JF2224: Note Investing Strategies With Jamie Bateman

Jamie is a part-time real estate investor and works part-time in the U.S Defense Department. He currently has a portfolio of 8 rentals and over 20 mortgage notes. Jamie started off as a coach and after some time he decided to work for a mortgage broker where he saw some shady things happening so he decided to quit his job and join the military. Now he is focusing on his own real estate business while working for the U.S Defense Department.

 

Jamie Bateman Real Estate Background:

  • Part-time real estate investor and part-time in the U.S Defense Department
  • Has over a decade of experience in single-family rentals and 2 years in mortgage notes
  • Portfolio consist of 8 rentals and over 20 mortgage notes
  • Based in Baltimore County, MD
  • Say hi to him at: www.labradorlending.com 
  • Best Ever Book: Wealthy Gardener

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Best Ever Tweet:

“One of the benefits from note investing is you have collateral” – Jamie Bateman


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 Jamie Bateman.

Jamie, how are you doing today?

Jamie Bateman: I’m doing great, Theo. I really appreciate you having me on.

Theo Hicks: No Absolutely. Thanks for joining us, I’m looking forward to our conversation. Before we get to that though, let’s go over Jamie’s background. He is a part-time real estate investor and part-time in the US Defense Department. He has over a decade of experience in single-family rentals and two years of experience in mortgage notes. His portfolio consists of eight rentals and over 20 mortgage notes. He’s based in Baltimore County, Maryland, and you can say hi to him at https://labradorlending.com/.

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

Jamie Bateman: I’d be happy to. As far as background goes, as you mentioned, I’m from Baltimore County, Maryland. I am the oldest of seven kids. I have three brothers and three sisters. Went to Hereford High School in Baltimore County. I went to Gettysburg College in Pennsylvania, played lacrosse there, and met my wife there, graduated in 1999.

After college, frankly, I really wasn’t positive what I wanted to do. Lacrosse was such a big part of my life at that point. I didn’t have too much direction at that point, so I decided to coach a little bit, so I coached in high school and at the college level. Unfortunately, it doesn’t pay real well and certainly not back then.  One year I made $8,500 (not $85,000) as essentially a full-time coach… So I decided it was about time to get a real job.

Through some networking, I linked up with a title company, and I later worked for a mortgage broker. At that point, there were some real shady things – this was probably 2004/2005-ish, kind of right before the peak of the real estate market… And some shady things were going on at the mortgage company I was working for and I said, “You know what, I don’t want to have anything to do with this.”

I quit my job, I joined the Army Reserves, went through Officer Candidate School, chemical school, deployed to Iraq for a year,  I ended up getting a Master’s… But again, as you can see, kind of bouncing around, not totally sure what I wanted to do. I was able to use that army career to pivot to a civilian job with, as you mentioned, the Defense Department, and that was in 2008. I got out of the Army Reserves as a captain. I’m still currently with the Defense Department today.

My wife and I actually bought our first rental property – pivoting over to real estate now – in December 2009. It was a condo, we still own it. In fact, we still have the same tenant there. I’ve kind of always had an inkling that I want to get into real estate investing, but frankly, at that point we weren’t really taking it too seriously, didn’t really know what we were doing. It was later on, 2014-ish, when I was driving a lot for work, for my commute, and listening to a ton of podcasts, and then I kind of decided to take real estate to the next level.

So 2015 is when we actually started buying rentals and I actually went part-time in 2015 at my “real job”, and my wife and I started ramping up our real estate investing.

Theo Hicks: 2015 – is that when you started to accumulate the now eight rentals that you own?

Jamie Bateman: You got it. Yep.

Theo Hicks: Are those all single families?

Jamie Bateman: They are all single families. One is a condo and six townhouses in Baltimore County, and then we actually just picked up a rental in Jacksonville, Florida. It’s our first out of state rental. That’s a true single-family detached home, which is a pretty cool story, I think.

Theo Hicks: Yeah, I definitely want to ask about that rental out of state. One question I want to ask you – a lot of people, when they think about single-family rental investing, you’re only allowed to have a certain number of the types of loans in your own personal name. I think it’s like four or eight or something.

Jamie Bateman: Yeah, I think it’s gone up to 10.

Theo Hicks: Okay, so you’re still just putting those in your personal name, then?

Jamie Bateman: No, actually they are in an LLC, and one of them is in our personal name. But that’s the first one that we bought over 10 years ago. We still have the same tenant there, and he brings us six checks twice a year, which is nice. But anyway, the rest are not in our personal name.

One of the downsides is we do have commercial notes attached to those properties and they are recourse loans that are amortized over 20 years, and they have balloons after five years. It’s your typical commercial loan, which that’s also typically a little bit higher interest rate. I’m actually looking to address that situation, because the payments are a little bit higher than I’d like them to be.

Theo Hicks:  Do you have one commercial loan over all those properties or each property is in a commercial loan?

Jamie Bateman: It’s actually the six townhouses in Baltimore County have three loans on them. So each loan is backed up by two properties.

Theo Hicks: Got it. Okay. Does that mean you bought those two properties at the same time?

Jamie Bateman: It doesn’t mean that. We actually were buying these with cash, and generally speaking, following the BRRRR method, which I’m sure a lot of your listeners are familiar with, and fixing these properties up and renting them out, and then refinancing. But in this case, when I say refinance, it’s really just a cash-out refinance to get some or all of our money back that we put into the deal. We weren’t using hard money or anything like that. We actually were using cash to buy them, fix them up, rent them out, and then went and got more of a standard loan.

Theo Hicks: Okay. When you refinance, you buy them all cash, and then you finance two at a time and bundle them into one loan?

Jamie Bateman: Exactly.

Theo Hicks: Got it. Okay. Let’s talk about the Jacksonville deal then. I’m assuming that the other ones – were all those in Baltimore County, Maryland, or were they also out of state or out of the area?

Jamie Bateman: The Jacksonville one is the first out of Baltimore County, actually. It’s the first one that’s even more than a 15-minute drive from where we live.

Theo Hicks: Walk us through that decision. Why did you decide to invest out of state? Why did you choose Jacksonville? And then kind of just walk us up until you actually found the deal. What team members were put in place from Jacksonville? How did you find them? How did you screen them? Things like that.

Jamie Bateman: Sure. I actually have – just for your listeners, if anybody wants to learn more about this particular deal, I do have a couple blog posts about this. But this actually is a good transition over to our note investing, because this actually was a note deal that we ended up taking back the property on; and I had no intention of keeping it initially frankly. I do like the Jacksonville market, which is one reason that I purchased the note, but I did not intend to pick up a rental there. However, we fixed up that property and I was going to sell it. The more I researched the market, I just thought that it’s a really strong rental market and why sell it now. I can rent it out for a year or two and if it’s just an awful experience, I can sell the property then.

As far as team members and that kind of thing, really, I relied heavily on networking through bigger pockets and other groups that I’m in and decided on a good, established property management company that’s down there, and I’ve relied on them heavily frankly. I’ve never been to Jacksonville, Florida, and so far, it’s going pretty well.

Theo Hicks: Let’s transition into the notes then. Overall, your note strategy, I think I know the answer based off of—or maybe I don’t; so is your goal — because I was talking to someone about notes, I think it was last week, and he buys notes because he wants to take the property. He kind of mentioned there are two strategies; there’s ones where you want the property and there’s the other one where you want to work it out with the person who’s currently living there, so you just make the money on the interest rate. Which one are you and why?

Jamie Bateman: I’m not intending to take the property back. I’m trying to keep people in their homes. I’d love to work with borrowers as much as possible. Sometimes it’s the last resort. That’s one of the nice benefits about note investing, is you have collateral, which is the property, as compared to the stock market and a lot of other investment strategies. That is one benefit there. So no, we buy both performing and non-performing first-lien mortgages.

Another benefit to note investing is that there are so many exit strategies. You mentioned a couple of them, Theo, but there are others. Another really good one is to buy a non-performing note, get it re-performing, and then resell that note. That’s what a lot of non-performing note investors aim for.

Yes, some people do try to take the property back and that’s certainly a strategy. I know, as the real estate market in general, across the country, tightened up over the last five years, there were a lot more flippers and rehabbers, and people who wanted the property, getting into the note investing space just for that reason. For me, it’s not my first goal, but it’s one of several options.

Theo Hicks: Sure. So you buy performing and non-performing. Do you do the strategy where you take the non-performing to performing and sell it, or the buy and hold as a flip strategy?

Jamie Bateman: Yeah. I would say that we’re closer to the buy and hold side of things. I don’t want to pretend like I’ve been doing the note thing for 10 years. It’s actively been more of a year and a half to two years type thing. We’ve had Labrador Lending for about two and a half years, but I’m actually in the process of adding value to some of our lesser performing notes. We’ll be hoping to resell them later this year. That’s definitely on our list of — probably our first option that we’d like to do. But I’m absolutely not opposed to just buying a nice performing note, and holding it for cash flow, especially during these times.

A lot of times what we’ll end up doing is if we’re using our own money, we’ll buy a performing note to pay the bills and keep the business going. I actually hired my wife in January. She helps me out with a lot of the due diligence and a lot of paperwork.. But we will use other people’s money. A lot of times a joint venture is best geared toward a non-performing note. The reason that is — well, several reasons. But with non-performing notes, you have more of a well-defined exit point. If you’re getting the note re-performing and selling it, that’s the transaction that ends your ownership of that note, right? But joint ventures don’t typically work so well on performing notes, so we’ll often buy a performing note with our own funds. Another strategy that I have employed recently is to sell partial notes, which is a part of that sell payment stream. That strategy works better for performing notes.

I hope I’m not confusing things too much, but there are different strategies to use with both performing and non-performing notes. We stick strictly with the first lien space and specific states as well. That’s another way of focusing the business.

But as far as performing, non-performing, frankly, you can’t control the borrower, you don’t know exactly how it’s going to go, so to pretend that you know, “Oh, this is my plan for this note” upfront – it just doesn’t work like that. You might have one or two strategies that you think are going to work, but the fact is, you have many options at your disposal. If you’re doing your due diligence well, you should have equity in the property. In my mind, whether it’s performing or non-performing, it’s actually a safer investment a lot of times than, like, the stock market or things that don’t have any collateral.

Theo Hicks: Can you give us some tips, some things that you do in order to take a non-performing note to performing?

Jamie Bateman: Well, I think it really boils down to carrots and sticks. Especially during this time with COVID and everything we’ve worked with our borrowers to defer a couple of months of payments if they were affected, or even if they said they were affected by COVID and the lack of employment. In other cases, we are modifying loans to lower the interest rates.

As an example, say a borrower — they might have an unpaid principal balance of $50,000, but they have unpaid interest in fees and all kinds of arrears upwards of $25,000, so they actually owe $75,000, and they’re unable to make their payments.  What we have been doing is modifying those loans, lowering the interest rate, potentially extending the term of the loan so that their payment doesn’t go up, and getting them back on track.

Another option there is to take those arrears – and this is a key part of it, and obviously check with attorneys in your state that the note is in… But if you can raise that principal balance, a lot of note investors actually bid on the principal balance, and that’s a key part of this is; you’re adding value to that note by, one, lowering their payment, getting them reinstated, caught up, and they start paying again, and then you’ve also raised the principal balance, so you’ve added value to that note then for the resale.

Theo Hicks: You’re saying that, in that example, a $50,000 principal and 25 payments and stuff, the new loan is actually $75,000 principle?

Jamie Bateman: You got it.

Theo Hicks: Perfect. Okay. All right, Jamie. What is your best real estate investing advice ever?

Jamie Bateman: I would say focus on your strengths and think about how you can add value contributing to something bigger than yourself. One more quick thing is, just do what you say you’re going to do. There are a lot of people that just don’t follow through and I think your word is really important.

Theo Hicks: Perfect. Okay, are you ready for the best ever lightning round?

Jamie Bateman: Let’s do it.

Theo Hicks: Okay.

Break: [00:16:15] to [00:17:06].

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

Jamie Bateman: The Wealthy Gardener by John Soforic. It’s really good blend between fiction and non-fiction, and it’s got so many life lessons in it. I think I’m going to have to re-read it.

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

Jamie Bateman: That’s a really good question. I think I would, again, go back to what I said with the best ever advice, focus on my strengths. I’ve got some networks built-in now as far as note investors and property managers and that kind of thing. It would take a little while but I think I could start over.

Theo Hicks: Out of the eight rental deals you’ve done and the 20 plus note deals you’ve done, which of those was your best ever deal?

Jamie Bateman: I’d have to say it was the Jacksonville deal, because numbers-wise, it’s really good. And again, go to the blog posts about that. It also utilized several different strategies. It used both buying a non-performing note, trying to work with the borrower, unfortunately, for closing, taking the property back, rehabbing the property from a distance, and then renting it out two days after it was on the market for rent, in the middle of a global pandemic. We certainly made some mistakes with that, I don’t want to pretend like it was the perfect deal, but that’s the one I’m most proud of.

Theo Hicks: And that blog post, is that https://labradorlending.com/blog/ and then it says  Jacksonville, FL, Case Study 2.0? Is it the one?

Jamie Bateman: You got it. Yes.

Theo Hicks: Okay. Now, what about a deal that you actually lost money on? How much did you lose? What lessons did you learn?

Jamie Bateman: We’re not really in the transactional space, per se. I’d say we’ve lost money with opportunity costs, the Jacksonville deal, for example, I overpaid for the note. I found out later that I paid $46,000 for the note. And it turns out, I actually could have paid $40,000 and found out through kind of a backchannel… But we didn’t lose money on the deal. We really haven’t lost money on a deal. I think it’s much easier to lose money if you’re actively flipping or that kind of thing.

Just to clarify, I have lost money on passive investments through crowdfunding deals that I totally blame myself for, for not doing enough due diligence there. I guess if you’re including that, then I certainly have lost money.

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

Jamie Bateman: We support our church financially and are active members there. My wife has volunteered there over the years and since we’re married, I’ll take credit for that—no, I’m kidding. I also coach youth lacrosse. I’ve coached my son’s lacrosse team for several years, so we’ll see where that goes. Other than that, just trying to support family members when we can and trying to be the best parents that we can.

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

Jamie Bateman: I’d say my website https://labradorlending.com/ and then you can also feel free to email me at batemanjames@labradorlending.com. A lot of people actually don’t know how to spell Labrador, surprisingly. batemanjames@labradorlending.com, I’d be happy to help anybody who has questions with single-family rentals or note investing, which is what we’re really focused on these days.

Theo Hicks: Perfect, Jamie. Thanks for joining us today and walking us through your journey. A few of the takeaways that I got… You talked about your strategy for acquiring those eight rentals and how you would buy them all cash, would do a BRRRR model, and then you actually refinance two properties into commercial loans. That was interesting.

You talked about your Jacksonville deal, and you mentioned that people can learn a lot more about that on your blog, and you mentioned how to find it there. But you mentioned the process of how are you able to do that deal by being out of state – it was originally a note that you had take the property back, which you didn’t intend on doing. And you mentioned that you fixed it up, and planned on selling it, but then did a lot of research and found that it was actually a really strong rental market. You relied heavily on networking on Bigger Pockets, and other groups to find a solid property management company that helps you with that process down there.

Then you kind of walked through your note investing, you kind of gave us a crash course on note investing; your strategy is closer to the buy and hold than is actually flipping the notes. You buy performing and non-performing, and you do joint ventures on some of the non-performing liens.

We talked about some of the pros and cons of performing versus non-performing. You talked about how to get a non-performing note to perform. You say it’s kind of like carrots and sticks, so you can defer payments; you can modify loans to have lower incidence rates, you can extend the term of the loan’ so the payment doesn’t go up, you can take the arrears and add it to the principal… So really just a lot about note investing. That was interesting.

And then also your best ever advice, which was focus on strengths, figure out how to add value, and then do what you say you’re going to do and follow through. So I really enjoyed the conversation and I learned a lot.

Better Ever listeners, I hope you enjoyed the conversation as well. Thank you for listening. As always, have a best ever day and we’ll talk to you tomorrow.

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JF2223: Invest When Approaching Retirement With Bill Manassero

Bill Manassero is the Host of The Old Dawg’s REI Network and has 6 years of real estate experience with a portfolio of 756 doors. Bill started into real estate a little later in life than most people and decided to start into real estate by buying a couple of turnkey properties. When he started seeing checks being deposited in his account he decided to focus on buying more properties.

Bill Manassero (Man-a-cer-o)  Real Estate Background:

  • Host of The Old Dawg’s REI Network
  • 6 years of real estate investing experience
  • Portfolio consist of 756 doors
  • Based in Irvine, CA
  • Say hi to him at: olddawgsreinetwork.com 
  • Best Ever Book: Clockwork

Best Ever Tweet:

“Know what your why is, because when all else fades away, it’s going to be your why that keeps you motivated” – Bill Manassero


TRANSCRIPTION

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

Bill Manassero: Hey, I’m doing great, Theo. How are you, my friend?

Theo Hicks: I’m doing great as well. Thanks for asking. Thanks for joining us and I’m looking forward to our conversation. Before we get into that, let’s go over Bill’s background. He’s the host of The Old Dawg’s REI Network. He has six years of real estate investing experience and has a portfolio consisting of 756 doors. He is based in Irvine, California, and you can say hi to him at his website, which is http://olddawgsreinetwork.com/.

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

Bill Manassero: Sure. I’m an old dawg, I guess that came across real clear in all the URLs so far… I started in real estate actually kind of later in life. I had about 25 plus years in business; both in the corporate side, the entrepreneurial side, everything from technology to automotive to financial services; a pretty broad background. I also spent a number of years as a professional musician. And then my last stint was with a new internet company that seemed to be the last company I was going to work with, because I had the stock options, I was going to retire with the stock options and go into full-time ministry. The bubble burst and I was kind of left, “Oh, my gosh, what am I going to do?” Actually, that’s when I was called in the mission field first as a professional musician, and then later living in Haiti, Port-au-Prince, Haiti, where I have a non-profit organization called Child Hope International, and I spent the last 12 years with my family there, working with the kids that are abandoned, orphaned, and at-risk on the streets of Port-au-Prince, Haiti.

As I was getting kind of old now, I had been doing a lot of different things over a long period of time there, I was kind of looking at retirement, and I’m still in Haiti and trying to decide what I’m going to do, because I just didn’t feel like retiring. I didn’t know what it would mean to just, you know, sort of walk the beaches, collect seashells or something. I like to stay active.  I like to do things. I was looking into different options and came across actually an inheritance check unexpectedly. And because I had been in tech in a lot of different areas, I was very active in the stock market.

I got this check and I was pretty heavily vested in stocks. I thought, “Well, you know, I’d like to diversify with this,” and so I was looking at different options, and gold and annuities, a lot of other things. And really, I had some friends, [unintelligible [00:06:39].25] board of directors from a non-profit that are really successful real estate investors. And I thought, “Well, maybe I’ll do that.” But just as a way to diversify my investments. I started researching, reading the books, you know, I came across Rich Dad, Poor Dad, a bunch of other books, and finally said, “You know, I’m just going to do this. I’m going to pick up a couple of rental properties, turnkeys, so I don’t have to worry about them.” And that’s kind of what I did. I hopped on a plane at Port-au-Prince, flew to Atlanta, flew to Memphis, came back with three turnkey properties, and that was it. I was going to focus on other things in life.

But it turned out well. The next month that I’ve got money appearing in my account, and I’m going, “This is pretty sweet.” And I started thinking, “Maybe this is something I could do in my retirement.” That’s what I started doing. I started researching more and looking at what types of real estate investments there are; and I’m still very active in my non-profit, but realizing I’m getting older, and Haiti is a tough place to hang out. So I’m getting ready to move back to the States in sort of a sabbatical, and decide if we’re going to stay in Haiti or move back to the States where a lot of our kids and grandkids are. That’s kind of what happened.

As I got started, I shared with a lot of my friends, who are other people that are looking for investments, and they wanted to hear all about it, “How did you do that? Where did you buy the rentals?” and just all the details, and it got kind of nebulous at a certain point, where I was emailing people and trying to communicate with them. I said, “Look, I’m going to put a blog together, and then in that blog, I’ll share everything; the good stuff, the bad stuff, everything.”

The blog started, then my mentor at the time really recommended that I start a podcast and I was kind of like, “I don’t know about that.” The blog is enough for responsibility. He said, “No, you really need to do it. It really will help you.” I just said, “Well, at least I’ve got a face for podcasting, so that’ll be good, as long as I don’t go to YouTube.” That’s how the podcast started.

My focus on the podcast is for people that are 50 years of age and older, the people that are approaching retirement or are already in retirement, that are interested in real estate investing as a means to supplement their retirement or to create a legacy to hand down to their children, to grow their current retirement nest egg, and that’s kind of where I am today. Of course, you know, I’m still actively investing myself as well.

Theo Hicks: Are you still in Haiti or have you moved back to the States already?

Bill Manassero: No, we moved back for sort of a one-year sabbatical. On that trip, we really found out we just needed to stay here. We’ve got people that are running things in Haiti, we’re still active, and that’s part of my ‘why’, so to speak, of why I’m in real estate investing; I also want to help support our efforts there in Haiti, too. So yeah, that’s still very active.

Theo Hicks: You’ve got 756 doors. You mentioned you began by picking up three turnkeys, I’m assuming single-family homes. That’s three of those 756 doors. What is the breakdown of the other 753 doors?

Bill Manassero: Well, two of those are actually were single-family. One was a duplex, and in a really short period of time, and especially I’m just devouring information. I’m doing a lot of research. I’m looking at YouTube videos, reading a lot of books; I want to be a good real estate investor.

In that process, really early on, I paid about the same amount for each of these three turnkey properties, but one was a duplex, and the duplex – I paid about the same as I did for the single-family homes, but it was producing twice the amount of rent. Not only that, but I only had one property tax payment, I only had one insurance payment, and one roof to worry about.

So I’m kind of looking at this and going, “Okay,” I’m starting to see the economies of scale, you know, sort of emerging here. I said, “I’ve got to keep doing this.” I bought another duplex, and this time in Indianapolis, and sure enough, it turned out to be an amazing buy; I bought it near downtown, it was really growing, and it doubled in price in just like two years, and I’m saying, “This is really cool, but why limit myself to just duplexes? Let me look for other properties.” And then I found a 22 unit in Indianapolis as well. I kind of jumped into the small apartment world.

And then from there, I started looking at a hundred plus units, started looking at what was available, ended up partnering with people where I came in as a GP co-sponsor, and got involved with the 529 units in Irving, Texas. And then I moved into this space that I have always been really interested, and that is in the area of senior living. I have, obviously because my audience is in that realm, I’m in that realm. There’s just a strong, strong interest there, and seeing the 10,000 baby boomers a day are hitting age 65, the demand for housing is huge.

So partnering with some others also as a co-sponsor GP, and we are doing ground-up construction on luxury senior living facilities. And right now, we’re in Florida and West Virginia, we’re also looking at Texas and Arizona, and we have other states under consideration. But we’ve already built three and looking at it anywhere from three to six per year. That’s where the rest of the units come from.

Theo Hicks: When you are the GP, the co-sponsor, what’s your role? What are your responsibilities in those partnerships?

Bill Manassero: It’s different in each one. In some areas I’m focused primarily in Investor Relations… Because I know a number of investors, a lot of people have followed my story and what I’m doing, so I have a lot of people that are interested in investing with me. I also have marketing responsibilities, and also involved with administrative roles as they see fit for me to do as well.

Theo Hicks: Do you mind talking to us a little bit — obviously, you’ve got The Old Dawgs Real Estate Network, very popular podcast, and you kind of mentioned that one of your primary roles is Investor Relations… Maybe talk to us about—and you can answer this any way you want, but how that podcast has allowed you to raise more money to buy more deals, or at least be involved in more deals?

Bill Manassero: Well, my mentor at the time told me that that would be one of the advantages of the podcast. Now, I don’t monetize the podcast, I rarely—I’ll have advertisers approach me and it looks like it’s a good fit. But I don’t seek out advertising, or I’m not selling, consulting or any other thing. I’m not selling books or whatever.

I did that on purpose, because when I first started, as I was telling you, I got sucked into every boot camp that it brought me to the next level and then the next upsell, and before you know it, I’ve got bookshelves full of all these home study courses and all these things and I’m kind of going, “What happened?” I didn’t want to create a vehicle that would be that thing, another upsell place for folks. I wanted them to come there without any fear of being pitched on something. It was kind of an afterthought.

When I started looking at syndication, I thought, “Well, I’m going to set up an investor newsletter so that people can see what I’m doing,” and then through that, there was a lot of folks that have been listening to the show for years, and we developed as best a relationship as you can on a podcast, and they wanted to join me in these investments. It was kind of an organic thing. I wasn’t really pushing it.  I really don’t mention it on the air, rarely. We have a newsletter that goes out every month, where we announce our podcast shows and the articles on our blog. In there, there’s just a little note if you’re interested in investing with Bill, and you can sign up, and that’s about it. I’m really not pushing anything. If there’s people that are interested and want to be able to share the investments and if it looks like something that would work well with their investment style and their portfolio, then we work together.

Theo Hicks: What are some of your tips for how to grow a podcast, how to attract a large following? Or was it kind of just organic for you as well?

Bill Manassero: It really was. I’m not really intentional in it. One thing that I did do early on though and that was good advice from someone who had a very successful podcast shared with me, he said, “Just make sure the quality of what you’re producing is there; that you’re not just putting out a bunch of stuff. Make sure not only the quality of the guests and the topics and so forth, but the quality of the production, too.”

Early on, I got a producer from the start, so that he could ensure that the sound quality was good and that the edits were there, and just all the stuff to keep the quality of the sound up and so forth. That really made a big difference, because a lot of the reviews  that we’ve had – I don’t know, hundreds and hundreds of reviews – the primary focus is they like the quality of the speakers, the quality of the sound, and so forth. That has really paid off, but I haven’t really done any marketing per se to try to grow my base. I have a pretty loyal base of folks that listen all the time and they’re spreading the word to others, and that’s just kind of growing organically, like we said.

Theo Hicks: Thanks for sharing that. I want to transition really quickly back to what it sounds like is your main focus now, which is senior living, right?

Bill Manassero: Right, I’m still looking at apartment buildings, but in the process, when I started looking—it was getting to 2016/2017, it was getting harder and harder to find the kind of deals that I had. My criteria was to always buy something a little below market. As you know, because you guys are very active, finding below market properties is pretty rare.

As I was looking around, and the senior living thing came in front of me, I said, “Gee, I can get amazing returns on this”, because it’s very different and we’re dealing with construction, and in fact, all we do is really get a construction loan, and we buy the land, and then we raise money to develop the land, right?

In that process, we get a construction loan and a five or 10-year loan, but we usually sell the property within three years. So we never really have to go to agency loans or anything of that nature. These construction loans are easier to get, they’re still great rates, and then we can do interest-only on them for the first two to three years. There’s a lot of options there, but it’s a lot easier and quicker, especially in light of COVID and all the things that have happened that have impacted the economy. It’s relatively seamless, and we’re building these facilities in 12 to 14 months. We have offers on these things, especially from healthcare REITs, sometimes within six months into construction. It’s a pretty good little formula here.

Theo Hicks: Are those REITs proactively reaching out to you or there’s someone on your team who’s there doing that?

Bill Manassero: Well, one of the guys on my team, he’s built 23 of these things, but most of them in Michigan. He wanted to broaden out, and then my other partner and I were able, because we were in other states, and we were able to sort of help him broaden out. But I think his experience, not only just constructing and designing them and all the elements that go into the actual development of the facility, but he also came up with the operation manual for operations of these facilities. Even during COVID, and all of them that this guy has built and managed, there was not a single COVID case in all of these homes. A lot of it was because of how well this guy has designed the operational side.

What will happen is some of the REITs will buy them and they asked our third partner if he’ll manage these for them, and he does. Out of the 23, I think, he manages 14 or 15 of them.

Theo Hicks: How did you meet this person?

Bill Manassero: My contact was not him initially. But my friend that I’ve known for about six years, he actually it was a guest on my show early on, and then he introduced me to this guy that he made contact with that had built these, and that’s kind of how that connection came together.

Theo Hicks: Had you already been interested in senior living, or was it after you met this guy that you were like, “Huh, I think this is something I want to do”?

Bill Manassero: No, I’ve been looking at senior living, I don’t know, probably for the last four years or so, and I thought I might get into the residential aspect of it, where you take a home in a community and you convert it into a senior living house. And you can add maybe six or eight or 10, depends on the size and the state you’re in. That really appealed to me, because I knew guys that were buying single-family homes and making $10,000 a month after expenses, just as cash flow with these homes. That really sounded appealing to me, too.

My wife actually happens to be a caregiver, I have a daughter that’s a caregiver and a son that’s a caregiver, so we’re very into this area. One of the reasons we came back from Haiti too and kind of started this is that while we were on sabbatical, my wife’s parents took ill, and so we kind of stepped in to take care of them, because we’re the only ones that really weren’t nailed down to jobs and so forth, because we were on sabbatical. And in that process, it was a really moving thing for us emotionally and it was just a really great experience to be able to spend that time with my wife’s parents when they were moving into this need for assisted living.

Yeah, a lot of things kind of birthed out of that, but there has been a strong interest for a while for me; you know, Gene Guarino, Gene does this RAL Residential Assisted Living, and I had him as a guest on my show a couple of times too.

So I didn’t think I would ever do ground-up construction. In fact, I’ve avoided ground-up construction because of how long it takes, and trying to keep things under budget, but this third partner of ours really has mastered that and he always keeps it under budget; just amazing. That was one of the appeals for getting involved.

Theo Hicks: Alright, Bill, what is your best real estate investing advice ever?

Bill Manassero: Well, I think the best thing I can say to anybody that’s going to get into real estate investing is to really know what your ‘why’ is. Because when all else fades away, it’s going to be that ‘why’ that’s going to keep you motivated. I honestly believe you need to take the time in putting a plan together, getting a mentor, doing the research and education and all of that, but the core of that, your mission statement has got to be that ‘why’; why are you doing this in the first place? Why are you getting involved in real estate investing?

Theo Hicks: Alright, Bill, are you ready for the best ever lightning round?

Bill Manassero: You bet.

Theo Hicks: All right.

Break: [00:20:58] to [00:22:17].

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

Bill Manassero: Best Ever book recently, okay… I don’t know if you know who Michael Michalowicz  is, but he is the author of Profit First and The Pumpkin Plan and a few others. And he wrote a book called Clockwork, which is a great book for people in business. It’s sort of a simple approach to making business ultra-efficient, eliminate stress and just get your time priorities right.

Theo Hicks: If your business, I guess in this case, businesses, were to collapse today, what would you do next?

Bill Manassero: Well, I would rebuild. The great thing about it is if you lose something that you’ve had, that you’ve built up, you already know the process about building them up. A lot of people say real estate is all about location, location, location. I believe it’s about relationships, relationships, relationships. If you have relationships, then you can go to those people and help rebuild what you had before.

Theo Hicks: If you don’t mind, can you tell us about a time that you lost money at a deal, how much money you lost, and then what lessons you learned?

Bill Manassero: It’s kind of a general thing, but one of the struggles I’ve had – I’m an out of state investor, I’ve always been an out of state investor – is dealing with property management firms. And property managers can be your best friend and your most important partner, but if you choose not so wisely,  you can end up losing a lot of money. In that is things that happen – not only up charges on things that they do for you in that way, but they can help bring in some bad tenants for you. When you have to deal with bad tenants, the costs can be exponential.

That was for me, one of the key things that I had to get a hold of early on, is that you really, really need to screen your property managers and make sure that these are people that you can prove that they’re good if you’re going to hire him.

Theo Hicks: You’ve already answered the best ever way you like to give back with the non-profit. Do you want to talk about that a little bit more?

Bill Manassero: I think it’s something a lot of real estate investors should see. First off, it’s really easy to establish a 501(c)3, and it’s a great tool to be able to do the kinds of things you’ve always dreamt of doing to help others. I had my 501(c)3 for a long time and it has been a great tool and has helped just hundreds of people and families in Haiti. We were rebuilding homes for people during the earthquake, we’d set up a school and a hospital and all these other things there. It’s a great vehicle if you’re ever thinking about getting serious about helping others.

The other part is giving back. I love giving back… And granted, my audience is targeted 50 Plus, so I love to be able to help people get started later in life, but I also work with a lot of younger folks too. Through Bigger Pockets and places like that; I try to make myself available if somebody wants to meet, have coffee, and just ask questions. That’s another way to give back as well.

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

Bill Manassero: Best ever place is at The Old Dawg’s REI Network, and the website is http://olddawgsreinetwork.com/, and you can write to me if you’d like at bill@olddawgsreinetwork.com, or you can go the website and check out the content. There’s also a Contact page there as well.

Theo Hicks: Alright, Bill, thanks for joining us today and giving us all of your advice on all that you’ve done in your life, I really appreciate it. It’s always fun to talk to another podcast host as well.

We talked about your background, how you actually started in real estate later, which is why you created that Old Dawg’s Network, to help others start real estate later in their lives. You kind of talked about the breakdown of your portfolio, and how you’ve been transitioning into Senior Living lately, in part because of the fact that, as you mentioned, 10,000 baby boomers are hitting the age of 65 every single day.

You focus specifically on ground-up construction on luxury senior living facilities across the country. We talked about what your roles are in the GP. It seems like it’s mostly Investor Relations, because you know a lot of investors from your podcast. We talked about the podcast, why you started it, how you just organically, over time, without asking people to really invest, have had people come to you wanting to invest just based off of listening to your podcast for a long time, and you gave us a few tips on how to grow a podcast.

I really liked how you talked about focusing on quality and that a lot of your reviewers said they really liked the podcasts because of the quality. And it’s not just the quality of the guests and the content, but also the actual quality of the production. You hired a producer who would help with the sound quality and make edits on the backend and things like that, and then you also attribute your podcast success to a lot of word of mouth referrals from listeners.

And we got in a little bit more specifics on your senior living investing. My biggest takeaway there was – and you can really apply this to any new niche you want to go into, is finding someone who’s super experienced at what you want to do, and then work with them, partner with them, and have them be your mentor. You had met someone – maybe a friend of a friend – you had met through the podcast, and he had a bunch of experience with senior living facilities, had built over 20 of them. You mentioned that he has not had a single case of COVID at any of those, and so you continue to partner with him for these deals.

Lastly, we talked about your best ever advice which is, it’s important to have a plan, it’s important to get a mentor and educate yourself, but at the end of the day, the core of all that and the thing that’s going to keep you motivated when you’re kind of in a rut is to know what your ‘why’ is, have your mission statement and you kind of explained what yours was as well.

I really appreciate it, Bill. I know the best of listeners are going to enjoy this conversation. I sure did.  Best Ever listeners, as always, thank you for listening. Have a best ever day and we’ll talk to you tomorrow.

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JF2221: Cashflow Quadrant | Actively Passive Investing Show With Theo Hicks & Travis Watts

Today Theo and Travis will be sharing the “CashFlow Quadrant” based off of the book from Robert Kiyosaki. “The cashflow quadrant will reveal why some people work less, earn more, pay less in taxes and feel more financially secure than others” – Robert Kiyosaki. Today Travis will break down how he understands and utilizes the lessons he learned from the book to hopefully help you in your own journey 

We also have a Syndication School series about the “How To’s” of apartment syndications and be sure to download your FREE document by visiting SyndicationSchool.com. Thank you for listening and I will talk to you tomorrow.


TRANSCRIPTION

Theo Hicks: Hello, Best Ever listeners and welcome to the best real estate investing advice ever show. I’m Theo Hicks and we’re back with the Actively Passive Investing show with Travis Watts. Travis, how are you today?

Travis Watts: Theo, doing great man. Happy to be here.

Theo Hicks: Awesome. Thank you for joining me yet again. Today’s topic is going to be the Cash Flow Quadrant. I’d probably say that 25% of the people I interview, I’m going to ask them what their best ever book is, it’s some Kiyosaki book. And so I’m sure everyone listening is familiar with Robert Kiyosaki.

This concept, the cashflow quadrant, is based off of his book, Cashflow Quadrant. I’m pretty sure he, at the very least, introduces it in Rich Dad, Poor Dad. We’re going to go over what each of these quadrants mean, and the overall quadrant works, and how you can apply that to your actively passive investing business.

Travis wrote this very detailed blog post on it. He is the expert between two of us, so I’ll let him start, and then we’ll talk about his background and how he was introduced to this concept in the first place.

Travis Watts: Yeah, you bet, Theo. First of all, have you read this book, Theo?

Theo Hicks: No, I have not read the full book. I’ve read Rich Dad, Poor Dad, but not the Cashflow Quadrant.

Travis Watts: Sure. Alright. Well, for those familiar with my story, my mind started to open to this world of real estate and investing through one of Kiyosaki’s books. It was not this book, it was called Rich Dad Prophecy, written around the year 2000, give or take.

The Cashflow Quadrant that I have here up on the screen, that was the second book. So Rich Dad, Poor Dad came out, I think in 1997, this may have been ‘98/’99, and just before Prophecy, so it’s kind of the sequel if you will. That’s how Robert Kiyosaki describes it. It’s the sequel to Rich Dad Poor Dad.

What he’s talking about here, as you can see up on the screen, if you’re tuning in on YouTube, is you’ve got the ESBI. There are four quadrants, and what that symbolizes is, there are four ways to make money, essentially, in our society. You can be an employee, which is the ‘E’; you can be self-employed, small business owner, specialist, doctor, dentist, that kind of stuff. That’s an ‘S’. You can be a ‘B’, which is a big business owner; that’d be 500 or more employees. These are usually your corporations. And then an ‘I’ would be a professional investor. So not putting money into a 401k per se, but actually being a professional real estate investor, oil and gas, self-storage, whatever.  Those are the four ways.

And what was amazing about this is I started studying taxes at a certain point. I started to understand the tax implications, and that’s really what my blog post goes into. And with the disclaimer I’m not the CPA or tax advisor, or a tax professional, but I’m basically just taking the information out of the book and relaying it there in the blog post. As we talked about last time, Theo, about the speed reading, if you will, the point of this today is just to condense timeframes. Yes, you can go out there and you can buy this book, and you can go spend a month or two reading it, or you can just spend 10-15 minutes here and kind of get the gist of it, and the takeaways. That’s the value that I’m trying to create.

Let’s talk about the taxes here, and this is really what changed my whole trajectory, is how I earn income. This happened many years ago, but I’ve been on a pursuit in a whole different direction. I was at one point, again, those that listen to my podcasts and things, I was in the oilfield, so I was working a ton of hours as an employee. That was essentially the bulk of my income by a long shot.

Now, I was also self-employed to an extent, because I was fixing and flipping houses and doing that kind of stuff, running a vacation rental. So I certainly didn’t have 500 plus employees, but I was self-employed. You could also say in some regard, I was an investor, though at the time I wouldn’t have said I was a professional investor. I was dumping money into 401Ks and IRAs and things like that.

You can be in all these quadrants, you can be in one quadrant, whatever. But here’s kind of the tax side of it, I’ll run through really quick. An employee, if you really run the numbers, which I do in the blog, an employee is usually in on average, talking about the whole United States, paying roughly 40% of their earned income in taxes. Now, that’s a combination of your federal tax brackets, your state tax, if applicable, and then also the Social Security and Medicare. I’m not including other forms of taxes, like property tax, or sales tax in your state, stuff like that. So it could be higher, but roughly 40%. As a self-employed, believe it or not, actually the highest taxes paid come from self-employed individuals.

The reason is, when you’re an employee, you’re getting half of your social security and half of your Medicare paid by your employer, number one, and as you’re a self-employed individual, you’re paying 100% of all of those taxes, in addition to statistically speaking, self-employed individuals often earn more income, so you’re probably going to be in a higher tax bracket, in addition to both of those. Kiyosaki points out this could be roughly 60% of your total earned income and taxes, which is just crazy.

Theo Hicks: Yeah, I did not know that before reading this blog post.

Travis Watts: It gets crazier if you look at states like New York, or say California is the classic example. High-income earners in the ‘S’ quadrant could be paying 13.3% state income tax, almost 40% at the federal level, and then all of the social security and Medicare, it could be higher, so… Crazy to think about.

Now the ‘B’ quadrant; in 2017 – I don’t think this is in the book, because this was the JOBS and CARES act that got passed, they took C corporations and gave them a flat-rate tax. It’s 21%. That may be temporary, but even historically speaking, when Kiyosaki wrote this book back in 1999, he says, “’B’ quadrant is roughly 20% tax,” so significantly lower.

In a C Corp, for those that may not know, that’s usually your big corporations; your Apple and Google and Facebook, they usually structured as a C Corp. You see more the S corp structure as you get into the ‘S’ quadrant, and a lot of folks are operating just as a sole proprietor, also in the ‘S’ quadrant, just their individual names.

In the ‘I’ quadrant, this is what blew my mind. He claims that it’s possible to have a zero percent tax owed legally. Okay, and again, this is why a lot of the real estate gurus out there, and not to be political, but the Donald Trumps and whatnot, can legally pay zero percent in tax as real estate professionals. That was mind boggling to think that here I was, thinking I was going to be real smart one day money-wise and be in the ‘S’ quadrant, making [unintelligible  [00:10:54] and money or whatever, but I’d be paying so much in tax, it’d be insane. I could literally make half as much in the ‘I’ quadrant and come out ahead.

How that happens – we can take, since this is best ever community here Actively Passive Show, we’ll talk about real estate real quick.

The way that you pay zero percent in tax is because we have depreciation advantages to real estate. And not only just the straight line, 27.5 years in a lot of cases, but we have bonus depreciation that comes from doing these cost segregation studies. And, again, in 2017 the JOBS and CARES Act passed, and you can take these lifespans of certain items in your property, the ceiling fans and electrical and the trees, the landscaping, you can itemize this stuff out and you can do an accelerated depreciation, often all in year one.

It’s very possible when you invest in a piece of real estate, let’s say you’re earning some cash flow, you’ve got $10,000 in cash flow that you received – well, you might have losses on paper of $20,000 or $30,000, or something like that. That can be used to offset that, hence the zero percent tax and/or carried forward. In rare cases, if you’re a real estate professional, you can actually offset earned income as well with passive losses. I’m not going to get in the weeds with that, I’m not a CPA, I’m not a tax advisor. Please seek your own licensed professionals there. But I did want to point that out. That’s how that happens.

Additionally, let’s talk about stocks, because a lot of people invest in stocks. When you have long term capital gains, so you bought into an ETF or stock or something, and you’ve held it more than 12 months, and you go to sell it. That’s a long term capital gain. I think, don’t quote me on this, but I think for like a married couple right now, you could earn up to almost $80,000 doing investing that way and pay zero percent in tax, which is pretty incredible. A lot of different ways. There’s a good book called Tax-Free Wealth, it’s Tom Wheelwright’s book, check that out if you want to dig a little deeper, and of course, seek out your own CPA and advice there. But that is it in a nutshell.

What happened, back to my story real quick – I decided instead of going from ‘E’ to ‘S’, which was really my life plan at that time, I decided to go from ‘E’ to ‘I’. Today, I’m a professional investor, and the bulk of my income is coming from the ‘I’ quadrant. Now that being said, I do earn income a little bit in the ‘S’ quadrant, and in the ‘E’ quadrant, but the majority is from ‘I’.

So just learning the simple stuff, a book like this that’s 20 bucks can literally save you tens of thousands of dollars, not only sometimes in the first year, but for the rest of your working career. It’s really worthwhile to dig into certain topics like this, and then leverage the experts to help you out kind of on your own business plan. I know I’ve been rambling for a while, but that’s kind of the gist of it, and what the blog’s about, and the book.

Theo Hicks: Yeah, thanks for sharing that, Travis. You mentioned one thing I wanted to follow up on was the depreciation and the cost segregation, and there’s depreciation recapture, there’s a bonus depreciation… We actually wrote a blog post—again, we’re not tax experts. This is just general advice. But it’s called the Five-Tax Factors when passively investing in apartment syndications. It kind of goes into more detail on what Travis was talking about. We tossed in some examples with real numbers, so you can understand what the differences are between regular depreciation and accelerated or cost segregation, and when you’ll have to pay taxes on recaptured depreciation on the backend, and what Travis was talking about with the bonus depreciation for the tax cuts and JOBS Act.

Obviously, the tax aspects of the ‘I’ are the best, but at the same time, this is the actively passive show, so I wanted to briefly talk about the time investment associated with all of these. Surprisingly, reading through your blog post, not only is the ‘S’ quadrant the greatest tax cost, but it could potentially be the greatest time investment as well. Correct me if I’m wrong, but the greatest time investment is going to be between the ‘S’ and the ‘B’. But depending on what type of ‘B’, you are, as you mentioned in your blog post, it could be relatively passive, right? For example, I’ll talk to some people who obviously invest in real estate, but they’ll have some other businesses on the side, like consulting or something. And then they’ll hire a bunch of employees under them and they’ll hire a high-level CEO guy, and they’ve got people that are running the day to day aspects of the business; they’re not necessarily working that much, but when you’re kind of self-employed, you’re the person. When you’re employed, sure, you need to work hours, but when you’re self-employed, you’re the guy or your the girl, and you’re going to need to do everything. So not only is self-employed the greatest tax hit, but it’s also the greatest time investment. Whereas on the flip side, the ‘I’ has the greatest tax benefit, and also potentially, and again, it’s possible that you could be spending a lot of time here if you’re active, but as a passive investor, you could be spending the least amount of time by paying the least amount of taxes. I did want to mention that as well.

Travis Watts: Exactly. And that’s a famous quote, Warren Buffett talks about, if you don’t learn how to earn income in your sleep, then you’ll work till the day you die, which is a bit extreme. But to your point, so the ‘S’ and the ‘B’, big difference there is the ‘S’ is the operator, to your point; you’re a plumber, you’re an electrician, you’re a speaker. It’s you; you’re the business. But on the ‘B’ quadrant, you’re the owner of the business, to your point, so that you can walk away from the business, and it continues earning income for you.

So yes, absolutely. As you can see, if you’re not already familiar with this cashflow quadrant, you’ve got to get over to the right side of the quadrant, the ‘B’, and ‘I’. It’s tough to make a leap over to ‘B’ from ‘S’. I would say most people have probably the best chance at getting into the ‘I’ quadrant, because you literally can do that with $10. Just buy a share of a stock or something and you’re already there in the quadrant, and then just keep building on to it. It’s not to say you should only be an ‘I’ or you should only be a ‘B’. Like I said, I’m virtually in all quadrants except for ‘B’.

Extremely helpful to start thinking about tax implications, because again, it’s kind of a compounding effect. If you learn about taxes, say when you’re 20, and you start implementing this stuff, well, you’re going to be decades ahead of most people, and that savings can compound into more investing, and it’s going to have the biggest impact. If you’re listening to this today and you’re 85 years old, well, you can still make changes, it’s not too late, but it’s not going to have as big of an impact, obviously.

Theo Hicks: Yeah, it’s also important. We talked about how—I wouldn’t say it’s a drawback, but one of the prerequisites to being in the ‘I’ is you need to actually have money. And so sure, you can start with $10, but you’re not going to live off of $10. It’s not like you’re going to hear — every single person listening to this episode right now is going to quit their job and jump into the ‘I’ and make a million dollars. Obviously, that’s not the case.

As Travis mentioned, the goal is to be more on the right side, the ‘B’ and the ‘I’; and less on the ‘E’ and ‘S’, and maybe ultimately being completely on the ‘B’ and the ‘I’. But the first thing is becoming aware that this type of quadrant exists, and then as Travis mentioned, it’s a compounding effect.

Figure out how much money you can save each month or each year from your ‘E’ or ‘S’ job to put into ‘I’ and then do that for, depending how much money you have, a few years, or five years, 10 years, whatever, then you can start to pull back from the ‘E’ and the ‘S’. I think that’s a key here, is that you need to, in a sense, use the ‘E’ and the ‘S’ to get to the ‘I’. The ‘I’ is in regards to passive investing. Obviously, you don’t need to do this for active investing. This is not the active investing part of the show. But for passive investing, you need that capital to invest.

Travis Watts: That’s a good point. Something to point out too is this cashflow quadrant is just more or less a generalization. There are ways and strategies as a self-employed individual to save on taxes, with your home office deductions and your car expenses and your commutes and your mileage. There are definitely ways to offset. There are also choices to be made about like we talked about with state income tax; you could leave a state with 13% state tax to go to Florida, go to Wyoming, wherever, go to a no-tax state and save that, too.

It doesn’t mean that when you’re an ‘S’, you do pay 60% in tax. That’s not true. But it’s a generalization that a lot of folks do, for the reasons that we pointed out. Just know that.

And also, one more thing on the ‘S’ quadrant. You could learn to operate like a big business. You could do the same strategies; you could elect to be taxed as a C Corp if you want. There are things that you could do to pay that 21% tax, things like that. Again, not a CPA or a tax professional, but things that you can do there.

Now with the ‘I’, you mentioned passive investing. That’s true. I think a single-family buy and hold, specifically a buy and hold. Some would say that’s passive, others would say it’s not. But regardless, that’s what would qualify you for the ‘I’ quadrant, because it’s mostly hands-off.

Now, if you’re flipping houses, like I used to do, and you’re not an ‘I’. You may think that you’re investing, but that’s not true. You’re in the ‘S’. You’re actually self-employed. This is now a business that you’re putting a lot of time into, so you actually fall into the ‘S’. Because also you’re earning, by the way, short term capital gains, which go into the regular tax brackets of federal income, right? So you’re not going to fall into long term capital gains if you’re doing flips, for example, or wholesaling, or any active business in real estate. So, something else to think about.

Theo Hicks: People who are essentially holding on to their investments longer than a year, until you start experiencing capital gains tax – that would be considered an ‘I’? Or is it only people who do that and aren’t spending a lot of time doing it? Like, if I’m a buy and hold person who’s buying 20 deals a year, that’s going to be a large time investment. Would that considered an ‘I’, or would that be considered an ‘S’?

Travis Watts: Say it one more time? Sorry.

Theo Hicks: Is it just the tax benefits that determine which one you’re in or is it also the time investment?

Travis Watts: The way I look at it, you’d have to go into greater detail in the book to see exactly how he defines this. The way I look at it is a) a longer-term approach to investing because of the tax advantages that go with it. If you’re really striving to do the zero percent or up to, let’s say – I think it’s 15% after that, but it’s still capped when we’re talking long term gains. That’s the biggest thing, right? Anytime you’re actively doing a business, spending a lot of time on it, then you’re going to be an ‘S’ in that situation.

Theo Hicks: Got it.

Travis Watts: Now, the reason that Kiyosaki excludes 401Ks and IRAs is because that’s not a tax-advantaged strategy, that’s a tax deferral strategy. If you weren’t aware, anybody listening, a pre-tax 401k, a pre-tax IRA, when you finally do go to pull that money out, assuming you’re over the age of 59 and a half when the IRS says you can pull that money, you’re actually taxed as ordinary earned income, which is quite crazy to think about, because the investments you hold, if you were otherwise to hold those investments say in a brokerage account, not an IRA account, you would be paying zero to 15% tax in most cases on the gains. But instead, you may be paying up to 40% to 50% in taxes by kicking the can down the road and taking it later. We’re not even going to get into early withdrawals, which statistically most people will pull that money out early anyway, and pay a 10% penalty on top of that tax. It can get really ugly in those accounts, and that’s why he doesn’t consider that a professional investor, because it’s a very seamless thing; it comes out of your paycheck, it goes in there. You’re not usually being very active with a 401k.

Theo Hicks: Got it. I would say from the perspective of our listeners, it would be kind of broken into two categories. It’s the people who are an ‘E’ or an ‘S’, or they are in an ‘I’. If you’re an ‘E’ and an ‘S’, you’re working a full-time job at a corporation, or as you mentioned dentist, doctors, or own a company. Then you’ll want to kind of transition into the ‘I’. And then if you’re an ‘I’, and you’re a long term hold investor, from there you’re already experiencing the tax benefits. From there, the advantage would be reducing the time investment, and so that’d be transitioning from more of the active ‘I’ to the passive ‘I’.

Travis Watts: Yep. And so many folks, I guess, subliminally pick up on this concept without even knowing about this book, because coincidentally, there are a ton of S’s that are doctors, dentists, lawyers, attorneys that invest professionally in these apartments syndications, private placements, or just real estate in general. The reason that they’re really after that is for the tax advantages.

And again, not to go too deep into the tax stuff, but you can learn how to become a real estate professional. In some cases, or even as a married couple, maybe the spouse or stay at home husband or wife, whatever the situation may be, the non-worker could be managing the single-family portfolio, could be putting in more than 750 hours a year, it could be their primary focus. If you can qualify, working with your CPA as a real estate professional, it is possible to take these passive losses that we talk about from depreciation and bonus depreciation, cost segregation; take that stuff, and apply it against your self-employed income or your employee income.

So it gets deeper and deeper and deeper. We’re not the professionals here on the subject. But I just want to open everybody’s mind to this concept and idea if you weren’t familiar with the book already, or to reiterate, hey, maybe it’s time to reread that book. It’s been 10 years. Hopefully, that’s helpful just as a concept for people here on this episode.

Theo Hicks: It’s been very helpful to me too, because I’m pretty sure I’m getting the cashflow quadrant and then the assets and liability thing mixed up. I don’t think this was [unintelligible [00:24:59].14] but what I was thinking of was the liability versus assets.

Alright, Travis, it’s been a solid episode. Thanks for joining me and sharing your wisdom on the Cash Flow Quadrant on these Actively Passive Investing Show episode.

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

Travis Watts: Thanks, Theo. Thanks, everybody.

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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JF2217: Setting Up Your Taxes Like The Elites With Khurram Chohan #SkillsetSunday

Khurram is the founder of TogetherCFO and an expert in high net worth tax structures. KC helps the elites set up their taxes and in this episode, he will be helping you understand how they pay fewer taxes than the majority of the public and how you can do the same.

Khurram Chohan Real Estate Background: 

  • Founder of TogetherCFO
  • Writer for Forbes Magazine
  • Expertise in high net worth tax structures 
  • Based in Los Angeles, CA
  • Say hi to him at: www.togethercfo.com 

 

Best Ever Tweet:

“We use the law in a way to optimize the taxes” – Khurram Chohan


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, KC Chohan. How are you doing, KC?

KC Chohan: I’m good. Thank you so much for having me on, Joe.

Joe Fairless: Well, it’s my pleasure. And a little bit about KC; he’s the founder of TogetherCFO, his focus is on high net worth tax structures, based in Los Angeles. Best Ever listeners, today, is a special segment called Skill Set Sunday, where we talk about a specific skill, and here’s a specific skill that you’re going to learn by the conclusion of our conversation today. It is know-how that that the wealthy are able to pay a lot less in taxes and how you can set that system up for yourself. With that being said, KC, first, do you want to get the Best Ever listeners just a brief background on yourself?  And then let’s go right into the tax structure.

KC Chohan: Yeah, I’m KC, born and raised in England, and moved out to America with a big Fortune 500 company. I was working there for over eight years. I worked my way up through the ranks. I was always curious and wanted to understand taxation, accounting, and business. It got to a point where I was pretty fed up with corporate America and then started my own company, TogetherCFO.

I watched this clip once and it really sparked my imagination. Warren Buffett was on, I think it was NBC News, and he was sat right next to his secretary, and he was talking about how he pays a 17% tax rate, which is half of what his secretary pays, and she’s the epitome of kind of the average American. She’s paying over 35% in taxes, and he’s calling for this new tax law to go into effect, which obviously didn’t go into effect. But the takeaway from that was, how is he openly sat on national television, talking about paying such a low tax rate, and he’s not the only one, and nothing’s really been done about it?

That really sparked something inside me to help my clients and myself figure out exactly what he was doing… Because it’s fully legal. He wouldn’t be on national television, CEO of Berkshire Hathaway, one of the richest men in the world, talking about how the system allows that to happen. And then when you look at other big companies like Amazon, and Microsoft, and Google, all these companies have paid very little, if anything, in federal taxes, all fully legally.

What my firm now specializes in is helping the regular average American, the slightly higher net worth middle-income American to be able to do that same thing that Warren Buffett’s doing, legally.

Joe Fairless: I’d love to learn about the process of doing so. Can you walk us through the process?

KC Chohan: Absolutely. There’s different types of taxation in America, right? Every single state has its own set of rules, its own set of guidelines that they follow. Then on top of all 50 of those states with their own legal entities and rules, there are federal rules as well. There are two real taxation systems, if we look at a high level; it’s the 1040 system, which 99% of people use, and then there’s the 1041 system, which the top 1% use.

The difference in the 1040 system is its state and trust structures. And even within that system, there’s nine subsets that all have different rules as well. You’ll hear me talk a lot about different rules and regulations, and it’s all hidden in the tax code, which is over 22,000 pages long. It’s like reading Shakespeare, it doesn’t really make very much sense unless you know how to read it properly.

Hidden within those 22,000 pages is one specific subset in the 1041 system, and it’s called the complex trust system.

The rules within the complex trust are a very different set of rules that apply to any other system out there, and that’s what the top 1% and the top elite people use to legally pay very low taxes. Even Mitt Romney, when he did declare his tax returns a while back, it was 13%. Prior to that, he’d been alleged to not pay any taxes, the same as President Trump. He’s never going to release any of those returns, because he just hasn’t paid any taxes; and the system that they all use is this 1041 complex trust system.

Joe Fairless: You said there’s two will taxation systems 1040 and 1041. Will you educate me? What do you mean by there’s two systems, 1040 and 1041?

KC Chocan: The 1040 and 1041 are just two forms that you’d file with the IRS. The 1040, you [Inaudible [00:08:45]. We’re talking about business owners here, primarily. This system doesn’t apply to people who earn the majority of their income via W-2. So just to put that requisite in there.

Joe Fairless: Good distinction.

KC Chocan: Yeah, so we’re very clear that this is people that own businesses primarily.

Joe Fairless: Why do you say primarily, and not only—does this sometimes apply to W-2?

KC Chocan: Sorry. Let me rephrase that. Because yes, if you are that top few percent that make millions on W-2 income, this could also apply to you, but the likelihood is that’s just a totally inefficient way of doing things. I would not recommend that. But it would also apply as well.  Very rare, but yeah, technically, yes, you’re right.

Generally speaking, the vast majority of people will be business owners, they will be paying their taxes through a K-1, and that care one goes through the 1040 system. When you file your taxes with the government, the form you fill out is actually called the 1040, for the vast majority of people. The smarter people, they’ll research what they can use in the 1041 world, which is just another different form, which is the next form that the IRS provides. And then at the top of that form, there’s a section that’s split into nine different checkboxes, and those nine different checkboxes are the different subtypes of the 1041 system. And they all have their own different rules and legalities within them. The one that we use specifically and exclusively is the complex trust system.

Joe Fairless: Got it. So there’s 1040 and 1041. Is there 1042, 1043, 1044, etc?

KC Chocan: There’s multiple forms, but they’re the only two that you really need to worry about.

Joe Fairless: Okay. With the nine subtypes of the 1041, if you couldn’t do the complex trust system, which we will talk about a lot during this conversation, but if you couldn’t do the complex trust system, what’s the next one you would look at?

KC Chohan: I wouldn’t look at any of the others. But the types of systems that we were talking about, if you don’t qualify to set up a 1041 complex trust system, then I would look at other types of policies and procedures that you could do in the 1040 world… Because part of getting into the 1041 world, there is a lot of setup costs, a lot of legal fees, because we’re dealing with a lot more complex vehicles, and that isn’t always cheap.

Joe Fairless: Okay. Well, let’s talk about the complex trust system. What is it?

KC Chohan: The complex trust, like I said, it’s one of nine types of system that you can use in the 1041. The way we build our trusts, it’s a three-tier system. There’s a reason for that, in terms of you want to segregate out business expenses with family expenses, and then charitable foundations as well. It’s a three-tier system that allows you to fully optimize your taxes.

Joe Fairless: Okay. How does it do that?

KC Chohan: Well, the proof is in the pudding, as we say in England. I don’t know if you use the phrase over here. But generally speaking, it’s down to the laws that apply in that system, and the verbiage and the way that the trusts are written. There’s a certain wording and phrasing in the trusts that we write in with our legal teams that allow us to use the law in the way to optimize the taxes.

Joe Fairless: What’s an example?

KC Chohan: An example would be—let me just run through the way we kind of set someone up and maybe this will answer that for you. Let’s just say a regular person comes into the system, that paid $200,000 plus in taxes using the 1040 system. Generally speaking, the first thing we do is we do a side by side analysis, saying, “Hey, regularly you pay 200k in taxes, this is how you do it. These are the general write-offs that you have, all the loopholes that are current at that given time, and that’s your end taxable liability.”

We do the same thing through our system. We go through, “Hey, this is how we would run it through our system of trusts and foundations, and this would then be your taxable liability.” Generally speaking—we don’t guarantee anything, but generally speaking, we can save people a considerable amount of money, 60 plus percent.

Joe Fairless: Okay, so noted on the generalization for what you could save potentially, but we’d love to get into more of the nuances of it, either how that’s possible or just some details that you can provide?

KC Chohan: Well, the details are the tax code itself. So if anyone wanted to comb through that information, it’s all public knowledge. You could go on the IRS website and see that, and it’s all really spelled out there. If you type in 1041 complex trust, and you can see the way that the laws are written — and there’s not just one law, there are multiple laws here that allow you to allocate funds differently in the 1041 complex trust system than you would in any other system that I know of.

Through that allocation, and the way you can dictate how the revenue or the income is classified, and what the governing body of the instruments actually says, and the way it says it… And a lot of it is semantics, and it’s very much in the literature, and the secret sauce of kind of what we do is it’s the way that the trust documents are actually written. It’s several different types of law. We’ve got taxation law, we’ve got business law, and it’s all based around common law.

Our legal team has spent a lot of time tweaking, testing, perfecting the verbiage of the trust documents to get them to a point at which we can then lean on the law the same way Warren Buffett does, Bill Gates, Jeff Bezos, all these guys, the Rockefellers, all these elite people and their teams, and do exactly the same thing so that you get to a point where you can openly say on national television that you pay 17% tax, and that’s perfectly fine.

Joe Fairless: When you’re speaking with a new potential client, what are some common questions that he or she has?

KC Chohan: How is this possible? Because a lot of people just don’t know… And it boils down to — this is not really information that’s supposed to be out there. This is written by the powerful and for the elite, for themselves. They haven’t written this, for everyone to use this, because then taxation would take a big hit.

The whole reason why it’s hidden in the tax code is just for them to use it for themselves, and not have to play by anyone else’s rules. A lot of the time people don’t believe that it’s true, which is why we have legal counsel, opinion letters and external firms that consult with our clients to ensure that, “Hey, this is exactly what we say it is,” just because it’s such a new idea, and not many people know about this, and that’s by design.

And then also from a professional standpoint, when you speak with lawyers and accountants, they don’t know about this either, because they’re all trained at a state level. So they all do state bar or state CPA, and they’re very good at knowing what’s going on in their own state. But this structure is at the federal level, and even within that federal level, it’s a subset of nine different types of federal law. So to find experts that know this system inside out is very difficult.

Joe Fairless: What’s the average investment or cost to implement this system?

KC Chohan: It depends who you do it with. So you could go to BNY Mellon bank in New York, for example. You’d have to have liquid assets, I think they’re asking for at least 10 million in liquid investable assets before they would even have a conversation with you. Their set of fees was 700,000 plus, the last time I checked, on top of their annual fees. That’s quite expensive; or you could find a more boutique firm like ourselves, but we do it for a lot less than that.

Joe Fairless: Approximately how much on average?

KC Chohan: Around $150,000 in setup fees, and then we have a yearly percentage on what we save; so the way we prices on value, and the value is a percentage of whatever we would save you compared to the way you were previously doing it.

Joe Fairless: To do that analysis, to determine if it makes sense or not, how does that process work? Is there a cost to it? Do you reach out on your website? What’s that like?

KC Chohan: No, there’s no cost to it. We do that completely upfront. We want to build long term relationships and we do that for free, eat all of that cost in time. Normally, it takes around a week for us to run those numbers and get it back to people. But that’s the way we let people look inside our house and see, “Hey, this is what we do, and this is how we do it, and this is how it would work for you before you even make any decision.” We want people to be fully informed before they make a decision to move forward with us, and that’s why we do that side by side up front for free.

Joe Fairless: What information do you need from that prospective new client in order to run your analysis?

KC Chohan: Just their personal and their business tax returns.

Joe Fairless: That’s it?

KC Chohan: That’s it.

Joe Fairless: For the last year, or last two years?

KC Chohan: Last year. As long as we’ve got at least one year, but last five years is probably the best. And then we can literally go down that and say, “Hey, you paid X amount doing this. If we run it through our system, this is how much you would pay.”

Joe Fairless: Our audience are real estate professionals and investors – what if the real estate investor is already getting significant depreciation losses passed through and is paying basically nothing? Let’s say they’re paying a little bit in taxes. Is your system still able to help that individual, since they’re already paying a low or no amount in taxes, to begin with?

KC Chohan: Yeah, specifically for kind of your audience in the real estate world, the advantages of our system is paying no capital gains tax. When you come to sell a property or if you’re looking to do a 1031 exchange and upgrade, if you did it through our system, there’d be no capital gains involved at all.

Another thing is inheritance, the probate, all of passing on wealth to future generations – none of that is taxed either, because it’s all the way we write it in the body of the trusts, so there’s no taxation there. And then more importantly, the real estate professionals are the ones that we’ve worked with a lot here in LA. A lot of them are buying properties because they do need to get that tax write off. They do need to depreciate down, or they’re doing conservation appeasements… There’s a lot of different things that people do to write down the taxes. You wouldn’t have to do any of that anymore. So you wouldn’t feel the rush of, “I have to close on this property by the end of the year or a property by the end of the year so I can depreciate it, get my tax write off.” You’re not forced into being in that game, unless you really want to close on a deal, because the way we write our trust system allows you to optimize the taxes without having to use depreciation as a vehicle.

Joe Fairless: And since it is called a complex trust system, my assumption is that you would be creating a trust for them to run things through. First off, is that an accurate assumption?

KC Chohan: Yes, two trusts and one foundation is the way our structure works.

Joe Fairless: Okay, which aligns with business expenses, family expenses, and charitable donations.

KC Chohan: Yeah, that’s right. Yes, so there’s three new entities that are created.

Joe Fairless: Okay. Now, one perceived disadvantage of a trust, or in this case two trusts, would be your loss of control over the assets if they’re put in a trust. What are your thoughts on that?

KC Chohan: It depends on the way you write the trust service. Over 85 different types of trusts, and yet a lot of them, you have that disadvantage, but not in the way that we write ours. Ownership stays with the trust, but you have complete control at all times. That’s not an issue. That’s the way we do it.

Joe Fairless: How can the best ever listeners learn more about what you’re doing?

KC Chohan: They can reach out to me at https://togethercfo.com/ or they can email me directly at kc@togethercfo.com.

Joe Fairless: KC, thanks for being on the show, talking about this system and the 1041 taxation code for complex trust systems and talking to us about some details around it, why you champion it, and some potential advantages for doing so. So thanks for being on the show. I hope you have a best ever weekend. Talk to you again soon.

KC Chohan: Thank you so much.

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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JF2212: Process Of Institutional Raising With Kevin Riordan

Kevin is a full-time professor at Montclair State University teaching real estate courses and has been investing for over 30 years. Kevin has had experience in taking a company public and also has been focusing on raising money from institutions and he shares the process on how to navigate this process.

Kevin Riordan (Rear-din)  Real Estate Background:

  • Full-time professor at Montclair State University teaching real estate courses 
  • Has been investing in real estate for 30+ years
  • Career has been focused on the institutional side providing debt & equity capital, public and private, for commercial real estate
  • Also took Crexus Investment Corp; a commercial mortgage REIT, public in 2009 
  • Based in Montclair, New Jersey
  • Say hi to him at: riordank@mail.montclair.edu 
  • Best Ever Book: Grant by Ron Chernow

 

 

 

Click here for more info on PropStream

Best Ever Tweet:

“Be cautious but also try to be bold” – Kevin Riordan


TRANSCRIPTION

Theo Hicks: Hello, Best Ever listeners. Welcome to the best real estate investing advice ever show. I am Theo Hicks and today, we are speaking with Kevin Riordan. Kevin, how are you doing today?

Kevin Riordan: I’m well, Theo. Nice to chat with you.

Theo Hicks: Yeah, absolutely. I’m looking forward to our conversation and picking your brain. Kevin is a full-time professor at Montclair State University, teaching real estate courses. He has been investing in real estate for over 30 years. His career has been focused on the institutional side, providing debt and equity capital, public and private for commercial real estate. He also took Crexus Investment Corp – a commercial mortgage REIT – public in 2009. He is based in Montclair, New Jersey, and you can say hi to him at his email, he provided us with his email address. It’s riordank@mail.montclair.edu. Of course, the link to his email will be in the show notes, so you can just click on that if you want to reach out to Kevin.

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

Kevin Riordan: Sure, I’m happy to. My background real quick on the education side; I was an accountant coming out of college, I got a CPA, and I was going down that route. I made a move into real estate on the accounting side, initially on the private side, but I had a little bit taste of actually making some transactions occur at that company, and I wanted to do that full time, rather than being in the accounting groups.

I’d say my big career move I made when I was 30 years old was making a move to TIAA CREF, which is a private pension fund for colleges, universities, non-profits. At that company, I joined as an assistant investment analyst, basically making real estate transactions, commercial mortgages, joint ventures, and I would stay there for 20 years, rose there to Group Managing Director. I started a number of initiatives, I was kind of combining — I was fortunate to be in a spot where public real estate capital is now coming into the commercial real estate space in the form of REITs and CMBS. I was there to structure and create a number of initiatives around that.

I left the company and then took a company public, as Theo has mentioned, called Crexus Investment Corp in 2009. I actually got to ring the bell on the stock exchange. It’s really not a bell, it’s actually a big button you press… But with that company, we were again providing finance capital to real estate owners and borrowers again, also assisting on some joint ventures.

Theo Hicks: Perfect. To make sure I just kind of wrap my head around it. When you say that you’re providing equity – are you providing this money to massive companies who are then using it to buy massive portfolios of real estate, or are these two smaller people who buy multifamily? I’m trying to understand what this money that you’re giving out, where’s it going to?

Kevin Riordan: That’s a good question, Theo. When I talk about working on the institutional side and providing capital for equity, one of two ways we’re doing that. One way we are doing it is we were simply becoming a joint venture partner with an operator. We are the money and then we try to find someone who is the operator developer. So we entered into a number of joint ventures with operator developers, having people on the ground using our money.

The way you would structure deals like that as you would be a partnership, and because you’re putting the money in, you would get a preferred return until some hurdle rates happen. And a developer, then once a hurdle rate was hit, then there is what they call the developer gets a ‘promote’, which is something beyond his equity contribution. I actually teach this in some of my courses. I teach how these are set up in the partnerships and how the money flows. That’s one aspect to it.

The other side, when I said providing capital to owners is assisting them to buy properties. That would probably be more, Theo, through a debt instrument; some type of mortgage instrument or participating mortgage instrument where he’s going to acquire and/or develop a property. And you are going to get, again, some stable coupon as a return, and perhaps share in the upside of the property through some kind of participation mechanism in the mortgage debt.

Theo Hicks: Perfect. Let’s talk about the first example you gave, about you becoming a JV and basically being the money, and then the person you partner with is doing the boots on the ground stuff. And again, just ballpark numbers here, what would be an average deal size you’re talking about here? Are we talking about like million-dollar deals? Are we’re talking about $100 million deals?

Kevin Riordan: A lot of those transactions were done more at my stay at TIAA. Those transactions ranged from $12 to $30 million, and that would be the entire investment. Really, we would put up 95% of the money, if not sometimes 100% of the money. Thenthe  structure would be – again, there’ll be a construction loan to build the project. Then once our money came in, we’re taking out the construction loan, in other words paying that off; we then become the owner as a partner with the developer and then we then have a preferred return.  The first money that comes to us, in terms of the cash flow for the property is up to our preferred return.

Just using simple numbers, it was a million dollars, and you had a 6% return, that would be $60,000. The first $60,000 would come to you if it was a million-dollar investment, and then anything above that you start sharing with the developer. That’s basically the way those things work.

Theo Hicks: Okay, so the reason why I was asking all those questions is because I’m just curious if you get to kind of walk us through—and again, I might still be misunderstanding, but let’s say I’m an investor, I’m an apartment developer, or I do apartment valuate type deals. I’ve been raising money from family and friends. Maybe I’ve expanded out to, I don’t want to say strangers, but I’ve expanded out to people I don’t know as well, right? And then I’ve reached a point where I’ve tapped all that out and I want to raise money from an institution, right?

First of all, let me know if I’m right and that person’s actually ready to raise money from an institution. And then assuming that I am, what steps do I need to take in order to maximize my chances of getting an institution to give me money for deals?

Kevin Riordan: The way you’re setting it up is exactly the way I’ve seen it happen. We’re starting with friends and family, we move from there. Theo, I would just say is the most important things would be first, establishing a successful track record with the things you’ve done. And approaching people, that’s going to be the number one question – what have you done? How has it performed? The first thing is to have that successful track record.

The second thing then when approaching someone is to have a very detailed and informed plan. And again, sufficient information and due diligence will be necessary, so that you can explain your plan to whomever you’re trying to raise money from. If I could use a slight example, when I took Crexus Investment Corp public, and we went out to raise equity, we went to visit a number of institutions.

I had never taken a company public before. I had worked for a private pension fund. And now I was on the other side, where I’m going to raise money from investors and I’m visiting pension plans. I’m visiting Fidelity. I’m visiting BlackRock. I’m visiting all these big money managers.  What did they want to see from me? They wanted to see two things. One, what had I done before, that I know what I was talking about, and number two, what was my plan?

To your listeners, I don’t think there’s any difference between what I’m saying as far as what’s required from myself when I took the company public, versus someone who has been building and owning just small multifamily projects and keeps rolling them up into bigger multifamily projects, to the point—and it’s also important, Theo, it has to have a certain critical mass to it. Institutional money is not going to look at $500,000 transactions. They’re going to look at something that has little substance to it. There’s probably some kind of minimum size transaction that’ll get their attention, and then the other things if you will make it happen.

Theo Hicks: Perfect. Let me take you back – you said that $12 to $30 million for those deals… Is that just the down payment, and then they’re in turn getting debt, or are you covering the entire total project costs?

Kevin Riordan: Those are the entire project costs, and the reason they would differ would be depending on where you were building. For example, one joint venture I did was out in Doylestown, Pennsylvania, which is a really cool little town. But that was a typical garden-style apartment, 210 units, and that probably all-in investment was somewhere around $12, $14, or $15 million. I don’t recall, it was a while back… Versus another project we worked on in downtown Atlanta, which had some construction issues around it, obviously a building in an urban setting, it gets more expensive – that project was closer to $28 to $29 million, if I recall.

Theo Hicks: When you talk about having a very detailed and informed plan. Are you saying for the specific deal you’re wanting to raise equity from the institution, or are you saying just overall business plan for what you would do were you to find a deal? Like, am I going to an institution after I already have a deal under contract, or am I going to an institution to see if they would be willing to give me funds, and then go out and find deals?

Kevin Riordan: The latter is what I’m referring to. That’s where you’re taking your track record with what you’ve done, how you’ve done it, how it’s performed, how you came about getting those transactions, how you made them work and now you just want to put that exponent to them, if you will, right? You want to make those bigger transactions, you want to get larger money, so herefore, what you want to do is have some larger plan ahead of you. It can work that way, Theo; you could go on a contract contingent on getting the financing, but it might be better to have a situation where people will believe in you and then with that, they’ll sort of say, “Okay, this is what we want to do, and with those parameters.” You can take that and go out and try to see if you can fit it into their mousetrap if you will… Because they’re going to have line items to check off. There’s going to be a return profile, there’s going to be a geography profile, there’s going to be an asset type profile… They’re going to have a number of things they want to check off.

And then what’s important from your side is not just the transaction itself. Yes, that’s important. What’s going to happen to its performance, those are all very important, but the other side that’s very important too is they’re going to want to see what is the ownership structure? In other words, what’s the guts of the company going to do to make this thing work?

Again, the money is not on the ground, the money is giving the investment to this person and run it. How do they run it? How’s their accounting systems? How do they report? What’s the depth of the organization? How do they respond to difficulties? How have they responded to difficulties in the past? All of those things will come into bear. It’s not only a question of looking idiosyncratically at the particular transaction, but it’s also looking at holistically, what does the organization bring to bear to make these transactions work?

Theo Hicks: Perfect. They’re looking at deals and you’re also looking at, and they’re also looking at who you are, and who works for your company and what you’re capable of doing.

Kevin Riordan: Right, because the question is really, how do I initially get this going? Initially, getting it going – it’s the two things. But once you get that breakthrough, then it becomes a transaction, you know what I mean? And you’re just looking at transaction. But initially, it’s got to be two things; breadth organization, of as well as an investment thesis.

Theo Hicks: Okay, so how do I actually find an institution? Do I just go on Google and start reaching out to people on Google? Do I go on LinkedIn? Do I just show up at their headquarters? What specifically am I wanting to do? Assuming I have all this setup, I’ve got my track record, I’ve got my super detailed plan, I’ve got my business all set up, I’m ready to go – how do I actually find these institutions?

Kevin Riordan: Great question. I will tell you that my experience would be that that particular individual — let’s call him the entrepreneur, he would have more success if he was successful finding an intermediary to make the introduction. There are a number of types of folks, consultants, mortgage brokers who actually canvass not just on the debt side, but also the equity side. Those types of people have the calling card if you will. 

The presentation initially is going to be — I think, this is an easier way. Because if you think about it, the pure money side, there would be just too much sourcing coming through the funnel, that it would be difficult to parse that. A lot of institutions will use outside intermediaries to help them, if you will, source transactions, and source organizations.

Theo Hicks: Perfect. Okay, Kevin, what is your best real estate investing advice ever?

Kevin Riordan: I think my best advice as something I didn’t do. Here’s what my idea would be. In 2011, I had an opportunity to buy about $2 billion of mortgage debt that Barclays Bank was trying to securitize, but they couldn’t because of the financial collapse, if you will. I only bought $750 million of it. My advice was looking back, I wish I had tried to buy all the 2 billion… And my advice would be, try to be bold. We had the capability of doing more; we erred on the side of conservatism, and I think we didn’t look far enough in advance to see how the winds were going to trade and how real estate was going to perform.

I guess my advice would be to be bolder in your assumptions. I’m cautious too, Theo; I’m sort of talking to both sides of my mouth here, but be bold with what you want to try to do, but understand the risks.

Theo Hicks: Perfect. Okay, Kevin, are you ready for the Best Ever lightning round?

Kevin Riordan: We’ll give it a shot.

Theo Hicks: Alright.

Break: [00:18:09] to [00:19:23]

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

Kevin Riordan: Grant, by Ron Chernow, and I’ll tell you why. I’m a big Chernow fan, but I read that book a year ago. What I had no idea was at the conclusion of the Civil War – yes, the Confederacy had stopped the war with the Union, but now they had created a civil war with the freed slaves. I think that’s very prescient as to what’s happening today, in June 2020.

Theo Hicks: That’s Ron Chernow, you said?

Kevin Riordan: Ron Chernow. He’s the author of Hamilton.

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

Kevin Riordan: I guess I would try to figure out why it collapsed, and adjust to what happened that made that happen, and figure out, what do I do to avoid that problem again?

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

Kevin Riordan: I’m a full-time teacher now, a full-time Professor at Montclair State University. All my people who are either in the business or at the business, I tell them what I do, 100% say, ‘That’s great. I’d love to do that, too.’ I know I’m doing the right thing, and I do teach them exactly what to do in real estate, particularly on the finance side. I help the students with their resumes, I’ll give them some interview tips. If I hear of a job, I’ll try to get them there. I think that’s kind of what I like to do.

Theo Hicks: Is Montclair State University, these courses you’re teaching, is it undergrad?

Kevin Riordan: They’re undergrad. I am technically housed in the finance and accounting department.

Theo Hicks: Okay, perfect. And then the last question is, what’s the best ever place to reach you?

Kevin Riordan: My email at Montclair State University is best.

Theo Hicks: Perfect. Best ever listeners, as a reminder, that email is in the show notes, and how to spell it one more time, it’s riordank@mail.montclair.edu.

All right, Kevin, I really enjoyed this conversation. I always enjoy talking about things that I don’t really know anything about at all and I really don’t know much about how working with institutions works. It’s been an enlightening conversation for me, and I’m sure it has been for the Best Ever listeners as well.

Kind of the crux of our conversation was around how to get your start in raising money from institutions, and kind of talked about the two important prerequisites, one being establishing a successful track record, and two, having a very detailed and informed plan, specifically in the beginning, about your business and your company. Obviously, after that, once you get your foot in the door, it’s more transactional, having a very detailed and informed business plan about the deal you’re working on.

Then you kind of mentioned the two things that institutions look at. One of them is the return, geography, asset class, profile, checklists, things like that, but they also want to know what the ownership structure is going to be, how you plan on running the property, what’s the depth of the organization, how you’d respond to difficulties in the past, things like that.

Then we also talked about how to actually find these institutions. It is essentially through these intermediaries, these brokers, so you’ve got different consultants. I’ve actually talked to mortgage brokers who do equity and debt, so when you’re having conversations with mortgage brokers, ask them if they also do equity and work with institutions, and that’s a great way to get your foot in the door, is through these intermediaries.

Then you gave your best ever advice, which is to try to be bold. Obviously, it’s important to be conservative, but you kind of gave an example of the time you had an opportunity to buy $2 billion in mortgage debt and only bought $750 million. You had the ability to buy all of it, but you decided to remain conservative, and then it sounds like you kind of regret that, and if you would have been bold, you probably would have made a lot more money on that transaction.

Kevin, I really enjoyed this conversation. Best Ever listeners, I hope you did as well. Make sure you take advantage of him providing us with his email address. He’s definitely very knowledgeable. He’s been doing this for a long time and he teaches people how to do it, and they pay him… So definitely take advantage of that.

As always, thank you for listening. Have a best ever day and I will talk to you tomorrow.

Kevin Riordan: Thank you, Theo. A pleasure to spend time with you.

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JF2210: Tax Liens With Melanie Finnegan

Melanie Finnegan is the founder of Tax Lien Wealth Solutions with 10 years of tax lien investing. She helps people with wealth management by teaching others to be able to manage their own money or can have her company do it for you. Melanie gives some explanation on what Tax Liens are and how you can go about investing with them.

Melanie Finnegan Real Estate Background:

 

 

 

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Best Ever Tweet:

“It’s all about due diligence” – Melanie Finnegan


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, Melanie Finnegan. How are you doing, Melanie?

Melanie Finnegan: Hey, how are you? Great, thank you.

Joe Fairless: Well, I’m glad to hear that, and I’m doing well. A little bit about Melanie -she’s the founder of Tax Lien Wealth Solutions, she’s got 10+years of tax lien investing, based in Provo, Utah. So with that being said, do you want to give the Best Ever listeners a little bit more about your background and your current focus?

Melanie Finnegan: Yes. So a lot of people don’t really understand what tax liens are. So it’s just a facet of real estate. I got into it– it’s been about 12 years now. I just accidentally got into it here in Utah. Our business, we do all of our investing in Florida. But what it is, is we’re yielding between 14% to 18% by having investors and creating investors’ portfolios in tax liens. We purchase them on the secondary market. I started my company Tax Lien Wealth Solutions about three years ago, and we’ve just been growing ever since. So we love it.

Joe Fairless: So what is your business exactly?

Melanie Finnegan: So we do wealth management. So we manage– people just send us funds, we have a minimum amount of investing and we manage. But we actually also have what we call the learning portal investor. They go in and get a certification through my learning portal. And then there are do-it-yourselfers which they can have any amount they want. They can start with 500 bucks, 1,000 bucks, all the way up. We have inventory on hand of certificates that actually we are able to distribute and assign them to client portfolios and transact them in their names, and so we’re just money management and advisors.

Joe Fairless: Got it. So you have a done-for-you solution or a do-it-yourself option.

Melanie Finnegan: Yep.

Joe Fairless: And you teach people how to do it themselves through your learning portal, and then they can go do it.

Melanie Finnegan: Yes. And then I just launched a little subsidiary. It’s called Detroit Wealth Solutions, and what we’re doing is we’re actually rebuilding Detroit. So we’re actually getting tangible properties and then creating a fund. We’re just in the process of setting up the fund right now. But they’ll be making a quarterly return, and then have an option if they want to purchase the property at the end of the rehab or at the end of the year, just do it again. So we just barely launched that two weeks ago.

Joe Fairless: Oh, well, congratulations.

Melanie Finnegan: Thank you.

Joe Fairless: So that has been launched, you said?

Melanie Finnegan: The business itself has been launched. It got incorporated and everything. And then the website, detroitwealthsolutions.com is launched, and the fund is almost launched. We’re just waiting for paperwork to come back and sign.

Joe Fairless: Okay. So why switch gears from tax lien and Florida to building up– investing in Detroit?

Melanie Finnegan: Listening to my clients. So I’m definitely not switching gears, because I actually have someone that’s directing it and overseeing it, because tax liens are my baby, and that’s where my passion lies. I love investing clients in tax liens, and that’s where my knowledge is the most superior. So I’ve delegated somebody to come in, who has real estate background with tangible actual properties and things like that. He’s overseeing everything and he’s doing it on, heading it up. So I haven’t switched gears; I just added to us. We’ve just diversified our clients. They say, “We want property. We want property,” or “We want to invest. We want to do a fund.” So we’re listening to that and hearing that. And then I made a trip to Detroit with our partner that we’re doing this with and he just– we solidified the deal. Just after that trip to Detroit, I saw there was a need for it.

Joe Fairless: Okay, cool. So we’ll go back to the tax lien part since that’s what your primary focus is.

Melanie Finnegan: Yeah, that’s where my personal– yeah.

Joe Fairless: So the learning portal for people to learn how to do it theirselves… What are the steps in that process for learning, from step one through whatever step it is?

Melanie Finnegan: Obviously, it would take longer than that. So I’ll narrow it down. What happened is, I was a portfolio manager for another company, and the reason for the learning portal is I was thrown to the wolves with it. I wasn’t a good educator 12 years ago because I was brand new. So all these clients would call us and say– they’d say they had the knowledge, but they didn’t have the knowledge and things would happen with their liens, or they wouldn’t progress it, or they wouldn’t know exactly how to do it. So I created the learning portal that just educates briefly on due diligence and how to do simple things and how to access our resources for the counties we’re purchasing from, and things like that. It’s just a step by step guide of making the process go, but it has a certification in there. So I can go, “Oh okay, that person has their certification. There’s an accountability there on both sides.”

Joe Fairless: Okay.

Melanie Finnegan: So that’s why it’s there, because I want to be held to a standard and I want the client, if they want to be a do-it-yourselfer, I can’t just throw them to the wolves. They have to have everything at their disposal. If they go through my learning portal, they’re also assigned a portfolio manager. So they have meetings with their portfolio manager; they advise and go through everything and onboard them and things like that. It’s pretty cool.

Joe Fairless: So let’s talk about the last, either group of tax liens that you purchased or the last major transaction you’ve done from a tax lien standpoint. Can you talk about it?

Melanie Finnegan: Are you asking in dollars?

Joe Fairless: However you want to define that.

Melanie Finnegan: Yeah. No, I appreciate that. Sorry. I just wanted to see that– So last purchase I did. I’m a member of the National Tax Lien Association who oversees the investment, and I also have what’s called my Certified Tax Lien Professional. So I’m a certified CTLP. I used to be the only woman in the US that did this. With that certification, I can buy from the secondary market that I access through the National Tax Lien Association. So I purchased– the last thing I did was at an event in March 6th. It was my last travel that I did; it was a business trip to Florida, and I purchased about $1.2 million.

Joe Fairless: Okay, $1.2 million in tax liens. And educate me; is that all-cash transaction?

Melanie Finnegan: Yeah, exactly.

Joe Fairless: So there’s no leverage or anything like that?

Melanie Finnegan: No, I was gonna say that. So some of that is client funds. Well, say I want $200,000 of taxes. If that’s when I’m managing them, they won’t access my inventory. I’ll go purchase on behalf of them. So I’ll make them wait and say, “Hey, let’s wait,” because I buy in bulk and I get a slight discount. So I say, “Hey, let’s wait. Next month is when I’m going to do my next purchase, and then we’ll lump it all together.” So some of it is business funds that we’re just reinvesting, because we sell them as quick as we get them. We sell out of them so quickly. I never have inventory just overflowing. We have tons of investors that are waiting for liens.

Joe Fairless: What’s the average time that you hold, since it seems like it’s pretty quick?

Melanie Finnegan: It just depends on which podcast it came out, what source of marketing I’m using and things like that. But I buy a few times a year, like six, seven. Sometimes I only buy $50,000 at a time. Sometimes I buy a million and a half.

Joe Fairless: No, I’m saying the hold period, not the amount. So you said you buy them as quickly as you sell them, right?

Melanie Finnegan: Oh, yes, it could maybe take us a month to get them going. But are you talking about the return to the investor, how quickly that process goes?

Joe Fairless: I thought you said you’re buying them and turning them around quickly?

Melanie Finnegan: What that means isn’t just assigning them to clients. No, I’m sorry, I didn’t explain well. So it’s under a taxpayer ID. So I purchase them, transfer them in my name, and then have to transfer them into the client’s name, or excuse me, taxpayer ID.

Joe Fairless: So let’s take a giant step back. Will you just talk about your business model with buying tax liens? And perhaps we should have started out with that.

Melanie Finnegan: So a tax lien certificate– just real quick, just so I can define it for your listeners. Sometimes people are like, “What is that?” When you don’t pay your property taxes, the following year at the annual sale, your property tax, that bill will go up for auction, because the counties have to do that, to put it up for auction. They have to incentivize investors with a mandated stated rate. So in Florida, it’s 18% is how much they get. But that investor comes in and pays that tax bill and the property owner is the only one that is penalized at all. The county just facilitates it. But the county needs that money for their police officers, their fire department. They have to meet their budget. So this tax lien investment has to benefit the investor so much, because they need us to keep coming back. There’s $14 billion delinquencies in our nation. So they’ve had to create a process that recovers funds on an annual basis, and that has been around since the 1800s. Just not a lot of us know about it. I had no clue about it when I fell into it.

Joe Fairless: Okay. So you buy in Florida, my guess is, because of that 18% compared to other states which could be lower. Is that correct?

Melanie Finnegan: Yeah. Each state has its nuances. So Florida, they really, really cater to the investor. So they have incentives. I created a strategy in the state of Florida, that actually I’ve been recognized for, that compounds money, turns money and things like that… And it’s just the best state for tax lien investing.

Joe Fairless: And what is that strategy?

Melanie Finnegan: That’s the secret; can’t share my secrets. It’s just turning the certificates as quickly as possible. So what I mean by that is we shake [unintelligible [00:12:30].09] by filing foreclosure, scaring the property owner to pay.

Joe Fairless: So when you buy a tax lien, your goal is to get them to either start paying or to file foreclosure, correct?

Melanie Finnegan: My goal is that we get in there and we file foreclosure and get that money back as quickly as possible, so that we use that interest that we’ve accrued for that period of time, and we’re making money. So I like to turn money twice a year. That way, I’m getting interest really, and they’re working for us. So we go in there… We’re buying season certificates. So the second that certificate is transferred into the client’s entity or name, we go ahead and initialize the foreclosures process and start the foreclosure process, because they’re maximized at that point, and it’s moving along, if you will.

Joe Fairless: And will you elaborate on what season certificate means versus unseason certificate?

Melanie Finnegan: Yeah. So one thing that tax lien certificates have is, it’s called a redemption period. I call it the grace period, for the property owner. In Florida, that redemption period is two years. So as an investor, you just have to be idle. You can’t do anything with the property other than just accrue interest on paper. But two years and day one, you can go in and file what’s called tax deed application, which is step one in foreclosure, and you can go after the property. I buy outside of that grace period–

Joe Fairless: Got it.

Melanie Finnegan: –so that we couldn’t do that immediately. I don’t like paper interest; I like real money. So I like to move it along. It’s nice to see it on a computer screen and things like that… But I love to show the investment earns the trust of the investor by performing.

Joe Fairless: And my assumption is that you can buy them at a steeper discounted rate if you purchase before the grace period’s over, but then you’ve just got to wait. Is that a correct assumption?

Melanie Finnegan: Kind of. A lot of people, if they’re buying season certificates, they go in thinking, “Oh, I’ve been [unintelligible [00:14:23].00] to foreclose on this and get this property.” So sometimes, the outside of the redemption certificates have a premium to them, because you can initialize foreclosure right away.

Joe Fairless: Makes sense.

Melanie Finnegan: Yeah. So over the course of 12 years that I’ve been doing this, we’ve had about 145 properties come to deed, and that’s nothing compared to how much money I’ve invested in clients in over the course of 12 years.

Joe Fairless: When you say 145 properties come to deed, what do you mean by that?

Melanie Finnegan: That means that the money didn’t shake loose and they took over the deed to the property. So they didn’t get the redemption, which is their initial investment plus the accrued interest at the time they actually got the property.

Joe Fairless: What are some mistakes that you see investors make whenever they enter in the tax lien purchase business?

Melanie Finnegan: It’s all about due diligence. So I analyze data; that’s how I look at it. I look at numbers; I can look at a huge spreadsheet and I can see it in 30 seconds if it’s gonna perform or not. But people, they think every certificate is going to perform, and there’s just some that have no value to them. So if they’re going in blind, they could go in and foreclose on a property and get invested into this property that has absolutely no value. It could be a marshland, and I’ve seen that happen, where people have– I’ve had to rescue people and buy back liens that they bought from somebody else, because they don’t know what to do with this property, this slice of grass. But all you have to do is go to the tax collector site and start doing due diligence, and there’s a lot of data there that communicates to non verbally, of course, that “Yes, I’m going to perform” or “No, I’m not.” I vet and cherry-pick every single lien. That’s where I am an asset to the client is I know how to read the liens and what they’re going to do. It took me a long time to do that, but that’s where I’m an asset to the clients, for sure. But I teach them too, because I want them to know how to do it and how to look at a property so they know what they’re investing in and be excited about it.

Joe Fairless: When you’re looking at it in the 30 seconds that you mentioned, what are the first four things that you look at?

Melanie Finnegan: There’s a lot of nuts and bolts here, so I hope I don’t overshare. But when you go in to file foreclosure, you have to pay off any additional tax lien certificate holders. So the number one thing is I look at what’s the additional tax column, what is the assessed value column this year and last year, and what did I pay for it. So if I have 20% equity in a property, I look at that. If my exit strategy is I’m going to get the property and I want to wholesale it, so I want to look at the assessed value. As you notice, the size is a low value. I look at that as our exit strategy if we get property. I leave about 20% equity in there that you’ll never get the property if a client would be absolutely enthralled by it, because they’d have an instant 20% buffer at the very minimum. So I look at those columns. It’s called the horizon lien to value, and I want to know how much of my total investment is going to saturate your assessed value, and I want to maintain 80% or below.

Joe Fairless: Anything else that we haven’t talked about as it relates to tax liens that you think we should, within the context of this conversation? I know it could be a much longer detailed conversation, but anything else you want to say?

Melanie Finnegan: Yeah. One thing that I learned that is one of the most key components is… and especially right now. We’re going through a weird time in our economy and things like that, and we’re very recession-proof, but not only that. We are an approved alternative asset investment, which means you can take your 401k or an IRA and do what’s called a self-directed IRA, and use those funds to invest and capitalize on that retirement fund that you have and make 14% to 16% a year. My ten-year average is 24.7%. So that’s incredible.

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

Melanie Finnegan: Just go to our website, taxlienwealthsolutions.com. You can go over to our Facebook, same thing. We’re on LinkedIn, and check us out. And then just call us or submit an inquiry on our email.

Joe Fairless: Melanie, thanks for being on the show. I hope you have a best ever weekend. Talk to you again soon.

Melanie Finnegan: Thank you.

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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JF2175: Understanding Depreciation With Natalie Kolodij

Natalie is the CEO of Kolodij Tax and Consulting, and she is also a real estate investor herself. She uses her investing experience to help other investors out in the tax world. Natalie gives advice on how to determine depreciation and shares examples of what you should specifically do. 

Natalie Kolodij Real Estate Background:

  • CEO of Kolodij Tax and Consulting
  • 6 years of real estate investing experience
  • Started off flipping mobile and manufactured homes
  • Based in Charlotte, NC
  • Say hi to her at: https://www.kolotax.com/

 

Click here for more info on PropStream

Best Ever Tweet:

“Depreciation is where most people make mistakes.” – Natalie Kolodij


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. First off, I hope you’re having a best ever weekend; because today is Sunday, got a special segment for you called Skillset Sunday and here’s the skill. It is a skill of, well, helping address one of your, if not the, biggest expense that you have, which might likely be taxes. Today we’re gonna be talking about depreciation and we’re gonna be talking about depreciation with Natalie Kolodij. First off, how are you doing Natalie?

Natalie Kolodij: Good, Joe. How are you?

Joe Fairless: I am doing well. Natalie is the CEO of Kolodij Tax & Consulting, she’s got six years of real estate investing experience. She started off flipping mobile homes and manufactured homes; she’s based in Charlotte, North Carolina, and the topic today, as I mentioned earlier, is talking about depreciation. So first off Natalie, do you want to give the Best Ever listeners a little bit more about your background? And then we’ll get right into depreciation and some things to look out for and some common mistakes people make.

Natalie Kolodij: Absolutely. So I got into tax and real estate at the same time. Got out of college, ended up doing exactly what I tell people not to do, which was I paid for one of those weekend guru seminars. So that wasn’t a great start, because it turns out it is actually a little harder because they lead you to believe, but that led me to–

Joe Fairless: Imagine that.

Natalie Kolodij: Yeah, it’s so weird. I paid them and they told me it was easy. That’s crazy.

Joe Fairless: Don’t tell everyone. That will kill their business model.

Natalie Kolodij: Yeah, pretty much. [laughs] So I was determined to make something of it though. So we decided to think outside the box and that’s how we got into mobile homes, and we ended up– at that time, I was in the Seattle area, so a high-dollar, competitive market, and so we were looking for blue ocean strategy doing something everyone else wasn’t. So we started doing a little bit of marketing and setting up some searches for mobile homes and parks, and we ended up–

Joe Fairless: Who is we?

Natalie Kolodij: Just one of my friends and I who I’d gone to the seminar with.

Joe Fairless: Okay.

Natalie Kolodij: Yep. So we ended up buying the first one off the MLS. It was listed. But the thing with mobiles is they cost people money. A lot of the time they’re holding them, they’re paying lot rent. If they’re age-restricted, they inherit them, they can’t live in them. So it’s not looked at as this asset to pass on like a house. It’s like a car, but if you had to make the car payment, but couldn’t drive it. So they’re really easy to find deals, and you can do a lot of creative stuff with them. The last one we bought, we paid $50 for. So if you’re looking for a good way to get started, I can’t say enough good things about mobile homes.

Joe Fairless: What’s the business model with that $50 purchase?

Natalie Kolodij: That one we bought for $50 came to me from an RSS feed search where pretty much I had a search set up for any mobiles under five grand kind of thing, and so I got the alert. She inherited it, thought it needed a ton of repairs, didn’t want to deal with it, was paying $400 a month for it, just wanted it gone. So we bought it, we put our sign in the window, and it was literally sold that same day. There was someone– it was in a highly desirable area. She had just been wanting to move out there to be closer to the grandkids. So she was ready to buy it. When she found out it would be renovated, she was even more excited. So we literally bought it and had it under contract to sell in the same 24-hour span, and then we had 30 days to finish the renovations. That one got a fair amount of work – subfloor flooring, drywall, a lot of the cosmetic and wear and tear upgrades on it.

Joe Fairless: How much all in and how much you sold it for?

Natalie Kolodij: That one was purchased for $50. I had just under $5,000 in renovations and it was sold for right about $18,000.

Joe Fairless: Wow. So the woman who put it under contract saw it in its original condition, and she agreed at that point in time to purchase it for $18,000?

Natalie Kolodij: Yep, knowing it would be updated… And that was tricky for me because I didn’t know what I had to do to it yet. I only owned the thing for 14 hours, but at that point, I felt like I had enough of a spread that — you can pretty much buy a whole new mobile home for $18,000, so I knew that could be good, but having it sold and knowing we didn’t have to worry about that was the best part of it. Like I said, highly desirable area, highly desirable park and I would say with mobiles, that’s your hardest selling point, is where they’re located. The park, the manager, how strict their guidelines are; that was one of the things we ran into with an earlier home. Why it was hard to sell was because their minimum tenant requirement was so high, their credit score income requirements, it ruled out a lot of people. So you’ve got to find a park that’s easy to work with where it’ll be easy to sell the home. The actual home itself is almost the less important part of the deal.

Joe Fairless: Well, why wouldn’t she just buy a brand new one for $18,000?

Natalie Kolodij: Because most parks don’t have spots anymore. So in a lot of the bigger city, the mobile home parks, they’re getting rid of them, a lot of places. So existing parks have the homes in place, but there’s not a lot that are moving in new homes, just because they’re running that risk of being zoned out or grandfathered out eventually.

Joe Fairless: Okay. Well, you are the CEO of your own tax and consulting business. What’s your background with taxes?

Natalie Kolodij: Yes, I went to college for five years and graduated with a degree in tax, worked for high-end CPA firms for several years… And I love it, I love tax, but what I found was, especially with real estate, it’s an area that gets ignored a little bit. Especially when it’s passive investors, there’s not the same amount of attention and strategy put towards those clients. It’s looked at as, “Oh well, you just collect your rent, there’s not much to do with it,” and that’s absolutely not the case. It’s a huge tax advantage area. So having someone who specializes in it can really, really put you in a good spot. It’s always just super frustrating for me to hear, because I feel like a lot of investors, they forge their own path. They’re sometimes taking money out of a normal retirement account, they’re making these big decisions and manifesting their own destiny for lack of a better word, but they’re doing something that’s not the norm to give themselves more freedom, and then if you go to someone who’s not putting in that same amount of effort as you are, it’s just impeding your goals. So having someone who really gets real estate and is on that same page as you and really will help you make the most of your taxes and keep the most money in your pocket, that’s who you want to work with.

Joe Fairless: You said you have a degree in tax. Is that the actual degree?

Natalie Kolodij: No, it’s imaginary. It’s from Pretend Degree University. [laughs]

Joe Fairless: I thought it was like accounting. I didn’t know there was a tax– what was your major?  Is Tax the actual major?

Natalie Kolodij: Yeah, for Master’s degrees, it is. So you can get–

Joe Fairless: Oh, Master’s. Got it.

Natalie Kolodij: Yeah, for a four year– Yep, so anyone who goes the CPA route has to have a fifth year of school, and you get either an accounting or tax specialization.

Joe Fairless: Alright. Well, it shows my ignorance. I thought everyone got the accounting degree. I didn’t realize there’s another–

Natalie Kolodij: It’s a little bit of both.

Joe Fairless: Alright, fair enough. So let’s talk about depreciation and some of the common mistakes that you see being made that come through your door.

Natalie Kolodij: So depreciation, just a quick background, is when you buy an asset, anything for your business that’s going to make you money over a long period of time, the IRS says, “Well, we’re not going to let you write it off all at once. You’re going to be using it for 30 years.” So write off a little bit each over the span of its useful income-producing life. So for residential rentals, that’s 27 and a half years, and the theory is that over that time, it should go down in value. You using the item, like a car gets worth less the longer you own it. We all know that’s not often true with houses, but the tax law is what it is. So when you buy a property, you get to depreciate it, and what that means is, when you buy it, you get to separate out the value of your land versus your building. Land doesn’t depreciate, you don’t get to; that just stays the same for millions of years. So you figure out your building value, and then you get to deduct it over 27 and a half years, and the reason this is so beneficial is that it’s an expense, it’s something you get to write off on your taxes, but you didn’t actually have to write a check to get the deduction.

Most of your write-offs you do, like you get to deduct insurance, you have to pay for that. So depreciation means that at the end of the year, you can make money. You can have $2,000 sitting in the bank that your rental made, but on taxes, if your depreciation is then a $5,000 deduction, it’s going to take your taxable, your paper income, what you’re showing, it’ll reduce that $2,000 by that $5,000, and on paper, you show a loss of $3,000. So it’s really important, because it’s what lets you make money, but not pay taxes on it, and then potentially use any leftover loss to reduce other income.

Common mistakes we see are people not separating out their land value; that’s really important. You can’t just depreciate the total price you paid. The land isn’t allowed to be depreciated. So something that’s important is that you’ll hear even tax professionals say, “Oh, we use an 80-20 rule. We just automatically put 80% to building.”

Joe Fairless: It’s got to be more precise.

Natalie Kolodij: That’s imaginary. Yeah, that’s not anything– that’ll never pull up an audit.

Joe Fairless: Like your degree. Just like your tax degree.

Natalie Kolodij: Just like that. That’s where you learn that rule, actually; that same place, that imaginary University. [laughter] So you can’t just pick an arbitrary number, but there are seven different allowable ways you can use, and most people don’t look at any of the other options. So what I tell people is, as a start, you have two really good options to look at. Look at the county assessor, you’re going to look at their percentage they allocate to land versus building. You don’t use their actual numbers, you just apply that same percentage to what you paid… Because I don’t know if you’ve noticed this, the county assessor is often nowhere near what the house actually costs.

Joe Fairless: Right.

Natalie Kolodij: So you just use the same split pretty much, 50-50, 40-60, whatever it is. The other option that you’re allowed to use is your appraisal, and oftentimes, an appraisal is more beneficial; they just tend to allocate less to the land portion. So I always recommend at least comparing those two options or talking to your accountant about looking at both options, because most accounting firms only just pull the county website and use that number and don’t look at anything else. So since you have a few different choices, you might as well compare and see which one puts you in the best position and gives you the best deduction.

Joe Fairless: Okay. So make sure we separate our land value, because we have to. Those are the rules. Okay. What if you don’t? What’s the consequence?

Natalie Kolodij: Potentially is if you get audited, they’re going to correct it and you’re going to end up paying back that excess depreciation you took on the land all at once as a result of that audit. The other thing with depreciation that’s a little weird is when you sell, you have to recapture it and pay back that tax. So pretty much the best way to describe that is, like I said, when you think about a car, it becomes worth less and less over time; that’s why they let you have this deduction. So when you go to sell and if you make money, the IRS is like, “Well, hold on. We let you deduct part of this every year because it should be going down in value, but it went up in value. We want that back.” So they tax it at 25%. So, if you don’t separate out your land, it’s going to be wrong for all those years. It’s probably gonna look wrong to lenders when they look at it, and it’s incorrect. You’re gonna get nailed in an audit, and the thing with audit is that it opens up a Pandora’s box. So if they find that one big red flag, they can now dig into every other little detail of your taxes.

Joe Fairless: Plus, correct me if I’m wrong, but wouldn’t you get fined? You’d have to pay interest on whatever money you should have paid initially to the government?

Natalie Kolodij: Yeah, having an audit go negative, go against you, puts you in a bad spot. So it’s gonna end up– you can be penalized for it depending on if– especially if it was like on purpose. If someone purposely did it, there can be additional penalties on it. So just yep, as a rule, you can’t deduct the land portion, you can’t depreciate that. So we’ve got to separate that out… But make sure you’re doing it in the smartest, most advantageous way you can.

Joe Fairless: By looking at the county assessor website and using the percentage they use, or looking at your appraisal.

Natalie Kolodij: Yep, I would start with those two.

Joe Fairless: Okay, that’s one mistake. What’s another mistake?

Natalie Kolodij: Another thing we see a lot is that if you do any big renovation on a property, like you buy a rental, you put 50 grand and you do the whole studs out renovation on it, they’ll literally just add that whole amount to the value of the property, and depreciate it over 27,5 years. And that’s fine… It’s not incorrect, but there’s quite a bit of things we can separate out from that, even without doing a formal cost segregation, which is where you separate out every component of a house. Just on a normal renovation, your accountant’s allowed to separate out especially things that aren’t attached to the house. So it’s important to, when you do a renovation, track your projects, essentially what it’s made of and what those costs were, because things like appliances, carpet, any land improvements, potentially kitchen cabinets, and counters – these are all things that can be separated out into a shorter life. So we can call those a five-year-old asset or seven-year asset or a 15-year asset. And what’s important is that anything under 20 years qualifies for something known as bonus depreciation, which is a freebie from the IRS that says, “Well, its life is short enough. We’ll let you write it off in this one year.” So your $50,000 renovation, if half of it was your appliances, carpet, cabinets and landscaping, we might be able to deduct $25,000 all in one year, instead of spreading the full $50,000 across 27 and a Half.

Joe Fairless: Will you elaborate more on bonus depreciation?

Natalie Kolodij: Yeah. So it is a rule the IRS has that says that — it used to be only 50%, but this was a change with the Tax Cuts & Jobs Act. So pretty much any asset that has a life of less than 20 years can potentially utilize bonus depreciation, and it’s just an option provided by the IRS that lets you deduct the whole value in year one instead of having to depreciate it over five years or ten years or whatever the life is. You just get to deduct it all in the first year.

Joe Fairless: What are some examples of assets that have lives of 20 years or less?

Natalie Kolodij: Your appliances, your computer, if you have a home office setup to manage your rentals… Something we see missed a lot is land improvements, which would be like if you put in a new retaining wall, you put up some landscaping. Land improvements are all 15 years, so as soon as you do anything on the outside of your house, keep that in mind, because there’s a good chance we might be able to use that as bonus depreciation.

Joe Fairless: Any other mistakes that you’ve seen that are common when factoring in depreciation?

Natalie Kolodij: Those are the big ones. The other one is just be careful of your date. I just reviewed a return done by a professional where they put everything in service. The date– the partnership was set up not when they actually bought the properties. So the date you get to start depreciating assets is when it’s purchased or when it’s in service, so it starts getting to do its job. So if you buy it, but it’s not livable at that point, you don’t get to depreciate it until it’s in its functional state. So just be aware of the dates you’re using as well.

Joe Fairless: Natalie, thank you for being on the show. How can the Best Ever listeners learn more about what you’re doing?

Natalie Kolodij: The best way to find me is you can find me on my website, it’s called kolotax.com; that’s a great way to find me. I’m also on Facebook at Kolodij Tax – The Real Estate Tax Strategist. So either of those places is a great way to find me and reach out and get a hold of me.

Joe Fairless: I enjoyed learning about the depreciation and the three common mistakes that you’ve seen, but then also the mobile home snippet that we talked about in the very beginning. Just learning the business model, a bonus on top of this episode, so thank you for that… And I appreciate you being on the show, enjoyed our conversation, learned a lot. I hope you have a best ever weekend and talk to you again soon.

Natalie Kolodij: Alright. Thanks, Joe. Have a great rest of the week.

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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JF2170: IRA Investing With Carl Fischer

Carl is one of the founders and principles of CAMA a self-directed IRA company. He comes from 3 generations of real estate investors and has been around real estate since he was born. He started as an engineer working with rockets but over time he saw that working in real estate he would have more free time in his life to do what he wanted. 

 

Carl Fischer Real Estate Background:

  • One of the founders and principles of CAMA Self Directed IRA DBA CamaPlan
  • Has been investing for over 40 years still owning his first property
  • His portfolio consists of residential, commercial, land and syndications
  • Based in Cape Canaveral, Florida
  • Say hi to him at: https://www.camaplan.com/ 
  • Best Ever Book: Keep It

 

 

 

Click here for more info on PropStream

Best Ever Tweet:

“I love properties in the ROTH IRA because I will have tax free income for the rest of my life” – Carl Fischer


TRANSCRIPTION

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

Carl Fischer: Really good, Theo. Glad to be here with you.

Theo Hicks: That’s good to hear, and I’m glad you’re here as well. Looking forward to our conversation. Before we get into that, a little bit about Carl – he is one of the founders and principles of CAMA self-directed IRA DBA CamaPlan; he’s been investing for over 40 years and still owns his first property. His portfolio consists of residential commercial land and syndications. He’s based in Cape Canaveral, Florida and you say hi to him at camaplan.com. So Carl, do you mind telling us a little more about your background and what you’re focused on today?

Carl Fischer: Sure. That’s a great question. I appreciate the opportunity. I come from three generations of real estate investors. So my mom and dad, they were in real estate and their moms and dads were in real estate, so you can say I grew up around it. I like to take the tax advantages of real estate that it provides me. I still like real estate. I used to launch rockets at Kennedy Space Center in Cape Canaveral Air Force Station when I was younger, when manned spaceflight was very prominent, but all the times, I was still doing real estate as a side job. I graduated from Cornell University in engineering and did the rocket launching for almost 25 years. And while I was doing that, I bought my first property, I started developing property, building homes, building apartment buildings, industrial space warehouses, and also in apartment complexes, obviously, because my mom and dad started me out on it and I felt comfortable in that arena. Launching rockets was more fun, but real estate provided more financial freedom, so you could do the things you wanted to do.

Theo Hicks: Sure, thanks for sharing that. So you said that one of the reasons why you like real estate investing is for the tax advantages. So a lot of people obviously invest in real estate for the same reasons, and a lot of people know some of the most common talked about tax advantages of real estate. Is there any tax advantage that you wanna talk about that maybe not all the people know about, or maybe not a lot of people are taking advantage of, that they should?

Carl Fischer: Well, when I first started out, I had a job, I had W2 income and every time I’d buy a property, I got to take home more income from my job, so I really liked that. But when my dad died, and he died land rich and cash poor and owed some money on a couple pieces of property, I actually borrowed money from a gentleman who had a self-directed IRA, and that IRA lent me the money and I ended up paying him 12%, which was his lowest rate, and his highest rate at that time was 18%… And I looked at the risk associated with that and the tax advantages of it – and this was in 1993 before the Roth IRAs even came out… So he was making interest and not paying any taxes on it, and then would reinvest that money with other borrowers, and I loved the model, and then when the 1998– when the Roth IRA came out five years later, it only made that better. So a lot of people don’t subscribe to my thought process, but I have properties obviously; like I said, I’ve been in there 40 years, and my knowledge of the IRAs only came out in the 1990s. So I have properties both in the plan and outside the plan, and quite frankly, I love properties in the Roth IRA, because I have tax-free income for my whole life, and then my heirs will have tax-free income for at least ten years after I die from the same account.

So from that aspect, I think it’s good. Yeah, will that work with stocks and bonds and gold and silver? Yes, it will. But like I said, I came from real estate; I still think real estate gives you a big bang for your buck as far as appreciation and cashflow and leveraging. So I just use all of those things together to provide a tax-free environment, and with tax-free, my net worth goes up and my cash flow continues to increase as I get older.

Theo Hicks: You said that when you buy a property with your self-directed IRA, the income from the property is tax-free?

Carl Fischer: Yep, the income from the property is tax-free and the appreciation is tax-free when I do it in my Roth IRA. And since I’m 59 and a half, I can take that money out the next day and have all [unintelligible [00:07:35].05] on it. So if I make $1,000, I take out $1,000. I just can’t beat that. Even with depreciation, everything else, and I’ve had buildings that I have had their 39 years of depreciation, as I said, and they’re 27 and a half years of depreciation or 27 years, 29 years, whatever it is, now; it keeps changing. So I understand both sides of it, but I really like using the IRAs, and I actually opened up a company after doing it for so many years, and the people I influenced and taught said, “Why don’t you open it up?” So my sister and I opened up CamaPlan so that we could give this to other investors.

Theo Hicks: Yeah, awesome. Because I’ve definitely heard of this strategy before. So just to be clear, so I have a self-directed IRA, I use that as a down payment on, say, a $200,000 property that cash-flows $2,000 per year; so that cash flow goes back in my self-directed IRA and then I can pull out $2,000 tax-free from my self-directed IRA?

Carl Fischer: You can if you’re 59 and a half. If you’re not 59 and a half, there are some ways to do it, but most people want to at least have it go in there and grow bigger. So I don’t recommend people do that before 59 and a half, unless they’ve got several million dollars in there and they’re done, then we can show them how to take it out sooner without any penalties.

Theo Hicks: So this is more of a long term play of continuing to put cash flow back into the IRA that grows at whatever rate your IRA is getting. Plus, you’re able to use that money to buy more properties. So what happens if you sell a property that’s owned by the IRA? How does that process work?

Carl Fischer: Your IRA sells the property, and when it sells the property, the money goes into the IRA. It’s that simple. Just like if your LLC sold it, the money would go into the LLC. Or if you sell it, it goes into your bank account, but it shows up just like you sell a stock or a bond. Most people are familiar with that. If it made money, you’re going to have more; if it lost money, you’re going to have less.

Theo Hicks: People that use this strategy, do most of them just buy their IRA or they do the IRA for the long term play, and then they also buy with their own money so that they can actually access the cash flow sooner?

Carl Fischer: Obviously, there’s people out there– some of our biggest clients are out there now, and they buy property and they like it because it’s passive income and you don’t have to pay Social Security and Medicare on any of the income, but then when they learn the tax-free advantages of doing it in a Roth IRA, a lot of them switch over, and then they try to focus on doing it in their IRAs. I mean, let’s face it. Once you make enough to live on, then you want to do all the rest that you can do tax-free. You’ve got your financial freedom, you’ve escaped from your job, you’re making whatever that number is – if it’s $50,000, or $500,000. Once you’re making that on the outside, you’re doing everything else tax-free.

Theo Hicks: You mentioned also that not only would in this situation I get the money tax free after I turn 59 and a half, but that my kids can also get it tax-free up to 10 years. So do you mind explaining that?

Carl Fischer: Yeah, it used to be up until December of 2019, you used to be able to put that down to your kids and they could have it for their whole lifetime. So let’s say I lived to be 90, I could give it to my granddaughter at 30, and she could have tax free income until she was 90 and died. But as of 2019, they said that the heirs have to take it out after ten years after my death, the beneficiary’s death or the owner’s death. So they can use that account. If it owns a piece of real estate, then that real estate will produce income for ten years. They can either sell the real estate or they can take the real estate out of the Roth IRA and deed it into their own name, and then it’ll continue to generate income, but they’ll have to pay tax on it after ten years… And that’s brand new.

Theo Hicks: Okay, so the tax free benefits are ten years, and after that,  they are in some form or fashion taxed on that money.

Carl Fischer: Right. Once you put it into your own name, then you’re gonna make, let’s say, $100,000 thousand a year in rents, then you’ll be taxed on that $100,000 after ten years.

Theo Hicks: What advice would you have for someone who wants to raise money for their own deals, or they’re an apartment syndicator and they want to raise money from people who have the self-directed IRAs? So people are using it to buy their own properties themselves, but they’re investing in someone else’s deals. What advice would you give to that sponsor who’s trying to attract those types of people?

Carl Fischer: Well, we work a lot with those types of sponsors. Most of them already have people that trust them. The biggest issue we find is there’s no shortage of deals to get into, but what there is a shortage of is a knowledge and an understanding and a relationship built and trust built with syndicators. So if you’re trying to find people with IRAs, the first thing you have to do is get a hold of them. The second thing you have to do is prove to them why you’re worthy of taking their money, and then you’re fighting with 100 other people trying to do that. But we find that it works very well if people have people that have already invested with them in the past, if they just mentioned to them that they can use their IRAs. Most people have seven times more money in their qualified plans, IRAs, 401K’s than they do and their discretionary savings account or investment account. So I would say, instead of going out there looking for people with their IRAs, convert them and tell them about the fact that they can use their IRAs. And we help people get through it and if they want to put a group together, we’ll come in and do the presentation so that they don’t have to answer it and we invite them to bring their accountants and their attorneys, and CamaPlan does even do continuing education for accountants, attorneys, realtors, etc. so that they can learn about this and not be afraid of it.

So that would be what I would tell syndicators – get your people in there. Once they trust you, and they’re ready to do this, let them know that they can also use their self-directed IRAs, and they can put their own money into it as well. So you can talk to one person and have two clients – them and their IRAs. Does that make sense?

Theo Hicks: Yeah, yeah, 100%. I like that strategy. So the last question before the best real estate investing advice ever question, and that is if I have a self-directed IRA and I want to use it to buy real estate and I’ve got a deal I identified, what’s the first step I need to take in order to do so? Can I just do it myself or do I need to call someone else to do it for me?

Carl Fischer: Well, the first thing you have to do is you have to have an IRA custodian administrator to do it, because the IRS doesn’t let you hold your own IRA. There are some checkbook IRAs out there, but you first have to open up an account with somebody like CamaPlan. Once you have that account open, then you can either get a checkbook IRA and do it yourself, or you can get the contract, negotiate the terms of it and make your IRA the purchaser of it, send that information in to us and we’ll help you get everything done so that your IRA could buy it… And it’ll add 24 to 48 hours to the deal, but that’s inconsequential when you’re buying real estate, a day or two.

Theo Hicks: Yeah. I guess I have one more question, and I know these are probably super basic questions, but I can use my IRA as a down payment for financing; I don’t need to buy the property all-cash, correct?

Carl Fischer: That’s right, but you do when you get a loan – it has to be nonrecourse, meaning they can’t come back and put a judgment against you or your IRA, and we have lenders that will help people do that. In some cases, you may or may not be subject to, what they call, unrelated business income tax or unrelated debt-financed income tax, but don’t let that persuade you. A lot of people say, “Oh, that’s horrible. It’s terrible,” but in most cases, most people don’t pay much or any of that tax. So talk to us before you do it and we’ll put you in touch with people that’ll put your mind at ease.

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

Carl Fischer: My best real estate investing advice is do your due diligence, know what you’re getting into, and have a system built so that you buy on the facts and not on the emotion.

Theo Hicks: Alrighty. Are you ready for the Best Ever lightning round?

Carl Fischer: Sure.

Break: [00:16:40]:09] to [00:17:42]:03]

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

Carl Fischer: My favorite book is Keep It by Joe Luby, and it’s a way to do Roth conversions, and it’s less than $20, but it saved me tens of thousands of dollars. So I would put that one on the top of my list.

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

Carl Fischer: I would probably retire and just do more fishing and hunting. I doubt I would start a new one.

Theo Hicks: So you did say that you’re an investor in your bio. So what is the best ever deal that you’ve done?

Carl Fischer: One of the best deals that I did was I bought a property under contract in New York City, and I got an offer to purchase it while it was still under contract, and I made, I think, $160,000 – this was probably 20 years ago (maybe not quite that long ago) – in about a month and a half, without any work, without even closing.

Theo Hicks: What about a deal that you’ve lost the most money on? How much did you lose and what lesson did you learn?

Carl Fischer: Well, there’s two of them that come to mind. One of them is I was in a syndication and I didn’t do the due diligence. I let someone talk me into letting them do it. So they went up, and if I’d gone and spent the time, it wouldn’t have been much – it would have been one trip up there – I would have seen a lot of the deferred maintenance and the expenses associated with it… And that probably cost me close to $100,000.

The other one is I’ve done some private lending and I didn’t make sure that the taxes were paid on the property for about three years, and when I had to foreclose on the property, I found out I owed three years worth of taxes. I think that was a $12,000 to $15,000 mistake that I could have fixed in five or ten minutes. So I look at my mistakes as dollars per hour – one phone call, one lookup on the computer, and I would have known that and I would have saved $15,000.

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

Carl Fischer: I like to help people, I like to educate them. I’m a big believer in teaching a person to fish versus giving them a fish, and I always tell people, I can help a lot of people, but I can only carry one, and one of the things I want to do is know the difference between that.

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

Carl Fischer: You can reach me at camaplan.com on the website. You can call in to our phone number 215-283-2868. My extension is 227. You can also email me at info@camaplan.com, and if you ever talk to one of my staff and not myself and you don’t get the right answer, just set up a conference call or a meeting with me and we’ll be available for all clients.

Theo Hicks: Well, Carl, thank you for joining us today and also thank you for offering to do the conference calls for our Best Ever listeners and providing email addresses and phone numbers. So Best Ever listeners, definitely take advantage of that, because Carl knows what he’s talking about when it comes to the tax advantages of investing with your self-directed IRA, and also if you’re a syndicator, raising money through other people’s self-directed IRA.

So just to summarize what we talked about, you talked about the tax advantages of the IRA, which is the tax-free benefits, and you’re able to pull that money out when you’re 59 and a half, and your kids are able to also have that money for tax-free for up to ten years after you pass away.

I really liked what you said about raising money from people with self-directed IRAs, and you mentioned that one of the best approaches is to just mention it to the people who already invest with you. So rather than going out and finding brand new investors to invest with you through their self-directed IRAs, ask the ones that you already have, because you mentioned that people have seven times more money in their self-directed IRAs than they do in their regular savings account. So you’re gonna have the investors trust because they’ve invested with you and you’ve done what you said you’re going to do and sent them their distributions. So you can mention to them that they can invest with their self-directed IRA and see what they say.

If you want to invest with your self-directed IRA, the first thing you need to do is have an IRA custodian like CamaPlan, for example, and then your best ever advice was to have a system in place so that you buy on the facts and not emotions, and making sure you do your proper due diligence, and you hinted that what happens if you don’t do proper due diligence when you talked about one of the deals you had lost money on. So Carl, thanks again for joining us today. Best Ever listeners, as always, thank you for listening. Have a best ever day and we’ll talk to you tomorrow.

Theo Hicks: Thank you, Theo, and a great summary.

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JF2168: Infinite Wealth Creation With Jim Oliver

Jim is the Founder of the wealth coaching company called CreateTailwind. He shares some insights today on infinite banking and how he teaches people to utilize it to purchase real estate and grow their business. We have had other infinite banking episodes before however they mainly focused on paying off debt whereas Jim will teach you how to grow your wealth.

Jim Oliver Real Estate Background:

  • Founder of the wealth coaching company CreateTailwind
  • Founded CreateTailwind in 1988 in Denver, CO as a traditional financial planning firm, but after weathering two major corrections on Wall Street, Jim and his team pivoted the company’s focus to building wealth beyond Wall Street.
  • Today, CreateTailwind is a multi-location, nationally recognized firm that has helped thousands of individuals and businesses around the US create their own wealth and be their own bank.
  • CreateTailwind’s main office is in Dakota Dunes, SD with offices in Denver, CO, Louisville, KY, Naples, FL, and Amelia Island, FL
  • Say hi to him at https://createtailwind.com/

Click here for more info on PropStream

Best Ever Tweet:

“Infinite banking is about the process of acting like your own bank, not the product” – Jim Oliver


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. First off, hope you’re having a best ever Sunday and because today’s Sunday, well, we got a special segment for you called Skillset Sunday, and today, we’re gonna be talking about infinite banking and how to use that to buy more real estate. Today’s guest is an expert on infinite banking and he uses it to buy more real estate. So makes sense for him to talk about it. How are you doing, Jim Oliver?

Jim Oliver: I’m doing great, Joe. Thanks for having me on the show, bud.

Joe Fairless: Hey, my pleasure and looking forward to our conversation. So a little bit about Jim – he’s the founder of a wealth coaching company called CreateTailwind, and he founded CreateTailwind in 1988 and focuses on infinite banking. Today, CreateTailwind is a multifamily location, a nationally recognized firm that helps thousands of people and businesses create their own wealth and be their own bank. So if you want to just give a quick refresher for anyone who hasn’t heard about infinite banking and hasn’t heard other conversations we’ve had on this show, just a quick refresher on what it is, but then let’s get into how we can use it to buy more real estate.

Jim Oliver: Absolutely. So infinite banking really started as a way to take over your debt – your cars, maybe your taxes, vacation, things like that, and stop paying other entities’ interest, and really getting money to flow back to you instead of money to flow away from you. Nelson Nash in his book, that’s the textbook on infinite banking; it’s called Becoming Your Own Banker. He says, “If some authoritative power distributed all the money in the world equally among all the people in the world, within ten years time, 97% of all that money would be under the control of 3% of the people,” and really, Joe, the reason is, is that money flows away from us and we don’t do anything to get money to flow back to us, and infinite banking is pretty simple – you write checks to you instead of the bank and you take over the banking function in your life. Now, that’s the basics of–

Joe Fairless: So those are the benefits of it and how it works, but what is it exactly?

Jim Oliver: Okay. So you have this very specifically designed insurance contract, and it’s not the insurance contract that your normal insurance agent would sell for death benefit or to leave the money in there and accumulate it over 20, 30, whatever number of years. It’s the way banks and corporations design life insurance, and so it’s cash-heavy, it’s the highest cash, lowest death benefit, and still be considered under the IRS regulations as life insurance. So you have this insurance contract, then because you have this insurance contract with a mutual insurance company, you have a contractual right to collateralize up to 100% of that, and you get to use the insurance company’s money. So if you think about this sitting in a tax shelter, growing, tax-deferred, eventually tax-free if you do it right, and because you have this account, the insurance company has to give you some of their dollars. By the way, Joe, what I just told you, 95% of life insurance agents don’t understand that. They think if you take a loan from your insurance policy, your money leaves the account. Your money doesn’t leave the account. So now you have uninterrupted compounding.

So you have this money sitting in this money pool, just think of it that way. Depending on your paradigm of insurance. So just think of it as a money pool. This other entity, this financial institution, this insurance company has to give you an interest-only loan; they can’t convert the loan, they can’t make you pay payments, anything else, and now you get to go put that money– you have control, now you put it in use, whether that’s buying an asset or paying off a debt, then that money is now in motion. The cash flow of that investment comes back through your banking system. Any principle paid back to the insurance company reduces the lien, which allows you to do what? Borrow it against it again, collateralize it again, and go buy more real estate. So that’s what I use it for, is to keep on keeping that money in motion, and the faster that it moves, it creates what we call velocity of money, what a bank does.

Joe Fairless: Why is that important?

Jim Oliver: Well, because think about what a bank does with your– let’s say, you had a $300,000 mortgage at 5%, and then your payment is a little bit over $1,600 dollars on that loan. What does the bank do with that $1,600 dollars when you pay them every month? They loan it out again.

Joe Fairless: They invest it.

Jim Oliver: Yeah, absolutely.

Jim Oliver: So by doing that, if you took that original $300,000 loan at 5% for 360 months, and you just loaned it out one more time, Joe, for the duration of that loan. So the first loan would be for the full 30 years and then all the way down to the last payment is only for 30 days. If you just loaned it out one more time under the same parameters, so the same 30-year am, 5% every time you loaned it out was the same and for that duration, you’d make over a million dollars on that $300,000 loan.

Now we all know just on a 30-year mortgage, you’re gonna pay in about almost double at 5%, but they’re gonna make more than a million dollars on that $300,000 loan by loaning it out over and over and over again. So we can create velocity of money just like that bank does by every time that our cash flows back into our banking system. We pay, we have windfalls and those windfalls go back into our banking system and we loan it out again, over and over and over. Now, remember our money never went anywhere. So it’s sitting in there, earning uninterrupted compounding every single day; guaranteed it cannot lose money, it can’t be zero.

Jim Oliver: “Guaranteed” is a watch out word usually in our industry, but in this case, describe why you’re saying that.

Jim Oliver: Because the whole life insurance contract, it has two projections when you see it. It has the guaranteed cash value, and that guaranteed cash value is at a 4% gross, and there’s a whole long story to how they came up with that, Joe, and they’re not going to go in there and change it, because they’d have to go before Congress again. So they have a 4% guarantee in there, and then they have a dividend, and the dividend is really a return of premium. So right now, companies are paying between 5% and 6%, with the dividend and the guarantee combined. So your money is sitting in there, and — so when you buy other types of insurance, they’ll give you a projected rate, but with whole life, they give you a guaranteed illustration, and then current market conditions. Now current market conditions today are pretty low. Dividends have been as high as 7%, 9%, in that range over time. So to be in the 5% to 6% range, we’re showing some really conservative numbers, but we can always just go back to the guaranteed. Infinite banking is about the process of acting like your own bank, not the product, and a lot of things that I see on YouTube and on some click funnel types of marketing is all about the product, but it’s your behavior. It’s just like in real estate investing, I’m sure that you would agree. It’s not, “Hey, I’ve got the greatest bank of all time that’s going to finance my deal,” it’s my behavior, it’s how I can negotiate the deal, how I can find the deal, how I’m going to syndicate the deal, how I’m going to wholesale the deal, how I’m going to flip the deal, whatever it is; it’s my behavior is where the money is made.

Jim Oliver: So walk us through a case study that you maybe have in your own portfolio that you’ve used this for.

Jim Oliver: Okay, so I used it for a really easy one, and it was a home run, so that’s why I like to tell this story. We all have our home run stories. So I bought a company from a much larger company. It was a forward and reverse logistics company, and I bought it in August of the year that I bought it, August 1st. And I bought the company for a little bit over $3 million, but I only had to come up with $75,000 out of pocket. Well, with logistics, and we were refurbishing electronics, Christmas season is the best season, so I was buying it at a good time because we were coming into the busy season. We had such a good four or five months there that I actually had a $400,000 distribution at the end of the year. So I took the $400,000, I paid back the $75,000, so then I asked people, “So how much money did I have in the business?” and they say $75,000. No, I only had interest on $75,000 for four or five months.

Joe Fairless: Because you just bought it with your policy?

Jim Oliver: Because I bought it with the policy and I used the insurance company’s money to buy the business, not mine. Mine stayed in that policy. So when you think about buying real estate, it’s the same thing. I bought this little house in Naples Park that was $192,000 using my insurance money, and I could have leveraged the bank’s money, too; I just didn’t need to, at that time. And then 11 months later, I sold it for $338,000. That was a great time, it was 2011, the prices were going back up, it was great timing, but my point to that is, is I could move really fast. I paid cash and I didn’t buy it with my money. So what was my rate of return on that? I just had the interest in it for 11 months.

Jim Oliver: That’s a good way to look at it. I hadn’t thought about it in that exact way… Because as you said– say you have a $100,000 policy and you have access to $95,000 of it. When you borrow against it, as you said multiple times today, your 95k is still earning that interest and you’re simply borrowing against it, but your original 95k– even if you borrow 95k, your original 95k is still making that interest as though you still have it in there, which it is. So you’re just paying the interest on that. When does it make sense not to pay back that interest and just keep on borrowing off of that original amount, if at all?

Jim Oliver: That’s a great question, and here’s the analogy I’ll give you for that question. Let’s say I would loan you $100 million, and the only thing that you had to do, Joe, is that in one year, you had to pay me $5 million of interest. First of all, would you take the loan?

Jim Oliver: You’d loan me $100 million and in one year, 5% interest?

Jim Oliver: Yeah, so you don’t have to pay me $1, but in one year, you gotta pay me $5 million of interest.

Jim Oliver: Yeah, I think I could make that work.

Jim Oliver: Right. So let’s just play along. So what if you took that $100 million, and then you leverage the bank’s money and you went and bought $500 million worth of real estate, and let’s just say it netted you 5% for that year. So you and I get together, I assume you’re buying me lunch, because you’re gonna write me a check for $5 million, and you’re gonna keep $20 million, and I say, “Well, do you want to pay any of that principle back?” and you go, “Nah, I think I’m good. I’ll see you next year.”

So the scenario where if my money is out there moving fast enough, I might not pay back the loan, and it’s okay, because I get to use somebody else’s money to go build my wealth, and my money is in a tax shelter. Now, think about this, Joe. When I start to take that money out– now, I don’t like to use the word retirement, because I don’t think any of the people that listen to your show are trying to build a retirement fund; they’re trying to build passive income. But when I want to start taking any distributions from this insurance contract, if I do want to start taking them, is it’s tax-free, because I’m going to withdraw the basis, and then I’m going to borrow the money out because my dividends are going to be growing at that time faster than any interest payments would. So if that was all the money I had, I wouldn’t have to file a tax return, but the people listening to this show are even smarter than, that because they’re going to have real estate which depreciates. So they’re gonna depreciate their real estate and they don’t have to pay tax on those distributions from the insurance contract.

Jim Oliver: When would it make sense not to use that money to buy something that would cash-flow? So for example, I’ll use my own policy. I’ve got a $100,000 policy with this infinite banking, and I think I have 95k available. I haven’t touched it, just because it’s a hassle and I don’t need to, but am I missing out on the main benefits of this by not doing it?

Jim Oliver: Even if you paid your taxes, even if you bought your cars, even if you did anything like that, but the next real estate deal that you do, what I would do is I would take a loan for part of that, because you’re increasing your rate of return, because you’re not going to use your cash. And wealth has to reside somewhere. So if you could buy more real estate, if you could take that 95k and let’s say you could buy a $450,000 property, and leverage the bank’s money – I’m not saying don’t leverage the bank’s money, just don’t let them control the banking function. Now you have $450,000 worth a real estate cash-flowing; let that cash flow back into your insurance contract until you have another opportunity, and then just keep doing it.

But if you wanted to use it for taxes or you wanted to use it for vacations or anything else, that’s what I would do, because when you pay cash, you have lost opportunity cost; and interrupting your compounding – that creates lost opportunity cost. And since you can borrow the insurance company’s money interest only while your money grows inside of a tax shelter, you eliminate lost opportunity cost. The other thing that you do is how many things– if you use it for real estate, then you could deduct the interest that you’re paying. By the way, I’m not giving you tax advice, but I’m saying your CPA could confirm for you that you could deduct that interest that you’re paying to the insurance company, because again, it’s not your money that you’re borrowing, remember; it’s the insurance company’s money. So just like any other financial institution, you could deduct that interest, but the money that you’re earning is growing tax-free. So how many things in your life, Joe, do you get to deduct the money that you’re paying off your taxes, but the money you’re earning you don’t have to pay tax on? Not very many, right?

Joe Fairless: Yeah. Good stuff. Jim, I enjoyed our conversation and I appreciate you giving some of these examples that really brought it to life. The business example resonated with me in particular. So how can the Best Ever listeners learn more about what you’re doing in your company?

Jim Oliver: Just simply go to createtailwind.com. We’ve got some free resources on there, we’ve got our podcast called Breakaway Wealth. There’s episodes on there, there’s free articles on there. If anybody sends me an email at jimoliver@createtailwind. com, I’ll send them a copy of “Becoming your own banker” by our Nelson Nash as our gift, Joe, yours and my gift to them. I’ll send that book out to you for free. If you want a coaching session, you can sign up for it right there on createtailwind.com.

Joe Fairless: Jim, thanks for being on the show. Hope you have the best ever weekend. Talk to you again soon.

Jim Oliver: Thank you, 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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JF2167: My First General Partnership Deal With Alexander Felice #SituationSaturday

Alexander Felice is a career banker working in risk analysis for SBA lending. Alex is a previous guest on episode JF1614 and is now back after completing his first general partnership deal and today he joins us to share the lessons he has learned through this deal. 

Alexander Felice Real Estate Background: 

  • A career banker working in risk analysis for SBA lending
  • 6 years of real estate investing experience
  • Portfolio consist of 40 BRRRR deals, and a 24-unit multifamily 
  • From Fayetteville, North Carolina
  • Say hi to him at: https://www.brokeisachoice.com/ 

 

 

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Best Ever Tweet:

“Start off small to get your reps in first, proof of concept, before doing bigger deals” – Alexander Felice


TRANSCRIPTION

Theo Hicks: Hello, Best Ever listeners. Welcome to the best real estate investing advice ever show. My name is Theo Hicks and today I’ll be speaking with Alex Felice. Alex, how are you doing today?

Alexander Felice: I’m extremely well. Thanks for having me.

Theo Hicks: Absolutely, thanks for joining us. So Alex is a repeat guest. So make sure you listen his first episode; it’s Episode 1614. Since today, I didn’t know it’s Saturday, we’re gonna be doing a Situation Saturday where we talk about a sticky situation that our guest is in, and have a conversation about any challenges he’s facing and what he is doing to overcome them. So that’s gonna be the focus of the conversation today, but before we get into that, let’s go over Alex’s background as a refresher. He’s a career banker working in risk analysis for SBA lending; he has six years of real estate investing experience, his portfolio consists of eight BRRRR deals and a 24-unit multifamily. He’s from Fayetteville, North Carolina, and you can say hi to him at brokeisachoice.com. So Alex, before we start talking about your sticky situation, which is your first JV deal, do you mind telling us a little more about your background and what you’re focused on now?

Alexander Felice: Yeah. So I got into real estate trying to — I had a job I hated, so I had to get out of it. So I started buying single-family homes, because I was broke, and that’s all I could swing, and that went well for a little while, but it doesn’t take long before you realize that there’s no economies of scale, which is probably something everybody who listens to the show already knows or has figured out – that you have to go to big multifamilies to get the economies of scale. So after about eight of them, I started moving towards that, but it’s a challenge to grow, for me at least, to go up to– some people do hundreds of units in their first bid; that was not something that I was capable of, so I switched into slowly going towards multifamilies, and lately, I’ve been doing flips. I still want to do multifamily, but I’m just gonna go a little bit slower than I had anticipated, but yeah, that’s the transition that I’ve been at.

Theo Hicks: Sure. So you’ve got the 24-unit multifamily. Is that the JV deal?

Alexander Felice: Yeah, last June, we closed on a 24-unit multifamily. I did it with four other people, all of which whom I met on the internet, which was neat, and our original intent was to syndicate, but the 24-unit at a million dollar purchase price, it didn’t warrant the cost to do that. So we JVed it, and it’s gone reasonably well, with some hiccups.

Theo Hicks: Sure, yeah. So before we get into the hiccups, I want to just set the stage a little bit more. So you mentioned it as a $1 million purchase price. What was the original business plan?

Alexander Felice: So the plan was, it was five people who had never done this before, and we all have the same idea – multifamily, buy for cash flow, value-add if we can. We wanted something that– we were worried about preservation of capital first, and more so than anything, I wanted the experience. I have a giant ego and so I was trying to make sure that I didn’t let that run the show. I said, “Look, I just need to get one of these. I need to get five partners that I know I can return money to, and get the experience,” and then– I have a long life ahead of me that I can buy bigger, bigger deals. I didn’t want to go off and buy something that I couldn’t handle the first one. So idea was to get my reps in, proof of concept, get one done so that I knew I could do it and then the sky’s the limit.

Theo Hicks: How did you find the deal?

Alexander Felice: Broker. We were talking to brokers for probably four or five months, just looking at everything. One of the partners was just looking at deals, looking at deals, looking at deals. So this one, he brought to me, my partner; he brought it to me and we looked at it. It was in an area that we knew well that I already invest [unintelligible [00:06:19].18]. It was about what we wanted to do, and I wish there would have been more value add, but it was a deal that we knew we could make money on and we said, “Okay, let’s snowball.”

Theo Hicks: Perfect. So a million dollar purchase price, found it through a broker. The last thing I want to know is about your partner. So you said you met him on the internet. Do you mind walking us through that? I mean, a lot of people do that as well. I actually met Joe through the internet and I’ve been working for him for four years. So I’m just curious, can you walk us through how you met those four people in more specifics?

Alexander Felice: Well, on my website, what I’ve been doing as an experiment for three years now, interestingly, is I put up on the contact page — so the first thing you see is, “Do you want a video chat with me?” There’s no strings attached, there’s no nothing, no cost, no– I don’t sell anything. So I just put it on there and see who will reach out, and sure enough, I booked a month out for Thursday nights, and strangers just going on the internet and they video chat me and I do deals with some of them. So these are four people that I met through doing video chat with me, because they just wanted to be interested in what I was putting together.

I’m very transparent on my website about the deals that I do and how I do them, so it resonates with certain people. So people reach out to me and over time, it was, “Hey, I want to do multifamily next,” and so you say that to people enough– the rule of investing or the rule of networking is, just tell everybody what you’re doing. And so I’m very loud on social media, and I’m very loud on the internet, and it attracts the people that I needed. So over time, I got four other people that wanted to do the same thing as I did. They wanted to be part of what I was putting together, and it’s not more complicated than that. It’s just you have to put yourself out there and you have to be consistent, you have to be loud, and it inevitably will attract the people that wanna do the same thing as you.

Theo Hicks: Can you give us an example of you being very loud on social media?

Alexander Felice: I don’t go– No, I guess not. I wear a lot of bright pink. I say things that other people think they’re controversial. I don’t think any of that I say is controversial, but I’m very unapologetic on the internet and I’m not good at marketing strategy. I’m just good at saying my authentic thoughts and I’m just good at saying them loudly, and I do it quite often.

Theo Hicks: Perfect. Okay, so we’ve get the context for the deal set–

Alexander Felice: For instance, my website is called Broke is a Choice; that’s a jerk thing to say to a lot of people. That’s the thing I mean, where broke is a choice, but it’s a little bit rude; that’s my style.

Theo Hicks: Yeah, I like it. So when I first read that, I was like, “Ah, it’s a really cool website. I like that.” I think it’s a lot of attention because of that website.

Alexander Felice: There you go. That’s it.

Theo Hicks: And in the pink too. I’m sure the pink helps as well. Okay, so 24-unit, four partners, including you. We talked about how you met them, purchase price, how you found the deal. So the deal’s purchased. You mentioned that it’s going relatively smoothly. Maybe explain to us what happened after you bought the deal.

Alexander Felice: So I’m a career banker, so I should have known this, but I made– one big error that I made was, I didn’t anticipate the maintenance costs to go to escrow to the bank. So we have a certain percentage that goes to reserves to the bank every month that comes out of cash flow. Well, I didn’t anticipate that in my projections. So that cost every month, plus insurance on year one charged me for year one and year two. The bank took the second year to an escrow. So I have about 10% of my gross potential income that comes out of cash flow every month. Is it the end of the world? No, not a little bit, but it does reflect on my ability to pay out investors cash on cash year one.

Theo Hicks: I’m sorry, but before you continue, I’m just confused. So it was reserves — so you’ve got reserves coming out each month. What about the insurance? You’re saying it was a lump sum?

Alexander Felice: No. So say I have $13,000 a month in gross potential rents. Well, I have $500 a month that goes to the bank for repair escrow. Now that’s pretty standard. I just fumbled it, I was paying attention to a lot of the things. So I put that into the projection. So $500 a month comes out and it goes to the bank. Now that’s our money, but we don’t get it every month. We won’t get it till whenever, probably two or three years down the road. The second one is $715 in insurance. Now, we pay $750 in a month in insurance for year one, but the bank is taking an additional $715 a month for escrow to pay for year two. Now that’ll come off at the end of year one, but for that first year, we have $1300 a month that comes out of our cash flow to go to escrow costs; that’s 10% of gross potential rent. It’s not painful, but it’s really annoying.

Theo Hicks: It wasn’t disclosed to you by the lender at closing?

Alexander Felice: It was probably something that would have been caught by anybody who’s done this before, and I should have caught it myself, but when you’re doing these deals your first time, and everybody who had done this on this team was a first-timer, it’s one of those things that just slipped by us, and I wish I would have better accounted for it. It’s not the end of the world, but it is very frustrating, because it messes up my year one cash on cash returns for investors.

Theo Hicks: 100%, yeah. Okay, any other challenges with the deal?

Alexander Felice: Yeah, it’s too small. I’ll never do 24 again; that’s ridiculous. It’s way too small. Most of our problems were scale problems. I’m trying to think of some good examples, but my first thought was to go to multifamily for economies of scale, but I don’t think you’d get economies of scale until you get to probably– now that I look back, probably 100 units is what you really need. Maybe a little less than that, but 24 is not enough, at least not for us. The rents are $600 to $625. I’ll never do that again. I don’t want anything less than mid-market rents, and that’s in my market $1,100 to $1,200. Maybe some of that is personal reasons, personal approach, but these are the things that I learned. Went too small, we were too timid with the money, we should have gone bigger, we should have been bolder, and I think it would have actually made us more.

Theo Hicks: Are you managing the deal yourself or is there a third-party management company?

Alexander Felice: We have a third-party management company.

Theo Hicks: Okay. Do they have someone on-site?

Alexander Felice: No, it’s not big enough to do on-site management, in-house, to do it full time with them. So we have a third-party management company. I love them; they’re working out fantastic, they’re taking great care of the place. Actually, our expense ratio is less than the previous owners who were self-managing. So I don’t have a problem on the expense side. What I have a problem really is– so we bought it in mid-2019 at, now we know, at the top of the market. I knew it then, but mania gets, I think, everybody in the beginning at least, “I should just pay less.” But the property is being run as well as it possibly can be, in my opinion. We just have the deal up a little bit shaky. And we’re going to end up making good money in this property, I just look back and think of all the things I could have done better.

Theo Hicks: Yeah, totally. So you’ve got four other people. What is everyone’s role in the joint venture?

Alexander Felice: So my main partner – we have somebody who does the financial side, so they’ll do my books, and then another guy just helped us get it and he’s helping us get the next deals, and then some people play less of a role than I would have liked, but I’m okay with that. So I just do– I manage the property manager and I manage monthly reports. My other main partner does the accounting books, and then another guy’s doing acquisition side.

Theo Hicks: Did everyone involved invest money in the deal?

Alexander Felice: Yes, I did this so everybody went in equal, or very close to equal. Me and my main partner have a slightly larger share, so that we can take the guarantee, and then the other partners didn’t have to take the guarantee, and they took a small share for it. I spread it out equally so that I could– how do I say it? People are taking a chance on me because it’s my first one, so I just said, “Hey, look, just believe in me. I’ll give a return and I don’t care what the work costs me, I just want to make sure that I can show that I can get this done, I can show a profit, and then I’ll take a bit of cut in the next one.”

Theo Hicks: Yeah, exactly. So since everyone’s in the deal for equal amounts, are the profit split done equally as well?

Alexander Felice: Yep. You’re split with the amount that you put in, both equity and cash flow.

Theo Hicks: Okay, perfect. Any challenges with doing a JV as opposed to doing the syndication route? Any challenges with control, or everyone having a say, anything like that?

Alexander Felice: No, but people is my specialty. So I didn’t expect any of those challenges from the start. Everybody knew that I was gonna lead the deal for the most part, and that’s worked out well. I didn’t take in anybody that I thought it was going to be more of a hassle than I was willing to take on. So I haven’t had any problems with that. The syndication route, I’m up for it in the future. I underestimated the challenge of the cost to price balance of doing syndication. With the syndication, thhe attorney costs you 15 grand, it’s like, “Dude, don’t do it on a million-dollar deal. It doesn’t make sense.” But the problem is not that we should have syndicated, the problem is that do a bigger deal. That’s the correct solution, in my experience.

Theo Hicks: So with all the lessons you learned, what would be your ideal next deal?

Alexander Felice: I would like an A or B Class property in a bigger area, in a growing area with higher rents and more investors. I would go bigger even if it means less returns. I think the stability is worth the premium by a longshot. The C Class properties, the numbers look good, but it’s just not what I would do again. I’d go with an A Class property in Raleigh or Charlotte, that’s what I’d prefer.

Theo Hicks: And then do you have a network of people that if that ideal deal were to fall into your lap tomorrow, you could raise the capital?

Alexander Felice: I think so. Funny, in this business everybody who’s done no deals – that uphill battle is really hard, but once you do one, it’s like the doors really open up. So obviously that gets bigger as you do more. I think I have– a lot of people didn’t want to do the first one with me, even though I’ve been doing single-families for a long time, and I have a big social media presence, a lot of people were interested… But I’ve had literally people tell me, “Yeah, I’ll do the second one with you. I don’t want to do the first one with you.”

And also, the first one, you don’t have a problem with — it’s hard for me to explain. I have a problem selling the first deal to people, because you don’t really know if it’s going to close when you get a hold of it, because I was new… And so you go to somebody, it’s like, I really can’t sell them as confidently as I’d like, because I’m not sure how to do this. So they can feel that, and that hinders me. So it’s like a cyclical thing; I’m not as confident so they aren’t as confident, so then I’m not as confident. When we go to do this next one, I think that will be mostly entirely removed, and so I’ll be able to much more confidently go out and get funding, and I’ll have learned a lesson from this first one, and I perceive that to be a much lesser problem.

Theo Hicks: Alright, Alex, is there anything else that you want to mention before we close out the interview?

Alexander Felice: Buy something that makes money. You can grow, you don’t have to do everything on your first one. Ego, I’m prone to ego, and it got me in a little bit of trouble on this one, and I know that problem for other people, but I play the long game. This multifamily thing, it works, but you don’t have to do it on the first deal.

Theo Hicks: Alright, thanks for sharing that. Alright, Alex, well, I enjoyed this conversation. I look forward to checking out your Broke is a Choice website and some of your comments on social media, but in the meantime, some of the biggest takeaways that I got from the episode was – number one, how you were able to put together a joint venture deal with four people you’d met on the internet.

I really liked your strategy of having a “Do you want to video chat with me?” on your contact page, and that’s how you were able to meet the individuals you did this deal with. You also mentioned how the roles and responsibilities were allocated, but your biggest lessons on this deal was number one, not anticipating the reserves that need to go to the bank every month, as well as having to pay a monthly insurance rate that was covering year one and year two during, year one. So another is understanding what the lenders’ criteria is for reserves and insurance and taxes. I know taxes is another thing that people talk about as well, that might be a little bit different in year one.

The second thing you said is that 24 units is too small, because most of the issues that you’ve come across have been economies of scale issues, and so you prefer to focus on 100 units or more, because that’s where economies of scale come into play. You also mentioned that you wouldn’t do $600 to $625 rent ranges anymore, and that you want to go a little higher than that. You also mentioned that you probably should have paid a lot less for the deal, but were really excited.

Alexander Felice: A little less, Theo. Not that much, a little less.

Theo Hicks: And then the last thing we talked about having a little bit of trouble selling the deal confidently – because you hadn’t done it before, so you weren’t exactly sure how things were gonna play out, so you didn’t feel comfortable saying something you didn’t really feel confident and comfortable with, and then in turn, they could feel that, so they were less confident and it’s a negative feedback loop.

So again, Alex, I appreciate you coming on the show. Make sure you guys check out his previous episode; again, that’s 1614. Go to the website Broke is a Choice, take advantage of the free video chat. It’s not every day that guests offer that to listeners. Best Ever listeners, as always, thank you for listening. Have a best ever day and we’ll 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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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  

Click here for more info on PropStream

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


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, John Stoj. How are you doing, John?

John Stoj: I’m doing great. I’m really so happy to have the opportunity to talk to you and share with the Best Ever listeners.

Joe Fairless: Well, I’m happy as well, and I’m looking forward to our conversation. A little bit about John – he spent 14 years on Wall Street from 1992 to 2006, he raised $300 million for a distressed hedge fund, and has started and grown multiple businesses based in Atlanta, Georgia. With that being said, John, do you want to give the Best Ever listeners a little bit more about your background and your current focus?

John Stoj: Sure, sure. Well, right now, I’ve, I guess, re-entered the workforce after a little bit of time playing Mr. Mom – super-excited about that – and one of the reasons why I’m doing it is that I feel like I finally found my ‘why’. People talk about that a lot, but I realized that my ‘why’ is taking care of people, and how do I do that? I’ve done it through the course of my career by helping companies more so than people. During the time I took off, I helped raise my son. My wife works a lot; she’s a physician, and I also helped be a caregiver for my dad. He was 96 when he passed away. So we’re in a position where I feel like I’ve got a lot to offer for folks. I can help them to get a sense of where they fit in the world and more so, where they fit with their careers and their goals, whether they be entrepreneurship or existing within the corporate world.

Joe Fairless: Okay, and so that’s from an individual standpoint. I am sure that ties into our topic today, which is building, scaling and growing a business. So how are those dots connected?

John Stoj: That is a fantastic question. It makes a lot of sense… Because when I speak to people — I get a lot of people calling me because they say “Well, geez, you’ve done this before. I want to start a business. How do I do it?”

Joe Fairless: Before we get into that, what businesses have you started and what were the results of those businesses?

John Stoj: Sure. I call myself an accidental entrepreneur… Although, I realized I was an entrepreneur from an early age, whether it be just having a paper route as a youngster, or building up a cache of folks who I mowed lawns for… But after getting out of college, I went to work for Wall Street, and the thing I liked about it was that your income was uncapped. If you did well, you got paid well, and I really couldn’t understand how people could go into careers where they knew what they were going to get paid regardless of how they performed, and that, to me, drove my entrepreneurial mindset. The reason why I say it was accidental is, I would say, I was pushed into it by the financial crisis. I left a banking position along with the rest of my team to start a money manager. And we started in February of 2007, and we were out of business by Thanksgiving. This was not a good time, if you recall, in the financial world, and I think that you have some experience with that, if I read your bio correctly…

Joe Fairless: So February 2007, in terms of what do you mean by that, I have experience?

John Stoj: Your experience in Lehman.

Joe Fairless: No, I’ve never– I’m not related to Lehman. You might be thinking of someone else’s bio. Never worked there, never–

John Stoj: I bet I am, Joe, and there I’ve made my first blunder on the podcast. I apologize.

Joe Fairless: I lived in New York City for ten years, but I wasn’t working for any financial company.

John Stoj: That’s exactly it. You were in advertising; my mistake. Let me go back to that and say, we got there and looking back– so, the reason why we were put out of business – and this is a key bit that I get into with folks, is learning to do the due diligence on any project you’re getting involved with. We were supposed to have financing for a minimum of 24 months, but there was a key provision in the company’s financing that scuttled the whole thing if a few key things did not happen. So surprise, it didn’t happen.

Joe Fairless: What were those things?

John Stoj: Well, we had to do a deal by a certain time period, otherwise, our bank wouldn’t release the rest of the funds for us. And now what we were doing was we were buying CDOs… So not to get too much into the weeds on that, but suffice it to say you could not purchase goods assets at the time. So I was an asset manager, I said I wasn’t willing to purchase these assets, and as a result, we couldn’t close the deal, and the company had to go out of business. So this was something where I trusted too much in someone else who had arranged for that type of financing.

Joe Fairless: So your financing was contingent on you all closing on a deal, okay.

John Stoj: And of course, that could happen in real estate as well.

Joe Fairless: Yes, definitely financing provisions could be violated or not adhered to or loan covenants rather. So it’s a little bit different in that world though, because — help me understand, why did your company need financing, because — isn’t it just your salaries, so if you just didn’t get paid, then that’s fine?

John Stoj: So think of it like a construction loan.

Joe Fairless: Okay.

John Stoj: We had to hit certain milestones in order for them to release the funding.

Joe Fairless: I get that.

John Stoj: We did not hit the milestone; the funding which would cover everything from salaries to the rent would then not be released.

Joe Fairless: Okay, got it. So how come you all just didn’t take salaries and just work from home?

John Stoj: Well, this is actually what led me to raise the capital for our hedge fund. Some people just threw up their hands. This was a time in ’08, where people in the finance industry and in my sector of it, structured finance, were throwing up their hands and giving up to do something different, or just taking some time off. A partner and I, we decided that we didn’t want to do that; we wanted to do exactly as you say – let’s start our own business. We had somebody try to start the business for us and work for them, and that was unsuccessful. Let’s do this on our own. So we were lucky enough to put together the project materials and raise $300 million for investing in these distressed assets, all backed by the types of securities that started the financial crisis – CDOs, subprime, real estate, bonds and such.

So what we did was we created a whole system where we would be able to purchase those types of assets out of the banks who were under severe distress at the time, and we ended up getting — these transactions take a long time to close. We were around for about a little over a year. In our second year, we were about to close on our first transaction of about $120 million or so, and literally, two weeks before the closing date, the banks were bailed out for the last time by the government, and we got a call from our banker that we were going to purchase from saying, “Well, we love you guys, but we don’t need your money anymore.” So that ended that adventure, and that’s [unintelligible [00:09:47].03].

Joe Fairless: Oh, that’s a punch in the gut.

John Stoj: It was a punch in the gut. I always tell people that you never know when the brass ring is gonna come and you never know when they’re gonna snatch it away from you. So I went from two weeks from being financially independent–

Joe Fairless: How much would you have made personally?

John Stoj: Well, my partner liked to torture himself, so he tracked that one investment, and contractually, we would have each made $7 or $8 million.

Joe Fairless:  Oh, that’s it?

John Stoj: Yeah. So not that much… [laughter]

Joe Fairless: Oh my… Alright. Instead, you didn’t make any money?

John Stoj: I didn’t make any money, except for our little salaries that we took during that period of time. So the $300 million was lined up specifically for the purpose of buying those assets.

Joe Fairless: So the $3 million that was lined up – was that already funded in an escrow account or in some other account?

John Stoj: No, it was pledged.

Joe Fairless: Okay. So then what did you do?

John Stoj: So then I got fed up and I said “This is now the second or third time that I’ve been put out of business in the finance world because of extraneous events. I want to control my own business. I don’t want to deal with any of that. So how do I do that? I’m going to go ahead and start my own business that’s completely different.” So I looked into businesses that have low barriers to entry. Food business is a business with low barrier to entry… And started making inquiries.

I found actually a friend of mine who I had gone to business school with had started a small business selling sushi, and that’s how I came to run a sushi kitchen… But then he was looking to expand his business. So this is one of the– we haven’t gotten to it, but when I talk about the steps that I think you should look at when opening your own business, one of the steps is making a plan that includes for running the business as it exists, and then running the business as you hope it might exist, and seeing even what could be the issues if you have no growth, low growth or even exponential growth.

So I figured the only way that food business could have exponential growth is either franchising or wholesale, and I had no interest in running a restaurant, because I did not want customers like that, and I didn’t want to worry about hanging up a shingle and just hoping somebody would walk in the door, whereas I knew I could go out and sell a product to folks. So I wanted to sell a product that I could sell to people all over the place or as many places as possible, and I didn’t want to deal with retail. So I caused this sushi company to be turned into a wholesale supplier as opposed to a retail restaurant, and we bought – or I should say we leased a large catering kitchen here in Atlanta, we transformed the company’s other locations into production facilities as well, and I went out and got businesses who had cafeterias, buildings who had cafeterias, and then universities, hospitals, folks like that to purchase our sushi and offer it as lunch fare. So we would make it overnight and package it and sell it to those folks at lunch.

Joe Fairless: I bet that’s so much more profitable than just a standalone restaurant.

John Stoj: Well, that’s it. You’re in much better control of your margins.

Joe Fairless: Oh, yeah. The stress level’s down, you don’t have to deal with random people complaining about stupid stuff…

John Stoj: Correct, and I’m also a planner. I was a Computer Science major in college along with finance, so I have a programming mindset and a planning mindset, and what you could do with a wholesale business like that, especially when we developed long term relationships with clients, you knew the whole month’s production, give or take some standalone orders, so you could control your inventory, you could control your labor, all those kinds of things, which are just impossible with a day-to-day operation like a restaurant.

Joe Fairless: So smart. And do you have any actual numbers for before and after, in terms of profitability or anything like that?

John Stoj: Yeah. So, the business, when I joined it, there were– I’ll call them two and a half locations in two different cities.

Joe Fairless: What were the cities?

John Stoj: They were in Kansas City, Kansas, and of all places, Alexandria, Virginia, and then we opened up one in Philadelphia, and then one is in Atlanta; it was the last one to open. So we had four production locations. When I joined the company, two of the three existing locations were losing money. The profitable location was supporting the other two.

Joe Fairless: Because they were restaurants.

John Stoj: They were restaurants with extremely small production, and we just turned them into production. And the Atlanta office, obviously, we started from 0 and we went from 0 to 400 in revenue for the first year, then we doubled it again, and then we finally got over the million-dollar mark by the time I sold the business.

Joe Fairless: What a smart move. If i as a restaurant owner, I would be doing the same exact thing. Well, fortunately, I’m not, because there would be no restaurants in United States.

John Stoj: Some things are more difficult to transform into that packaged food than others… And in fact, I will tell you the main reason that I like sushi as an idea was not because of I’m a big sushi eater, or that it wasn’t necessarily the most popular food, but it’s a food that’s–

Joe Fairless: Gotta be made fresh.

John Stoj: It has to be made fresh, which is a little sad. I was always jealous of the guys that did frozen stuff, because our shelf life is literally just one day. But constructed food, there’s no cooking involved. All you do is– the rice is steamed, but everything else is just a construction, essentially. So if you have a couple of guys that are good with knives that can cut the fish correctly, the rest can be trained. So those are all reasons why I really liked that business and why I chose it, even though it wasn’t something that my heart was drawing me to. Now one of the things I talked about when making the plan for the business–

Joe Fairless: Well, let’s talk about that. That way we’re not sprinkling in some stuff. We’ve got about five minutes left. So let’s talk about your steps for scaling. So what are your tips?

John Stoj: Okay, the first one is to think about, what do you want to do? How much do you want to make? How much can you make? You have to ask yourself all those questions, and then what would happen if you had something that was extremely good that happened, like exponential growth, versus– people always think about, “Well, what if nobody comes in the door? How can I keep the lights on and cover expenses?” Well, what happens if that customer walks in the door and they ask you for 5, 10, 100 hundred times what you’ve ever produced in the past? I tell folks the same story, and it did happen in my sushi company, because I was pursuing a client – the Atlanta public schools, in fact – to see whether they would be interested in selling sushi in their cafeterias and providing it to their students, and going back and forth with the head chef, and then even the superintendent of schools and all that stuff… Tons of meetings, tons of samplings, all that stuff, and you say, “Well, geez, nothing’s gonna come of this.”

And then summer before school started one year, I got a call from the chef and he said, “Okay, we like the idea. Can you start providing the sushi in August, whatever” and I was like, “Oh, that’s great. Sure. How much?” and he’s like, “Well, we want to have two pieces of sushi at least for each student on the opening day of the school” and I did the calculation pretty quickly. They wanted 120,000 pieces of sushi. Now pieces aren’t rolls; they’re eight pieces in each roll, you do the math, but it was a staggering amount, that he also wanted delivered at the same time, on one day. And that was the offer that you get as an entrepreneur and you think to yourself, “Oh, geez, this could make me and/or break me.”

So I did work it out, but it took a lot of figuring, it took a lot of explanation about the food business, about freshness and about delivery service, because half of my company was a logistics company by delivering the sushi. But it doesn’t matter that I did get through it, that good thing was just as stressful as a bad thing. So I tell folks that you’ve got to think about it and you’ve got to wargame it out, and really figure, “Okay, how do I do this if it happens”, and if it’s not possible, don’t go for those opportunities.

Joe Fairless: Okay, so that makes sense, and it’s gonna be a fun exercise too to think what would happen if things went really well, and also what happens if they don’t. You mentioned earlier, making a plan that includes running a business as it exists and how you hope it might exist, which is similar. Any other tips for scaling?

John Stoj: Scaling is big. I think you’ll find that — I’m not the first person to say this, but systematize everything as much as possible. And that’s where I would tell folks, especially — I’ve worked with a few people who have, like me, have left the corporate world to go and try to either purchase a franchise or start their own business. They’ve got a great idea they think, and one of the things I tell them is think about anything that you took for granted working in the corporate world is suddenly not available to you. The human resources department, for instance, how to hire people. It’s a little easier now. Even when I started the company in 2010, between then and now, outsourcing is a lot easier than it used to be, but as you know, there are pitfalls that can go along with that as well. So I tell people they need to figure out where they can source people, they need to systematize things. So if they need to hire people quickly, they can get that person trained up quickly. It’s all about creating almost that handbook of the business while you’re building it.

Joe Fairless: It makes sense. And then any parting thoughts that we haven’t talked about that you think we should before we wrap up?

John Stoj: I think one of the biggest things that if you’re going to be an entrepreneur and you’re going to start your own business, if you have a family involved, you want to get full buy-in from your family, because without that, you’re going to have a difficult time being there for the business. Because as you know, owning your own business means you’re never fully off. You’re never fully on vacation, you’re always on call, and if they’re not up for that, you might want to look into a different opportunity. I’m going back now, way back in your podcasting days, hundreds of episodes back, but I listened to an episode with Matt Rodak, and he said–

Joe Fairless: He’s a friend of mine.

John Stoj: Okay. He said that entrepreneurship is hard, really, really hard, and when I heard him say that, that lit up in my mind, because that’s what I tried to tell people. I sat down last year with a friend who told me that he and his wife both wanted to quit their jobs, and they were looking at half a dozen franchises to purchase and open, because they wanted control of their lives… And I told them two stories. I told them the story of how I started the sushi business; it grew, it was fantastic, but my wife practically wanted to divorce me before I sold it, because I was getting calls at [1:00] in the morning when the guys ran out of avocados. So I said, “Watch out for that, because that could be a big problem.” But if you talk to somebody who started a business and they didn’t really notice it, and then somebody bought them out for millions of dollars, they’re gonna give you a different opinion for sure.

Joe Fairless: Yeah, they’ll have recency bias.

John Stoj: Yeah.

Joe Fairless: They’ll just remember the end. Well, John, thank you so much for being on the show. How can the Best Ever listeners learn more about what you’re doing?

John Stoj: Well, thanks a lot, Joe, for having me. Again, just being able to do this podcast for so long and so consistently is super impressive. Best Ever listeners can get to me at my website at verbatimfinancial.com or john.stoj [at] verbatimfinancial.com.

Joe Fairless: I have been doing this podcast for many years, but I learn something every day that I do them; I do about eight to nine interviews. Let’s say I learn probably something on every interview, but maybe not every interview, I don’t learn something, which is my fault, because ultimately everyone has something to teach us; it’s my responsibility to find out what that is. But on this one, I can say I certainly learned some stuff, and I find your sushi restaurant to wholesale supplier fascinating, and it’s something that we should all take a look at in our business.

If our business in total is not working, then what services, what products do we have to offer within that, that would be beneficial for others and maybe we just shift the focus. So thanks so much for being on the show. Hope you have a best ever day. We’ll talk to you again soon.

John Stoj: Thanks for having me.

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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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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.

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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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.

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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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:

 

Click here for more info on groundbreaker.co

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.

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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.

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