

Click here for more info on groundbreaker.co

Best Ever Tweet:

“It’s very important with any investment to get the fees down as low as possible.” – Minesh Bhindi


TRANSCRIPTION

Joe Fairless: Best Ever listeners, how 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 of that fluffy stuff. With us today, Minesh Bhindi. How you doing, Minesh?

Minesh Bhindi: I’m fantastic. Thanks for having me on the show, Joe.

Joe Fairless: My pleasure. Anytime I have a chance to have anyone on with a fancy accent, I always welcome the opportunity. A little bit about Minesh – he started negotiating and selling real estate at 16 years old with his dad. Since then, he has helped investors purchase over £20 million worth of real estate with this strategy. It’s a unique, no money down strategy transaction in the UK. So we’re going to talk about that. So with that being said, Minesh, do you want to get the Best Ever listeners a little bit more about your background and your current focus?

Minesh Bhindi: Sure. One thing I’ve just got to correct – the £20 million of property was actually between the first few years of being involved in real estate. So between when I was 16 and 18 and a half, 19, something like that. Since then, we’ve really brought out the idea of no money down investing into the UK back then. Since then, I’ve made a transition to investing with REITs and really leveraging time and lifestyle with real estate as well by using REITs, using options to control a sizable amount of real estate and also get a very, very good return. So that’s been my transition over this period.

Joe Fairless: Okay. So let’s talk about how you started, and the unique no money down transaction that you did early on, and then we’ll talk about what you’re doing now.

Minesh Bhindi: Sure. So when we started, what you could do back before the 2008 market crash was you could buy a property and you could, in essence, do an instant remortgage on that property. What that allowed you to do, in essence, is negotiate a really great deal, and then on the day of completion, you’d buy the property with cash, and then instantly remortgage it at the true market value; that, in essence, gave you a cashback back, and that was really how I got involved when I was 16.

I was watching my dad negotiate deals. One day, I was just watching him and he got off the phone and he said, “What are you smiling at?” and I said, “That looks easy to me. I don’t know why you think it’s so hard.” So luckily, instead of telling me to screw off, he said, “Well, show me,” and then I had to prove it that I could do it. And very quickly, I started getting really good deals because I didn’t have a fear of being attached to any deal. I didn’t know this back then, but evaluating in hindsight, I just didn’t have fear, because I knew that if this deal didn’t happen, I still had to go to school, I still had to do my homework.

So very quickly, I was starting to getting better deals with a lot of people that were in the consortium that my dad was negotiating deals for. Then at 18, I was negotiating a block in London’s Canary Wharf neighborhood, which is the financial district of London pretty much, and there was just a deal that was just really, really good and I decided to get involved myself. So that’s when I bought my first properties. And it was three properties in that development, out of the 18 that we were negotiating.

I got a £68,000 cashback on the day of completion and a quarter of a million pounds in equity. So that’s really what we were doing, and to get into that deal, it cost me £500 per property. So it was a £1,500 total just to put a reservation down on those. So that’s sort of what we were doing back then, and it was pretty easy to do, and obviously, it partly led to the financial crash that happened in 2008, that everyone knows about. It was a part of the pot when it came to the cold storm that caused that.

Joe Fairless: Okay. So since that strategy is gone, no longer doing that…?

Minesh Bhindi: Yeah, it would be very tough for anybody to do that right now.

Joe Fairless: So what are you doing now?

Minesh Bhindi: So [00:06:45].12] little light bulb had gone out in one of the apartments, and so I said, “Well, the spare light bulb’s in the cupboard. Just change the light bulb,” and he refused to do it. He said, “On the contract, it says that I need to call you.” I didn’t have a management agent at this time, because the way that we were buying property, we were buying them for capital growth, as well as cash flow. So you’ve got a very sensitive balance when it comes for that part of the strategy. I understand if you’re buying, for example, single-family homes, you’re really aiming it to be in certain parts of the state as a cash flow strategy. So it might yield you 20%, but really, from a capital appreciation perspective, it’s not going to do much. Whereas we were trying to do both in London.

So I had to drive 11:00 p.m. on a Saturday night to go change a light bulb for a guy, while being a multimillionaire, while having a property portfolio, etc, etc. So at that point, I was very, very frustrated and angry on the way there, and on the way back, I decided that this wasn’t for me anymore, and I needed to find a better way of doing it. A lot of people that I was around were involved in real estate, but weren’t doing the things that I had to do back then, like go and change light bulbs at 11:00 p.m. at night. So I made a decision. I was like, “Okay, I’m going to go to zero net cashflow. I’m going to hand all these properties over to a management agent and go figure out a better way of doing it.”

So I started speaking to people, started understanding what they were doing, started understanding what I was missing with real estate, and then I discovered REITs, and then I discovered how to use REITs. We were already doing options when I  was trading the stock market, so I just came into it as a combination of things, and implemented the strategy that we have, that we use on gold and silver and in the stock market over to real estate… Which is amazing to me, because most people don’t even know that’s possible.

Joe Fairless: Please educate us on how you use REITs to get that cash flow and also get the upside on your investments.

Minesh Bhindi: So a REIT is a real estate investment trust, and in essence, how it works – it’s a company with managers who are solely purposed on making you money. They have got to return you an ROI so that they continue to receive your money and other people’s money. So what they’ll do is they’ll focus and they’ll say, “Okay, I’m going to buy residential property in New York, and I’m going to set up a REIT.” So now, if you want to get involved in a residential property in New York, you put money into the REIT, they’ll go and buy the property, manage the property, deal with all the headaches of the property, and then give you a dividend at the end of it, which is your cash flow return. So that’s, in essence, a REIT.

Now what I like to do is I like to invest in REIT ETFs. ETFs are exchange-traded funds. In essence, these are funds that have a diversified portfolio of a particular asset class. So while a REIT is a particular asset class, is real estate, an ETF is going to go, “Alright, there are residential REITs, there are healthcare REITs, there are commercial REITs, there’s all these different types of REITs; we need to invest in everything.” So for me, one stock purchase diversifies me into eight different real estate sectors, across 154 different real estate holdings. With one purchase of a stock, it cost me 0.12% of a yearly fee. I’m in a fund which has $64.2 billion in it. So you can imagine the negotiating power when it comes to going and finding a deal.

This is the other advantage of REITs that most people don’t realize. If you’re an individual and you go in and try to negotiate a deal that you’re trying to, hopefully, hold on to, because it depends on your next year’s income, versus REITs or an ETF that goes in with $64 billion behind them, which one’s going to get a better deal? It’s very simple.

The most important thing about REITs and REIT ETFs is that these are managed by full-time nerds, accountants, lawyers, and statisticians that are looking at the market all across the USA and trying to identify what the best investment is. And the reason for that and why they will never slack, unlike you and I– I remember, I’ve gotten into deals, and then I’ve had to admit that this was a bad deal. Well, if I was them, I’d have $100 million pulled from my fund. So they don’t have the slack that we do as retail investors. So as a result, since inception, they’ve had an 8.48% compounded growth rate, with a 4.52% dividend.

Now, that cash flow on the dividend side isn’t as much as what you would expect if you were buying single-family homes, for example, somewhere around a 20% cashflow. However, you’ve got none of the work, you’re doing zero effort into actually doing this, and you’ve got a completely diversified portfolio across the entire USA. So from a stability perspective and from a freedom perspective, it works. The best thing about it is, I’m currently traveling in Bogota, Colombia, and my entire real estate portfolio travels with me on my iPhone. I don’t have to worry about it. I don’t have to do anything with it. It’s continuing to generate me money, and all I’ve got to do is know when to get in and when to get out and what to really invest in.

On top of that, we have our options strategy which allows us to generate an extra 12% a year of cash flow. So you’ve got the compounded growth rate since inception of 8.48%, you’ve got the 4.52% a year dividend that’s coming in and you’ve got a 12% a year cash flow by utilizing options, and the entire yearly fee for holding this fund and for having all these nerds do all the work for you is 0.12%. That’s what I do now.

Joe Fairless: What are the tax benefits, if any?

Minesh Bhindi: Well, you’re still going to pay up the gains tax. If you sell, you still got that, depending on what country you’re in… And I don’t really like talking about tax. That’s something that you’ve got to talk with a CPA about. But really, it’s very, very similar to having your own real estate portfolio.

Joe Fairless: Got it. So REITs do pass the appreciation through to their investors?

Minesh Bhindi: I would highly recommend you guys speak to your CPA to confirm that.

Joe Fairless: I know, I understand that. But generally speaking, it’s not really a tax strategy question, it’s just black and white question. Generally, do you know if REITs pass depreciation through to investors?

Minesh Bhindi: I’ll have to confirm that, and simply because I’m based in London, so I’d have to speak to the CPA.

Joe Fairless: Yeah, a little bit different. Well okay, so what tax forms– and it probably is completely different from US so, but I’ll just ask… What tax form do you receive at the end of the year to show your gains or losses?

Minesh Bhindi: I’ll have to confirm that as well.

Joe Fairless: Oh, okay. Alright, because then–

Minesh Bhindi: Simply because these are publicly listed rates. So, in essence, you’re investing through a broker account. So it’s not a private equity situation.

Joe Fairless: Right, got it. Because one component of it is taxes, and with private investments like syndications, investors in the US, they’ll likely get a K-1, and that K-1 will probably show a loss, although no guarantees, because the depreciation is passed through, assuming that the operator passes the depreciation through… And then it gets recaptured whenever it’s sold. So it’s not all sunshine and rainbows, because then you eventually have to pay it, but it’s just years down the road, whenever you actually sell the deal. But then there could be a 1031 option, so that the passive investors could continue to defer that. So I was just wondering if there’s anything like that with REITs, but that’s fine. We can—

Minesh Bhindi: Yeah,  I think it’d be different, simply because– and I’m not familiar with syndication structures, so forgive me on that, but I think it would be different simply because the return is reflected in the price of the stock, as it’s a publicly-traded stock. So I think it would be slightly different in that sense. I’m not sure with a syndication whether you get full title ownership of the property through a syndication or not, but with a stock, you’re not getting that; you’re getting the ownership in the stock.

Joe Fairless: Got it. So what are some ways that you’ve optimized your approach investing in REITs that you weren’t doing at the beginning?

Minesh Bhindi: Wow, okay. So before, what I was trying to do was – I was trying to purchase multiple different REITs, trying to guess the market. It’s like trying to pick a stock, and you’re going in there going, “Okay, I want New York real estate. I want Detroit real estate. I want healthcare here. I want commercial real estate here”, and unfortunately, that is just like picking a stock. Obviously, different REITs have different risk structures and things like that, and then you’ve got to get involved like you’re picking a stock, which I don’t want to do, simply because for me the goal is lifestyle. For me, the goal is to be able to travel, look for opportunities in different places, like I am right here in Colombia, and still manage my portfolio, and still enjoy life, and I don’t want to be reading returns papers, etc, etc.

So what I eventually did was transitioned from finding individual REITs to investing in a REIT ETF, and anyone can go and purchase a share of that – the symbol is VNQ – and that really was the set-off point for me in terms of really coming up and solidifying not only my investing with REITs, but also the Property Profits For Life strategy that we teach, too.

Joe Fairless: So for someone who’s never invested in a REIT, what are some questions they should ask about the REIT prior to investing to pick the right one?

Minesh Bhindi: Number one, it’s got to be diversified into at least five different real estate sectors for me. Number two, it’s got to have–

Joe Fairless: And is a sector meaning an asset class, or a market, or what?

Minesh Bhindi: Yeah, like a market. So for example, there’s healthcare REITs, there’s hotel REITs, there’s industrial REITs, etc, etc. So at least five of them. It’s got to have at least 5 to 50 different real estate holdings. So you might be in a healthcare REIT, but you’ve got to make sure that there’s more than one building that they manage, so that it’s diversified. And then really, you’ve got to look at the provider. And that’s why, to make it really simple for people, out of all the research that I’ve done and what I do with my money, VNQ is the best one. It’s the biggest one. It’s the best one. It’s the one that’s used by most billionaires, hedge funds and private family offices. So you can go do your own research, but really, we’ve done it all for you.

Joe Fairless: All roads lead back to that one, based on your research?

Minesh Bhindi: Yeah, exactly.

Joe Fairless: Alright, cool.

Minesh Bhindi: One other thing… One other thing I’m gonna mention is the yearly fee, because really, the yearly fee is very important. People don’t realize it. If you’re paying a 2% yearly fee, versus a 0.12% yearly fee, just get a compound calculator out and work out what that’s going to cost you over a period of 20 years. It’s very important with any investing to get the fees down as low as possible, and that’s really my message… And that’s why VNQ is one of the best – because it’s got so much economies of scale. The fees are almost nothing,

Joe Fairless: And that is the Vanguard Real Estate Index Fund.

Minesh Bhindi: Yes.

Joe Fairless: What else should someone know about investing in REITs who’s never invested in REITs, that we haven’t talked about already?

Minesh Bhindi: One of the main things is that the REITs are a lagging indicator to the stock market, in my experience. So what might happen is you might say, “Okay, the stock market’s going down and REITs are going to go down,” but what you’ve got to realize is that property moves at a much slower pace than the stock market. You can’t just sell in and out of property like you can a stock. So it’s important to be much more patient with a REIT than a stock.

Anyone who’s had experience with the stock market at all, you’ve got to be able to react on the fly. But with the REIT, it’s important to understand how the REIT’s going to perform, it’s important to understand when you get into a trade, it’s important to understand what type of parameters you set for that trade, and then have patience. If you start reacting to a REIT the way you react to a stock, you’re gonna cost yourself money.

Joe Fairless: One benefit of REITs is the liquidity, right? You can bounce in and out with a couple pushes on your phone?

Minesh Bhindi: Yes, but the problem with that is that you shouldn’t really be trading in and out that often. With everything that we do at Perfect Portfolio, we want to invest long term. So we want to be long term investors in real estate, long term in the stock market and long term in gold and silver, and that’s how we approach it. The real thing that we do is hold these assets long term, they’re going up over the long term. It’s a great time right now to be involved in real estate, especially until 2035-ish; it’s going to be fantastic.

Then for the short term cash flow, we use options to do that, and we use a simple option strategy to get that working. What we really specialize in is helping people actually execute. We’ve now coached people in 46 different countries, and our job isn’t really to give you a massively creative strategy. I firmly believe, after almost 20 years of doing this, it’s not about the strategy, it’s about doing it that matters. So that’s what we do. We coach enough people around the world to understand how to make someone successful with this, if they’re serious and committed as well.

Joe Fairless: You mentioned 2035, 15 years from now. Why’d you mentioned that number, not five years from now or 12 or 20 or 3?

Minesh Bhindi: To put a range on it, because that’s what you’ve got to do to hedge yourself nowadays. I would say somewhere between 2030 and 2035-ish. And that’s simply because we’re entering the prime spending years of the millennial class right now. They’re just about turning 30, they’re about to receive tons of inheritance funds, and that’s going to go into real estate. That doesn’t mean there won’t be a correction, but any pullback in real estate will be a buying opportunity until 2035.

Joe Fairless: You mentioned earlier, you’re a multi-millionaire. I heard that correct, yes?

Minesh Bhindi: Yes.

Joe Fairless: How did you make most of your money?

Minesh Bhindi: Through actually doing deals. Obviously, I have a business that teaches people how to invest as well, that did pretty well at the beginning, and then what I realized – the mistake that I made with that was that before, when I started, when I was buying physical real estate, I was spending a lot of time actually on the education side of the business, and not enough on my own investing. It just happens like that when you’re traveling for two weeks out of every month. So this time around, after 2010, when I started what was first known as Gold and Silver For Life, before we merged everything into Perfect Portfolio, was that I didn’t want to do that. I didn’t want to sacrifice my own investing for any business, not just an education business, but any business. So now, we will only work with 155 people per year, and if we get those 155 people by March this year, for example, we won’t take any more until next year; it’s as simple as that. So my main focus now is my own investing and my own portfolio, but I also have, obviously, an education business, and it’s not a charity.

Joe Fairless: What deal did you make the most money on?

Minesh Bhindi: Oh, wow, I can’t say that there’s one deal. I don’t think I’ve ever had a really big– well, obviously I’ve had purchases which had a sizable amount of money, but then it was trumped by following my own strategy and the accumulation over a period of a year; it trumped any one particular deal that came in. And that’s what I like to tell people – it’s not about one deal, it’s about how are you going to do this for the next 20 years.

Joe Fairless: Okay, just pick one though. Just any deal that you made a decent amount of money. I mean, it doesn’t have to be the most. We don’t have to know exactly first place, but what’s the deal that you made a lot of money on?

Minesh Bhindi: First deal I ever did was a £68,000 cashback on day one, with a quarter of a million pounds in equity; that was a pretty good deal. There was another deal that we did 200k on on the day of completion. It’s just these sorts of things, but however, I do want to stress that the setup of my businesses and my investing made it so that these were momentary periods of celebration, because the consistent growth of the business and the investment portfolio outperformed any short-term momentary hikes that we had, basically.

Joe Fairless: On the flip side, a deal you lost the most money on?

Minesh Bhindi: The deal I lost the most money on wasn’t actually a real estate deal. I lost $100,000 in three day. That was in the stock market, before I really figured out how to invest in the stock market properly. I was over-leveraged on a position and it did not go right. So I was down $100,000 in three days. That’s the most painful one that I remember.

Joe Fairless: That would be painful, and I imagine that is etched in your memory. Well, we’re gonna do a lightning round, but first, what’s your best real estate investing advice ever for real estate investors?

Minesh Bhindi: Understand what the goal is. There’s a lot of people that are very attracted right now to the ego side of “I want to own 10,000 doors”, for example, or etc, etc, “I want to own 50 buildings.” Figure out what the goal is first, because I think there are a few people in the world, but I don’t believe that everyone that’s involved in real estate is truly in love with the actual property. I think most people want the security, want the freedom and want the future that successful real estate investing can give you.

I don’t think they’re attached to the actual property. So understanding the goal and what you’re doing it for is very important, because then you can find the right strategy, then you can decide, “Okay, do I want to get involved with REITs? Do I want to get involved with a syndication plan? Do I want to go and buy this myself? Do I want to do the work for that?” You can go and decide what you want to do. So understanding the goal of what you’re truly in it for, and not just because someone’s saying you need to earn 3,000 doors, I think that is the number one most important thing that you can do.

Joe Fairless: Love it. We’re gonna do a lightning round. Are you ready for the Best Ever lightning round?

Minesh Bhindi: Sure, let’s do it.

Joe Fairless: Alright, let’s do it.

Break: [00:24:39]:03] to [00:25:22]:06]

Joe Fairless: What’s a best ever research tool you like to use when identifying investment opportunities?

Minesh Bhindi: ETF.com and TradingView.

Joe Fairless: Best ever way you like to give back to the community.

Minesh Bhindi: I’m involved in a bunch of different charitable things, but I don’t want to talk about those.

Joe Fairless: Okay, how can the Best Ever listeners learn more about what you’re doing?

Minesh Bhindi: They can go to perfectportfolio.com. I’m sure you’ll have a link in the show notes anyway, so they can click on that and come take a look at our trainings. Again, what we specialize in is actually helping people generate results over and over again. So once you’re a client, you get access to a weekly coaching call for life, without any other cost for that. We’re really looking for friendships and client relationships, rather than just trying to get as many people in as possible. So yeah, come and have a look, see what we have, see if it’s right for you, and then we can go from there.

Joe Fairless: Minesh, thank you for being on the show talking to us about REITs, why you champion REITs, and your journey that’s gotten to this point, and some things to look for when you’re selecting a REIT, as well as the REIT that you like, VNQ. So thanks for being on the show. I hope you have a best ever day, and we’ll talk to you again soon.

Minesh Bhindi: It’s been a pleasure. Thank you so much.

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JF2077: Coronavirus and Asset Protection With Brian Bradley

Brian Bradley is a returning guest from episode JF1811. He has been in law for over a decade and in this episode, he wants to help you understand the best ways to protect your assets and also give some advice specific to today’s coronavirus pandemic.

Brian T. Bradley Real Estate Background:

  • Asset Protection Attorney for Investors, Self-Made Entrepreneurs, Business Owners, High-Risk Professionals, and Affluent Families
  • Sets up systems and strategic teams for our client’s asset protection and wealth management
  • Based in Portland, OR
  • Say hi to him at https://btblegal.com/
  • Best Ever Book:

Click here for more info on groundbreaker.co

Best Ever Tweet:

“Plan before you need it, don’t wait till after an attack happens.” -Brian Bradley


TRANSCRIPTION

Theo Hicks: Hello, Best Ever listeners and welcome to the best real estate investing advice ever show. I’m Theo Hicks and today, we’re speaking with Brian Bradley. Brian, how you doing today?

Brian Bradley: I’m doing great, Theo. Thanks for having me back on and I look forward to jumping into a little bit of a different talk about asset protection today.

Theo Hicks: Absolutely. So as he just mentioned, he is a repeat guest. So if you wanna check out his first interview and hear his best ever advice and the best way to protect your assets, check out Episode 1811. So this is going to be a Skillset Sunday. So we’re gonna talk about a specific skill that will help you in your real estate investing journey. So we’re going to talk about all things asset protection, and more specifically, we are going to talk about how the advice that Brian can give today relates to the Coronavirus. So before we dive into that, Brian, do you mind giving the Best Ever listeners a reminder about your background and what you’re focused on today?

Brian Bradley: Yeah. So a little background about me – got into law and practice of law around 2008 back when the economy tanked, and I just had to sort of jump into court and figure it out how to sink and swim on my own. So I spent the first three years just purely in court, representing clients for free, which was a great experience. So I got more trial experience and litigation experience in those first three years than most people have in 25 years of experience, just because if you’re representing people to organizations for free, who’s not going to use you?

So then that just trickled down into – well, I like money, I like financing, I like investing on my own, and I got tired of seeing problems walk in the door when it was too late. So I started incorporating asset protection into my practice because I wanted to help people keep what they have and have a stress-free life, knowing when something bad were to happen or negligent happened, that they can sleep soundly, a little bit better, knowing they have the system and teams in place beforehand. So I started building a secondary portion of my practice around asset protection, but higher levels of asset protection for investors and doctors and real estate investors, higher net worth clients, generally around that million-dollar net worth mark or more, or for people who are trying to be full-time investors and how to scale them up to that protection level down the line. I just wanted to get ahead of the problems for people so that they know that there’s solutions for them.

Theo Hicks: Perfect. Thanks for sharing that. So one of the questions I have for you is about lawsuits that you see coming down the line for business owners and investors due to the Coronavirus. So maybe we could talk a little bit about that, but more specifically, in addition to that, maybe you can mention some of the things that people haven’t done that they should have done leading up to this moment that is the result in them being affected by these types of lawsuits.

Brian Bradley: Absolutely. It might be a little long-winded answer to cover some of that, but I’ll try to jumble through it without boring anybody. But it’s a great question and it’s obviously a really big topic, and it’s a really polarizing issue, but people are gonna have to go to work and have to invest at some point, and whenever these regulations start getting lessened, you’re just gonna have to do it the right way. So the key in any crisis is first, you’re gonna have to weather the storm; and what’s obvious is that if income goes down without expenses going down in the same amount, then you’re gonna start depleting your assets. You’ve gotta have some control over your expenses. What’s also critical though, is your assets, and especially your hard assets like real estate, because they give you the ability to subsidize and reduce income to ride out of that crisis. So the last thing that you need is to have a creditor attach a lien or tell you how you’re going to use that asset, when you potentially need to use it to ride out a bad crisis.

So the sad thing is that we now also have to add the liability and cause of COVID-19 to the list of things that investors and business owners need to start planning for. So you want your assets and equity safe. You want to protect your future and your legacy. You didn’t spend all your time building this for it to just go away, but a lot of us just don’t know how to do it. It’s a common pattern that pandemics and recessions or fear of recessions bring on substantial increases in lawsuits. Just look at how many lawsuits were filed in 2008 to 2010 during that recession.

So what we’re looking at through legal bar associations and the litigation arena is a really big concern of a substantial rise in what’s called casualty claims and employee claims, and there’s going to be supply chain disruptions and that’s going to cause projects to not be completed, or just money not be available to pay… So you’re gonna have those lawsuits coming there through breach of contracts, and inability to perform… A lot of other breach of contract claims and administrative claims and internal liability claims of businesses.

For example, we have general liability claims that alleged negligence for failing to protect a customer, or invitee or a tenant, especially if a death is involved, and that can be extended to a family member, not just that individual employee or guests. So what we’re talking about is also a potential rise of casualty insurance claims for negligent acts, and we’re also preparing for a possibility that the insurance industries may experience what’s called negative coverage. So as some carriers are already excluding COVID-19 from general liability coverage because it’s been classified as an epidemic and global emergency, so that gives them that wiggle room out. So that’s going to put you on the personal liability hook because of the World Health Organization classifying COVID-19 as a global health emergency. That’s also going to affect your employer’s liability coverage, and you’re most likely not going to be able to use that as coverage in an event of an illegal incident happening.

So all this makes asset protection and preventative planning even more important, because you don’t want to wait around for something bad to happen. You can’t be ahead of the game; you want to protect yourself before something bad happens and mitigate the risk. So what asset protection does, in this case, is it creates the legal barriers that you’ll need. It levels the playing field if you ever were attacked, and what you need to do as investors or syndicators, landlords or general partners or high-risk professionals like doctors or if you have a high net worth, is talk to an asset protection attorney and start practicing conservative methods of protection and be preventative. Plan before you need it; don’t wait for after an attack happens.

So a breakdown of a few steps that you can take are to recognize if your income is reduced and your expenses aren’t. That’s going to shorten the amount of time that you can meet your obligations, like paying bills and paying payroll and things like that. So next, you need to take steps to protect your hard assets, because those are critical to giving you the ability to weather any storm. You can’t afford, like I said, to let a creditor decide how to use those assets. You need to be the one deciding what you need to do with them.

The final step is to create a plan. So first, you need to reduce your expenses quickly and efficiently, but don’t handicap your business to the point that you’re not even going to be able to give yourself a chance to evolve and thrive. You don’t want to deplete yourself of revenue coming in to actually have a business that can function. So these first few steps you can do on yourself.

The second step is legally securing your assets and protecting them from having a claim attached to them, and that’s asset protection – that involves legal professionals. So some good questions to think about and ask yourself are – do you have employees that are located or traveling to areas where there’s been documented and diagnosed cases of COVID-19? Most likely everyone’s going to say yes to that. Does your business increase the probability of employees exposed to infected individuals? Most likely, yes. Do your employees work in close proximity with vendors or other partners who have given employees a greater potential to contract COVID-19? Potentially, yes. Most likely, yes.

So if your answers to any of those or all of those are yes, then you need to come up with a potential contingency plan on how you are going to manage your business to mitigate these risks. You’re going to have to think about these and talk to some experts and start making a plan to go forward to stay in compliance with the federal guidelines in your state and local guidelines, so that you can decrease these negligent claims. At the end of the day, you want to be able to keep doing business, but you need to keep doing business smartly.

Theo Hicks: Well, thank you for all that. That was all great information and I appreciate how you broke down it. Because I was gonna ask you, “Well, what’s the next step?” So you told us that. “What’s a question to think about?” Well, you told us that too. So I guess my follow up question would be – so you mentioned those three steps, which is, number one, to determine if your income is reducing more than your expenses are, step two is to protect your hard assets so that you’re able to decide what you can do with them, and step three was to create a plan to reduce the expenses, but making sure you’re not handicapping your business. So steps one and three, you said that people can do on their own. Step two, you need to find someone. So how do you find this someone, and then also, can you just find anyone who does asset protection, or is there a certain question that you should be asking these types of people to make sure I’m finding the person who is the right fit for me?

Brian Bradley: That’s a great question. So you’re not going to go to a general estate plan attorney, like someone who just is drafting revocable living trusts and wills, and medical directors, because that’s not asset protection; that’s just traditional estate planning. So you’re going to want to find an attorney who specializes and specifically does asset protection, which is using asset protection trusts, LLCs, business organization type of structures, but specifically to protect your assets.

You just want to find out what percentage of their business is purely asset protection, or are they just dabbling in and then dipping their toes in it? I really wouldn’t want to recommend someone go to a person who does 20% of their practice as asset protection, because they’re not going to be really familiar with the language and the liability and how to mitigate all the risks properly. You want to go to someone whose main focus of their practice purely is asset protection, and then what type of clients do they have. Do they have clients similar to your level of assets that need to be protected, your specific circumstances? If you’re a doctor, how many doctors do they have? If you’re a real estate investor, how many real estate investment clients do they have? What kind of different systems do they use for each? Or are they just trying to sell you one size fits all systems? Nobody’s one size fits all, everybody has a personal issue. So everything has to be created personally.

So I would just say, ask those type of questions and make sure you go to a specialist, just like you would a doctor. You’re not going to go to a general doctor for brain surgery, you’re going to go to a brain surgeon.

Then one of the things we were talking about back before we started recording was the potential recessions and what to do, and it ties into COVID-19 because people have no idea. Are we going to go into a recession or not? I can’t tell you, I don’t know. Half my wealthy clients think that there’s not going to be a recession. Some of them do. Some of them are over panicky and conservative. I see a mix, so I can’t really tell you personally what I think, because I see a different spectrum of opinions… But I’d say it’s just human nature to panic when things are uncertain. But the first thing is just stay calm, don’t make rash decisions based off of news clips.

We’re in a geopolitical instability, but there’s nothing new. We also have things going on with oil in Saudi Arabia, trying to push a lot of cheap oil to hurt Russia out there and take them out of the market. Combine this with COVID-19 and Corona, and we have a really crazy, poisonous geopolitical cocktail going on. So even when you think the world and economy is on fire, like it was just a little bit of time ago, what did we just learn? We can throw a monkey wrench in it for things that we have no idea who saw COVID-19 coming. Then all of a sudden, the economy’s on hold; no one’s working.

So the issue is just be proactive, protect your assets beforehand, even when times are good. And when times are potentially bad, and we see recessions, to recession-proof our assets, one, talk to your financial advisor. Diversify – that’s a great thing, but diversification doesn’t protect your assets. You’ve got to put them into mechanisms like asset protection trust that we talked about in the past, or business organizations, or combining the two of them together to actually give you the protection that you need. It’s not a matter of if a claim is against you, it’s a matter of how collectible you are. So that’s something that you can control, is your collectability. No matter if there’s a recession or good times or bad times, that’s something that’s in your control.

Theo Hicks: Perfect. Then going back to those steps that you can take. So create a plan, reduce expenses, but don’t handicap your business. I’m assuming you work with real estate investors, correct?

Brian Bradley: Oh, yeah. Most of my clients are in real estate.

Theo Hicks: Okay. What types of expenses do you see them focusing on reducing the most?

Brian Bradley: Right now, their biggest concerns are potential financing issues or supply chain issues. Most of them are all business as usual, especially the syndicators and large developers, and my clients that have apartments. Honestly, I haven’t had a single client that hasn’t been able to collect a rent check yet, and we’re not really seeing anyone slow down. Every one of my clients– and we have, I think, overall in the whole system, over 3000 clients, and I haven’t had anybody yet say that they’re having an issue building or collecting rents. So what they’re looking at is just potential supply chain issues with current developments, and what they can potentially do to alleviate that concern right there. Some people are talking about force majeure arguments, and that’s not really going to work. That’s like acts of God, and trying to use COVID-19 as a pandemic as an act of God. That’s going to be a state by state argument, but even those are going to potentially fall through. That’s a whole other episode of a conversation right there – a dive into force majeure as a legal argument.

So I would say other steps that they would do is just practice social distancing, making sure that tools are clean, worksites are safe… Whenever you’re sending out an employee to go, just make sure that you’re sending them out with the equipment that they need, to make sure that they potentially mitigate the contact that they have with COVID-19, and then start working on your supply chain, making sure you stay ahead of it… Because one of the things with  litigation is always, “Well, what did you do to mitigate your risk?” So you’ve got to be planning on this down the line. So that would be maybe talk to your contract attorney on that and come up with some alternatives to your supply chain in case it gets disrupted.

Theo Hicks: Perfect. Is there anything else as it relates to asset protection and the Coronavirus that we haven’t talked about already that you want to mention?

Brian Bradley: Not really about the Coronavirus, specifically, but there is one principle I think real estate and any investor needs to understand. It’s just about legal authority over practical authority, because this is what it comes down to when you ever do get sued… And just the reality is that a judge can do and does do whatever a judge wants, whether you have an LLC or LP. Yeah, they’re governed by state statutes, but those state statutes don’t transfer to other states. So you hope that everything works out in theory.

For example, I have a Nevada LLC and I’m being sued in California – you would hope that those internal shields would hold up, but theory and practicality don’t really ever work out. Practical authority is the power a judge actually has to make decisions, and judges have very, very broad powers and they have a superpower called the court of equity, and they can reach into your assets and seize them, place some liens on them, foreclose them, ordering sheriff’s sales, clearing title… There’s a lot of things a judge can do, and the problem is judges even without legal authority do these things all the time, and even if it’s in direct contradiction to statutes and case law, especially when they’re exercising their magic power, the court of equity.

So the solution to this really is to just try to level the playing field and then hindering the judge’s practical authority over your assets, so that they can’t circumvent the legal process. And you do that with just preventative and strong asset protection planning and having asset protection trusts in place and different layers of protection. So that would be my last caveat of why we really care – the legal system’s messed up. It’s not what it was 30 or 40 years ago. Things we did 30 or 40 years ago don’t apply today, because we’ve had this massive litigation shift by attorneys being able to take on clients commission-based for a percentage, which wasn’t allowed in the past, and attorney advertising, which wasn’t allowed in the past… So it turns the legal field into a business and an industry with a billion-dollar (B) market point. So we just need to realize the system’s not what it used to be anymore, and you need to protect yourself against the dysfunctional system now.

Theo Hicks: Thanks for adding that. So if the Best Ever listeners want to learn more about what we talked about today, learn more about the services you have to offer, what should they do?

Brian Bradley: They can jump on my website, www.btblegal.com, and I have lots of educational videos on there, and pamphlets and brochures to browse through. They can just email questions to me brian [at] btblegal.com. I do free consultations, just because I’d rather have people get educated on what their liability is, and different options; even if you don’t use from me. Most people are afraid to talk to lawyers because they don’t want to pay a consultation fee when they want to shop around, and I just find most people just become google lawyers and are getting bad advice, because they’re not getting advice. So just start reaching out to lawyers and don’t be afraid to contact them, and most lawyers will do free consultations, and that’s what I do, just to educate people.

Theo Hicks: Best Ever listeners, make sure you take advantage of that. Brian, I really appreciate coming on the show today and talking to us about asset protection and Coronavirus. From my perspective, one of the biggest takeaways is that obviously, right now you want to try to do what you can to weather the storm, but at the end of the day, the people who are going to do fine or better during this time are the ones who, as you mentioned, were proactive and protect their assets when things were all fine and dandy, when everything was going smoothly, as opposed to trying to do it now.

So you talked about a few steps we can take – creating a plan to reduce expenses, because obviously if income goes down and your expenses don’t go down, that’s where people get into trouble… But really, as I said, at the end of the day, it sounds like the assets need to be protected. So I guess, do that now, while you still have the chance, because as Brian mentioned, he expects there to be an increase in lawsuits coming down the line, which is typical for recessions and pandemics like this. So Brian, again, I really appreciate you taking the time to talk to us today about this asset protection advice during the Coronavirus.

Best Ever listeners, as always, thank you for listening. Have a best ever day, and we will talk to you tomorrow.

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JF2063: Tax Strategy With Dusty Rollins

Dusty is the Owner and Founder of Oxford Business Services, an income planning, and tax strategy expert. He helps people save on their taxes as well as retirement planning. Dusty explains 5 things you might be missing by not having a tax strategy. 

 

Dusty Rollins Real Estate Background:

  • Owner and founder of Oxford Business Services, an income planning, and tax strategy expert
  • Helps people save on their taxes, as well as retirement planning
  • Based in DeLand, FL
  • Say hi to him at https://www.dustyrollins.com/bestever 

Click here for more info on groundbreaker.co

Best Ever Tweet:

“A tax strategy is like a good chess player, it is 3 or 4 moves ahead of an amateur.” – Dusty Rollins


TRANSCRIPTION

Joe Fairless: Best ever listeners, how are you doing? Welcome to the best real estate investing advice ever show. I’m Joe Fairless, and 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 of that fluffy stuff.

It is Sunday… And because it’s Sunday, we have a special segment for you called Skillset Sunday. Today you will learn five things you might be missing by not having a tax strategy. Do you have a tax strategy? If you don’t – well, here’s five things you might be missing.

With us today to talk about that – Dusty Rollins. How are you doing, Dusty?

Dusty Rollins: I’m excellent, Joe. Thanks for having me.

Joe Fairless: Well, I’m glad to hear that. It’s my pleasure.  A little bit about Dusty – he’s the owner and founder of Oxford business services. He’s an income planning and tax strategy expert based in DeLand, Florida. He helps people save on their taxes, as well as he focuses on retirement planning. With that being said, Dusty, do you wanna give the Best Ever listeners a little bit more about your background and your current focus? Then we’ll get right into the five things.

Dusty Rollins: Perfect, Joe. Thanks so much for having me on the call. I’ve gotta tell you, I love the name of your show, Best Ever. If I could have a quick segue – I have a son who’s ten years old and he’s special needs; he’s got a little bit of a learning development delay… And he loves waffles. So just about every morning he has waffles, and every morning he says “These are the best ever!” [laughter] But it’s every single morning, they get better and better and better.

Joe Fairless: That’s awesome. What a great mentality!

Dusty Rollins: Exactly, I love it. So I couldn’t help but think about that with the title of your show. But I got into taxes kind of backwards. I didn’t set out — I’m not trained as an accountant, and I didn’t set out to get in the field. I got into my own business, and actually my initial business experience was in real estate investing in Atlanta, in the go-go years… The early 2000’s, when you just couldn’t make a mistake in real estate. Any idiot could make money, and I did. So that was kind of my initial foray into business, if you will.

Then as my business began to grow, the taxes began to be more and more of a big issue. And I knew I had a sense; I loved strategies, I loved the thought process, I knew there’s always more than one way… So I knew there were these strategies that I could save on my taxes, and I also knew that the advisors I was using weren’t gonna get me there. So that  kind of began a self study to learn how to best set up your tax strategies, no matter what kind of business you’re in… And real estate is a very tax-favorite industry.

So as I was doing that self-study, then other friends, other business owners were saying “Well, can you do this for me? Can you do this?” and that kind of just led me into doing the tax strategies as a business. And one of the things that I think is interesting about that, or one of the advantages I have now is I tell my clients or prospects when I’m talking to someone – make sure that your advisors have front of the check experience. And what I mean by that is if your whole life you sign the back of a check, meaning a paycheck – nothing wrong with it; the majority of America does that, and I did it for actually a very short time early on in my career… Nothing wrong with it, but there’s a different experience we have when you’ve signed the front of a check. When you’ve put that money out, you’ve put your family, your own financial well-being at risk to pay other employees, to pay the vendors… There’s another level. So I think it’s important to have advisors who have that front of check experience.

Joe Fairless: Yup, been there, I know what the clients are going through… So you can speak from experience. Let’s talk about the five things we might be missing by not having a tax strategy. And before we talk about those five things, what is a tax strategy?

Dusty Rollins: Great question. One of my favorite sayings – I don’t know if it’s good or not – is your CPA is not doing what you think they’re doing. So the overall big mistake I see business owners make is they kind of default their taxes. The term I use a lot is “Oh, my CPA handles that.” And unfortunately, the way the business model and the business structure of taxes are done, your CPA is probably handling some of your accounting work, and then your tax preparation, which means at the end of the year they fill out the forms, they put the numbers in boxes and help you discover how much money you owe, and then they say “Okay, now you’ve gotta pay the IRS.” And often if that business owner goes to that CPA and says “Well, this is how much I owe… How can I pay less? How can I owe less? Is this the absolute least amount I have to pay?”, I think they teach this in their training school somewhere, the CPA will say “Well, you make what you make, you pay what you pay.”

So the difference, that next level of tax strategy is it’s kind of like playing chess; I don’t actually play chess, but I know that a good chess players is 3-4 moves ahead of an amateur chess player… Whereas checkers, you’re just doing a jump. The next jump, the next jump… But chess – you’re playing 3-4 moves ahead, and that’s what a tax strategy is. Tax preparation is checkers; you just fill out the forms to keep you out of jail… And you need to do that; don’t stop doing that. But the chess part is the tax strategy, where you’re figuring out moves, you’re figuring out what you’re wanting to do, so that you can pay the least amount legally required tax-wise.

Joe Fairless: Okay. So what’s the first thing that we might be missing.

Dusty Rollins: So the number one — and again, geared toward real estate investors, which I’m assuming a lot of your listeners are…

Joe Fairless: All of them.

Dusty Rollins: All of them, there we go… One of the big things is the new Trump tax law change over the last few years. A lot of the people said “Oh, this is a tax cut for the rich”, and I always like to say “It’s not a tax cut for the rich, it’s a tax cut for the business owner.” So what I mean by that is you can have a doctor who is making half a million dollars a year on a W-2 income, meaning they work for a hospital or for an employer – that doctor is probably paying more in taxes than they did before the Trump tax cuts. But if you take that same doctor and he/she is a business owner, they  could pay considerably less in taxes.

So for the real estate investor what’s really important is understanding that now even more so you’re in the small business realm. So even if you don’t have another business outside of real estate, real estate can open that portal to the tax savings.

So here’s the big one. Number one is to take full advantage of section 199A. It’s called Qualified Business Income (QBI). If you qualify, you get an extra 20% deduction on that small business income. The problem is for most real estate investors what they need to watch is the way they 1099. So there’s a way that if you don’t give a 1099 to the people who provide services for your company, then you might lose deduction. Did that make sense at all?

Joe Fairless: It does.

Dusty Rollins: So that’s number one, is really making sure you’re handling the 1099s correctly, which will give you the maximum deduction allowable under section 199A.

Joe Fairless: What’s the most common mistake when handling the 1099s?

Dusty Rollins: Not doing them. [laughs] Because there’s massive penalties for not doing them. It’s not like not filing the tax return, it’s not on that level… And it gets a little bit complicated, but if you’re not doing it properly, or at all, then you might not be able to take the full 199A deductions.

Joe Fairless: Okay.

Dusty Rollins: Any other questions on that? That was number one.

Joe Fairless: No more questions on that.

Dusty Rollins: Perfect. Number two is real estate professional status. What’s important to know here is if you have passive losses, it’s sometimes hard to take them if you only have earned income. So what the IRS has said is if you have the passive income, you can take the passive losses. So the real estate professional status means you worked at least 750 hours a year as a real estate professional. Now, a lot of people take this and don’t work those hours, or they kind of fudge that a little bit… So one of the things to watch that I’ve seen is there are some cases where a W-2 worker, so a person who has a full-time job, also claimed that they’re a real estate professional status, meaning they’re working about 15 hours a week in real estate, and the IRS didn’t like that.

So one of the things to watch for if that’s the case, and you have a spouse, and the spouse doesn’t have a full-time W-2 job, there’s a natural fit there. But that’s just an area — because it can be very lucrative tax savings-wise if it’s handled properly… But I see it mishandled a lot.

Joe Fairless: What’s an example of how that can be beneficial, dollars and cents? You gave a really good example with the 500k doctor on number one… But how about number two?

Dusty Rollins: Let’s go back to a doctor, just to stick with the —

Joe Fairless: Sure.

Dusty Rollins: …because everybody thinks they’re rich anyway. So a doctor couple, who are clients – he had a very high W-2 income, and they had a lot of rental properties, investment properties… So before they talked with me, they weren’t declared real estate professional status, so they couldn’t take some of the losses. What we did is we set up a clear plan — and the IRS always wants a Why, and they want everything clear; so that’s a free one there, not even part of the five. So we clearly showed where this lady – in this case, the doctor was the husband, the wife was not a doctor – was able to qualify, because she legitimately spent 15 hours or more a week managing the properties.

So by getting that status, we were able to open up and take a number of losses, and in their case it was an additional 35k a year in tax savings.

Joe Fairless: Wow. Okay.

Dusty Rollins: And the key point – she didn’t have to start doing it. She was already doing that work, she just wasn’t classifying it correctly.

Joe Fairless: Okay. Number three?

Dusty Rollins: Number three is cost segregation. A lot of your real estate investors will know this… You know how when you know something so well, you assume everyone knows it… We just keep running into people that don’t know it. So what cost segregation does is one of the magics of real estate is that you can have positive cashflow, and yet still not pay any taxes on it up to a degree, because of depreciation. So what depreciation is saying is the IRS understands that yes, you have positive cashflow, but your property is in essence decaying every year.

So what they do though is they make you depreciate the value of the property over a certain schedule. So it can be 27,5 years, 30+ years… There’s different schedules, depending on the type of property. So again, if you’re depreciating a property over 27 years, that’s a much smaller yearly depreciation.

Cost segregation is a study you do, and what it does is it goes through and takes out the different parts — so it says “Your light fixtures and different parts inside the property depreciate differently.” So your life fixture is not gonna last 27 years, right? It’s gonna last five years. So it’s a little bit complicated; you need a professional,  I believe. You can kind of do it on your own, but it’s really hard… And I don’t do them either, but we work with teams that do it. And then you can accelerate the depreciation… Let’s say massive parts of the property – if you can accelerate it to a 4-5 year period, then you get a much bigger deduction each year. Does that make sense at all?

Joe Fairless: It does. What is your response to someone who says “Okay, I hear you, Dusty, but isn’t cost segregation just kicking the can down the road, because eventually it’s gonna be recaptured?”

Dusty Rollins: Yes, that’s a great question. There’s a lot of different answers to that. One would be though that I would rather have the cash now, meaning the tax cash back, than in 27 years.

Joe Fairless: Yeah, the time value of money.

Dusty Rollins: The time value of money, and then opportunity cost. So now, instead of leaving that tax cash in the IRS coffers, if you will, 27 years from now, let’s use it now to go buy another property to go build more wealth, and then the time value of money will capture it down the road.

And then there’s other things though about depending on when you sell it and how you sell it, and if you ever sell it, and how you transfer it… There are other ways, that again, the magic of real estate when it comes to taxes can help you alleviate. Did that make sense? I feel like I got in a little bit of a wormhole there.

Joe Fairless: Yeah, it’s a big wormhole, because there’s a lot of different variables, and different permutations of how that could look… But yes, time value of money I think is the main reason why a dollar today is better than a dollar in five years.

Dusty Rollins: Correct.

Joe Fairless: It just makes a lot of sense. Okay, number four.

Dusty Rollins: So number four is — again, there’s three levels of taxpayer. Number four is slightly more complicated, in terms of this… There’s three levels. Level one is the W-2; we’ve kind of talked about that. But that’s a W-2 – an employer pays you the money, they take out half the tax over the time for your withholding for the government. When it comes to the tax code, you’re basically screwed. There’s like three deductions; you don’t have many plays when it comes to the tax code. So that’s level one.

Level two is a business owner. And again, all of your listeners who are involved in investment  real estate are in essence business owners in one way, shape or form… So that opens up the portal to a lot more tax strategies. And those strategies center around writing off your mileage, the cost segregation, like we just talked about, personal things that you used as a business being deductible.

Level two is the realm of deductions and write-offs. But there’s a level three, and this is where not many business owners, even really smart ones that  have good advisors – not many business owners go to this level. I call it the elite level. It’s kind of like the Navy SEALs level. And that’s where you’re actually partnering with the IRS to help you build  your wealth. Now, all of your libertarian clients just had chills go up their spine. [laughter] It’s a partnership where you sleep with one eye open, and it’s not a surrender type of partnership.

What I mean by this is the government uses the tax code to drive behavior; so that’s why at various times some politician will suggest we do away with the mortgage interest deduction on your house. And all the mortgage people and the real estate agents, that industry, the realtors – they get up in arms, because they feel like if you take that deduction away, you’ll hurt home sales, thus hurting mortgages. So whether they’re correct or not is another discussion, but the government definitely uses the tax code to direct behavior.

So what level three (elite level) is is when what you’re wanting to do to build your wealth and protect your family and leave your legacy – when that lines up with what the government wants you to do, and are willing to give tax breaks for, then there is real magic. Did that make sense at all?

Joe Fairless: Yeah, it makes sense, but by partnering up with the IRS — and I’m not taking it literally, so I’m not going down that path, but… That seems to be pretty general, not specific. Because I could say that “Well, as a real estate professional status, I’m essentially partnering up with the IRS, because I’m going towards the direction that they want me to go to maximize benefits.” By being a business owner, I’m doing what the IRS is wanting me to do, because I’m a business owner and I’m getting those deductions… So what’s the actionable item here, other than the concept?

Dusty Rollins: Sure. Well, real estate as a giant umbrella is — the IRS wants you to go into real estate. If you look at the Forbes 400, the top people, they either made their money in real estate, or after they made their money went into real estate. So it is dripping with lucrative tax advantages, like we’ve just talked about. But when you have tax-free exchanges and you can accumulate and pass over, you can have the magic of depreciation, where you’re getting positive cashflow, but the property is actually depreciating… So real estate is absolutely a giant area.

I’ll give you one caveat. When you get on a high level of real estate — I knew a couple guys in Atlanta that did major deals, and they would get tax credits. So a municipality would give them tax credits to go in and build mixed-use real estate; a lot of times it would be nice apartments and condos, a little bit of commercial underneath, and then mixed in with a little bit of low-income housing, properly done… But they would get tax credits, and if they didn’t need those tax credits for that project or for that company, they could actually sell those tax credits on the market, usually for a slight discount… And then that way, somebody else who needed those credits could buy them. So that is a way, again, where “partnering” with the government to build the wealth you  want anyway.

Another area, that’s not directly real estate related is ESOPs (employee stock ownership plans). Those are where the government is saying “As a business owner, if you’re gonna help out your employees, give toward their retirement, help give them some ownership, then we’re gonna reward you  with some ways to save on taxes as the business owner.” Now, you’ve gotta set them up correctly, or they don’t work unless you’re a really giant company. But ESOPs are another good way where you can build that wealth, and you’re “partnering” with the IRS.

Joe Fairless: Okay, cool. ESOP planning. We won’t go do deep into that type of plan, but what are some general guidelines that you’d give for a listener who does not have a Fortune 500 company, but is looking to implement this and get some tax advantages.

Dusty Rollins: Sure. On this level you need a couple things. You need a business, you need to have some employees (usually, it’s over ten employees) and you need to have a tax bill. You need to pay a fair bit in taxes. And largely, a part of that is because to make it worth everyone’s time to set it up and to operate it properly.

If you have somebody who’s just the sole operator, they have zero employees and they don’t pay that much in taxes, then the ESOP is probably not something they need to really pursue heavily… But if they have the employees and they have a big tax bill – and a big tax bill, in my mind, would be basically 100k+. At that point you can really start to get some exciting strategies going under the ESOP realm.

Joe Fairless: Number five.

Dusty Rollins: The last one would be to get a second opinion. One of the things we find — one of my new clients is a chiropractor, and we were doing a tax plan for him, and as we were looking over it, we saw that his previous accountant of 18 years who had retired had put one of his rental properties on the wrong form… Just for no apparent reason, just some kind of mistake that we never actually figured out why they did it, but we were able to amend it. But he put it on the wrong form, and by doing that, it cost the client over $1,200 in extra taxes.

And again, you say “Well, that’s not that much”, but the client only paid the CPA $800/year to do his taxes, so the CPA was making these errors… And the reason I said 18 years and retiring was because a lot of times these guys get into kind of a rhythm or a system where they’re just filing year after year after year, so if they make a mistake one year, it just kind of keeps going. And it wasn’t a mistake — the IRS is not gonna hound you to refund your money, so it’s not a mistake that would be legally problematic, but it took in this case $1,200 out of his pocket that he didn’t need to pay.

So I think the fifth or the overarching thing is to really look at getting a second opinion, make sure that you’re getting that tax strategy in place, and not just handle it by default.

Joe Fairless: What are some questions you should ask him/her in order to see if they qualify to give you a second opinion?

Dusty Rollins: Someone else or your own CPA a second opinion?

Joe Fairless: Someone else. Let’s assume we’re good with the CPA, but we wanna get that second opinion. How do we qualify the second opinion person?

Dusty Rollins: Great question. I would say, again, start with how do you handle your clients, and if they immediately start talking about tax preparation – “Here’s how we do the forms, we get this to you ahead of time” – if they immediately start there, they’re probably not a tax strategist mindset. If they start with “Well, we first need to look at where you’re at, ask you some questions about what you’re wanting to do, and then make sure all the strategies you’re taking advantage of.” That starts to help  you see — if they start talking tax strategy first. Did that make sense?

Joe Fairless: It does.

Dusty Rollins: And then a key thing too, if you go back to your CPA — because invariably, when we work with the client, we don’t even want them to fire their CPA, we just wanna do a tax plan to help make sure they’ve got all the strategies available… But when they go back to their CPA with our strategies, their CPA will go “Yup, yup. Yeah, we can do that.” The client will call me up and say “Well, if we can do all that, why weren’t we doing all that?” I’m like, “I don’t know, don’t ask me that. Ask them.”

So that’s some place you can start. If you really like your CPA and you think they’re doing a great job on the tax side, ask them “Am I taking advantage of every strategy possible?” and see what their responses are.

Joe Fairless: How can the Best Ever listeners learn more about what you’re doing and get in touch with you?

Dusty Rollins: If they go to dustyrollins.com, and I think the link will be in the show notes… DustyRollins.com/bestever. It’s a page there just for your listeners, Joe. One of the offers – I have a book called “The taxpayer manifesto”. If they go to that page, they can get it a completely free copy of the book shipped out. No credit card needed, just send me a mailing address and I’ll mail you the book.

Joe Fairless: Outstanding. Thank you for that, thank you for sharing with us five things we might be missing out on by not having a tax strategy… And it’s not only things we’re missing out on, but you talked about some practical ways to implement those five things. So you didn’t just leave us hanging, and I appreciate that.

Dusty Rollins: [laughs]

Joe Fairless: Dusty, thanks so much for being on the show. I enjoyed our conversation. I hope you have a best ever weekend, and we’ll talk to you again soon.

Dusty Rollins: Thank you, Joe. Take care.

 

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JF2028 : How To Attract Investors, Establish Credibility, and Fund Deals With Hunter Thompson #SkillsetSunday

Hunter Thompson is a return two time guest from episode JF1545, and JF1220. In this episode, you will learn a ton from Hunter on attracting the right investors, how to establish credibility and fund your future deals. This exact same information has helped him raise more than 30Mil in private capital. He has a book called “Raising Capital for Real Estate” so be sure to check his book out to ensure you can get more info on this topic. 

Hunter Thompson Real Estate Background:

 

Best Ever Tweet:

“Content creation is one of the most efficient ways to build your brand but also raise capital.” – Hunter Thompson


TRANSCRIPTION

Theo Hicks: Hello, Best Ever listeners. Welcome to the best real estate investing advice ever show. I’m your host today, Theo Hicks, and today we’ve got a two-time repeat guest, back for a third time, Hunter Thompson. Hunter, how are you doing today?

Hunter Thompson: Hey, Theo. Thanks again for having me on.

Theo Hicks: Absolutely. I’m looking forward to our conversation. Today is Sunday, which means it’s Skillset Sunday, where we go over a specific skill that our guest has. Today we’re gonna be talking about how to attract investors, establish credibility, and fund deals.

A little bit about Hunter before we begin – he’s the founder of Asym Capital, which is a private equity firm. He has raised more than 30 million dollars in private capital. As I mentioned in the intro, he’s been on the show two times before; listen to his episode 1545, “Seven due diligence items for passive investors and passive investing opportunities”, as well as 1220, “He took his money out of the stock market to syndicate self-storage and mobile  parks.” Both of those links will be in the show notes as well.

He just had a book come out. We’re recording this in the past, but when this episode airs, the book will be live. That book is “Raising Capital for Real Estate: How to Attract Investors, Establish Credibility and Fund Deals”. You can buy that book by click on the link in the show notes.

He is based out of L.A, and you can say hi to him at asymcapital.com. Hunter, before we get into the main skill of today, do you mind giving us a little bit more about your background and what have you been focused on since the last time we spoke?

Hunter Thompson: Yeah. So it’s interesting, there’s so many ways to make money in real estate. I mentioned earlier about conducting due diligence, which is obviously critical; if your deals don’t perform, no one’s gonna get paid… We talked about mobile home park businesses, self storage business… But in my opinion, this element of real estate is the most important, sought after and lucrative part of the entire business. I was at a conference recently where someone said “Is the money in the deal, or is the money in the money?”, and man – the money is really in the money.

Now, that could be the case that not everyone agrees with that and not everyone wants it to be that way, but it certainly is, at least for right now. In those earlier interviews I had been focusing on very much of the same; we have been focusing on the recession-resistant real estate asset classes, most notably mobile home parks, self-storage, and workforce housing, or C and B class apartments. I’m really comfortable with those, from my perspective. I know that a lot of people are more and more interested now  in the “recession-resistant” real estate asset classes.

From my perspective, it’s always a good time to invest in recession-resistant real estate, not just late in the cycle. Because when the economy is booming and the capital markets are loose, you’re going to get the advantages there. But when the economy is correcting or there’s a recession, you still get the advantages of the stable demand for that product. So more of the same – I experienced a lot of success and a lot of growth and a lot of scalability, and that’s what we’re really gonna talk about today.

Theo Hicks: And you wrote a book, which is a great accomplishment. I’ve written three, working on the fourth right now, so I totally understand the work and effort that gets put into that, so… It’s always great to talk to the fellow authors who’ve gone through that experience.

Hunter Thompson: I appreciate that. I’m going through the experience that most people go through when they write a book, which is — you know, I have waited a long time to build up the knowledge to feel comfortable sharing with people, because I want to make sure that I was bringing a lot of value to the table. So I wrote the 60,000 words in about 60 days… And I was like “Wow. When is the next one gonna be?” And then I started the editing process and realized “I’m never gonna write another book in my entire life.” That’s where I’m at right now.

But no, I’m really proud of it, and also I have been really fortunate in the sense that I’ve been able to give back to the community… But I’m really happy and looking forward to the response to this, because there’s so many key takeaways. I’ve spent $100,000 on legal fees in 2018. A lot of what I’ve learned in pursuit of that is in the book, and of course, the strategies and systems that I’ve outlined are what has enabled us to get to where we are today… So I’m really happy to hear both of those responses.

Theo Hicks: So the title of the book is, again, “Raising Capital for Real Estate: How to Attract Investors, Establish Credibility and Fund Deals”. You did kind of drop a bomb that you paid 100k in legal fees and you learned some lessons, so do you wanna walk us through what happened, and the lessons that you learned?

Hunter Thompson: Oh, jeez. If you wanna start with the securities law stuff, that’s gonna probably bore your listeners to death. It’s one of those things where — when you’re dealing in the world of securities, you’re entering a new dynamic, where not only pooling investors together has significant legal implications. You have to stay within the SEC’s guidelines. But as an investor, it’s very favorable, because not only do you get the economies of scale going along with pooling investors together… In the sense of if you lose $25,000 in a syndication, it’s very hard to pursue someone and spend less than $25,000 on legal fees. But if you cumulatively invest in a syndication, there’s much more ability to pursue someone if they act in bad faith… Because cumulatively, each person may invest $25,000 and you may cumulatively be able to come up with a quarter million dollars, which is gonna actually do it.

But from a big-picture perspective, I’ll give away something that took me a lot of money to realize – and maybe not everyone listening to this agrees with this, but I’m a huge proponent of the 506(c) offerings. Those are the offerings which allow you to publicly solicit. It doesn’t necessarily mean that you “don’t wanna know your investors” or that you’re actually interested in publicly soliciting investors… But the solicitation or the 506(c) offering requires that you have a third-party verification of your investor status as an accredited investor. I think that level of scrutiny really adds to the protection of the [unintelligible [00:06:48].05] the person who’s actually creating the deal.

I don’t have to worry about going on  a podcast or going on a webinar and conducting an in-person dinner – all of which I talk about in the book – I don’t have to worry about saying the wrong thing at those events, which can cost me later down the road. If you’re using 506(b) – and please don’t take this wrong, this is just my perspective – there’s so much grey area surrounding it that I just don’t feel comfortable with it. Once you do create your 506(c), I think you’ll never create another 506(b). Just my opinion, of course.

Theo Hicks: I actually just did an interview earlier today – I’m not sure if it will air before or after those one – with Ryan Gibson; he does 506(b), and he basically mentioned the exact same thing. He has a really good process for making sure that he is going by the book. So make sure that if you are doing 506(b) you check out that episode and learn his process for making sure that he has that pre-existing relationship with them. Alright, thanks for sharing that.

Let’s go into the book… Attract Investors, Establish Credibility and Fund Deals. In the context of — let’s say I have not done a syndication deal before, but I do have previous real estate experience. So I’m not a complete newbie; maybe I’ve done — let’s just use me as an example – I’ve done 15 units worth of multifamily before, and I want to scale up and raise capital for a 50-unit building, and I want to attract investors. What should  I do?

Hunter Thompson: I’ll tell you what I did, and you can use it as a playbook of what not to do, when I started thinking about scalability. Back in 2011 I saw a great opportunity in the mobile home park business. I spent about two years learning every single thing I could as an investor, flying around the country, doing due diligence, taking it very seriously, as a full-time job. By 2013 I figured I had established a track record, I had created some amazing relationships with some high-caliber operating partners, and wanted to create my first fund.

Basically, what I did is I had an investor luncheon where I invited extended friends and family and their plus-ones or plus-two’s (they had to be accredited investors), I went through a 30-minute presentation, and at the end of the presentation I handed out a piece of paper so that people could write how much money they are interested in investing. I agreed with my partner that we’d at least raise half a million dollars; I thought I could raise up to a million dollars. There was 30 million dollars of net worth in this room.

I went through the presentation, I was very comfortable speaking in front of people, I answered some questions, and resulted in me raising a total of zero dollars. This was heartbreaking. And really what the book is about is realizing what I did so wrong, and then creating the infrastructure to do the opposite of that.

What I did wrong was that I envisioned myself going out and finding investors, converting them to investors in real estate – which is basically like a pseudo-religious experience, to say “Okay, I’ve invested my whole life in the stock market…” Now in this 30-minute luncheon this person is gonna start investing in not only just real estate, but the mobile home park business.

So I’m thinking about it in the wrong way. I needed to create an infrastructure that attracted the right people, that were already interested, converted them through education and indoctrination to a certain extent, and then close them through this sales process. So there has never been a more favorable time to create that infrastructure now. So if you haven’t really started doing this content creation — it is so asymmetric; it’s one of the most efficient ways to build your brand, but also raise capital… Because if you go through the process of writing ten articles, which we can talk about in a second how to do that, just writing the articles alone will help you communicate more effectively to future investors, so much so that it’ll pay for your time. That’s if no one even ever reads the article. So the book is really about how to create that infrastructure and then funnel people through the sales closing process.

Theo Hicks: Alright, so let’s talk about the infrastructure for a second. Content creation – basically, what you’re saying is that  you want to have some sort of thought leadership platform where you pump out content, and then use that to educate people and attract people who are already interested in investing. Then once you have those people who are already interested, that’s when you close them.

Hunter Thompson: Exactly. And that’s how you create a system that’s actually scalable. Because a lot of these sales strategies may take you from closing 40% of your investors to 60%. That’ll be a remarkable increase. But if you only have ten people in the room, that’s going from four people to six people. I don’t wanna go from four to six. I wanna go from 4 to 4,000, and the only way to do that is to attract the right people.

One of the things I talk about in the book which is a reoccurring theme is time batching. I’m hyper-obsessed with productivity, so I like to do things only in increments of 60 minutes to 180 minutes. And I don’t like to shift gears cognitively when I do these tasks. So what I’ll do is I’ll block out the 60 to 180 minutes, and all I will write is up to 100 topic article titles. These are things like “Five reasons to invest in self-storage; is the mobile home park business actually recession-resistant; what does low interest rates mean for housing?” Those are three, so if  you wanna use those three, go ahead; you’re only gonna have to come up with 97 more.

And then I go and sort those articles up, put them in Excel, put them in numeric value in terms of how quality I think they are and how aligned with my business they are, sort in terms of numeric value and then write an article about the first ten. And that is the beginning of your lead nurture process. I’m telling you, just going through that process alone is gonna help you. And then if you still have some below that ten that are still compelling, I would write outgoing emails – these are probably 300 to 500 words – I would write those emails about those remaining topics. And you’ll probably work your way down to where it doesn’t make sense to write about topics about things that are low on the numeric value. Stop that, put those emails in an outbound drip campaign so that your new investors receive one every single week, and that’ll give you time to focus on other areas of your business.

Three months later you come back, you’ve gotten a lot more knowledge, you’ve got a lot more topic ideas… Do the same thing again and constantly push those emails that aren’t as aligned with your business out months and months and months, and eventually you’ll have an entire year of outgoing email campaigns, so that you can spend your year focusing on operating the actual real estate or other things regarding content creation.

Theo Hicks: That’s a fantastic strategy, very specific. I really like that. But that’s kind of step two, but first I need to have my list of these investors. So you said that what you did wrong was you were trying to find people who weren’t interested in real estate and converted them to real estate. Instead, you wanna find people who are already interested in real estate, educate them on the deals that you do… But it seems like that’s what the article part is. But how do I actually find these people and get them on my list in the first place?

Hunter Thompson: Yeah, so the way that I’ve been able to do this is in effort towards those content creation strategies. So we did  not do paid marketing. I used to go to 3-5 networking events every single week; that’s fine, but it didn’t really help the scalability. So from my perspective, the pursuit of actually creating that content will attract thousands of people.

Now, of course, the content has to be quality, but write the content with that in mind. The goal should be to write something that your friends and family, and also the people that are interested in investing are interested not only in reading, but sharing with your friends. This is how you get things to become viral.

Now, if you wanna supplement that with paid marketing, that’s totally reasonable. I know a lot of people that have done that and have had success, but that just hasn’t been the route that we’ve used. So from my perspective, really the creation of the content will attract the right people.

Theo Hicks: Perfect. So you create the content, you’ve got the emails going out, you’ve got the blogs going out, people are reading these… How are  you converting them into investors?

Hunter Thompson: You kind of work your way up in terms of sophistication. I’m a huge proponent of writing a really quality eBook. This is something that’s probably 10,000 words. If you  have a topic that you think is really compelling that’s kind of evergreen — like “Stock market versus real estate” I think is the name of Michael Blank’s book. It’s a great example. That’s always going to be something that he can use.

In an eBook I like to use more things like detail, data, graphs, back up the claims that you’ve made in some of the articles that you’ve mentioned, and be very aware of who your readership  is going to consist of. I don’t think it’s wise to hyper-niche yourself into “Single moms with dogs” type of stuff, but you definitely wanna have an idea of who your ideal investor and who  your ideal reader is.

Now, if you don’t really like writing, for example, you can outsource this. One of the things that we’ve done – and I know that you guys have done as well – is have a friend interview you on a topic that’s very specific, do a one-hour interview, then convert that interview into a transcripted eBook. Just go to Rev.com, it’s about a dollar per minute of audio. If you wanna email me at info@asymcapital.com, I’ll shoot you an email of one of our transcripted podcast interviews we’ve done… It’s the easiest way to do that.

By the time that someone goes through reading an eBook that you’ve written that’s in that 10,000-word range (about 45 minutes to read), they’re going to be very interested in moving forward with you. Then you can move forward with the actual sales process, and looking at the particulars of the deal… But from my perspective, having a combination of articles, maybe some interviews that  you’ve done on podcasts and this eBook will get you so far along the lines that by the time you get on a phone call with someone, if that’s required, you’re going to be basically answering questions that they have, as opposed to trying to hard-close them, which is not scalable and not a good idea in the real estate sector.

Theo Hicks: Do you wanna walk us through what a typical conversation would be like for someone’s who’s read your eBook, or read some of your blogs, and then you schedule a call with them and you’re kind of having a conversation with them to get them to invest? How would that conversation go?

Hunter Thompson: Yeah, certainly. I’ll start by saying this – not only is it good for credibility, it’s actually good for you and your time as well to make everything as systematized as possible. So if you’re gonna be doing anything, whether it be having a phone call, writing an eBook, writing some articles, ask yourself “Why am I doing this? How can I make this systematized?” So for calls, I like to say there’s only two reasons to jump on a call with an investor. It’s either to have an introductory call, which is usually 30 minutes, or a due diligence call, which is usually 30-60 minutes, depending on the types of questions that they’re asking.

So when I jump on that first introductory call, my goal is to listen to their story, establish if they’re accredited, I want to learn about their experience investing… And here’s the really important part – I wanna hear their motivations for investing. Now, if you do 100 of these calls, you’re gonna hear the same things over and over again, so don’t block out the actual answers that they say. Listen to the nuances, because the nuances are gonna come up voluntarily.

You may hear things like “I really like the cashflow, because I wanna pay off my expenses in order for me to retire.” Or “I wanna invest in deals that have predictable outcomes, as opposed to the stock market, which I don’t really trust.” Then the conversation will transition over to me, and I’ll talk about two really important things here – my last straw moment, whether it be in the stock market or when I realized that my other career wasn’t going to get me the financial freedom that I was looking for, why did I transition out of a typical lifestyle into the world of real estate.

The reason this is important is that we didn’t learn about alternative investments in high school and college. Everyone that’s having this conversation with you – they have that moment when they realize “This typical way of thinking about money  is not going to get me anywhere.” So I transition from the last straw moment to my key motivating factor, and really address what motivates me to help people invest like this.

Then I directly address their reasons to invest, whether it be the cashflow, the lack of predictability of the outcome, or the fact that they think the stock market is too high, and say “That is absolutely correct.” I affirm that those fears are genuine, but there’s another way… And that’s when I outline our general investment thesis, answer any questions that they have, and make sure to stick to the time commitment, which is that 30 minutes.

The introductory call – half of it is about creating that credibility, and the way to create credibility is ensuring that they know that your time is limited, as well as the investment availability. So that’s kind of a brief introduction to introductory calls.

Theo Hicks: Perfect. Is there anything else as it relates to how to attract investors, establish credibility and fund deals that you wanna talk about before we close out the call?

Hunter Thompson: Yes, I’ll say this – your willpower is limited. There’s been many scientific studies about this – people have limited willpower throughout the day, but also over the long-term as well. The reason I say this is that it’s absolutely critical to find a mentor that you can inspire them to share their playbook with you… Because that’s gonna help you get over those humps when you run out of that free will. You’re gonna feel exhausted. But if you have someone that you know has succeeded and they’re depending on you to succeed, it’s absolutely helpful to have them push you along. The number one way to inspire this is just to have a real significant sense of urgency about accomplishing your goals.

Mentors are so drawn to momentum… So if you can show that mentor you attract the right people… And that’s someone that not only has helped me in my career, but I’ve also helped other people, when I’ve seen their momentum and wanna help them along.

Theo Hicks: Well, Hunter, very powerful content. A lot of these things I hadn’t heard of before, I hadn’t thought of in this way, so it’s been a very good interview for me as well. I’m actually looking forward to taking a look at your book as well. Again, that is “Raising capital for real estate: How to attract investors, establish credibility and fund deals.” A link to that will be in the show notes.

Thanks again for coming on. Just to summarize — I can’t summarize everything, but some of the big takeaways that I had… I really liked your time batching concept. How you implement that is you will do things in increments of 60 to 180 minutes. The specific example you gave was you will write down 100 topics for articles in that timeframe, and then you’ll put them in Excel, and then assign  them a numeric value based on how powerful you think the article will be. Then you will write an article about the top 10 articles, and then you will write smaller, shorter emails about the remaining topics. You repeat this process every three months, with the goal of having a year’s worth of content, so you can focus on other aspects of your business.

Something else I really liked on the content creation was the eBook idea. If you don’t like to write, a perfect way to overcome that is to have a friend interview you on a topic that you want to write about, that you’re very knowledgeable about, have it transcribed and turn that into an eBook.

Then lastly, we talked about when you’re actually talking to an investor on the phone, and the only two times that you believe you should talk to an investor on the phone is [unintelligible [00:21:43].10] or a due diligence call, and you walked us through exactly what you will do during that due diligence call. Basically, the outcome is to figure out what their motivation for investing is, making sure you’re listening to those nuances, and figure out what they’re (in a sense) fearful of; then affirm that those fears are genuine, that there is another way, and that’s when you present your option to them, and always making sure that you stick to the time commitment.

So again, Hunter, really enjoyable conversation. Looking forward to checking out that book. Best Ever listeners, thank you for tuning in. Have a best ever day, and we will talk to you tomorrow.

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JF2022: Business Credit Tips With Stephen Wible

Stephen is a former Marine Corps Veteran and has owned 300+ Rental Units. He is a business credit expert, in fact, he wrote a book called “The business credit; the complete step by step guide.” He gives some great advice on how to build and maintain credit for your business and shares the three most common mistakes people make when it comes to getting approved for a loan. You will also learn what you can do if you already have a bad business credit score.

Stephen Wible Real Estate Background:

  • Marine Corps veteran, sold, invested, and managed real estate, owned 300+ rental units
  • Business credit expert specializes in helping obtain and manage credit for their business
  • Based in Tampa, FL
  • Say hi to him at https://businesscreditspeaker.com/

 

Best Ever Tweet:

“We call that the “secret sauce,” if you know who reports and who will approve you, then you can very simply just follow a step by step process I laid out in my book ” – Stephen Wible


TRANSCRIPTION

Joe Fairless: Best Ever listeners, how are you doing? Welcome to the best real estate investing advice ever show. I’m Joe Fairless, and 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 of that fluffy stuff. With us today, Steve Wible. How are you doing, Steve?

Steve Wible: I’m great! How are you, Joe?

Joe Fairless: I’m great, and looking forward to our conversation. A little bit about Steve – he’s a former marine. Thank you for everything you do for our country, first and foremost. He has sold, invested and managed real estate. He has owned 300+ rental units, he is a business credit expert… In fact, he wrote a book called “Business Credit: the Complete Step-by-step Guide”, and he specializes in helping obtain and manage credit for your business. Based in Tampa, Florida. With that being said, Steve, do you wanna give the best ever listeners a little bit more about your background and your current focus?

Steve Wible: Absolutely. Right now I’m working for a company called Credit Suite. I’m the head of their business development. And the reason I was attracted to this company is I was around for the ’08 crash, as I’m sure most of your listeners were, and when it all went down, I was able to walk away with almost perfect credit. Now, the question is how did I do that, right?

Joe Fairless: Huh… What did you have going into it in terms of portfolio

Steve Wible: I had at one point 300 single-family units, and I also had a 35-unit apartment complex, and a 187-unit apartment complex.

Joe Fairless: So in 2007 what did you have?

Steve Wible: In 2007 I had 234 left.

Joe Fairless: Cool. Alright, good stuff.

Steve Wible: So when it all crashed, [unintelligible [00:02:24].00] single-family homes and whatnot; that has some effect. However, none of my business debt affected me at all, and I’m talking high-limit credit with Home Depot, with Lowe’s, Visas, Mastercards, five different vehicles in the company name… None of it was against my credit.

Joe Fairless: Just so I’m clear – so you lost those properties, they were given back to the bank, and it didn’t affect your business credit. Am I hearing you correctly?

Steve Wible: It didn’t affect my personal credit.

Joe Fairless: It didn’t affect your personal credit, but you were foreclosed on with those properties.

Steve Wible: Kind of. I actually made a deal because I felt bad for the tenants. I saw what was going on… I didn’t do what a lot of people did, which was just collect the rent and not pay the mortgage. What happened is the Section 8, which was the majority of my tenants, they have what’s called Fair Market Rent, FMR. And as the market crashed, so did my rents. So I went from collecting anywhere between $800 and $1,000 per unit, down to as low as $250 and $300/unit.

Joe Fairless: Okay…

Steve Wible: So I went from making X amount of dollars per month to losing close to $100,000 a month.

Joe Fairless: Okay.

Steve Wible: So I went to the banks and said “Look, what I don’t wanna do is just collect the rent, not pay you, take you a year to foreclose… These are families; I don’t want a sheriff showing up at their door. I’ll make a deal with you.” It was ten different banks. “I’ll deed them back to you, in lieu of foreclosure, if you honor the leases for the next two years. And you can collect the rent; I’ll sign the rents.” And it worked.

I was one of the few I knew that did that. A lot of my friends walked away with a lot of cash, I walked away with my hat in my hand. But all the business debt I had created, in other words the operational debt – everything from the computers in the entire office, all the vehicles, all my credit with Home Depot and Lowe’s, the Visas, Mastercards, American Express… All of it. None of it was tied  to me personally. So I literally walked away clean.

Joe Fairless: So you said your personal credit didn’t get affected, but then you also said your lines of credit with your businesses were not affected either.

Steve Wible: No, no, no.

Joe Fairless: Help me understand this.

Steve Wible: Okay. Accidentally, I figured out how to build my business credit profile. It took me a long time. When I started getting approved for credit in the company – in other words, tied to my EIN, not to my social.

Joe Fairless: Got it.

Steve Wible: When I shut the company down – because obviously the company was bankrupt, there was no more assets; and I didn’t file bankruptcy – the debt was just wiped out. It was not tied to me, nobody came after me personally… I was also one of the top five RE/MAX agents in the States… So when I moved to Florida — because everybody knew me, at this point nobody wanted to let me sell their house… [laughter] So I moved to Florida, I got my real estate license, doing really well, and then I found this company Credit Suite, who was teaching what I had learned through years of business. They were teaching people to do it in 5-6 months. And I said “I have to come work for you.”

Naturally, I called them, I asked for a job… First job ever. 53 years old. I’d never applied for a job other than the marines… And they turned me down. [laughs] Anyhow, they eventually called me back and I ended up working for them… And I didn’t even know how little I knew until I got here. In other words, I was good at it, but I had no idea. So anyways, that sort of attracted me to this company.

Joe Fairless: What were you doing, without prior knowledge of what you now know with Credit Suite – what were you doing that was effective for building the credit in your LLC name?

Steve Wible: That’s a brilliant question. So what I did is I took a shot in the dark — you could imagine how much I was spending with Home Depot, right? I took a shot in the dark and said “I’d like a Home Depot credit  card, but I don’t wanna sign for it. I’m spending 50k to 100k every month with you”, and I got approved.

Well, once I had that approval, I didn’t realize it was reporting on my business credit profile. Then it was easy to get Lowe’s, then all of a sudden Ford was approving me, I was getting Visas, Mastercards, AmEX… All of a sudden, my profile was building organically.

Joe Fairless: Did you say Ford, the car company?

Steve Wible: Yes.

Joe Fairless: Okay.

Steve Wible: There’s actually a couple – Ford and Ally. Both will give you credit in the company name, not tied to you personally.

Joe Fairless: Okay.

Steve Wible: So I looked at that as “This is beautiful.” So when I got to Florida, it was the first thing I started to do. I started a business and started to build my business credit again. And look, it’s not really about if things go bad; obviously, you wanna protect yourself. But it’s more about protecting your personal credit for when those opportunities show up.

As we all know, personal credit is based on a series of things. One, how you pay your bills, two, how much debt you have, three, and most importantly in my mind, your utilization. Well, business credit doesn’t operate that way. So you can run up your credit cards and your debt max; it doesn’t affect your business credit score, and it absolutely doesn’t touch your credit score, because you didn’t apply, you didn’t sign. So I was able to keep my credit score in the 700’s while still generating debt. So then if a great deal came up – let’s say I found an apartment complex today that just fit my needs, my credit score hasn’t been touched, so I have no problem buying it.

Joe Fairless: Got it. So that’s what you were doing before… And then you jumped on board with Credit Suite. Now what are some enhancements to that process?

Steve Wible: Well, I only knew about the things that I knew about. I didn’t realize there were hundreds of people who would give me credit in the business name. And there is a step-by-step process. When you first start your company – and I’m talking like today; if you register your company today, within 30 days I’ll have you some sort of business credit. I didn’t know there were starter vendors out there, I didn’t know about Sprint, I didn’t know they offered business credit, I didn’t know about Apple, Dell… I didn’t know about all of these people.

There’s so many people who will give you business credit, but it has to be done in a very specific order. In other words, there’s starter vendors, you need an X amount of trade lines reporting, and then you can go on and on from there. But more importantly, you can’t get approved for even your first one unless your business is set up credibly. Now, that immediately brings questions to people’s minds, “What do you mean credibly? You mean I’m not credible?” No. But the biggest defense that banks and lenders and creditors have is to protect against fraud. They wanna protect against fraud. So they have certain steps that they follow – and it’s all done through artificial intelligence – to make sure that your company is legit, and it’s not  a fraudulent application.

If you don’t mind, I’ll give you a couple of those things, because I’ll bet you 90% of your audience is gonna fail these 2-3 things I mention.

Joe Fairless: Alright, what have you got?

Steve Wible: Alright, first thing is – if you’re old enough to remember back in the day I used to pick up the phone and dial 411 and get Joe’s pizza up the street… That database still exists today, and it’s actually the first database that the banks check. The National [unintelligible [00:08:44].15] Business database. Unfortunately, if I ask most business owners for their phone number, they’re gonna give me their cell phone. Well, that you can’t list with National [unintelligible [00:08:51].25] database. It has to be a legitimate phone number.

Now, I know not everybody has a phone on their desk or a phone on their wall, but you can get what’s called a virtual phone number. And most of your audience I’m sure is gonna be familiar with Google. Google has their Google phone number. That’s the right path, but you’re on the wrong alley. They own that number, where if you buy it or rent it from a company like RingCentral; that’s your number, because you’re paying for it, and that’s listable with the National [unintelligible [00:09:19].06] database. That’s the first thing, and I see that all the time. I actually had a guy get approved for half a million line of credit when he was denied pretty [unintelligible [00:09:24].02] and the only problem was his phone number.

The second thing I see is the address… And it’s not that using your home is  a problem, because it’s not. You can use your home, you can use an actual business address, or you can use what’s called a virtual address. And there is a big difference between a virtual address and a PO box, and that is the number one reason people fail – they’ll put down a PO box.

Joe Fairless: Okay.

Steve Wible: So a virtual address is actually a very specific industry. They won a lawsuit in the ’70s to be recognized as an actual office. So you can go to places like Regus — I think every city in this country has a Regus. You can run a virtual office from them. What you can’t do is like your buddy owns a grocery store and you have a backroom office in his store. That doesn’t work. So that’s the second thing.

The third thing – and this blows my mind – is the website and email address. I see people who have great websites and then their email will be Iminbusiness@gmail.com. [laughter] Or even worse, Iliketoguff@gmail.com. It’s unbelievable.

Joe Fairless: Right. Needloanasap@gmail.com.

Steve Wible: Exactly. So what we recommend — and look, Gmail has the G Suite, which is great, so you can personalize it. Like ours, info@creditsuite.com. Or purchasing@creditsuite.com, or accounting@creditsuite.com. Whatever it is, it needs to be a legitimate business email address. Now, those three items, 97% of business owners I talk to fail one of them. And if you only get one wrong, you’re denied. Only one. Now, there’s a series of ten.

One of the things lenders look for is they look for congruency. In other words, across the entire internet they wanna see that your business address matches everywhere. Your phone number matches everywhere. That you have a fax machine, believe it or not, in today’s day and age. They’re looking for that. An 800 number is added value.

Joe Fairless: You have to have a fax machine?

Steve Wible: I know, it’s hard to believe. Nobody uses them, except digitally… But guess who does use them? Banks. Banks and lenders use fax machines. And I’ll put it this way – if Walmart wanted to buy your product and they sent in a credit app, and on the credit app they had the purchasing agent’s cell phone, no fax number, and it had purchasingforwalmart@gmail.com, would you think that was legitimate?

Joe Fairless: [laughs] Well, the email I wouldn’t think was legit, but no fax number – I’d be like, “Alright, welcome to 2020”, right.

Steve Wible: I agree with you, because I don’t have a fax. But you can get a virtual fax. When you get a phone number, you can add on the fax for free. And I’m sure you’ve them where you call up and “This is the fax. Press 1, or 2”. It’s the same thing.

Joe Fairless: Okay, got it.

Steve Wible: So there are the minor things, and there’s other items that go along with it as far as making sure everything matches. Like I said, that you have a real business bank account. I’m amazed at how many people don’t have business bank accounts. They run everything through their personal account.

So all these little items add up to a big mess if you don’t have them in order. And we have tons of videos out there. If you go to YouTube and check out our videos, we literally teach everybody the first steps… Because we want all the people to succeed.

And then once you have that set up properly, then getting credit is easy. You just need to know who to go to. Because the big issue is not everybody reports that gives you credit. For example, I had a printing company; we did about 25 million dollars. So you can imagine, because the margins aren’t big in print manufacturing, how much paper I must have been buying. How much ink I was buying, how many plates, and film etc. Well, almost none of them reported, so I wasn’t doing anything for my business credit profile. I had tons of credit, but nothing was reporting on the business.

So you need to know who to go to, and that’s the hard part, that’s the moving target. We call that the secret sauce. If you know who reports and who will approve you, then you can very simply just follow a step by step process and build it up… And I lay that out in my book, and certainly we lay it out in our program.

Joe Fairless: You mentioned a half a million line of credit earlier… Can a real estate investor get a line of credit from somewhere through this process, that allows them to go buy a property for cash?

Steve Wible: Yes and no. It’s gonna depend on their business. We look for the three C’s – cash, credit and collateral. Obviously, collateral – hard money and they could easily do it. My friend and I had a line of credit of two million with a hard money company.

Joe Fairless: At what rate?

Steve Wible: Back then? 12,5%…

Joe Fairless: What year was this?

Steve Wible: It was the ’90s through mid-2000.

Joe Fairless: Okay.

Steve Wible: It was as high as 18%, and as low as 10%. And I made money. Can you imagine?

Joe Fairless: Right… What about now?

Steve Wible: I’ve seen them — and I’m not a financial office; we have them and we definitely do hard money here… But I’ve seen them as low as 6%-8%.

Joe Fairless: Okay.

Steve Wible: That’s just not my department. So I hate to say 7% and have 1,000 of your listeners call up and be like “He lied.”

Joe Fairless: Yeah… [laughs]

Steve Wible: And obviously, rates just dropped tremendously a couple days ago… So it’s a moving target.

Joe Fairless: So from a business standpoint for a real estate investor – you’ve got a hard money department, but in terms of building your business line of credit it can be beneficial for especially people who are managing their own properties, because that’s where you’re gonna be having a large outlay of cash, like fix and flippers, and then you’ll be able to use credit with Home Depot or wherever else…

Steve Wible: Exactly.

Joe Fairless: …and won’t be out of pocket.

Steve Wible: Exactly. And here’s what’s great about it — and I know things have changed a little bit with the hard money world, but back when I started, they would fund the purchase and they would escrow the construction. I’m assuming that still happens today… But what I would do is I would get them to fund the purchase, they’d escrow the repairs… I would do all the repairs via my Visas, Mastercards, American Express, and my Home Depot and/or Lowe’s credit card, depending on what I was buying… Then they would release the escrow, I would keep that cash and pay off the credit cards once they have sold. In other words, I was taking my profits out early. That’s how I was able to leverage; instead of buying one or two or three or five, I was buying blocks of ten.

Joe Fairless: Got it.

Steve Wible: Does that make sense?

Joe Fairless: It does make sense, yes.

Steve Wible: My brother was amazed. We were partners, and he said “How do you have X amount of hundreds of thousands in the bank already?” I’m like, “I’m letting Home Depot finance this. Why not?”

Joe Fairless: And then with this approach, what if someone has a business and the credit is shot right now? What do they do?

Steve Wible: The business credit?

Joe Fairless: Yeah.

Steve Wible: Well, there’s a couple of options. Time and greed is important. In other words, after you hit that two-year mark, you start noticing that the limits go higher and higher and higher… So I’d never tell anybody to shut down a business if it’s not necessary. If their business credit is shot, like unrepairable, then that’s probably your best option. Start a new company, different address, different phone number.

I’ll give you an example. Dun & Bradstreet, their reporting system – they give you a score. Have you heard of the PAYDEX score?

Joe Fairless: Yup.

Steve Wible: Okay. So 80 is perfect. I’ve seen people get approved at 78, 77… That means you’ve paid late a bunch of times. But as you add lines, what happens is that has less and less impact. Because business credit is strictly based on how you pay your bills. So if you’re late five or six times, five or six different vendors, but now you’ve added 20-25 vendors, you’ll be a 79 and you’ll be approved.

Now, the second part of that is if it’s not truly your debt – easily disputed. Easily disputed. I’ve seen that. And the third is, typically after three years it all disappears anyway.

Joe Fairless: What do you mean, “it all disappears”?

Steve Wible: If it’s not active, it just disappears. It just disappears off your report.

Joe Fairless: If your account is not active?

Steve Wible: Correct. Let’s say you’re negative and you didn’t pay your bill. Or you settled it, but you were 180 days late… A couple of years from now it’s gonna be gone. It’s not like personal, where it stays on there for 7-10 years. With the business credit it’s gone fairly quickly.

Joe Fairless: Got it.

Steve Wible: But again, if you have a negative — I’m not talking about a bankruptcy or a UCC judgment; that’s different. But when we’re talking about vendor credit, or regular credit cards, or even a vehicle, or things like that, you can add enough trade lines to certainly outweigh the negatives… Unless you just have so many negatives that I would look at your report and say “You know what – better off start a new company.”

Joe Fairless: When you work with someone who’s looking to do this process, what are some things that surprise them?

Steve Wible: That’s a great question. The first answer that jumped in my mind is how fast it goes. I’ll give you an example. I can show you a  business credit report… And by the way, if you have nothing reporting  – and this is important for your listeners to know – you will get a failing grade. Automatically, a failing grade. But even adding one trade line will bump your score all the way up.

I show an example during my webinars of someone who had a failing grade, it says high risk, because there’s nothing reporting, they added one trade line under $100, their score jumped all the way up, and they were recommended for $2,500 in credit.

Add three trade lines and it suddenly goes to $5,000. Ten trade lines, $25,000. $30,000. $100,000. It’s scalable. So that’s usually what surprised people, how quickly. Unfortunately, the beginning, when you first start, feels like it takes forever. It takes about 60 days, because you’ve gotta make sure you’re set up properly. Find the starter vendors, apply, get approved, buy something from them, then pay the bill and then they report. So you can imagine that takes 60 days.

Joe Fairless: Yup.

Steve Wible: So once they get through that though, it’s like a waterfall. It just keeps coming. And then what’s really cool about it – and this surprises a lot of people – is once you have enough trade lines reporting, the same thing that happens to you as a consumer begins happening to you as a business owner.

As a consumer, if you have 680-700 credit score or higher, you’re getting offers in the mail all the time. Credit card offers, personal loan offers… You’re always getting offers in the mail. Well, they don’t just magically appear. Those lists are being sold. Not your personal information, but “Hey, I wanna buy a list of people between 700 and 800 credit score in this zip code”, and then they mail you. Same thing happens in a business. So suddenly, instead of you chasing the money, the money is chasing you.

Joe Fairless: Based on your experience as not only a real estate investor, but clearly in the credit building business for businesses, what is your best real estate or business advice ever, as it relates to your area of expertise?

Steve Wible: My absolute best would be – I don’t care  if you’ve been in business 20 years or you’ve just started today – make sure you set up properly, because that’s gonna hold you back. One negative, one thing that’s set up wrong will stop you from ever moving forward, and you’ll be frustrated all the time.

Joe Fairless: Can you fix it retroactively?

Steve Wible: Sure, I talked about it. Phone number… If you’re using your cell phone and it’s everywhere, get a virtual phone number; go back, fix your website… Wherever your phone number is listed, change it. Go to the IRS. Go to the Secretary of State. Wherever that phone number is listed. Because they can find that information in a matter of seconds. Not seconds, tenths of a second. It’s all artificial intelligence.

And the  second piece of advice I would give is don’t fall for the shelf corporation scam.

Joe Fairless: What is that? Real quick.

Steve Wible: People buy aged corporations… I started an LLC which I still have, 20 years old. I could sell that. But it’s not like it was in the ’70 and ’80s, where the banks looked at your data of incorporation. Now they have access to everything, through LexisNexis. So they look at the date of your corporation starting as the day you opened your bank account. So if you have a 20-year-old corporation with a bank account that’s one week old, guess how old you are?

Joe Fairless: One week?

Steve Wible: You’ve got it. But if you put down 20 on the application, they’re gonna mark your file as fraud. And they will report it to Dun & Bradstreet as fraud.

Joe Fairless: That’s a problem.

Steve Wible: Once you’re marked on Dun & Bradstreet, there is no removal. Once it says “fraud”, you’re done. That’s it. Shut down the company.

Joe Fairless: We’re gonna do a lightning round. Are you ready for the Best Ever Lightning Round?

Steve Wible: I’m ready.

Joe Fairless: Alright, let’s do it. First, a quick word from our Best Ever partners.

Break: [00:21:01].28] to [00:21:51].10]

Joe Fairless: Alright, what’s the best ever book you’ve read as it relates to  your business or something relevant to real estate?

Steve Wible: Gary Keller, The Million Dollar Real Estate Investor.

Joe Fairless: Ah, yes. Okay. What’s the best ever way you like to give back to the community?

Steve Wible: The best ever way to give back to the community – back when I was flipping houses, I was giving away homes for homeless people. I’d fix up a property and give it to a homeless person. Obviously, through a charity, through a fund.

Joe Fairless: Sure. And how can the Best Ever listeners learn more about what you’re doing?

Steve Wible: Oh, that’s simple. Go to CreditSuite.com. If they wanna reach out to me, they can certainly reach out via info@creditsuite.com.

Joe Fairless: Steve, thanks for being on the show, giving us some specific tips for setting up our business credibility – virtual phone, address, website with email address and concurrency across all the internet with that stuff, as well as other things… And giving us some examples of what we can do with it as well. Thanks for being on the show, I really appreciate it. I hope you have a best ever day, and we’ll talk to you again soon.

Steve Wible: Alright.

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JF2020: Private Lending With Joey Mure

Joey is a partner at Wealth Without Wall Street, a financial advisory firm. He is from Birmingham, AL and started off his career in the mortgage business in 2003 learning how to become an underwriter and eventually started to see a niche of opportunity to lend money to individuals who didn’t qualify under the mortgage guidelines. He shares the pros and cons of private lending and also shares a unique deal he did with an auto loan. 

Joey Mure Real Estate Background:

  • Partner at Wealth Without Wall Street, a financial advisory firm
  • Started career in the mortgage business in 2003 
  • Became branch manager and led 25 loan officers, gaining national recognition by 2010
  • Based in Birmingham, AL
  • Say hi to him at http://www.wealthwithoutwallstreet.com/home/ 

Best Ever Tweet:

“In terms of a lending perspective, think like a lender, make sure you’re covered and get creative.” – Joey Mure


TRANSCRIPTION

Joe Fairless: Best Ever listeners, how are you doing? Welcome to the best real estate investing advice ever show. I’m Joe Fairless, and this is the world’s longest-running daily real estate investing podcast. We only talk about the best advice ever, we don’t get into any of that fluffy stuff. With us today, Joey Mure. How are you doing, Joey?

Joey Mure: I’m doing great, Joe.

Joe Fairless: Well, I’m glad to hear that, and looking forward to our conversation. Joey is a  partner at Wealth Without Wall Street. He started his career in the mortgage business. In 2003 he became branch manager and led 25 loan officers, gaining national recognition by 2010. Based in Birmingham, Alabama currently. With that being said, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?

Joey Mure: Yeah, Joe. Thanks for having me. My background and being in mortgage – I realized that there’s a  lot going on behind the scenes. The banks make tons of money off of our need for finance, and I realized that I was doing a lot of things wrong in terms of my own personal finances, just from giving up unnecessary cashflows to other people, always paying down debt, always paying taxes…

There’s a number crazy things that I was learning, and I started implementing some of these things myself, that I was learning from a mentor and a coach… And about four years in that personally, I really saw the trajectory of my family’s finances going the way that I wanted, and I said “Man, this is exciting stuff. People need to know this.” I was at a conference, looking around, and there was only about 300 people in the room that were people that are certified to talk about these things, to teach these things… And I said “Man, there’s just not enough people doing this. Why don’t I do this?”

I was at the pinnacle of my career in mortgage, I enjoyed what I did, but I knew that I could have a much greater impact if I could help people implement the same things that I was doing. So in 2014 I transitioned to work with my mentor at the time, Russ Morgan; I think you interviewed him actually, Joe… And we started Wealth Without Wall Street to share this message with the rest of the world. So that’s what I’m doing now.

Joe Fairless: Okay. And with your background in mortgage, and you have a track record with private lending… Can you talk to us about that?

Joey Mure: I worked at one of the nation’s largest lenders, so I got trained to think like an underwriter. You don’t submit an application with somebody that you think “Oh, this person’s never gonna get approved because of this, this and this.” The collateral, the borrower, the credit… You start looking at things in the light of an underwriter.

So when I got out of the mortgage business, I was sitting on a lot of cash. We talk about usually life insurance as a vehicle for funding… I was sitting on all this cash value in my policies and I said “Man, what do I know the best? I understand the lending process.” And it was weird though, because I had never really thought about it in light of that, like “I could be the lender.” Then someone came to me and they said “Hey, somebody just came to my office and they need a private mortgage, because they don’t fit the criteria of a traditional loan.” I said “Really? I’m sitting on some cash…” They said “Would you wanna partner with me on this mortgage? They’re willing to put down 20%, and I told them that we’ll charge them 10% on a 15-year note.” I said “That sounds awesome. I’ll do it.” So that’s kind of my entree into private lending, and I learned some good things, some bad things along the way, but that’s how I got into it.

Joe Fairless: Okay. Well, natural question next – good things and bad things.

Joey Mure: The good thing was this was a really low-risk situation. It was 20% on a piece of collateral… I got an appraisal done, I knew what the value was — in fact, it was here in Birmingham, so I could drive by it; there’s a physical collateralized asset there, and that was great. Their payment history was great, so I  knew they’d pay on time. It was consistent cashflow… And it put money at work that was just sitting there idle up to that point. So those were the good things.

It had obviously a note, and a mortgage and all that stuff backing it up. I was the loss payee on their insurance policy… So I had all the things in place to protect me. The bad thing was I realized money in a velocity sense is way more important than money just growing at 10%.

Joe Fairless: Will you elaborate on that?

Joey Mure: Yeah. What I mean is I had — at the time, I guess that was somewhere around 75k of my money sitting in  a deal that as I grew this business, I realized “Man, I could be growing my business with a lot higher percentage than 10%, if I had access to that money back.” And here I was, I was committed to a 15-year note. So if they had held on to that note for 15 years, I’d realized that my goals changed. I didn’t want just the money growing, coming back to me at 10%; the access to my money was a lot more important, and it being tied up for 15 years… Gratefully, they paid me off in less than two years, because the interest rate was high enough that they were like “Well, I could refinance now… I’m in a different position.” And they did, so I got my money back.

Joe Fairless: And will you just take that one step further on why is access to your money over those 15 years more important than making 10%? Because some people might hear “Well, 10% per year (like your initial reaction was) for 15 years… That sounds great.” So why is that worse than the alternative that you’re talking about, where you have access to it?

Joey Mure: Well, let me say this – everybody’s goals are gonna be dependent on where they’re headed. And that’s what is so important. If you put into your GPS you have a destination, then you know how to get there. Well, in my position, I realized I was growing a business, and the business was the asset that was going to produce a much, much higher return than 10%. But I didn’t see that at first, so I tied up my money at 10%, thinking “Oh, this is a great deal”, and it was… Until I realized “Man, if I just put in that 75k into marketing, or into hiring a new assistant…”

For instance, in the last year we hired an executive assistant, and that money was far less than 75k, but it’s going to turn into hundreds of thousands of dollars in 1) a tech strategy we implemented, 2) we’re doing some land flipping now that’s gonna be very profitable, and she’s helping us with that… She has helped me to be way more efficient… We always talk about time as money, but when you look at what money I have could be helping me to grow my business, the ROI on that is far, far higher than just the 10%. Does that make sense?

Joe Fairless: It does.

Joey Mure: That’s what I was really kind of realizing within two years of having this money tied up in a mortgage. I was like “Man, I wish I had that money back”, and then lo and behold, they refinanced, so it was a blessing in disguise.

Joe Fairless: Okay. So is that a combination of the good and the bad that you recognized, with the private lending?

Joey Mure: Let’s say that I was in a different position than I was. Let’s say that I was in a regular job, or I had a business that was already really off the ground, and it was mature, and all these things… Then having just 10% working on the side, and money that would have been otherwise useless would be  a great thing.

I’m not saying that a 10% private mortgage is a bad thing, I’m saying for me where I was it was holding me back from potentially 100%, 200%, 300% ROI on my own business. So it’s kind of the way that that works, and I had three outstanding at the time; two of those refinanced back, and then the other one finally came back recently.

Joe Fairless: How many years into it?

Joey Mure: That one was three.

Joe Fairless: So all pretty short-term… Because it’s 10%, and once they can qualify for a mortgage rate, then they’re gonna do it, right?

Joey Mure: Yeah, gratefully they had that motivation. Otherwise I may still be waiting on that money.

Joe Fairless: So basically it’s looking at – in anything that we do, especially investing-wise – the opportunity cost. It’s 10% per year – great. 15 years locked up. Wonderful security for 15 years. But are we building a business on the side, or do we have alternative ways of generating that type of cashflow or greater with that level of safety? And then we just make a decision based on our goals, “I’m okay with a little bit more risk, so let me go this direction”, or “I want more safety, I wanna lock it in for 15 years. Let  me go this direction.”

Joey Mure: Exactly. And I can tell you, I learned through that I needed to go more short-term, so I actually did an auto loan shortly thereafter. Within a year or two after that I still was growing the business, and I had somebody come to me that had heard about the mortgage that I’d done, and they said “Hey, by the way, do you do auto loans?” [laughter]

Joe Fairless: Really?

Joey Mure: And I was like, “Never have… But tell me what you’re thinking.” And that would actually end up being a really good win for me, because I started thinking differently… And I said “Man, I’ll do it for a year.” He said “I’ve got this Suburban, and it’s owned free and clear.” It’s like a 30k vehicle. He said “All I need is 10k, because I need to get back on my feet on some things. I’ve gotten behind on some bills… It’s worth 30k. Here’s the title,  it’s free and clear.” And I said “Man, that’s good collateral against a 10k loan… But then I said “Okay, tell me what’s important to you.”

I knew cashflow was tight, so I set it up on just a minimum $100/month interest-only. I said “But in six months I’m gonna go up to $200/month.” So I’m trying to give him an incentive to pay me off early, to get my money back. Again, I learned a lesson there… And then I said “But when you pay me back, you’re not gonna pay me back 10k, you’re gonna pay me back 11k. And it’s like a lump sum. Use that increased pay-off.”

He said “Well, that sounds great”, because he was actually  a real estate agent, he was in the hardest part of the year, like around this time of the year (in December), and he said “I’ll have the money come spring-summer-fall, whenever the real estate market ticks up.” And sure enough, he paid me off. But the ROI on that was 26%. Even though I had that really small payment, it worked really well for his cashflow, and he was happy to do it. In fact, he came back to me and said “Hey, would you do that again another year?” So I did it two years in a row.

Joe Fairless: Was it a 10k loan for a vehicle?

Joey Mure: Yes, just against his current —

Joe Fairless: Right, but what was he using the 10k for? Another vehicle, or something else?

Joey Mure: No, just to catch up on bills and other things.

Joe Fairless: Alright, got it.

Joey Mure: Yeah. But then he paid me off, and then he called me back about two months later and he’s like “Hey, do you wanna do that loan again?”

Joe Fairless: What did you say?

Joey Mure: I said “Yeah, absolutely.”

Joe Fairless: Is that full-circle as well, or is that in the middle?

Joey Mure: Yeah, both of those have been paid back.

Joe Fairless: Okay.

Joey Mure: But then I had come a long way in the business and I realized it was a good learning opportunity… But I said “But man, I actually need to really focus in on where my ROI is coming from”, and it was from the business.

Joe Fairless: Yeah…

Joey Mure: But it was a great opportunity in the meantime.

Joe Fairless: Thank you for sharing that. I don’t think we ever talked about auto loans in 1,900+ interviews on this show, so thank you for that. What paperwork is involved with an auto loan?

Joey Mure: So it was really just a simple note that I had to just agree to on paper. It had to be added to his title. You’re essentially writing that in and then sending it in. Then I was added to his loss payee on his auto insurance, so he had to show me his declarations page and show that I was the named beneficiary if something were to happen and he had to claim it on insurance. And besides that, that was really about it. So it’s pretty simple. I actually had an attorney just draft up a simple note, and we just kind of went from there.

Joe Fairless: And being added to the loss payee on the auto insurance declaration page showing that – that’s if he were to claim a loss… Like if the Suburban were to go away magically one day, and he’s like “Someone stole it” and you’re out of Suburban, then you would get the insurance claim, not him, right?

Joey Mure: Well, I would get paid back.

Joe Fairless: You would get paid. Okay, so how did you think to add that in there? Because someone might not think about that, myself included, if someone said “I’ll do an auto loan.” And I probably wouldn’t do an auto loan, but it’s interesting… And if I did do it, I would do a note, and then I probably would think about being