JF2765: Market Comparison: Appreciation in Denver vs. Cash Flow in Cincinnati ft. Sarah May

Denver-based Sarah May and Cincinnati-based host Slocomb Reed discuss in-depth how cap rates and population growth impact the way investors operate in their very different respective markets. A few topics they cover include: 

  • Ideal cap rates. In Denver’s current market, Sarah wants to see about a 6% cap rate when purchasing a value-add property, with an opportunity to sell between 4% and 5%. In Cincinnati, however, Slocomb says investors are seeking to purchase at an 8% cap rate, but will typically end up purchasing in the 5.5%–6% range.
  • Appreciation vs. cash flow. The lower cap rates in Denver mean investors won’t see as much cash flow as investors in Cincinnati, where lower population growth is reflected in its higher cap rates. However, the potential for appreciation is much higher for Denver investors. 
  • Population growth. While Cincinnati is seeing both rent and population growth, the rates don’t compare to Denver, which Sarah says is projected to beat the national average in population growth for the next five years. 
  • Raising rents and increasing property value. Sarah points out that in lower cap rate markets like Denver, incrementally raising rent by even a small amount can result in a big multiple when it comes to adding property value.
  • Three things that will help you succeed in any business. Sarah believes mindset, focus, and follow-up are key when it comes to making it in real estate. That means having the right attitude and perspective, being able to limit your options enough to put all your energy into one pursuit, and following up in order to discover unlikely opportunities.

Sarah May | Real Estate Background

  • Co-founder of Regency Investment Group, which owns and operates apartment communities. Their business model is to buy older properties that are in need of renovation and/or improved management.
  • Portfolio: 
    • GP of five properties with over 450 units in Colorado, LP of 1,200+ units
  • Based in: Denver, CO
  • Say hi to her at:
  • Best Ever Book: The Go-Giver by Bob Burg

Greatest Lesson: Grit. Stick to it and amazing things will happen. Approach problems with the mindset that there IS a solution and I’m going to find it. Don’t give up even if we haven’t won a deal for a while. Good things are just around the corner.

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TRANSCRIPT

Slocomb Reed: Best Ever listeners, welcome to The Best Real Estate Investing Advice Ever Show. I’m Slocomb Reed, and I’m here with Sarah May. Sarah is from Denver, Colorado. She’s the co-founder of Regency Investment Group and they GP value-add apartment syndications. They currently have five properties in their portfolio with just over 450 units, all in Colorado. They’re also LPs of 1200 plus units. Sarah, can you start us off with a little more about your background and what your current focus is?

Sarah May: Sure, I just wanted to say thanks so much for having me on, Slocomb. I really appreciate being here. I got started out probably like a lot of the listeners that have a W2 job. I’m originally an aerospace engineer working for a large company and just discovered real estate, reading that little purple book Rich Dad Poor Dad. Got really fascinated by it and so slowly started buying rental properties while working a W2 job. I was successful with that and wanted to learn how to go bigger, faster, and found out about syndication. After getting mentors and coaches, joined a mentoring program and started our syndication company, Regency Investment Group. As you said, we have five projects, about 450 doors from moderate to more heavy value-add deals, and always looking for new properties that we can outperform for our investors.

Slocomb Reed: Nice. You were just telling me before we started recording that you just went full-cycle on a deal that closed last week?

Sarah May: Three days ago.

Slocomb Reed: Three days ago. Nice. So this week. It’s currently March of 2022. Tell us about that deal. What were you projecting going in, what happened, and then what did you end up selling at?

Sarah May: Sure. We bought it in May of 2017. It’s a really nice C-class property, maybe B-class, in a good part of town here around Denver, 100 units. Our business plan was to renovate all the unit interiors; they were mostly original, or lightly upgraded [unintelligible [00:05:34].25] We told our investors that with our business plan we could about double their money, maybe slightly over. I think we projected a 1.2 equity multiple… No, that’s not right. Anyways, 100% gain on their original investment. So if they invested 100,000, we were projecting 200,000 by the end of our five-year business plan. We just sold this week, and are getting about a 3X multiple on their money; maybe a little bit better, actually. It was a great property, the market definitely helped us out here in Denver. It’s been a hot market and cap rates have compressed, as they have elsewhere, and we’re excited to [unintelligible [00:06:13].14] for everyone involved.

Slocomb Reed: Sarah, what did you buy it for, and at what cap rate? And then the same thing, what did you sell it for and at what cap rate?

Sarah May: We bought it for 150,000 a unit, and that was about close to a six cap at the time, and maybe a 5.7 cap rate…

Slocomb Reed: That was in 2017?

Sarah May: That was in 2017. And that was a high price in 2017, or so we thought. But now we sold it for about 228,000 a door, and that was about a 4.5 half cap rate on trailing numbers.

Slocomb Reed: Gotcha. So you buy this in 2017, projecting a five-year hold, of course not knowing that COVID was going to happen. It sounds like this deal would have been a solid return for your investors without COVID. But then, with the pandemic and with what’s happened to the economy and the real estate industry since then, even better returns. Frankly, everyone I know who was investing in real estate in 2017 and before has a similar story to tell, which is great. The people who were investing before the pandemic are seeing great returns as they should.

Best Ever listeners, this is a shameless plug for the Best Ever conference. I’ve met Sarah and her partner at the conference. In fact, we sat across one another on the bus, on the way to the Best Ever party at one of the bars in downtown Denver. It was supposed to be a 30-minute drive, the driver took a couple of wrong turns and it ended up being 45. This means that I spent 45 minutes peppering Sara with questions about Denver, and their syndicating, their deals, and what did the market look like. First, I will say that it is at the Best Ever conference that you have the opportunity to get stuck on a bus across from someone like Sarah and have these kinds of conversations.

So if you want to meet people like Sarah, or like any of the thousand other people who came to the Best Ever conference in 2022, if you want to meet those people in 2023, the best way to get stuck on a bus with them is to go to the Best Ever conference. But the other thing that I want to do while getting to know Sarah and getting to know the Denver market – those 45 minutes of questions were really about me trying to figure out how to compare Cincinnati, Ohio where I’m from, which is a cash flow, higher cap rate market, to what’s happening in Denver. I’ve had a lot of time to muddle over some of the things that we discussed… Basically, I want you to have the opportunity to hear part of the conversation that Sarah and I had on that bus.

Let’s start here, Sarah… Part of the conversation that we had was just cap rates. In the interest of helping our Best Ever listeners understand the differences between the opportunities available to then, investing in MSAs like Denver and MSAs like Cincinnati – tell us, what your cap rates look like right now in Denver? The deals that you’re interested in buying, the LOIs that you’re writing, at what kind of cap rate are you looking to purchase, and then what are you currently projecting as an exit cap rate?

Sarah May: It’s definitely more competitive now than it was even a year ago. After COVID, the market skyrocketed and got really hot here in Denver. So as far as cap rates now, it does depend a little bit on if there’s value-add or not, but a little bit counterintuitively. If the property is old, and needs a lot of work, and there’s an upside, it will ironically sell for a lower cap rate, because there is that upside, even if the property’s kind of beat up.

There was a 100-unit deal we were looking at in Colorado Springs in Metro South of Denver, and they want to sell it at a three cap. There’s some value-add that needs to be done, some improvements that need to be made. If you look at enough deals, there are levers to pull and things that you can do to make the property more attractive, and the financials more attractive. But buying it at three cap is tough. So it ranges; kind of these B and Colder deals that we look at, from a three cap up to about 4.5 cap.

Slocomb Reed: That’s based on actuals, that’s based on current performance. That’s the performance you’re paying for when you buy a value-add deal. Man, my stomach is turning in knots hearing about the idea of buying a three cap because I think Cincinnati, and ain’t nobody doing that here. What would you consider a good operating cap rate to be? Let’s say you bought one of these deals, it worked out for you, this is a deal that you want it to buy… After you have the opportunity to add value, what are you expecting the cap rate to really be when it’s all actually stable and performing at market?

Sarah May: We want to see above a six cap still on value-add, ideally; or at least close to a six cap in this market. Some of that’s through a combination of putting in better property management, renovations, and the general market appreciation, everything’s going up. So around a six cap, and then we model around a five cap on the exit; maybe slightly below or above, depending on the sub-market, where it’s located. That’s kind of the game that you play. If cap rates stay at 4% like they are now, that’s just a bonus on the back-end.

Slocomb Reed: Gotcha. So based on your purchase price, do you want to get it up to performance at a six cap, with the opportunity to sell between four and five.

Sarah May: Right.

Slocomb Reed: Gotcha. And you were telling me before we recorded that the deal you just sold, after going full-cycle,  you sold for a four and a half cap.

Sarah May: Right. I think we’ve modeled six cap on exit, so the cap rates help surpass investors’ returns.

Slocomb Reed: It was in 2017 that you modeled a six cap model.

Sarah May: In 2017 yeah.

Slocomb Reed: Yeah, totally. A lot of things made more sense then than they do now. I’ll say, in Cincinnati, people are very excited when they can buy a seven cap currently. Not all people, the Cincinnati homies like me, the people who were investing here five years ago. Historically speaking you want to see an eight cap in Cincinnati because that’s when you see really a cash flow, and again, most people are coming to Cincinnati for cash flow more than appreciation. But right now, your purchase cap rate in Cincinnati for apartments, if you’re focused on B areas, you’re probably going to end up with a purchase in the 5.5 to six cap range. What makes that interesting to value-add investors, eight cap is really our benchmark. You said that you want to get up to six, in Cincinnati, we want to get up to eight.

Sarah May: Yeah, it’s a totally different market. I think it’s not really a trade-off, but the appreciation in the market like Denver can be a huge benefit on the back end. It’s a little bit delayed gratification versus what you have in Cincinnati where you get that nice cash flow check every month which definitely is what a lot of investors want. In Denver, it’s more of like a little bit of cash flow every month, but then on the back end, the game can be two or three times what you got from the cash flow while you owned it for five years. In this 100-unit property that we just sold this week, I think our total distributions to investors, 40%-50% of their original capital were paid out as cash distributions.

But now, on the sale, they’re going to get another 250% back as cash distributions for the total equity multiple of around three. You don’t get the cash flow but you get the potential for higher profits on the back-end, and in a market like Denver, population growth, employment growth, landlord and business-friendly, those are the things that we look for. I think Cincinnati has a lot of that too, but maybe just the more stable population. What are your thoughts on the market and Cincinnati versus Denver?

Slocomb Reed: We’re not seeing the growth that you are, absolutely. It’s reflected in our cap rates, to be frank. A couple of responses to what you just said. The first is, if you decide that your investment vehicle is the apartment syndication, then yes, you have to be more patient to make money in Denver. Because you’re just not going to see cash flow the same way that you will at such a lower cap rate. To your point, what you’re returning to your investors, Sarah, is not as much during the ownership of the asset. But upon sale, what you’re able to deliver is much greater than what you would get at a higher cap rate.

However, if you’re looking at real estate investing, and if you’re looking at apartments as a long-term buy and hold, like an ideal hold period of forever, Warren Buffet style, I would say that is a time when Cincinnati looks more appealing as well because your cash flow is going to stay steady the whole way through. In places like Denver with lower cap rates, you will have the opportunity to do more cash-out refinancing or cash out more as the property increases in value, as appreciation just happens naturally in a market like that, by comparison to Cincinnati. But you’re not going to have nearly the same cash flow through the duration of the ownership of the asset.

Sarah May: Yeah. When I was just getting started, while still working my engineering job, I didn’t even model an exit. All I modeled was what’s my cash flow going to be when I buy the property? That was over 10 years ago/ Back then, the crazy thing was if it didn’t have 20% cash flow per year, we were going to pass on it. It’s just funny how things have changed. But for people looking to get out of the rat race a little bit and get that financial freedom, that cash flow can be invaluable as well. Make sure you have enough money coming in every month to cover your living expenses and things like that. I don’t think it’s a one size fits all strategy by any means. But being in Denver, we take the benefits of being in Denver with the appreciation potential and make the best of it.

Slocomb Reed: Yeah, absolutely. Sarah, I’ve modeled out a couple of things for our conversation. I want to talk about a recent experience I had repositioning an apartment building in a C neighborhood of Cincinnati. You and I talked about this a little bit on the bus on the way to the party at the conference. I bought, in 2019, 24-unit in a C, C minus part of Cincinnati. I’m high on and I’m bullish now because I’ve already got 24 doors, so anything I add is just increasing scale to a portfolio that’s already performing. If you were just pinging the reputation of investors in Cincinnati, this would be a low C part of town. After our reposition, to use some simple numbers that will be easier for the Best Ever listeners to follow along with, basically, we got this property, this 24-unit after all of our value-add was done.

By the end of 2020 to early 2021, we got it up to an NOI of $100,000 a year. We had difficulty with appraisals because that particular sub-market within Cincinnati was not proven. Remember, this is March of 2021, just a year ago, we appraised at an 8.7 cap. Our NOI of $100,000 got us a valuation of 1.1, basically. Only because I’m looking at the spreadsheet, I want to give you some other numbers. We know that we could sell it between a seven and an eight cap, at an eight cap it’s worth 1.25 million, at the 4.5 cap that you just sold your property at, it’s worth $2,222,222.

This means in order to buy $100,000 in NOI, in Denver at that 4.5 cap, you’re putting out over $2.2 million. Whereas in Cincinnati, for that same $100,000 of NOI, if you’re buying it on market and it’s relatively stable, you’re probably in the 1.4 to 1.5 range because you’re paying a high six or low seven cap for that money. I use eight cap because that’s kind of like the historic number, that’s like the cash flow benchmark when you, Sarah, say that you want to get up to six during your operations, we want to get up to eight.

Let’s talk about one of your deals now. When you have an incremental rent increase, you decide, “Okay, it’s time to raise rents.” Or you’re thinking, “For our annual rent increase this year, we’re going to go from X to Y” What is X, what is that base rent that you’re looking at, and how much is the increase right now?

Sarah May: On Denver properties, I would say an easy number to use for a one-bedroom would be $1200 a month in rent. But people are coming in $100-$200 under that and then we’re bumping them as close to $1200 as we can just because that’s where the market is at. For two bedrooms, anywhere from $1400-$1500, so it’s a pretty high rent increase. One thing that’s nice in these lower cap rate markets, which you’ve probably put two and two together as well, is every time you raise the rent by $100, to use a five cap for an easy estimate, you raise the rent by… What would that be? Let’s say $1000 a year, that would be an easier number. If you raise the rent by $1,000 a year at a five cap, you’ve added $20,000 in value to your property. It’s a big multiple every time you add that extra money onto your NOI.

Break: [00:19:57][00:21:53]

Slocomb Reed: First of all, let me say, for the Best Ever listeners to give them a point of comparison. $1200 is what Cincinnati investors are trying to get Section 8 to pay for three-bedroom apartments and houses in lower-income neighborhoods here. Just a point of reference. There are $1200 a month one-bedrooms in Cincinnati, but only in very premium locations.

Sarah, we stabilized in March of 2021, this 24-unit in Cleaves, the part of Cincinnati I was talking about earlier, that I’m bullish on. I would buy this thing again, for sure and I’d even buy it right now because I like the area. There’s not a lot of apartment inventory there, which has been helpful for us because there are some major employers in close proximity, like Amazon. We don’t really know what exactly market rents are in that area for our one-bedrooms because there aren’t a lot of comps. When we refinanced, our base rent was $650 a month for a one-bedroom. We charged pet rent and there are other things. It’s a neighborhood that ends up with some tenants who pay late fees, but the base rent is $650 a month.

We decided to try bumping it up to $700. Everyone stayed and it was still easy to fill up our apartments. We did that just recently, a $50 a month rent increase. Projecting as conservatively for increased expenses at an eight cap increases the value of our 24-unit by about $150,000, for that $50 a month rent increase. Yeah, Sarah, you can say “wow” but if it were in Denver at a 4.5 cap, it would go up by over $250,000 for that same $50 a month rent increase.

To your point, this is different from a lot of interviews for the Best Ever podcast, Sarah, because we’re revisiting a conversation that we’ve already had to the benefit of our listeners, thankfully. We couldn’t get all thousands of you onto the bus with us, but this is an important thing to hear fleshed out. Let’s take a couple of minutes and you pitch Denver to your investors. Why should people invest in Denver and not Cincinnati? I will pitch why people should invest in Cincinnati and not Denver. Let’s just see what happens. I’ll go first since I just sprung this on you.

Sarah May: All right, cool.

Slocomb Reed: Speaking about $100,000 NOI in a building. As we were saying, in Cincinnati that’s going to run you about 1.5 to purchase and you’re going to get in around a seven cap or a little bit lower. Meaning that our cost of entry is much simpler, it’s lower, you get more net operating income, and therefore more cash flow for your dollar. You come to Cincinnati because you want to know that your asset can, not only have cash flow, but remains cash flow positive if rent rates recede. Because our cash flow is so much higher, we can take a hit better than Denver can.

We are seeing rent growth, there is growth in Cincinnati generally, though it’s not the same growth that you’re seeing in Denver. We are projecting… Well, I won’t say that we’re projecting compressed or even the same cap rates. I think everybody should be expecting cap rates to go up a little bit right now. We are seeing rent growth, we are seeing some population growth, it’s a solid stable place to invest, and you’ve got great cash flow. Your cash flow should increase and you’ve got to hedge if there’s an issue because you’re not going to go in the red if you have to reduce your rents a little bit.

Sarah May: All good points. I was trying to take a few notes on things that you said. I would just say, hearing Denver to Cincinnati, the reason people would want to invest in Denver is that it’s a primary market. You get the best financing available from the lenders. Even though the cap rates are lower, your interest rates are lower too, so there’s still a spread there to make money. It’s also a great place where people want to live and work, lots of recreation, though that contributes to the strong job growth, strong population growth, with continued projections that is going to beat the national average for the next five years or longer.

Also, if you look at the real estate industry data, even though we’ve had some monumental years of rent growth, last year was 18% on average in the Denver Metro area. Even these conservative market data sites still say we’re going to see above 10% rent growth in 2022 and just tapering from there, 8%, 7%, etc. Those numbers are something to get excited about. The market data is really strong and the other thing is, even though it’s less cash flow, it’s still cash flow in Denver. I think that’s something important to keep in mind. We’re not buying vacant properties, we’re not losing money when we buy properties, we’re making money from the very first day that we’re owning a deal and that provides extra stability, and lower risk.

We do sensitivity studies on all our deals as well and usually, we could withstand a 40% impact on our ramps and still pay our bills. There are still some strong numbers, good cash flow, and great appreciation potential. One thing I learned recently is Denver is rated the number one airport in America. I don’t know how they got that rating but there’s tons of money going in for renovations and expansion. I think it’s over a billion dollars. That will be good for the economy, transportation, jobs, and things like that. That’s my take on Denver.

Slocomb Reed: Sarah, to both of our points, the Cincinnati airport is way easier to navigate than the Denver Airport.

Sarah May: I believe it. I don’t like the Denver Airport either.

Slocomb Reed: The reason is though, that before the Great Recession, Cincinnati was the main delta hub for the Midwest. They have since moved it to Detroit, which means that we have almost twice the infrastructure we need for the volume of flights that we have. That’s why CVG is so easy, flying in and out of Cincinnati is, because we have twice as much infrastructure as we need. Because Delta moved out, Detroit was growing faster. To your point, we do have population growth, we have rent growth, we have wage growth, we’re attracting employers to Cincinnati, just not nearly at the clip that you are in Denver. But we have a very easy-to-navigate airport because it’s too big for the flights that we’re actually bringing.

In summary, I don’t think we’re surprising anyone, but I think it’s helpful to flesh this out. A 3X equity multiple on a five-year hold, impressive. You can’t even get that with COVID numbers in Cincinnati. At the same time though, if your focus is cash flow, when I was modeling out, to your point about being a primary market, you have some better debt options than we do. I still see our cash flow numbers. I was building out models, taking the different cap rates for the same NOI. Even with our lower debt structures, depending on the deal, I think your cash-on-cash return still ends up being five to 10 points higher in Cincinnati than it does in Denver. Just simply because the difference between interest rate and cap rate is still proportionately higher than Cincinnati.

If your goal is if you’re underwriting to a whole period of a few years and looking to sell, Denver looks great. Cincinnati, that works, but if you’re looking for long-term cash flow, if your kid was just born and you’re wondering how well your property is going to be performing when you need to pay for college, Cincinnati has got that cash flow. Sarah, thank you. Are you ready for a Best Ever lightning round?

Sarah May: Sure thing, Slocomb.

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

Sarah May: I really enjoyed the book The Go-Giver by Bob Berg. It’s written as a story of a young business person who wanted to get ahead and getting mentored. But really the gist of the book is that the more you want to get, the more you have to give. If you put your focus on giving as much as you can, you will receive more in abundance. I just really enjoyed that book, I highly recommend it.

Slocomb Reed: What is your Best Ever way to give back?

Sarah May: Right now, I am enjoying being involved with my church, their community outreach program, and also working on starting up a real estate meetup in Denver. It’s still in the beginning phases there, but I want to spread the word about real estate and meet other great people in our local area.

Slocomb Reed: What is your Best Ever advice?

Sarah May: My Best Ever advice is to focus on three things for success in business. Mindset, focus, and follow-up. Mindset, have the right attitude and perspective, and also believe in yourself. Focus, be able to limit your options enough to focus on one thing, and put all your energy there. Tony Robbins likes to say “Where focus goes, energy flows,” so be focused. Follow up, a lot of times great things happen when you follow up. Something that you used to think was a dead end and, all of a sudden, when you follow up, new doors open. Mindset, focus, and follow up.”

Slocomb Reed: Awesome. Where can our Best Ever listeners reach you?

Sarah May: Thanks. Obviously, social media or our website. But really the best way to get a hold of me is to send me an email. My email is sarah@regencyinvestmentgroup.com.

Slocomb Reed: Awesome. Well, Best Ever listeners, thank you for tuning in. If you got value from this conversation with Sarah May about the Denver market, the Cincinnati market, and the comparison between lower and higher cap rate apartment investing, please do subscribe to our podcast. Please leave us a five-star review and please share this episode with a friend you think we can add value to through this conversation. Thank you and have a Best Ever day.

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JF2726: How to Build a Social Media Content Engine to Scale Your Business ft. David Toupin

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

In this episode, David Toupin—CEO of Real Estate Lab, a multifamily real estate software company—shares his social media hacks to help grow your real estate business.

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

Check out David’s previous episode on the podcast: JF2039: Experience Shouldn’t Stop You From Starting With David Toupin

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TRANSCRIPTION

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

David Toupin: Well, hey guys. I think we’ve got some slides popping up here pretty quick. I’m really excited to talk to you all today about social media specifically, about how it pertains a lot to the multifamily space, and building a content engine at the end of the day. I’m not just a social media guy, my main business is multifamily. I own two companies, Obsidian Capital and Real Estate Lab. I buy apartments, that’s what I do every day, day in and day out. I started at age 20 in college, bought a 12-unit, house-hacked a 100-unit deal shortly after that. Since then, I’ve syndicated as the primary GP, 800 units, building around 200 apartments at the current time… And recently, I started a software company called Real Estate Lab for multifamily investors, tackling their pipeline and analyzing deals, all online.

It’s kind of what I do, and I’m training to be a pilot, kind of something on the side that I’m doing as well. So all I do is real estate, and I really want to talk to you guys today about how social media has helped me take my real estate game and absolutely exploded over the years. I think this is really powerful, especially in the times we’re in, with everything that’s happened since early 2020 with the Coronavirus. Today has become an absolute virtual world. It’s no question that if you are not involved in some form of social media or virtual outreach, you are missing out on a lot of business. So it’s really important today that we pay attention, we learn what’s going on in the social media world, what are the trends, what’s happening, what is the most impact that we can create on different platforms, and how to reach people that can become potential investors, customers, clients, relationships, business partners.

Something really powerful, –I keep my slides pretty simple, but… Social media equals attention, attention equals influence, and influence equals income. The more people that we can put ourselves in front of, the more attention that we can gather through social media, the more influence we’re going to get. Speaking on different topics, teaching people, educating people about apartments and multifamily – it’s part of the reason that syndication has become such a large business nowadays. When I started back in 2016, syndication wasn’t so much of a common thing. But nowadays, a lot of people who get into the single-family space are quickly led into, “Hey, multifamily is a great place to be in.” And I agree. And that’s because of all these social media influencers, Joe and a lot of others, we’ve garnered a lot of attention online and created the influence. It has driven a lot of people towards this, which is hopefully creating a lot of passive income for you guys.

So you really need to focus on social media. I’m going to go through a couple of different ways you can do it and how to get started. Also, I think the two things I’m going to touch on are if you’re not doing any right now, how to get started, and if you are doing it, how to really ramp it up and treat it like a business. Because nowadays, social media is not just a hobby, it’s not just something fun that you’re doing on the side. A lot of people do use it that way, but if you are in the business world, or you’re in real estate, there are a lot of ways that you can be using it to really help grow your business and grow your impact and your influence.

So I’ve got a couple of false statements I want to share. I’ve been hearing these for years, back when I started when I was 19 and 20, just getting into this business… It’s “people with money don’t use social media.” It’s simply not true. I remember talking to people four or five years ago, and they’re all telling me, “Why are you spending so much time on social? You’re trying to raise capital, or you’re trying to do this and that in real estate; social media is not the place. You need to be out and meeting people one on one.” I agree, all that’s great. But the fact of the matter is that a lot of people with money use social media. I have personally raised over $4 million just through connections, private investors that I’ve met on social media. So it is very powerful. A lot of people with money – you’ll find them on LinkedIn, Instagram, Facebook, it’s huge. You definitely need to be connected with people that have the capital. In social media, it’s very possible.

You can’t build real relationships over social media. Some of my closest friends today — and I’m sure a lot of you guys listening have stories similar. Some of my closest friends today are all other young real estate investors, people that are successful in the business – I’ve met them through social media. I’ve created a pretty great network of good people all through social media. Nowadays, we are in a virtual world. This is an online conference nowadays because of Coronavirus and other factors, and we’re going to keep seeing a lot of these virtual conferences, virtual events, and meetups… So you really are forced to build relationships over the internet, and social media is the best way to do that. This is a fact – if you are not using social media in 2021, you are missing out on major business opportunities, investors, partnerships, and more, in this multifamily space. I’m a strong believer that if you go very strong in 2021 on social media, you can grow twice as fast than if you are not using social media.

How social media has helped me – I just want to give a couple of examples, guys, because I know it’s always like “Well, what do you actually get out of social media? How can it actually help you?” So I’ll give a couple of examples. I did mention that I’ve raised north of $4 million in capital from private investors, probably over 50 private investors, through social media. That’s Facebook connections, Facebook groups, Instagram, making posts, direct messaging, LinkedIn, YouTube, all that. I bought a 230-unit apartment complex last year, and that was through a friend of mine I’d met on Instagram, who had shared that lead with me. We ended up buying that complex.

I’m right now building a 150-unit apartment complex – that was through referral. The landowner, who is partnering with us on this development, and she’s contributing her land to this development – her son met a friend of mine up in Dallas, who told the son of the landowner that I was down in Austin doing some new developments, so she referred him my way. Through a friend, through social media, I’m now, 150 plus 230, almost 400 apartments that I’m getting into just through social media. So it’s absolutely something you need to be doing. Over time, it grows into this spiderweb network of all this business that can come your way, that you can refer to other people’s way. Very powerful stuff.

I just wanted to talk about a little bit where to start. If you are new to social media or you’re just using it right now for entertainment-wise, there are definitely a couple of ways that you can just get in in an easy way. I know it can be overwhelming, there are a dozen different platforms you could be on nowadays… So my advice to people would be to pick one to three platforms – I’d say it’s probably best to just start with one or two. Let’s say you take Facebook and Instagram, which are the first two that I really went strongly into when I started. Take those two and run really just focus on that. Pick what your niche is, tell your story to people, and explain what you’re doing day-to-day. It’s not going to be easy, especially at first, if you have a current audience that’s maybe not real estate focused; maybe they’re just a bunch of friends, relatives, and whatnot, and you’re not very heavy into social media. One thing you could do is create a separate account just for business. Or you take your current account – this is kind of what I did when I started. I said, “Hey, I know most of my current network is not real estate focused. But over time, I know the more that I talk about real estate, the more I’m going to attract real estate-related people to my page.” So what started as an audience that was very heavily weighted towards college, high school friends, family, and relatives – I just started talking about real estate constantly, talking about the projects I was working on every day, what I was doing, telling my story to people… And over time, it just created a huge influx of people through referrals. The way that algorithms work on these social media sites is they drive people who have similar interests together. So the more you talk about something, the more I talked about real estate and connected with other real estate people, it snowballs over time.

So a couple of tips – don’t worry about what other people think about what you’re posting; it really doesn’t matter. At the end of the day, if you’re going to use it for business, treat it like a business. You wouldn’t be worried about anyone else off social media in regards to your business, so don’t worry about what people think about it. If you love it and you’re passionate about it, talk about it, share your story and you’re going to attract a lot of people towards what you’re doing.

A couple of ways that you can make it very structured, as opposed to really just getting sucked in… I know it’s easy to get sucked in on social media sites nowadays, where you can scroll for hours if you really had the time… But what I’d say is block out one day every week to record a few hours of content and take some pictures. Let’s say you’re focusing on Facebook and Instagram – take a couple of hours out every weekend or every Saturday, record a couple of one to three-minute videos talking about different days, or talking about what you’re working on, take a bunch of pictures that you can either put text over or a caption with, take some nice pictures and just stockpile some content, begin to do that. Then throughout the next seven days, or that next week, you have a bunch of stuff you can post. You’re not worrying about taking the content all during the week, and “Oh, I don’t have anything to post.” It’s because you planned ahead, you scheduled it out, you took a bunch of content, and now you have that to post throughout the week.

Block out two hours every day to post and to interact with your followers. It’s one thing to just post content and outwardly post content, and it’s another thing to actually interact with the people that are following you. My philosophy has been, since I’ve started, is I like to respond to every single comment or direct message that I get. If you catch me on Instagram nowadays, within a day, I’ll at least be able to get back to you as best I can. I have a team of people that help respond to direct messages for me now… But interact with people. One of the biggest ways that I’ve grown my Instagram following, which is my strongest network, is because I’m always constantly direct messaging and interacting with people. I’ve got people like Grant Cardone directly through DMs, and we’ve connected that way, or other very successful real estate people I’ve found through Facebook and Instagram, and connected with them in a way that it probably would have been hard to through their emails, because they’re so flooded in their emails, and maybe they don’t have a huge social presence, but they’re very successful investors. I’ve connected with some really cool people through social media that way. So definitely interact with your followers, get out there, follow other people that are in the space, comment on their posts, get your name out there, consistently post stories.

On Instagram, for example, I’ll post two to five times a week, but then I’ll be posting on the story. There’s a story function where you’re posting just 24-hour posts that go away after a day. I’m posting on that pretty much every day, consistently.

Break: [00:13:45][00:15:41]

David Toupin: If you’re starting, pick one or two platforms and learn how they work, learn what type of people you meet through there, and get good at it… Because Instagram is different than Facebook, it’s different than YouTube, it’s different than LinkedIn.

I’m going to share with you guys – I think my most impactful sites right now are Instagram, Facebook, YouTube, you guys all know these, LinkedIn, Twitter… I really don’t use Twitter much. I know some people who are successful on Twitter in building relationships for real estate. TikTok, I would say is very much so in the younger generation. I don’t use TikTok a lot, but I know some people who are very successful, maybe on the real estate agent side, through TikTok. I don’t know many multifamily investors, but maybe there’s a space that’s kind of ripe for somebody to take over on the multifamily side of things there; it’s a little untapped. Bigger Pockets, obviously, you guys want good social sites or a lot of forums you can post and stay active there, commenting, creating relationships, and networking.

One that’s, I think, pretty noteworthy, because it’s fairly new, is Clubhouse. I’ve tried to spend a good amount of time on there. It’s a very new network. Imagine live conference rooms; there are constantly different conference rooms that are popping open, you can hop in and listen, it’s audio-only, and you have various speakers that talk on various topics. You can sit in these rooms with people that are very influential, and have conversations with them, and ask questions. Clubhouse is great, I’ve gotten a lot of reach on there. I’ve actually transacted with a couple of people business-wise through people I’ve met on Clubhouse. These are the ones you guys should be focused on right now, in my opinion. The most bang for your buck, I guess I’d say, would be across these platforms.

So if you’re a little bit more advanced and you are getting into really ramping up, let’s say you already post business-wise on social media, Facebook, LinkedIn, and you guys have a couple of different platforms, what’s really key next is starting to treat your social media like a business. No longer should you treat it just like something fun you’re doing on the side, or just for entertainment. If you’re really partially kind of doing it for business, and you want to take it to the next level and tap the full potential of social media, you need to treat it like you treat your syndications. When you do syndication, you have a process for gathering investors, you have a process for finding deals, underwriting them, making offers, and then you have a process for due diligence, and you have a process for asset management after the fact. It’s the same thing for creating this social media content engine. You want to have a process for this that you can follow, use, and get in a groove, to where you’re getting the most reach, the most impact, and the most interaction with your followers.

I’ve started to do this over the last six months. I hired a Chief Marketing Officer and we have a team of content producers, creators, editors, and then people who will go and schedule these posts. So what I suggest – maybe you can hire one person part-time at first to help with this. Some kind of content creator would be I think one of the first people; a professional videographer or photographer… And you want to start recording lots of content. What I do is schedule a couple of sessions every month with a videographer, and we’ll get together for three to five hours, and we’ll knock out a ton of videos and a ton of photos. I do that a couple of times a month. I take all this content, I store it in Dropbox, I then have an editor that will go in and start editing all these videos, cuts them down, and we repurpose them in multiple ways.

I might record 60 minutes of content talking about how to raise capital. Well, we’ll take that full video, we’ll chop it up a little bit, maybe down to two 30-minute videos, and we’ll put those on YouTube. Then I’ll take a couple of two to five-minute clips from that; maybe out of those 60 minutes, I can get five good two to five-minute clips, and I’ll post those on Instagram, IGTV, and I’ll post those on Facebook. And I’ll get a bunch of 20 to 60-second clips that I could post quickly on Instagram, my stories, Facebook, LinkedIn, and whatnot. So an hour of content, I have now created 10 to 20 different pieces of content that I could post on various platforms from that.

So we’re creating a content database that is going to drive this engine. Your content engine and your social media engine are driven by the content that you put out so we need a lot of that. So we’re doing that, we’re storing it all, and then my CMO goes in and he schedules all these posts to go out. He’ll either do that on a weekly basis or a monthly basis.

I have various pages. On Instagram, I have a personal page, I have a business page for my real estate company, I have a business page for my software company… So we’re scheduling our posts for those over the course of the month. We already have the content, we’re scheduling them; that means day-to-day, I’m not having to personally worry about it or Steve’s not having to personally worry about going in and posting all this content. It’s all scheduled, you can time block that; it’s easy to do, systematize it.

Once a month, we actually have a content meeting with our team, and we go over all the content, my team writes up a bunch of captions, they’re writing a bunch of copy and text to go along with these posts, and then I’m reviewing it, I’m approving, I’m making sure it looks good and it sounds good.

What’s being posted goes is according to what I’m trying to convey at that current time. So every month is different. One month, I might be really trying to push users into my real estate community. Another month, I might have a deal under contract and I’m trying to raise capital, so that’s what I’m going to talk about. Another month, I’m really just trying to build awareness for my software coming out; or maybe it’s a week-by-week. So I’m always changing up my focus of what I’m talking about, along with consistently providing value, videos, and texts that either inspire people, educate people or provide value to people, so that when it comes time for me to want to raise some money or I have a product to sell, I’ve given enough value to where value will now come back to me.

So treat it like a business, schedule your posts, record the content in batches, keep it in a Dropbox or something where you’re storing it, where you just have this bank of content and photos, and then you’ll never be behind, you’ll never be wanting, you’ll never be in need of going out and taking a photo, because you can just go back and look through 100 pictures and say, “Hey, I want to post this one today, and this is my caption.” So that’s kind of how you create this engine, treat it like a business and systematize it.

I’ve just got some final tips for you guys and then we’re wrapping up here in a minute. I would say the number one tip for social media, the number one secret is consistency. You are not going to start up and make an extra million bucks in your first month of using social media. It’s it doesn’t work like that; it’s not what it’s intended to be. Social media is like anything – you’re building rapport with people, you’re building a relationship, you’re creating a brand for yourself. That takes time. It took me probably two and a half years before I did any type of monetization. Four years after I really had been consistent with social media; I’d put out a community that I started this past year about six months ago, and we did multiple six figures in revenue within a 30-day period. So I provided constant value for people == over four years I’ve been providing value and connecting and building relationships. Then in a 30-day span, we did about 150,000 in revenue on a singular product that we offered out to the community. So consistency is key.

Number two, I’d say, is focusing on a niche. It is very hard to spread yourself thin. It’s like anything, if you want to focus on buying apartments, it doesn’t make sense for you to spend time looking at single-family homes, commercial, or in 10 different markets. If you want to buy apartments, you narrow your focus, you figure out what size, if you want to buy 50 to 100 units, it’s the same thing; focus on your niche. Find a niche, focus on it, talk about it, and you will attract people in that same niche. Be yourself. People will recognize if you’re fake; there’s a lot of fakeness out on social media nowadays. A lot of people definitely are fronting and can act like something or not. It’s very easy to tell, in my opinion, nowadays. So just be real, be yourself, be a good person, and I promise you’ll attract a lot of really good people to you. Interact with your audience. If you’re just posting, but you’re not replying to comments or questions, you’re not replying your direct messages, people will shortly forget about you and they’re going to go interact with somebody else who actually will give them that attention back. It’s a two-way street, that’s how you build these relationships.

Tell your story. If you have an interesting story or you’re creating that story at the current time – maybe you haven’t bought a deal yet, but you’re working towards it, you’re working towards buying your first property. Post about that; hold up your camera and take a video on LinkedIn, Facebook, or Instagram on what you’re doing, like, “Hey, I’m touring a deal today. This is what I’m up to.” Somebody might comment on that and be like, “Oh, you do real estate? How does that work?” You tell them “I raise money from investors and go buy apartments.” They’re like, “Well, I’ve got 100 grand and I’m interested in investing real estate.” There you go, boom. You’ve created value, you’ve told people what you’re doing, you’ve shared your story, people will comment, interact, and you will create those type of relationships.

The same thing at this last point, you’re going to automatically attract the people that like the same things you like. That’s how these algorithms work. Once you start talking about it, those people will become attracted to you. Guys, lastly, if you’re not using social media, like I said, if anything you get from this, please start using social media in 2021. If you’re already using it, think about taking it a little bit more seriously, treating it like a business, like anything else you do in your business. I know personally, I have made a couple million extra dollars in the past five years specifically because of social media. If I hadn’t used it, I wouldn’t have met my current business partner, I would have bought less deals, I would have raised less capital. It’s huge.

Thanks for having me today. I hope you guys enjoyed this. Connect with me on social media here. Here’s a lot of my tags, look me up. If you want to get in touch, the best way would probably be through a direct message on Instagram.

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

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JF2719: Top 10 Things to Ask Before Investing ft. Ryan Gibson

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

In this episode, Ryan Gibson—CEO and co-founder of Spartan Investment Group—shares the top 10 questions you should ask an operator before investing in a deal.

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

Check out Ryan’s previous episodes on the podcast:

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TRANSCRIPTION

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

Ryan Gibson: My name is Ryan Gibson, CEO, and co-founder of Spartan Investment Group. I’ve made some bad decisions passively investing and what I’m about to share with you today is hopefully going to prevent you from doing that. I’ve made some bets on some operators that didn’t do a very good job, and the signs were there based on the information I’m about to share with you. If I had just known to ask it, then I probably would have been able to research and figure out that these operators were not people that I wanted to invest with. I’ve also invested with some outstanding operators. So all of this I’ve kind of sort of put together and really made a concerted effort to provide this type of information and provide this type of resourcing at Spartan Investment Group for our investors.

Without further ado, the first thing you’re probably looking for with an operator is to find the operators. I get asked the question all the time, “You guys do self-storage, who else do you know in multifamily, or mobile home parks, or different types of space?”

So before you get together your questions and your routine for interviewing an operator, you want to find them. These are kind of six ways that I find operators. You can find them online, there are two really great resources. 506investorgroup.com lists a lot of different syndicators and operators, there are probably, I don’t know, maybe 100 or 200 on there. A great group put together. You can read reviews on operators and see how other passive investors have rated them.

The other thing I like is an interesting website called formds.com. That provides you with a list of every single syndication that’s ever taken place legitimately and listed on the MCC website. If you search a company on formds.com, you’ll see active raises, what the raise was for, how they’re raising capital, and things like that. If you want to find some 506B offerings, if you’re sophisticated or not accredited, that’s a great resource for that.

The next thing I do is networking. Obviously, you’re doing that now, so congratulations; I won’t elaborate too much on that. Funds, when I say funds, there’s Fund of Funds, Hunter Thompson, RealtyMogul, CrowdStreet, things like that, where there’s a platform or there’s a representative that’s raising a fund and finding great operators to place capital with. Syndication groups, obviously – there are great meetups that you can be part of or privy to. And then projects. Sometimes you’ll be in your neighborhood or your street, you’ll see a project and you’ll figure out that that’s syndicated equity. A lot of times you’ll figure out that a lot of things in Main Street investing are syndicated equity and you can kind of figure out who that operator is. And a lot of that is – once you get the operator that you really like, ask them who they know in other spaces. Great operators will give me great referrals, we do all the time.

First, setting the stage. If you want to invest passively with an operator, how do you structure that interview? Maybe you get 15 minutes, 25 minutes, or an hour, or that sit-down coffee or meeting and you want to ask questions to the operator or the person who’s syndicating the equity to do a deal. This is how I like to structure my interview. Ask open-ended questions. So get the operator talking, and kind of see what the things that they talk about the most are. Write down everything that you ask, everything that the operator says, and keep a log of that, keep a log by operator, maybe in a Word document, “This operator, this is the things that we talked about, this a the things we discussed.”

The other part of that, too, is to see if they’re interested in what you have to say, and really kind of determining what kind of investor you are and what you’re looking for. So it’s kind of a two-way interview there. You’re trying to see if you’re a good fit for one another. Ask for their portfolio projects; this is every deal they have now, every deal that they’ve done and closed, the historical performance, referrals, and maybe a property location that you can go by if you have time.

Okay, are they an operator or a syndicator? The first question you’re going to ask them is are they syndicating equity for somebody else’s deal, disconnected? If they’re an operator, determine what role their company is playing in the operation. Just go into this with eyes wide open – are you going to a fund of funds, are you going to an operator? If they are an operator, how much of a role do they play in the operation? Are they property management? Are they construction management? Are they simply syndicating the equity, buying the deal and outsourcing it? There’s nothing wrong with either lane that you go down, but just get clear on who you’re really investing with. How are they compensated and how are they aligned with the deal?

If they’re an operator and they’re doing all aspects of the business, figure out how their alignment is through their fees, through their splits, through their structuring… How are they aligned with the project? And lastly, are they aligned with the success of the project? Are there compensation and incentives based on the success of the project and your ultimate success? Just make sure that you’re really clear in the PPM, how the waterfall is structured, and how they are being compensated, and how you’re being compensated if the deal does well or doesn’t do so well.

My favorite question of all time is – tell me about a deal gone bad. Somebody might say, “Well, all my deals have gone perfect.” That probably means they don’t have a lot of experience. Because as we know, in real estate eventually something goes bad. It may be the fault of the operator, it may not be the fault, it may be a blend, maybe kind of the operator’s fault, and maybe some outside circumstances… If nothing’s gone wrong and they’ve been in business for 30 years, it’s probably a good chance they’re not being truthful with you. And then get them talking about the deal going bad and listen to how they responded to the bad issue.

This happened in 2020, this is a picture of my business partner, Scott Lewis. He’s standing in front of an RV park that we own that was ripped apart by an F1 tornado in West Texas. You can see here that the deal went bad; we had a tornado rip through our property. Fortunately, there were no injuries… Well, a limited number of injuries, and everybody was okay. Within a couple of months, we had the park completely restored, and actually, the park is distributing a return to our investors within the same year. So you know, talk about that story. What happened? How did you respond to it? What kind of operational team did you have on the ground within a certain period of time? You want to really try to learn what type of capability the group has to respond in bad situations.

Another thing about this is, is the company well-capitalized? Never mind the deal; the deal can be well-capitalized, I understand that. But if the operators doing 10, 20, 30 deals, and one deal goes bad, does the main corporation or main company have the liquidity to sort of handle these one-off deals needing an infusion of cash to get things kind of going again before insurance catches up? So kind of gets to know the company more than just the deal.

Mission, vision values, alignment. This is huge. If they’re just one way talking to you on that interview and not learning about who you are, you’re never really going to kind of figure out if they’re really interested in you and kind of helping your goals and your mission. Read the company’s mission/vision/values and see if it’s kind of aligned with your way of thinking, your values, and your culture. Ask them for an example. “Hey, give me an example of how you’ve completed your mission recently. Maybe tie it to an investor situation.”

Who’s on the team? Here’s the great picture of the one-man band. Are they a one-man band? Are they doing everything themselves? Do they have a deep bench? Do they directly hire the team? Are they vertically integrated? Do they have a property management construction company? Whatever it might be, kind of understand their business model; understand when they take fees on the front end of a project, are they going out and finding great employees to run your projects? Or are all those fees sort of just going to them, and maybe they might hire the person to complete your deal or not. So kind of find out who their team is, who’s on their team, and how many FTEs or full-time employees that that business has.

Break: [00:11:49][00:13:58]

Ryan Gibson: What is their business model? You may have an operator who is a business coach, they’re selling an education platform, they’re teaching classes on the weekends, they have all these webinars and education platforms… But are they focused on their deal, or do they have people focused on their deal? Are they working another full-time job? Are they a guru? We all know the gurus out there that are doing great guru stuff, but they’re not doing great deals stuff. Or maybe they have a great team, and they can be a guru and have projects go really well. So just kind of figure out what their core business model is and where they focus their attention on stuff.

What’s their communication plan? This is probably the number one most important thing to me when I’m deciding to place capital with another operator, and the number one focus inside Spartan Investment Group in our Investor Relations Department. Do they have best in class, or a minimum standard of communication? That is our communication plan up on the screen. We do a monthly email project reporting, we do a quarterly financial reporting of the quarter, and we do an investor conference call every quarter where we get all of our investors on a call and we go through just kind of high level of how every deal on our portfolio is going. Not just their deal, but we go through all the deals. We can usually get through an optional conference call in 30 to 45 minutes and really kind of have an opportunity for everybody to ask questions to get answered.

The thing is, a lot of people say, “Oh, yeah, we are so good at communicating. We communicate with our investors.” Say “Okay, great. Can I see your last three communications with your investors?” You might gain a lot of information from that. If they said they had great communication, I asked them, “Hey, can I see the last three communications that went out on specific deals?” That will give you a better understanding of their communication style, the reporting standards, how they’re communicating to you when you’re inside of one of their deals. And is their plan in writing? What I mean by that is we put our communications policy in our operating agreements or the deal. We’re actually putting down in writing that we’re not just saying this, we are putting it in an operating agreement, and we’re committed to the communication plan.

Performance and portfolio. I really like this one, because there are a lot of different ways to present data and project performance to people. What I like to see is a historical performance, proforma versus actual. You might see something that was a low return and you might say, “Oh, these aren’t great returns,” but they could be a core or core-plus asset. So you kind of got to understand, when they’re projecting returns in their portfolio or they’re showing historical performance, do you have the context of the business plan? Did they meet their business plan and exceed it, or did they just perform below it? There’s a type operator that’s going to tell you the performance is here and they’re consistently coming in down here. So you want to start to see what performance they had in the past, what performance they have now, and kind of reconcile if that’s better or worse than they projected.

My favorite is, what is project-level IRR or is it an investor-level IRR? Are they giving you the total project IRR, which could look great, or are they giving you what went to the actual investor? And consistent metrics. There are a lot of different ways to spin IRR by return in capital, or return on capital; you can really manipulate that number quite a bit.

What I like to look at are two things as part of my overall analysis – let’s look at equity multiple and how long it took to get that equity multiple. Because equity multiple is giving you a true, time-tested return on how much money you earned on your initial investment over a certain period of time. IRR might be something that might not be as representative; it’s a tool to use that is consistent across multiple asset class types, but it might not be the best metric. So find consistent metrics, and then when you’re looking at different operators or evaluating opportunities, you can kind of figure out if that’s consistent across multiple deals and multiple operators.

References and background checks. My favorite way to get a reference is not to ask somebody for a reference, it’s to find my own reference for that person. [unintelligible [00:18:04].18] when you get job candidates or you get people that are applying for a position, who in the room has actually given someone a bad reference? It’s kind of funny, when you ask for references and you get references, I always check them, but it’s something that I’m not going to give a bad reference; at least I hope somebody wouldn’t. If they did, that’s bad, because they probably don’t have anybody that they can call that are going to say good things, and that’s even worse. So try to find other people that have invested with that operator and ask them how it went. How did they communicate, and all the questions that I prepared you with earlier in this presentation, ask them. When was the last time there was a distribution? How did the communication go? Kind of get the feeling, too. The business plan was set out and they’re not quite hitting the business plan – that’s okay, so long as they’re doing something to fix it or get the project back on track, and how they responded to that.

Other ways – look on BBB, visit Better Business Bureau, Google reviews, the 506 Investor Group, etc, and see what’s out there on the internet about not only the company name, but also the individual sponsors that are on the deal. Google the actual principals in the deal and kind of see what information you can dig up on that. That’s very helpful.

Insurance. So I always ask this in the syndication process, if something goes bad, it may not be you that have the issue, it may be another investor that has an issue, and if the syndicator operator isn’t covered by insurance, they could be financially strapped and fighting a lawsuit if they don’t have the proper insurances in front of them to protect them. You may not be the issue, it might be another investor that has an issue and that is making an issue, frankly, out of nothing, but you’re still getting dragged into a lawsuit. So ask them, does their SEC attorney provide E&O insurance to cover lawsuits? Title insurance; what exclusions are on their title policy? If they’re doing raw land development, you may want to look at their title policy and see that they’ve done as much as they can to kind of mitigate what’s covered in their title insurance policy. For property level insurance, minimally A-rated carrier giving them coverage on the property. Just ask for any other insurance that they might have.

What we do is, is we put our civil engineers and architects — we require them to list Spartan Investment Group on their E&O insurance. That way, if they design a big building for us that we go out and build and they do it incorrectly, we have an insurance to go after for our architect and civil engineers. So there are a lot of things that an operator can do, but just get them talking about and see how cavalier they are about insurance or how dialed in they are about how they’re insuring a property in general.

And [unintelligible [00:20:33].02] access is a great one. As a limited partner, generally, it’s up to the operator when you sell. But just kind of get their feelings on how they go about deciding to exit a project. A lot of these are five-year or seven-year holds. You’ve got to ask yourself, if the business plan is completed early and I’ve got the right offer on the table, are we going to sell? What is your thought process for doing that? Deciding to exit is great early in the project, but is the operator going to put numbers in front of you and show you the justification why they’re exiting? They don’t have to justify and get your permission necessarily, but you want to make sure that they’re keeping you on board and you kind of understand with eyes wide open why we were going through an exit. Ask them about deals that they’ve exited. How many deals have they exited and how did that go? How did it compare to the original projected timeline, and what was their decision to decide to exit early, later, or on time?

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

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JF2716: 3 Ways to Improve the Culture of Your Multifamily Property ft. Josi Heron

When Josi Heron acquired her first value-add apartment complex, there were many unexpected difficulties that arose, mainly surrounding the tenants. Navigating these issues was no easy process, and in this episode, Josi shares how she turned around the culture within the property. She also discusses how she finds her deals, what systems she uses to run her analytics, and how she plans to scale her business. 

Josi Heron | Real Estate Background

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TRANSCRIPTION

Ash Patel: Hello Best Ever listeners, welcome to The Best Real Estate Investing Advice Ever Show. I’m Ash Patel and I’m with today’s guest, Josi Heron. Josi is joining us from Louisville, Colorado. She is the CEO of Waypoints Equity, which specializes in Class B and C multifamily. Josi’s portfolio consists of 350 units as a GP. Josi, thank you for joining us and how are you today?

Josi Heron: I’m wonderful, Ash. Thank you so much. This is truly an honor.

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

Josi Heron: Yes, of course. My background is fairly varied. I started in the military, and have experience in engineering as well as finance. Most recently, I’ve found myself having climbed the corporate ladder as an Asset Management Consultant leading a program for large infrastructure projects with a Fortune 500 company. I had a couple major epiphanies, where I realized that there was a better application of my skill set and my experience, and found multifamily investing. To sum it up really quick, I left my corporate job, used that as a transition, and went all-in with multifamily investing. Now I am, like you mentioned, a GP in 350 units, and continuing to grow. Our sweet spot really is multifamily value-add deals that range from 40 to 100 units. I’ve found a lot of success there, so we’re going to continue to focus on current markets and then expand outside of our Midwest focus.

Ash Patel: Where in the Midwest?

Josi Heron: Kansas City. Kansas City is where we are.

Ash Patel: Okay. Josi, you said you’ve found multifamily. How did you find it?

Josi Heron: Yeah, so I was looking for alternate investments outside of the stock market, and I’m a huge saver and huge investor on that front. But we’re looking for alternate investments and tax savings. So through a couple of podcasts, some networks that we’re in, we heard of this – essentially, a pitch for syndication that had tax benefits through the opportunity zones. As I was looking through that pitch – and it was by a former military member, so there were some know, like, and trust factors there – light bulbs went off. I realized what they were doing was so much in line with what I’ve done in the past, and also was something that I wanted to learn how to do.

Ash Patel: Prior to that, talking about the tax perspective, you had your W2 job for a lot of years. Did you ever think there was a way to diminish your taxable obligations?

Josi Heron: No. I thought I had it all figured out, and that was work hard, grow, climb the ladder, save, max out 401Ks, IRAs, and that’s it. So yeah, a huge light bulb and epiphany as of the last couple of years, for sure.

Ash Patel: What was your first deal?

Josi Heron: I bought a deal myself, it was 24 units. I have learned so much from that experience. It’s a bit of a leap of faith. I had a couple of single-family rentals prior to that, I had a short-term rental, but I knew I wanted to go bigger. In my mind, at that point, bigger was five to nine units. But I met a meta broker, I told them “This is my criteria, I want to go bigger, five to nine units.” They’re like, “Okay, we’ll start looking,” and they were sending me deals. I went to a conference that really expanded my mindset, so I called her back and said, “Hey, I want more units and more value-add. I know that with my project management background I can handle running a construction budget.” She’s like, “No way. Well, I have this property that I’m trying to get the sellers to list” and ended up going under contract on that property.

Ash Patel: Josi, what was it about that conference that changed your mindset?

Josi Heron: Oh, my gosh, this industry is so incredible, to begin with, because – for the most part, it is a win-win industry. Everybody sees that one, there are benefits in partnership, that was my next step, but it was just being inspired; it was the mindset. There’s a lot of mindsets in this world, in this network, and not holding myself back. So when I ran the numbers and realize I could go up higher and I could get more units at less price per unit, it’s just a matter of really getting the gumption to do it.

Ash Patel: When the broker and you spoke, what was the number of units that you purchased?

Josi Heron: I ended up buying the 24-unit property, but she was looking for five to nine units for me. [laughs]

Ash Patel: That one you purchased all by yourself?

Josi Heron: Yes.

Ash Patel: Were you working full time at the time?

Josi Heron: I had transitioned to part-time, and then got one under contract. I kind of reduced my hours, because I was already building my business plan. I went under contract on this deal, ended up leaving my full-time job, and then two weeks later closed on this property. So it was a little premature. I know everybody’s trying to make this cushion of passive income… But I knew also when I focused and I’m all-in on something, that I’m going to have the most success. I think that really attributed to a lot of my success.

Ash Patel: Was this a Class B or C property?

Josi Heron: It was Class C.

Ash Patel: Alright, you’re smiling. Tell me how bad it was. [laughs]

Josi Heron: 1960s era, just not maintained at all, 50% occupancy, significant deferred maintenance. It was over the last year and a half, I renovated everything, I’ve redone the systems, I had to move everybody out… So it was a huge deal for a first deal; it was huge.

Ash Patel: You moved everybody out?

Josi Heron: Yeah.

Ash Patel: Were they just not paying?

Josi Heron: No, I needed to change the culture in the property. It had some bad tenants and bad actors. I wanted to increase rents, and just bring the whole property up. It’s in a good area, it was really the poorly-run property with the shady characters in the area. I knew it had potential, it’s just — it’s just hard.

Ash Patel: This reminds me the movie New Jack City. Do you remember that from the ’80s?

Josi Heron: Yeah. [laughs]

Ash Patel: Was it that bad?

Josi Heron: Yeah. [laughter]

Ash Patel: How do you get tenants out? What do you tell them?

Josi Heron: Well, I did it over time, because I didn’t have enough carry costs built-in just to empty it and renovate. We kind of had a little bit of a prioritization. Those who were not paying rent, those were the first to go, and then those who had the lowest rents. They all were on a month-to-month, so it just was a non-renewal kind of situation. When I inherited it, a lot of them didn’t even know if they had leases; it was just a mess.

Ash Patel: They didn’t care.

Josi Heron: No. They were just there.

Ash Patel: And you don’t live near this property.

Josi Heron: No.

Ash Patel: Your first property – how did you manage everything remotely, especially a huge lift?

Josi Heron: So kind of coming from both a consultant perspective as well as — I’m still in the reserves, so I travel a lot. So I did a lot of trips out there, and I just built a really good team. My contractor is a civil engineer, which was what my undergrad was; and we connected immediately. He’s got an amazing team, amazing crew, amazing work ethic, and was a partner with the property manager as well. So I just set it up like any project – I’d have multiple touchpoints a week, and then I was out there at least once a month for a couple of different days just to oversee things.

Ash Patel: I was a project manager when I had my corporate career as well. This is a different level, because now it’s your own money in your own emotions.

Josi Heron: It’s a big deal, yeah.

Ash Patel: So what were some hair-raising moments? When you’re trying to be systematic and have your Gantt charts, but then it’s like, “Oh, my God, I’m losing money. This tenant is…” What were some of those crazy moments?

Josi Heron: There’s been a number of them; some of the material. We were doing the renovation on one unit, they opened up a wall, and it’s going to be $10,000 worth of water damage that I wasn’t planning. Other were tenant factors. I installed cameras almost right away, and learned how to operate them pretty quickly, because there were two or three different incidents I had to provide footage to cops, because there was some kind of incident right outside my building. So those kinds of things. I feel like I can see the bigger picture, I know the vision; I actually have a rendering of this property and where it’s going, so I know I just need to get through this phase of it. But there were definitely some times I was like, “Just take some deep breaths. We’re going to be fine, but we got to get through this.”

Ash Patel: So you never question whether or not you made a good decision. Did you always have the perspective–

Josi Heron: No.

Ash Patel: Okay, interesting. How do you change the culture of assets like this?

Josi Heron: I think it really comes down to creating a clean and safe environment, that feels welcoming. We focused on exterior, we focused on the interior, we had to move out some folks who just were not ideal tenants, I would say, and then we did some heavy advertising, marketing, and just really screened well. It’s been hard as well, because I want to get good tenants in there, but more than anything, I want it stabilized, so that’s been tricky as well. But really, I think it’s a clean and safe environment.

So we installed some really heavy-duty doors, security fobs on the outside, got the security cameras, improved the lighting outside… Those were like number one, like let’s get these things done. At the same time, all of the activity on that property is very noticeable. Tenants know that there’s a change, the neighborhood knows that there’s a change, and it kind of just went from there. But it definitely is a process.

Ash Patel: Josi, how did you know that you’re going to be able to turn this around and raise rents? Were the surrounding communities much nicer than this one?

Josi Heron: Yeah, they definitely were a step or two up. And I did my comparison shopping at the other properties. I knew if I could raise it up to that level, that it was a winning strategy.

Ash Patel: How long ago was this purchase and what’s the condition of it now?

Josi Heron: Good question. I bought it in October of 2020, so it’s been a year and a half… And we completed all renovations before Christmas, and we are in the final lease-up phase. There’s been a couple of different phases. And it’s good, we’re off to the races.

Ash Patel: With the number of renovations, you have a massive taxable loss, right?

Josi Heron: Yeah. [laughs]

Ash Patel: So it’s got to get easier from here, but you tackled a very tough deal. How did you transition to becoming a GP?

Josi Heron: At the same time and at that same conference, I was networking. I had already chosen my market, which was Kansas City. Obviously, I remember 2020, everything was virtual. So I’m at a virtual conference, there are all these breakout rooms… I met some investors who also are looking at Kansas City, and ended up meeting a gentleman who becomes my future business partner. He had an 80-unit deal under contract, and was looking for investors. At the same time, he had used a lot of the same contacts that I was using; he used the same lender in the past, the same broker… He started kind of mentoring me on this property that I was about to tackle. We developed some good rapport, and then I jumped onto his deal as an investor. Eventually, because of my super-strong interest in tax and legal, he brought me in as a general partner there to run all of the cost segregation studies and the tax portion of that syndication. From there, it grew.

As we were closing on the 80-unit property, we had another property that had just become available, I would say. A third partner in that deal was the actual property manager. He had another deal that had just come off-market to him, and they gave it to me to run and lead that deal, because of this 80-unit deal we had just closed,  there was a ramp-up there. This 44-unit deal came to us, so I led the acquisition on that. And then we just had momentum.

Break: [00:15:35][00:17:44]

Ash Patel: How much money did you raise for each of those projects?

Josi Heron: Oh, gosh… Our average deal is about 1.5 to two million raised.

Ash Patel: And why Kansas City?

Josi Heron: I looked at rent to price ratios, I looked at population growth, and job growth across the country. I did this analysis in April or May of 2020, so COVID had hit and things were crazy. Kansas City was not top of my market analysis, there were some other markets that were. But during a COVID environment, it was closer to the top. And I live in Colorado, so I could drive there; that really is why I started focusing on Kansas City. I did drive several times, which was fine. I fly now when I go, but that was why. Once I started networking and finding all those great resources there, it kind of has grown and solidified. We get off-market deals now where I hear so many other syndicators are putting a hundred LOIs out to get a good deal.

Ash Patel: How are you getting the off-market deals? Is it from brokers?

Josi Heron: Yeah, relationships. They know that we can close and they know that we can handle heavy value-add.

Ash Patel: How long has your partner been in this space?

Josi Heron: He probably was there three or four years ahead of me.

Ash Patel: Okay. What are your roles today?

Josi Heron: As I said, for the first couple of deals, we switched back and forth with acquisitions. I would say now he is definitely acquisitions lead. I am more on the asset management as well as the capital raising. I’ve got the platform, I’ve got the blogs and the outreach. They’ve got two other partners now as well. They kind of fit in with property management and capital raising as well.

Ash Patel: And Josi, What’s your bottleneck today? Is it deals? Is it investors?

Josi Heron: Neither. I think deals we’re good and on investors we’re good. It’s creating the systems to scale. We have great momentum, got to 350, we’re now managing and operating all of those… We have good systems and we’re trying to make them better, so that we can take those more strategic moves going forward.

Ash Patel: What were some of your biggest growing pains?

Josi Heron: As partners, I would say, when something goes a little bit awry from your well laid out business plan and your well laid out proforma, it’s working through that set. How do you problem solve and get to a solution in a partnership that is going to meet the mark for the investors? One of our properties had a water issue where we had, out of nowhere, some really high water bills. And for two months, we weren’t able to distribute to investors. That caused a lot of pressure and stress on the partnership. It was eye-opening in terms of how are we going to operate through thick and thin? One of the bigger challenges; we need to come together and make the right decisions to get this property on course, but then two, who’s leading, who’s taking this role, how are we all supporting each other as we go through?

Ash Patel: And what was the reaction from investors?

Josi Heron: We over-communicate, especially in a situation like this, and I think there was understanding. There also was a need to know what is the plan and what is next. We just would communicate on a regular basis, what we are doing, what actions we are taking, what we are finding, what we thought the next couple of months would look like. We always had the CRM, and the [unintelligible [00:21:13].15] list, and the emails, so we were making phone calls and just making sure that everybody understood what was going on and what it meant.

Ash Patel: How was the communication done? Was it through phone or email?

Josi Heron: Both. I would say the phone was most effective. I had several conversations where you talk through it. You say this is what happened, this is what we’re doing, how we’re solving it, and this is what you should expect moving forward. The investors understood; it is real estate, things do happen.

Ash Patel: What’s on the horizon for you? What’s next?

Josi Heron: We’re going to continue to operate in Kansas City. As I said, our business model there is working really well. But we want to take that model and move it to another market or two. I’m refreshing my market analysis, we’ve got a couple of markets that we’re targeting, and we’re developing relationships, and going to start hitting the road here shortly to go and really fine-tune that strategy. But the goal is to syndicate — three syndications a year I think would be good. We did four last year, so I think three and then potentially larger deals as well.

Ash Patel: Josi, in your analytics and systems background; what did you find were some pain points with implementing systems? What are some of the things that did not work out as expected?

Josi Heron: One thing I think is — in my corporate world, like you said, with my background, I’m used to being the lead or in charge of a team, and you kind of set things one way and it happens. In a partnership, that’s not necessarily the case; you have to meet each other at the same level.  So I would implement systems – we use Asana, and I’m very much up to speed with that. But bringing everyone into the fold, I think, is one of the challenges. It’s not a concern, it’s just getting everybody on the same page and moving in the right direction.

Ash Patel: Well, how do you do that? If you have somebody that’s not a systems guy or gal and just somebody that flies by the seat of their pants, how do you bring that person into your world and systemize them, so to speak?

Josi Heron: Good question. Communication. We’ve got regular calls twice a week as partners, and then we’ve got calls with our property managers. You put it up, you go through the list and you say this is what we’re tracking, how’s this is going, and just create more of a structured approach there. Also, on a platform where everybody has access, we can all see as a team, and we can communicate as a team what’s the status.

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

Josi Heron: I would say find a mentor and educate yourself, but don’t do that to the point of inaction. Find something that is a little bit outside of your reach and go for it, and focus. I would say when I finally cut all the distractions and truly focused on becoming a syndicator, it changed everything.

Ash Patel: Do you have a mentor now?

Josi Heron: I do. Yes.

Ash Patel: How did you find him or her?

Josi Heron: I did a lot of homework. I did a lot of homework and a lot of asking folks within this multifamily network.

Ash Patel: Some of the younger people that want a mentor, what advice would you give them on how to approach that individual?

Josi Heron: It is always, as you know, about adding value. I’ve been approached to sponsor deals or to mentor and I’m always open to that. I think other syndicators are, as long as it makes sense from my standpoint. There is risk there; so if you can come and add value immediately – and that could be with hustle, maybe you have an IT background and you can help fix my CRM… Anything like that is super helpful. The exchange would be, “Let me show you how to work on some of these deals.”

I have two mentees right now, I would say. I would love to maybe someday get into coaching; I think it’s a little early for that for me. But I’ve got two different masterminds that I run, one for women and one for military investors. That’s more of a sounding board, but from that, I’ve got two mentees that are helping me build my business, and I’m showing them everything I know.

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

Josi Heron: I am, Ash.

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

Josi Heron: Okay, so I go back to The Hands-Off Investor by Brian Burke quite often. That one is a favorite I’ve got earmarked. It’s geared towards passive investors, but I’ve learned a lot from that as well.

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

Josi Heron: Oh, my goodness. I do a lot of donations and charity work with veteran organizations. We actually give 10% of our profits to vet organizations. But I do have to put in a little bit of… I don’t know if it’s a plug. I just spent the last three months on orders as a reservist, and it was helping the Afghanistan refugees. I would say that’s giving back.

Ash Patel: Yeah. 100%.

Josi Heron: That pulled me aside. And one major issue that these refugees are having –we’ve settled now 50,000 in our communities– is they need to find housing. And it’s been a really tricky road for me to walk, trying to help resettle them and also being on the multifamily side, because they don’t have proven income, they don’t have a background check. So I just wanted to give the pitch out there that there are so many refugees and people who are coming from a great background, great skill set, and great work ethic, that may or may not have all of our normal screening kind of criteria. Yeah, I’ve given back the last couple of months by helping these individuals. I think the next step is can our community now help them.

Ash Patel: Incredible. Josi, how can the Best Ever listeners reach out to you?

Josi Heron: My company is Waypoints Equity, and the waypoints speak to those different pivotal decision points we all have in our life. I would say go to my website at waypointsequity.com, or you can reach me through my email, josi@waypointsequity.com.

Ash Patel: Josi, thank you so much for sharing your time with us today. Your story with your military background, in the corporate world, asset management, getting into real estate, and then going big with that change in mindset… And thank you for your military service and your sacrifices as well.

Josi Heron: Thank you, Ash.

Ash Patel: Best Ever listeners, thank you so much for joining us. If you enjoyed this episode, please leave us a five-star review and share this podcast with someone who you think will benefit from it. Please also follow and subscribe. Have a Best Ever day.

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JF2714: Survive Any Market Cycle: 4 Ways to Diversify Your Assets ft. David McAlvany

What if you could minimize the risks to your investments? In this episode, David McAlvany, CEO of the mobile app Vaulted, shares why diversifying your assets with precious metals can provide stability during market dips, rising interest rates, inflation, and more. 

David McAlvany | Real Estate Background

  • CEO of the McAlvany Financial Group which consists of McAlvany ICA (precious metals advisory firm), McAlvany Wealth Management (an SEC-registered investment advisor), and Vaulted (mobile app for investing in allocated and deliverable physical gold).
  • A key pillar of McAlvany Wealth Management’s strategy is centered around hard assets and global real estate.
  • Based in: Durango, CO
  • Say hi to him at: https://vaulted.com/ | https://davidmcalvany.com/ | https://mwealthm.com/

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TRANSCRIPTION

Ash Patel: Hello Best Ever listeners. Welcome to The Best Real Estate Investing Advice Ever Show. I’m Ash Patel and I’m with today’s guest, David McAlvany. David is joining us from Durango, Colorado. He is the CEO of McAlvany Financial Group, which is involved in wealth management and global real estate, as well as various other assets. David, thank you for joining us and how are you today?

David McAlvany: Thanks for having me. I’m doing great. Looking forward to our conversation. I hope we can cover all the ground that you want to cover.

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

David McAlvany: Yeah. Our family business comes into its 50th year this year. We started in precious metals, specifically gold and silver, in 1972. So we have seen similar economic environments and financial market environments to what we have today. In fact, a part of the reason we exist today is because there were significant inflationary issues on investors’ minds in the late ’60s and early ’70s. Five decades later, we’re still doing that, helping investors who want to own physical/tangible assets.

In 2008, I launched our asset management company which focuses, in a complementary way, on hard assets, but this time in publicly traded markets, specifically in real estate, which would be in the form of real estate investment trusts, in infrastructure, in global natural resources, and then precious metals, but more of a producers as opposed to the physical product itself, which our sister company handles.

Ash Patel: With the economic cycle that we’re heading into now, what dissimilarities do you see versus previous inflationary times?

David McAlvany: What dissimilarities do I see? Some of the inflationary pressures obviously will recede; it depends on the length of this pandemic/endemic with COVID. They are clearly pressures in China, with Chinese manufacturing. Whether it is rare earth minerals that are in a hard-to-find situation, or semiconductors which continue to constrain some of our manufacturing here in the United States, because we don’t sufficiently provide our own… These are things that do have inflationary pressures which will recede. The thing that I don’t think will recede will be monetary policy, which today we’re looking at changes in monetary policy, and the idea is that Jerome Powell is going to raise rates, we’re going to see an increase in rates… I would just tell you that there’s so much debt in the system, roughly $30 trillion, that to raise rates is highly consequential. So being able to talk about raising rates and actually following through is quite different.

Another dissimilarity is in the 1970s, as we went from the era of Arthur Burns to Paul Volcker, Volcker got to raise rates and crush inflation. We were working off a very low level of debt, private, corporate, governmental. You can’t do that, you don’t have the same latitude, you don’t have the same levers to pull in terms of monetary policy today as you did then.

Ash Patel: Can you dive into that a little bit deeper, where — because of the amount of debt that we have, what’s the impact of raising rates significantly?

David McAlvany: You’re really talking about a cash flow issue. If you’re talking about corporate entities who have a lot of debt on the balance sheet, as they recycle their debt and have to renew it, it’s going to be at higher rates, so that impacts their cash flow pretty significantly. You tend to see stocks perform very well in a declining interest rate environment, and you tend to see stocks suffer, again, because the cost of capital goes up, in an increasing interest rate environment. So there’s an impact to corporations managing debt maturities, there’s also an impact on the government itself, at two different levels. Number one, they have to refinance their debt too, and at higher rates, it’s a larger line item. Interest in principal payments becomes a larger line item in the national budget.

If you look at the interest in principal payments today, it’s less than 7% of our total budget. But you don’t have to add very many percentage points in terms of an increase in interest rates for that to be 20%, of all government spending, just to pay interest in principle. We have a very leveraged balance sheet as a country, and an increase in interest rates takes that single line item, interest in principle — and again, from a low single-digit, it could be 25% in very short order, of our total governmental expenses. And that has huge implications.

Ash Patel: David, we keep hearing about all the money on the sidelines. What will it do to all the money on the sidelines?

David McAlvany: That’s a good question. All the money in the sidelines – it depends on the atmosphere that you’re in. Money on the sidelines in a fear-based environment stays on the sidelines. The Plaza Hotel came for sale in the 1930s and no one was willing to buy it, even though the price asked was only equivalent to the revenue generated by the bar and restaurant, not just the hotel. There’s plenty of money on the sidelines, but no one would put that capital to work because they were scared out of their minds. Money on the sidelines in a rising market means that you’re going to rise further, money on the sidelines in a declining market means that you’re going to have money on the sidelines. Just because liquidity exists doesn’t mean liquidity is flowing.

Ash Patel: What advice would you give to people that are going all-in on real estate, taking on a lot of leverage?

David McAlvany: I think it’s ill-advised, for a couple of reasons. You have an asset class that, like a bond, is sensitive to interest rates. We’ve been through a good long cycle of declining interest rates. Ash, when did interest rates start to decline?

Ash Patel: I would say 2008…

David McAlvany: 1982. This has been a huge stretch where interest rates have come down and stocks have gone in a beautiful direction for our entire lifetime; bonds have gone in a beautiful direction our entire lifetime; real estate has gone in a beautiful direction our entire lifetime. But the average interest rate cycle is somewhere between 22 and 36 years here in the United States. What had started at 82 – we’re already well past the longest interest rate cycle we’ve ever had, implying that at virtually zero, we have only up to go in terms of interest rates. And you’re talking about an asset class that is price-sensitive to a rise in rates. So if you are leveraged in an asset class that has downside potential as rates increase, I think that’s a dangerous position to be in. Are there exceptions to that? Of course, there are. Location, location, location is always going to be the mantra and a true issue as it relates to real estate.

Is there always going to be a place to make money in real estate? Yes. But I think you’re talking about the difference between a professional and a novice. If you are counting on the environment to remain the same in support of real estate trajectories continuing to go higher – again, the history of interest rates would argue otherwise.

Ash Patel: Alright. We real estate guys live in this bubble where all of our news is real estate-centric, our social media is real estate-centric, and all you see right now is with inflation coming – how do you battle that? Go out and buy more real estate, borrow more money. So give people a little bit of a dose of reality on the drawbacks of taking on that large amount of debt. Granted, you’re locked in for a long period of time, but I don’t think many of us realize the pressure on the asset price itself. Can you explain that?

David McAlvany: Well, you guys know about cap rates far more than I do. But when cap rates are compressed more, and more, and more, another way of looking at that is the risk in the asset is also increasing at the same time. There’s not a lot of room for error if you’re dealing with a cap rate of three, or four. There’s a lot of room for error if you’re talking about a 12 ca; there’s a lot more room for error. At this point, things have to work out; in a compressed cap rate environment, things have to work just right. I’m not a negative neutron, but I look around and I say “If I could have cash or a cash equivalent and be in a position to put money to work in a distressed environment, that would be pretty compelling to me.” Because I think there’s a lot of people in the real estate world who are way over-leveraged. And if there is any change at all, either in the economy or in the direction of interest rates, you’re going to find very leveraged players, all of a sudden, in real trouble.

We’ve had, perhaps, a great demonstration of this with a Chinese development company – $300 billion in debt; Evergrande, they’re one of the top 10 real estate developers in China. Now, all of a sudden, things begin to change and there are not as many people buying apartments as there were before, so volumes changed, just at the margins. And because they had so much debt, now all of a sudden, they’re in a real bind.

Ash Patel: Underwriting, in the perfect world – how do they anticipate what’s on the horizon? Do they have their exit cap rate one or two points higher than what they’re buying it at?

David McAlvany: That’s a good question. I think a part of the question that I like the most is when you’re buying something, be clear on what your exit strategy is. I think that’s a healthy thing to keep in mind. Again, for me, it comes back to a compressed cap rate. If you are buying something that’s at a compressed level, what possibly is your exit strategy, what possibly exists?

Ash Patel: I’ve seen a lot of proforma’s where they’re compressed even more upon sale.

David McAlvany: Right. But see, if you move away from the real estate crowd, on Wall Street we call that the greater fool theory of investing. You may come in with $10 million and all you’re hoping for is that somebody comes in with 15. But if you paid too much for an asset, what you’re really hoping, even though you paid too much, is that someone comes in and pays even more on the “too much” side effects. So you’re just banking on it. What’s your exit strategy? Is the best exit strategy counting on a continuation of market insanity? I don’t know.

Ash Patel: David, how do you advise people? Some of the younger guys and girls that have only seen good times in their life, people that graduated high school in maybe 2009 or 2010 and have had a great run (graduated college) and just all they’ve seen is an incredible booming economy. How do you bring them a dose of reality on what could happen?

David McAlvany: We spend hours every day looking at market history, looking at trends, and trying to extrapolate nuggets of important data from the past that would be relevant in the present. And I think for anyone who wants to look at where we’re at, it’s really important that you start looking at cycles, it’s really important that you understand the nature of interest rates, one of the prime drivers of real estate values. But more than that, prime drivers of all asset classes. Would it surprise you to hear that as of 2016, we’re only marginally above these levels? But as of 16, interest rates hit a 5000-year low.

Ash Patel: That is very surprising.

David McAlvany: Yeah. So with that in mind, you could also say that any asset that is interest rate-sensitive and does well on the basis of low rates is also the equivalent of a 5000 year high. I would just ask any investor, whether it’s real estate or anything else, where do you make money? When you sell something or when you buy it?

Ash Patel: It’s really when you buy it.

David McAlvany: Buy right. So if we make the case that we’re somewhere close to the highest values ever, because the cost of capital is the lowest in 5000 years, you’d have to argue that you can’t possibly buy it right. And that’s a broad statement about an asset class in general. There’ll be exceptions where the details percolate to the top, and whether it’s a distressed deal, or… There’s always an opportunity; that makes sense. But in general, you’d say, “You should look at history, know where you’re at in the continuum, and recognize that this is not a market that is going to help you make money.”

It’s no different in stocks. If you look at current price-to-earnings ratios, if you look at price-to-sales ratios, the price-to-sales ratio in the S&P 500 is the highest it’s ever been in all of US stock market history. We blew out the 2008 levels, we blew out the 2000 levels, we blew out the bull market levels of 1968, we’ve blown out the levels that we saw in 1928 and 29 before the market rolled over. You could look at stocks, my gosh, you are paying through the nose to own these companies.

Ash Patel: I’d like to pose a couple of different scenarios to you. Let’s take the real estate investor syndicator who’s really leveraged, taking on a lot of other people’s funds as well, and interest rates go up a point. Now they realize their proforma sales cap rate is not going to happen; they’re underwater. How does somebody like that get right?

David McAlvany: You get right before you get there, and you get on the hook now, you get on that immediately, because you have to make sure that your portfolio is lightened up and you’re a lot more liquid. I remember that my dad sat with one of our clients, a reasonably large investor; not a syndicator, but he probably had 50 properties, single-family homes, up in Oregon. This is 2005 or 2006. He sat down and did a consultation with my dad who was in the business at the time. He said, “What do you think I should do?” My dad said, “I’m going to recommend something that sounds crazy to you, but I’m going to recommend that you sell 100% of your real estate portfolio.” He’s like, “This is my cash flow, this is where I’ve made my fortune. What are you talking about?” He went home, thought about it over the weekend, called my dad, and said “I’m putting for sale signs on all the properties.” That was 2006; it took him about two years to get liquid.

The banks knew that he owned those properties, and in 2009 and 10, they came to him and said, “Are you interested in any of your properties? This one’s in foreclosure, this one you can buy from us in a short sale.” And he’s like, “Wait a minute. So I got liquid in advance of a significant decline in real estate, and now I get to own the entire portfolio for cash, plus another 20 or 30 properties on top of that, for cash?” So he went from being leveraged to unleveraged and owning a higher percentage — sometimes the best offense is a good defense is what I’m saying, Ash. It’s not as if you say “Well, that’s just silly. The sky is falling.” Somebody is always betting on the downside. Yeah, there’s a rain cloud somewhere, even on a blue-sky day. I’m really not saying just focus on the negative; what I’m saying is be strategic in the way that you approach the markets and recognize the markets don’t care about you, the markets don’t care about your long-term goals or ambitions. The markets just do what they do. And if there are trends that you can take advantage of… In this case, I think you’ve got a lot of over-leveraged players. And I would say, at this point, if you’re over-leveraged in real estate, and Jerome Powell does follow through, March, April, May, June, between now and the end of the year, Goldman Sachs says we’re raising interest rates four times this year… I personally don’t believe they can do that without unhinging the economy, because of our debt structures. But if they follow through, you’re talking about a 100 basis point increase, to your point. Now, how does that person get out? Well, it’s a lot harder to get out in December than it is now. And this is not a negative commentary on real estate; this is “How do I buy more of what I own, on better terms?” That’s what I’m talking about.

Ash Patel: So for somebody who’s not exposed to real estate today, is there a hedge knowing that the market is going to be negative in terms of real estate pricing?

David McAlvany: Yeah, is there a hedge…? Not a very good one, honestly. Not a very good one. That has a direct one-to-one correlation with real estate.

Ash Patel: How can you benefit financially if you know that prices are going to go down?

David McAlvany: What I would say is by positioning in cash and being able to do that, you give yourself optionality, you give yourself the ability to have leveraged purchasing power in the future. Positioning in cash now is the opportunity to buy a lot more later. What I would say is that in this environment of desperate monetary policies and governments who are willing to spend anything to keep people happy… Keep in mind, COVID reintroduced the world — this is something that’s very different. We haven’t seen this since the 1960s and ’70s. Governments around the world rediscovered that it’s really fun to put money in people’s pockets. It makes you very, very popular as a politician. “Ash, I’m sending you $10,000. What do you think of me today? Don’t forget to vote in November.”

So we’ve rediscovered the power of the purse. This is a fiscal policy through COVID. We’ve got build back better, and there’ll be a dozen other things over the next decade which are huge trillion-dollar spends. That means that your cash is at risk too, because inflation is here to stay. Even the supply chain issues go away when we sort out who we’re buying our microchips from; that’ll all sort itself out. But what’s not going away is the government spending money that they don’t have, and that having an inflationary impact. We went from sub 2% inflation to now the official CPI is 7%. I’m saying move to cash. How can I in good conscience say “move to cash,” when it’s a guaranteed loss of 7% sitting in the bank? Well, what I would say is that’s why we launched our vaulted program. Our vaulted program is a cash equivalent, it’s meant to substitute for a bank or savings account, but it’s denominated in ounces, held with the Royal Canadian Mint in Ottawa. On your smartphone, on your computer platform, if you go to the app store and look at Vaulted, or go online to vaulted.com, it’s a brilliant program. It’s a cash equivalency, very compressed cost to buy and to sell, instant liquidity, and it’s designed to be what gold was for 5,000 years. Not a commodity that you speculate on prices up and down, it’s the basis of a monetary system. And if we’re not going to be on a gold standard as a country, you can put yourself on your own gold standard. Insulate yourself from the cost of inflation by having a part of your liquidity in something that protects you from the ravages of inflation.

So yes, you want to reduce your market risk in real estate, yes, you want to have some exposure to cash, or I would say a cash equivalent, and you can get that in ounces. Vaulted is a great outlet. There are others, I’m sure too, but that would be the way I would solve the inflation problem and the overexposure problem to real estate.

I’m a huge bull in real estate. I own real estate personally, I invest in real estate, I am dying to get out of ounces, and into more cash-flowing real estate. So this is not the gold guy who is anti-real estate, I’m pro real estate; I just want to own more of it on the best terms possible. I think that given the market structure and the fever pitch speculation that we’ve seen in cryptocurrencies, in non-fungible tokens, in meme stocks – you’ve got money flowing, and people are excited, and people are making money, and it’s in real estate, and it’s in every asset class. Ash, I just don’t think this ends well. The good news is, it ends really well for someone who’s like, “Yeah, I think I’m just going to take a few of my marbles out of the game, and I’ll put them right back in… But instead of three marbles buy three things, I want to see three marbles buy nine things.” Increase your purchasing power, let the market come to you; make money on the buy side, not when you sell.

Break: [00:22:38][00:24:48]

Ash Patel: David, you’ve made a really compelling argument about what’s on the horizon. Why would you not take your father’s advice and sell all your real estate now?

David McAlvany: A couple of things. Number one, my real estate is not leveraged; and number two, I’ve got really good visibility on the rents. So it’s a very strong position to be in. I remember one of our other clients who at one point had close to 1,000 doors in downtown San Francisco. He leapfrogged from 500 to about 1,000 in one of the many economic downturns we’ve had in the last 60 to 70 years. This is a guy who’s dead now; he retired to Spokane, made a ton of money building houses in the 1930s, made a ton of money in the poultry business in California in the 1950s and ’60s, built a real estate empire in the ’70s and ’80s… And what he told me about what he built in terms of a real estate empire in San Francisco — not a bad place to own 1000 doors, I think — is that when the market turned down, he had zero debt. Everybody around him was scrambling to make payments, while he just lowered his rent 30% and stayed 100% of capacity.

Meanwhile, building A, B, and C across the street are going back to the bank. That’s how he jumped from 500 to 1,000 doors pretty quick. He had staying power, he had the ability to lower his rents to whatever to keep it 100% full, which put him in a huge position of strength. His kids always looked back and were like, “Dad, teach us how you made money in real estate. This is amazing.” My last conversation with him was in 2002. Gold was at about $400 an ounce, it’s $1,800 today. He said “My kids will never get it. It’s not about real estate, it’s about understanding value. It’s about buying things right.” What he was doing – he actually moved almost 100% of his money into gold at the time.

Ash Patel: How does gold compete with NFT’s, meme stocks, syndications, and growing money? These coins, your money is growing, you can watch it… There’s nothing fun about gold. How do you convince people that that’s the right way to go?

David McAlvany: Well, I think there’s a difference between something that is fun and something that has had a meaningful existence for 5,000 years. If you think about the rise and fall of nations, if you think about the history of the world, and even the fact that we have the opportunity to buy real estate on leverage… The basis of all banking, the basis of all money has been, for 5,000 years, gold. We’re playing games now with fiat currency that has nothing backing it. But the longer history of gold is just money. So you’re interested in money, I’m interested in money; you’re interested in non-fungible tokens, cryptocurrencies, and syndications because it represents more money to your balance sheet and income statement in the future. This means you should have an interest in gold, because gold is nothing but money. It’s just what money has always been, versus what it is today. I’m interested in more money, which to me translates as more ounces. Now, I’m going to get to more ounces through understanding relationships and relative values between asset classes.

Today, the relative relationship between stocks and gold favors getting out of stocks and getting into gold. Why? So I can come back into stocks when stocks are cheap and gold is expensive. I don’t care about ounces, actually. I’m improving my position by moving laterally from one asset class to the next. And yes, I’m interested in syndications, yes, I’m interested in real estate. I’m probably not interested, I’m not your guy for cryptocurrencies and non-fungible tokens, because I don’t know what they are. Maybe you can tell me what they are.

Ash Patel: Yeah, I’m like you. We’re still trying to figure it out. The fear of missing out.

David McAlvany: That’s fear of missing out, it’s “I can’t believe somebody made a million dollars.” There is a sense of sort of irrational exuberance when it comes to those things. Whereas if you look at real estate, the reason you like real estate is because it’s a tangible asset. You can stub your toe on it, you can walk around it, you can get comps in terms of what this thing is worth, and then know if you’re getting a good deal or not a good deal. And you can look at the cash flow attached to it and be like “This is fun.” I look at gold and I say “It’s actually really fun.” Because all you’re doing is playing a game. For me, I may be in gold today so that I can be in acres tomorrow. And I think about that relationship.

Ash Patel: Yeah, it was brilliant with Vaulted where you can just swipe and buy gold.

David McAlvany: Yeah, I think we’re moving into a digital era, certainly. And gold is stuck in the 19th century, certainly. So Vaulted is how you bridge all the integrity of 5,000 years with the innovations and convenience of the 21st century. So you get the benefits of something that has been enduring wealth through millennia, but you’re not hampered by somebody delivering a package to your front door from the US Postal Service, or God forbid, a FedEx driver leaving $50,000 with gold on your doorstep without a signature. So to us, Vaulted is a great way to own an incredibly valuable asset, to protect yourself against inflation, to have some upside in the case of a market downside… Because they do tend to move in opposite directions. If stocks go down over the next two or three years, gold’s going up, no question. So you’ve got some upside.

Ash Patel: And David, what’s the markup? How much more am I paying per ounce if I buy through Vaulted?

David McAlvany: 1.8% is the transaction cost to buy or sell gold through Vaulted. The beauty of Vaulted is we have an arrangement with the Royal Canadian Mint. We’re sourcing our bars directly from them; there is no wholesale middleman. We’re getting the bars as cheap as you can get them. So it’s melt value plus 1.8%. There are actually other people I know in the industry who are like “Oh, we only charge 1%.” Yeah, off of a much higher base. We are one of the most, if not the most affordable way of buying gold. And the beauty is you don’t have to buy an entire bar. You can buy $5 worth, you can buy $20 worth, you can buy $1,000 worth; we have clients that have bought multiple millions of dollars in the Vaulted program.

It’s been particularly popular with people that are looking for a short-term repository for their wealth. You sell a real estate deal, you know it’s going to be put back into the market, you’re going to be hanging out for six to 12 months, and you don’t like what the dollar is doing, and you don’t want it in the bank. Maybe you don’t have had a great relationship with your bank, they certainly aren’t paying you much.

Ash Patel: David, discounting today’s economic climate, what is your best real estate investing advice ever?

David McAlvany: My best real estate investing advice ever… I go back to that example of the Plaza Hotel in the 1930s, and I think “Buy when no one else is buying, and sell when everyone is interested in buying.” It’s a contrarian model that it’s really hard to do, because again, there’s the issue of fear of missing out, there’s the issue of what does someone else know that I don’t know? So how confidently are you engaged in the investment process? It’s a lot easier to look around and say everybody’s doing it, everybody’s making money; I’m just not worried. But to be able to buy when no one is showing up, and sell when everyone’s there just begging for the opportunity to own it, this applies across asset classes. But I can’t tell you the number of times we’ve seen it, even in our own industry.

This goes back — again we’ve been in business for 50 years. This is the early, early days, 1979; silver is at $50 an ounce. It’s just gone from $1 to $50; that’s silver. So there is an upside, there is a lot of activity, and a lot of things to be gained in having long exposure to precious metals. But my mom takes the call from a doctor – we were a small business at the time. The doctor says “I want two bags of junk silver.” She’s like, “I don’t think you should do this. You’re paying the highest price silver has ever been. Why don’t you wait six months and see?” He’s like, “Excuse me. I have an MD behind my name. I think I know what I’m doing here.” She could not hold him back, and he went on to lose 80% of his money. Why? Because there’s volatility in any asset class. He bought at the absolute peak, which we didn’t see again until 2011. So where you buy does make sense. If everybody’s clamoring to put money to work, take your time. Everybody wants to move their personal balance sheet ahead as fast as possible. If you’ve got a million dollars in assets, do you want it to be 10? If you’ve got $100,000 in assets, do you want it to be a million? You want to close that time gap to make that happen as fast as possible. Leverage gives you that opportunity, but leverage gives and leverage also takes away. The problem is if you’re overpaying for an asset to begin with, and it’s on leverage, you’re going to find yourself in a world of hurt. I think the best advice I can give is in this environment, you probably just want to cool your jets. And that’s not because you’re any less strategic and wanting to grow your wealth in real estate, it’s because you’re more strategic than the next guy, and you want the best price possible, because you know that’s how money is made – it’s the price you pay, not what you sell it for.

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

David McAlvany: Okay. I don’t know what that means, but sure.

Ash Patel: Alright. You’re about to find out. David, what’s the Best Ever book you recently read?

David McAlvany: The best book I recently read… I’m reading a novel by [unintelligible [00:34:22].21]. I’ve got to get out of my head, which is sometimes tough for me to do. A spy novel… It’s perfect, it’s a complete distraction. So I’m actually in the middle of a [unintelligible [00:34:34].10] novel and it’s fabulous.

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

David McAlvany: If you’re interested in the Vaulted program, Vaulted is on the app store for either platform, or you can go to vaulted.com online. Keeping in touch on a regular basis; in March we go into our 15th year of a weekly podcast on all things financial. So if you want an education, if you want to deep dive into the deep end of the pool, on economics, finance, and geopolitics, that’s where you find us, at weeklycommentary.com. You can do some binge listening and I doubt you’ll ever catch up, because we’re solidly 14 years in.

Ash Patel: David, thank you for an incredible conversation today. The contrarian advice that you’ve given is refreshing. A lot of us older guys have seen market cycles, but there’s an entire generation that is not. So this is very refreshing advice, very contrarian to everything we’re bombarded with on all of our real estate social media, our real estate news sites, and really what everyone’s telling us. So this was a great dose of reality.

David McAlvany: Ash, thanks for having me on the program. In this period of sort of political volatility and hypersensitivity, I’ve found myself gravitating towards country music, a good dog, a good beer, and a good pickup truck. Let’s just go back to the basics. A song rings in the back of my mind, you’ve got to know when to hold them, you’ve got to know when to fold them, you’ve got to know when to walk away, you’ve got to know when to run. It’s not that you’re any less bullish in real estate, or have less of a strategy, it just means that if you know how to engage even more strategically, the benefits are going to accrue to you that much faster, and you’re not going to be forced to a place you’re playing the patience game.

Ash Patel: Yeah. Again, thank you. Best Ever listeners, thank you so much for joining us. If you enjoyed this episode, please leave us a five-star review, share this podcast with anyone who you think can benefit from it, and follow and subscribe. Have a Best Ever day.

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JF2712: Lessons Learned Managing $2+ Billion Portfolio During COVID ft. Jilliene Helman

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

In this episode, Jilliene Helman—CEO and Founder of RealtyMogul—shares seven lessons she learned while managing her real estate business during the pandemic.

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

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TRANSCRIPTION

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

Jilliene Helman: Perfect. I’m going to go ahead and kick us off. I’m Jilliene Helman and I’m the founder and CEO of Realty Mogul. Realty Mogul is an online marketplace to invest in commercial real estate transactions, sometimes known as crowdfunding for real estate. We connect investors to real estate investments around the country. Since its inception, Realty Mogul investors have invested in over $2.8 billion of real estate through the Realty Mogul platform. I thought it would be fun today to talk through lessons learned with $2.8 billion of real estate during COVID. I can assure you it was more fun to have a $2.8 billion platform pre-COVID. But we learned a lot during COVID and I thought that it would be helpful to share that and share some of those lessons learned. I’ve got seven lessons to share today and then I’m going to give you a little bit of insight into where we think the market is headed, the types of deals that we don’t want to do, the types of deals that we do want to do.

Lesson number one is you play defense before an economic crisis, not during it. What do I mean when I talk about playing defense? First of all, underwrite well and don’t do deals that don’t meet your underwriting criteria, don’t stretch to do a deal. I sometimes see real estate operators changing assumptions, trying to make deals work, convincing themselves that this deal will be different than the last one, it’ll have better tenants or better collections. That’s just bad news, that’s incredibly important to play defense before an economic crisis. The second thing that we learned is that you have to have a strong property management team in place. During a time like COVID, we saw strong management separate the property’s performance compared to comparable properties. Our best property managers were proactive, they were working with tenants on payment plans, they were helping our tenants to complete rent assistance applications, and they were incentivizing tenants to pay rent online. These all had really positive effects on maximizing collections and occupancy right in the heart of COVID. There’s no such thing as “set it and forget it” with management companies, you have to actively manage them. That was even more true during COVID when so much was changing so quickly.

The other one around playing defense is having open conversations with your lenders. It was absolutely critical to our success in managing through COVID. COVID has caused lenders to take an increasingly proactive approach in managing properties. Having open discussions with your lenders as to how COVID is affecting the property and the steps that you’re taking to mitigate those effects is incredibly beneficial for your lender. But you have to have those relationships pre a crisis like COVID. At the end of the day lenders are made up of people, which means that you have relationships with those individual people, and those are absolutely critical. Now, why is it critical? There were times during COVID when we needed the lender to do a draw request for construction expenses that we’d already spent pre-COVID. Or maybe there was an extension on a loan that needed to happen or a payout of additional proceeds for good news money. If you don’t have strong relationships with your lenders, in times of crisis, it’s really challenging to get them to do what you want them to do.

Lesson number two is the proforma is always wrong. I shared this on stage at the Best Ever conference last year and I’m repeating it this year because I just think that is such an important lesson in times of crisis and not even in times of crisis. But knowing that the proforma is always wrong, what are some ways to combat that? First and foremost, it comes down to underwriting. Underwrite a minimum 10% budget contingency, scale back the number of units that you’re planning to renovate and release per month, slow it down, use a cap rate at exit that is at least 1% greater than your cap rate at purchase, and increase vacancy and bad debt to stress test your pro forma. If your stress test financials are still acceptable to you from a risk-return perspective, that’s probably a deal that you want to do. But it’s impossible to predict, in good economic times and particularly in bad economic times like COVID.

Lesson number three, take a breath, be deliberate. In times of crisis, things can feel really, really crazy. Many people forget to plan and forget to prioritize. When COVID hit, we took a breath as a company and we came up with a plan. We reassigned folks who were working in the originations team onto the asset management team. We drafted communications around that plan and we came up with two priorities, limiting the priorities and measuring them because what you measure gets done. The number one priority was the health and safety of our tenants and our team. The number two priority was keeping occupancy up and shoring up cash reserves. That meant immediately halting renovations, halting rent increases so that we could keep people in their units, and cutting all non-essential expenses and repairs. When you’re looking at an economic cliff, cash is king, and we took deliberate actions across our assets to ensure that we shored up cash. That’s it, two priorities and a plan.

Lesson number four, don’t be afraid to innovate. Going back to our priorities, the first was the health and safety of our tenants and team. In the very early days of COVID when it was still unclear how dangerous it was, it was still unclear exactly how it was spread, we didn’t want the property management teams interacting with the tenants. This led us to use software to do virtual leasing and self-guided tours. It’s still shocking to me how many units were leased via self-guided tours. At some properties we measured the data, the conversion rates were higher through a self-guided tour than they were when a property management professional joined the prospective tenant in the unit. It was pretty remarkable and amazing and it’s something that we’re going to continue to use post-COVID. I think it’s a real lesson of not being afraid to innovate.

Lesson number five, do experiments and test the market. Lesson number five was a big one for us in the face of the pandemic. We decided to start testing the market and the appetite for renovations back in June 2020, just a few months after the pandemic started. Sure enough, we were able to keep hitting renovation premiums in many of our assets. Step number one was making sure that we shored up cash and shored up capital so we stopped all the renovations. Then we got back in the market and started testing. It turns out, as more and more people were stuck in their apartments, a nicer apartment was even more important than before. We approached the first renovation post-COVID that every property is an experiment. When the experiment worked, we doubled down. We had one property in the height of the summer, which was the height of COVID in Texas, where we leased over 40 renovated units over the summer using virtual leasing and testing the market. It worked very, very well.

Lesson number six be a stellar communicator. This is particular for all those sponsors and all those operators who are in the audience today. But providing detailed updates to investors is critical in good times and in bad times. Investors are reading the news and wondering how the pandemic has affected their investments. Providing detailed transparent and regular updates eases uncertainty and increases confidence. We increased the frequency of our updates to monthly from quarterly and we were available and receptive to questions, calls, comments, and ideas from investors.

Break: [00:09:07][00:10:46]

Jilliene Helman: Lesson number seven, which is my last lesson here, is to take a position. There’s a lot of fear in the midst of an economic crisis and in the midst of not even an economic crisis, but a global medical pandemic. It’s really important that you can overcome that fear, and the only way that you can take a position is by overcoming that fear. I want to share an excerpt from our June 2020 investor communication. “Choosing to invest in today’s market means two things. One, you must assume the world is not ending, and two, you believe the country will recover in the future.” I’m reminded of Warren Buffett’s quote from his recent Berkshire Hathaway shareholder meeting in which he said, “One of the scariest of scenarios when you had a war with one group of states fighting another group of states, and it may have been tested again in the great depression, and that may be tested now to some degree, but in the end, the answer is never bet against America.”

That, in my view, is as true today as it was in 1789, and even was true during the Civil War and the depths of the depression. We do not believe we are in for depression, namely, because of recent massive government intervention. The US has never seen the extent of monetary and fiscal stimulus that we are seeing today. As a reminder, this was June 2020, 90 days after COVID hit in full swing. We decided in June 2020 that we wanted to play on offense, and we assumed the world was not ending, and we believe that the country would recover. Data told us that supply and demand fundamentals, particularly in apartments, made it such that investing still made sense. In the ’08 and ’09 crisis we had an oversupply of housing, today we have an undersupply of housing. That, coupled with low interest rates, made us get back in the market. We decided to get back to finding real estate investments that met our due diligence criteria and we based it off of a deliberate assessment.

I’m going to share that assessment with you completely transparently. Here are the things that make us afraid in today’s market and made us afraid in the height of COVID in June, in March, in April. Unsurprisingly, most of these were on our list well before COVID. I gave a presentation at the Best Ever conference last year, you can go back and you can look at my list from last year, and there are not that many that are that different on what makes us afraid. There’s one in particular on what we’re excited about and I’ll talk through that one in a minute. But let’s talk through first what makes us afraid. There are a ton of landlords who got sucked into the WeWork craze or the Silicon Valley craze. That’s doing master leases to tenants with no credit quality like WeWork, that’s something that we’ve avoided since inception, and we will continue to avoid. The next one is office with significant rollover. We’re not afraid of office today and we can talk more about that, and why we’re not afraid of all office. But we’ve been afraid of office with significant rollover for years. What tenants are going to come in and replace those tenants? We’ve questioned that for a long, long period of time.

The other thing that we’re afraid of is retail unless it’s Main and Main. We’re not afraid of retail the way a lot of investors are, but the reality is that retail is significantly overbuilt. We just have way too much of it around the country and we have a lot of big-box retailers like the old K-Mart, the old Sears boxes that are not functionally working, they’re functionally obsolete. But we do like retail in Maine and Maine. Given that it’s out of favor, cap rates are higher and given where interest rates are, retail can be a great place to find strong cash on cash returns. But you have to be very, very careful about where it’s located. The next one is hospitality. We hate hospitality. Hated it before the pandemic, certainly hate it during the pandemic, and I expect that all hate it after the pandemic. Clearly, there are deals to be done today, given just how much distress there is in hospitality. If you’re willing to stomach that risk, if you’re an operator in hospitality, there are certainly some amazing operators. But I still believe it’s the worst risk-adjusted return in any real estate asset class that you could think of. You have nightly tenants in hospitality, it’s an operating business, and I don’t think that you’re paid for the risk of that operating business generally. Thankfully, we had almost no exposure to hospitality when COVID hit, and it’ll go down as the worst-performing asset class during COVID. Even though there’s a ton of opportunity in it today, I still don’t like it.

We’re also worried about the impact of insurance costs rising in markets like Florida and Texas, predominantly due to climate change. You look at Texas right now, I just got a note this morning that we had a pipe burst due to the cold freeze that’s happening in the Texas market. You can underwrite for this. But when I see standard 3% increases in insurance expenses year over year, this is a red flag for me. Insurance costs are going to go up until there is government intervention. I think that if we can’t get control on climate change, we will see government intervention. But for now, we want to make sure that insurance costs are being modeled appropriately.

The other red flag is modeling a refinance with Fannie or Freddie that is less than 4.5% or 5% interest, two to three years out. I wish I had a genie bottle to know where interest rates are going to be, but I don’t. In the absence of concrete data, we don’t think it’s prudent to guess where interest rates are going. I don’t like business plans where it’s a value-add business plan, it’s being acquired with bridge debt, and then there’s an assumption in three years that you can replace that with Fannie or Freddie debt at 3%. That’s just not going to fly, even if we get lucky. That’s where interest rates are three, four, or five years out from now; not something I’m comfortable seeing in underwriting.

The other thing that makes me really afraid, is sitting in cash when inflation starts to rise. That is the single best way to lose purchasing power. Personally, I’m trying to get capital out, I don’t want to be sitting in cash; of course, I always have cash for a rainy day, but that’s something that makes me afraid. It makes me afraid for a lot of Americans and a lot of investors who are going to see their purchasing power decline when we start to see more inflation, and the Fed has said that they want to start to encourage inflation; they’re actively trying to encourage inflation.

Alright, switching gears to be a little bit more positive here. Where do we think that there may be an opportunity? Well-occupied apartments with reasonable bad debt, financed with long-term, fixed-rate debt. This has really been the bread and butter of how investors haven’t used the Realty Mogul marketplace to invest, pre-COVID and post-COVID. I’m a huge believer in apartments, I think that they are some of the best risk-adjusted returns in real estate. Even though the pricing has been bid up, even though cap rates have come down, I think that it is one of the safer areas to invest in commercial real estate. But you have to look at the bad debt. We sometimes will see operators bring transactions that they want to use the Realty Mogul platform for, and it has terrible bad debt during COVID.

There’s an expectation that with better property management it’s going to get better, with the rent relief bill we’re going to get that money back… I don’t like that story. I’m not afraid of bad debt today, 2% to 4% bad debt is kind of where our portfolio is running. The economics of that portfolio still work even with that kind of bad debt. Hopefully, you can get a little bit of a discount off the pricing because of that. But I am very cautious of bad debt today and where that property has performed during COVID. We’re big, big believers in long-term fixed-rate debt. Debt is incredibly cheap today compared to where it’s been historically. We don’t know where it’s going to go, but if we can lock in that interest rate and we know what the underwriting is on a long-term fixed rate debt, that gives me a lot of comfort.

This next bullet was on my “where we’re afraid” last year at the Best Ever conference, and now it’s on my “where there may be an opportunity.” That is new construction in growth markets with a late 2022, 2023 delivery, even better if the costs are fully negotiated and locked in. We believe that construction costs are going to rise, and we believe that transactions that are just about to go vertical, that already have their costs locked in, are going to have a significant advantage to new construction in 2024, 2025, 2026. We are investing in new construction, we’re investing specifically in growth markets that we believe in, but we’re also investing in some markets that we believe are going to recover in 2022, 2023, 2024 that are hard hit today. Where we wouldn’t want to buy existing apartments there today, but we’re interested in doing construction projects that are going to deliver in 2023 when we expect the market to recover.

I’ll walk you through a couple of examples of those. We also like growth markets – Austin, Dallas, Denver, Raleigh, Charlotte, Columbus, Phoenix, Jacksonville, Salt Lake City, Nashville, growth markets, people are moving, positive demographics, jobs are moving, markets that we want to invest in. I mentioned on the last slide that we’re not afraid of office, so we like office with long term credit tenants, and a functional need to be in office. As an example, we have the DEA as a tenant in one of our properties. It’s hard to imagine that the DEA is going to work from home, so that’s a tenant that we like.

Triple net with great tenants, I’ll walk you through two examples of that. Retail at Main and Main, ideally trading at a discount; and not yet, but NYC, LA, and Miami in 2022 and 2023. These are some of the hardest hit markets during COVID, they are some of the greatest rent declines during code, and yet we believe that people are still going to live in cities. People are creatures of habit, people are social creatures, they’re going to want to be back in cities at some point in time.

Break: [00:20:13][00:23:10]

Jilliene Helman: With that, I thought it might be fun to quickly go through the deals that we’re invested in via the Realty Mogul platform since COVID hit, to give you a sense of the type of deals that we felt comfortable offering up to our members in the heart of a pandemic. To be clear, none of these are available for investment, there’s no sale of securities, you can’t invest in any of them. But I wanted to give you a sense of the types of deals that are sort of — the crystal ball that Ben was talking about. These aren’t even crystal balls, these are deals that we did in the heart of COVID.

The first transaction is a deal called NV Energy. Now, people may think that we were totally crazy, but in the middle of COVID, June 2020, we did an office deal in Las Vegas, Nevada. What could sound stupider? Las Vegas, Nevada, heavy, heavy, heavy hospitality market, very challenging, obviously, for job creation, and for the economy. When travel was getting shut down, when people were not choosing to travel, we did an office deal in the heart of Las Vegas, Nevada. Now, how did we get comfortable with that and why did we make that decision? This is an office building that is leased to NV Energy, which is owned by Berkshire Hathaway. It provides energy in the state of Nevada and elsewhere. There are nine years remaining on the lease, we got fixed-rate debt at 4%, and there’s double-digit cash flow. At the end of that nine years, investors will have 100% of their principal out and will still own the property. Pretty good risk-adjusted return from our perspective.

We did another triple-net deal in the heart of COVID, closing Q2 2020. This was a triple net medical office deal leased to Covenant Health, 10 years remaining on the term, fixed-rate debt at 4.15%, double-digit cash on cash returns, and strategically located right by the hospital. They cannot afford for a competitor to come in and lease that space from us. So it’s strategically located, long term, and leased to medical. As we all know, medical has been doing okay during COVID.

The next one, a two-pack portfolio of apartment buildings in Dallas, Texas. I think that this deal and the next deal are probably the main COVID discount deals that we got, to be completely honest. A lot of uncertainty around apartments in that Q2 timeframe – these close in Q3 – but a lot of uncertainty around apartments. That is not the case today. Apartments are well bid up, it’s incredibly competitive, multiple offers, hard money at the signing of PSA… But I think that this deal and the next one was exceptions. Parks at Walnut, 308 units in Dallas; that’s a growth market, there’s been huge, huge job creations and new companies that have announced that they’re moving into Dallas pre-COVID and even post-COVID, and fixed-rate debt at 3.06%. I think this is one of the cheapest loans in our entire portfolio across 15,000 units that have been transacted on the Realty Mogul platform. This is a value-add strategy, so testing the market with value-add, going in, making sure that the market can bear it even during COVID, and then renovating those units.

Very similar is this transaction, 9944, that was also closed during COVID. A very similar story, right next door to Parks at Walnut, fixed-rate debt at 3.18%. Again, very, very cheap. The ability to generate meaningful cash on cash returns because of how cheap that debt is.

The next transaction, Casa Anita, 224 units, closed in Q4. This is in Phoenix. We like Phoenix, Phoenix is a growth market, testing renovations, renovations are turning, and excited to be in Phoenix. We hadn’t done a lot of transactions in Phoenix, we couldn’t find the right transaction. But we found it in Costa Anita and we like Phoenix a lot. We think Phoenix will continue to be a growth market. I think Phoenix was one of the best-performing markets during COVID from a rent growth perspective.

Next one, Gravity [unintelligible [00:26:47].12] This is a deal a year ago that we wouldn’t have done and, this year, we’re excited about it. It’s a ground-up development transaction in Columbus, Ohio. It’s planned to be stabilized in 2024, so we expect the economy to be in a very different place in 2024. 382 units and mixed-use. We’re very excited about this, we’re excited about Columbus, which is another growth market, and a transaction, again, that we would not have done a year ago, that we are open to doing today, and that we’re excited about doing today.

The next one is another deal just outside of DFW in Plano, Texas, built in 2000, 73 units, stabilized asset, hold it for cash flow. The next one is very similar – Turtle Creek, Fenton, Missouri, 128 units, 2018 build, completely stabilized, 12-year fixed-rate debt at 3.10%. The business plan here is to set it and forget it, generate cash flow, hold the asset, do a little bit of renovation with tech packages, so putting in USB ports, but not a lot of work here. Really hold it, set it and forget it, and take advantage of that long-term fixed-rate debt that is incredibly cheap.

Next one, Toluca Lake Apartments, a ground-up development deal in Los Angeles, California; delivery in early 2023. This is also a deal that we would not have done last year or the year before. Had we done it last year or the year before, we probably would have delivered right in the heart of COVID. That was very concerning to us 12 to 18 months ago. Today, with the delivery of late 2020 to early 2023, we think that the economy will recover, and we think that there will be a good opportunity to get back into primary markets – LA, New York, Miami – for 2023.

That leads me to just reiterating lesson number seven, which is to take a position. I shared at Best Ever Conference last year that the first-ever deal that I did was a duplex in Compton in 2013. I started Realty Mogul eight years ago; had I never taken a position on a duplex in Compton and I had a crowbar in the backseat, I never would be where I am today. I wouldn’t have built the real estate portfolio that I have personally, and I wouldn’t have helped a lot of investors all over the country use the Realty Mogul platform to build their own real estate portfolios. It’s so incredibly important to take a position and overcome your fear.

One of the things that I learned in COVID was it was incredibly mental to say “We’re going to get back in the market, we’re going to take a position, we’re going to take risk. WEe’re going to find transactions that we think are the best risk-adjusted return transactions in the market today, but we’re not going to sit on the sidelines.” In any real estate cycle, including COVID, including the 2008-2009 recession, there’s always an opportunity. Whether it’s distressed debt, whether it’s buying apartments, whether it’s buying distressed hospitality if you have the stomach for that; there’s always an opportunity, but you have to take a position, you have to know that the proforma is going to be wrong, so you want to stress-test it, and you want to play defense before an economic crisis, not during it.

I’ll leave you with the lessons learned with $2.8 billion of real estate during COVID. I hope this was incredibly insightful and helpful as folks look to manage their own real estate portfolios or get into real estate deals today. There will be another economic cycle. I don’t have a crystal ball and I don’t know when it will be, but there’s an opportunity to prepare today, even for the next economic cycle. I’ll leave you with one disclaimer, because I should. Whether you invest directly or indirectly, there’s still a real risk to investing in commercial real estate. Things do not always go right; all proformas are wrong. Real estate companies can surprise you and disappoint you. The Realty Mogul platform gives investors the opportunity to discover investments that used to be out of reach for most, and you can use it to create your own diversified real estate portfolio.

I won’t always be right, we won’t always be right, but discerning investors deserve a discerning investment platform, so we built one at Realty Mogul. I’m so pleased to share some of our investment thesis with you and share some of the transactions that we did in the heart of COVID, that I think are representative of the types of transactions that we’re going to continue to look to do as COVID continues and as the economy starts to recover.

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

Website disclaimer

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

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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JF2710: 4 Strategies to Scale as a Multifamily Syndicator ft. Mike Deaton

Mike Deaton and his wife, Ligia Deaton, began their real estate career by flipping land and soon expanded their portfolio to include multifamily. In this episode, Mike shares how he chose his commercial real estate markets, successfully pitched to investors, and the success-mindset that kept him going.

Mike Deaton | Real Estate Background

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

Mike Deaton: I’m great, man. Thanks for having me on.

Slocomb Reed: Absolutely. Mike is a co-founder of Deaton Equity Partners. They acquire and operate multifamily properties that complements their land business. They combine real estate professional status with passive income and tax benefits. The current portfolio is 800 units as GP, they’re in 31 units as LPs, and 168 units as KP. They’re based in Woodland Park, Colorado. Mike, my first question I have to ask is what is a KP?

Mike Deaton: A key partner. We’re lead syndicators on our latest deal.

Slocomb Reed: Leads syndicators. Okay, how is that different from a GP?

Mike Deaton: Well, on this one – so we actually signed on the loan, and we’re responsible for running, operating, and doing everything from end to end, versus… A GP can have more of a, let’s call it role-specific. Maybe most of our GPs, they’re helping raise capital, they do a little bit of investor communications, they’re participating a bit in asset management, but our partners are responsible for the whole enchilada.

Slocomb Reed: Nice. Well, hopefully it’s a tasty enchilada. That’s 168 units – and where are you with that deal?

Mike Deaton: We closed in November and it’s a value-add deal. As of this month, we have contractors on-site and we’re renovating about 30 of the 168 units to get started. Then we’ll be doing five to 10 each month after that. So it’s kind of hitting its stride right now.

Slocomb Reed: Nice. Where is it?

Mike Deaton: It’s in Waco, Texas. If you’re familiar with that, it’s just a little bit south of Dallas.

Slocomb Reed: In Waco – I have family there actually.

Mike Deaton: Oh, nice.

Slocomb Reed: 168 units and 30 of them were vacant when you purchased?

Mike Deaton: Yeah. About 25 were vacant. We’ve had a little bit more turnover since we’ve taken over, so we’ve got a batch of rooms that we’re just going to renovate. We’ll be able to make those up to more of a non-classic style and command a little bit of rent, which is our business model.

Slocomb Reed: Got you. Do you self-manage or do you hire third-party management?

Mike Deaton: For asset management, we’re doing this one ourselves, so we’re in there. We have a property management company that’s doing the actual property management, so lease-ups, maintenance, and things like that. But I’m making sure the renovations are on track, getting general contractors in there, and overseeing the business plan itself.

Slocomb Reed: Nice. I’m sure your property manager is happy with you. We’re recording this in late January 2022. I’m sure they’re happy they get to do all the renovating in the winter and do the leasing in the spring and the summer.

Mike Deaton: That’s our aim. Yeah.

Slocomb Reed: Operationally, that’s beautiful timing. My experience is much fewer units than yours, Mike, but I know that that’s the way I like to do things, too. I’m coming out of a lot of renovation and coming into a lot of leasing here very soon myself.

Mike Deaton: Surprisingly, there is a waiting list for rooms of the property. This is not an unfamiliar story around the nation, but occupancy is just maxed out at most properties. I think you have to really be doing something wrong to have a low occupancy in your properties in this day and age it seems like.

Slocomb Reed: Tell me a little more about this property then, Mike. How much did you buy it for? Where would you put its class, A, B, C? What rents is it getting and where are you projecting the market rents to be?

Mike Deaton: This property came on market in the summer and we put an offer in for 14.7, so just a little bit below 15 million on this one, which is what we landed it at. It’s 168 units, it’s an older property, it was built in the early ’70s, it’s a working-class property, so we see it as a C class. There have been no real renovations on site, so all of the units are very dated, kind of in more of a classic, what you would call a classic style. Our plan was to come in and renovate somewhere between 75 to 80% of the units and bring them up. Average rents in the area are a little bit below $1,000 a month, depending on the unit size. This one has a good mix of ones, twos, threes, it even has some four-room unit rooms there. We’ll go in and rents are just going crazy right now, so it seems like every month that we don’t have the units up to a renovated status, the rents are ticking up.

We’ll be able to take these up a good $125 to $150 on average. We’ll get them up just a little bit over $1,000; that’s at least our target. Our property management company is pretty confident that we can get those, and so we’ll test the waters and keep pushing them at that level. Yeah, I mean, it’s a great property. It’s well positioned, it’s not far from Baylor University, it’s surrounded by some employers… Waco is undergoing really a great growth period right now. You’ve got Amazon, Elon Musk is coming into town, there’s a lot of entertainment, they’re developing — the Brazos River comes right along the edge of downtown, there’s a big development going in there… So I think this is a five-year hold for us; at least that’s our business plan.

I think within this next two, three, four years, you’ll see kind of a renaissance in Waco, and just great signs, so we’re pleased to get a property here. It’s more of a tertiary market and it’s a little easier to land a deal there. There are a lot of people shopping in Austin, Dallas, Houston, and San Antonio, and more of the primary tech markets, so we love these little out-of-the-way properties. It’s on I35, right in between Austin and Dallas Fort Worth, so it’s poised for great growth, great logistics; it’s really nice little gem, so we’re hoping to overachieve our business plan and make a nice return for our investors.

Slocomb Reed: The times of COVID have been great for overachieving business plans, for sure.

Mike Deaton: I’ll tell you what, I have someone I know who’s also an investor in syndications… And yeah, there are some properties that are flipping in less than a year. They’re achieving their growth targets and they’re just going ahead and capitalizing on the market appreciation, without having to do too much in the way of forced appreciation. But I’m with you, I like a little more buy and hold, although the syndication model is a bit more five and six-year term, so it’s a good balance.

Slocomb Reed: Talking about preferring the buy and hold, do you have a long-term hold portfolio, or just the syndicated deals that I referenced earlier?

Mike Deaton: Yeah, that’s an interesting question. My wife and I got into real estate, I would say five years ago with our land business, which is really just a flipping model. We buy cheap and we sell more at the market rates, and probably for 90% of our properties, we’ll owner-finance which makes it a lot more attractive for people to get into.

Slocomb Reed: You’re talking about raw land.

Mike Deaton: It’s just vacant land; no improvements, nothing like that. There are people that want to build a cabin, or they just want some land or something. But about two years ago, we expanded into multifamily to diversify, but also to get passive losses, so we could offset our income. And we came into multifamily with a mindset that it would be more of a buy-and-hold business model. And as we got into it, we found our way into the syndication space. And really, in syndications it’s all about investor returns, so it’s five to six year holds, getting good returns for investors. Right now we’re kind of getting our feet wet, growing into the space, learning the ins and outs. It’s all about these indications and shorter hold periods. But I foresee — 5 to 10 years down the road, I would definitely like to get more into a buy and hold situation to where we have just cash-flowing properties and it’s more of a retirement plan. Whether it’s multifamily, storage units, or a business that cash flows. But that’s the longer-term vision, is just to have some things where we can scale back our active level of participation and enjoy the cash flow.

Break: [00:09:21][00:11:00]

Slocomb Reed: Nice. Are you guys still buying land then?

Mike Deaton: We are, yeah. That’s bread and butter for us. I mean, it’s a great business, it brings a lot of revenue in; it’s active in the front end, you definitely have to be out there shopping, checking properties, and buying… But once you lock in — we try to price our properties in terms of owner financing around what you would pay for a car, somewhere between $250 and $500 a month, over five to six years. If you stack some of those up, it’s a really great passive income stream. As I said, it comes with a nice tax bill, so multifamily is a perfect complement for that.

Slocomb Reed: I’m going to take a minute for a personal anecdote here, Mike. I hope the Best Ever listeners enjoy this. My grandfather, Fred, and my grandmother, Evelyn, in the late ’50s, in a small town in Northwest Arkansas, when they were getting ready to have a family, they decided to buy a large plot of land… The thought was they could build their family house on it. But then when it came time for their kids, who eventually were my father and his brother, to go off to college, they could sub-parcel the lot and sell individual lots to homebuilders or people who wanted to buy a land to have a builder put a house on it for them. They did that like a college fund for their kids, buying the raw land outside of Siloam Springs, Arkansas. And what you were saying about buying vacant land so that it can be resold at market, that’s what that reminds me of. That’s a cool connection.

Mike Deaton: That is. That’s great.

Slocomb Reed: It’s a fun investing strategy, that I wish I could get into myself. It’s a far stretch from what I’m doing right now. There’s a lot of learning and studying I’d have to do.

Mike Deaton: Yeah, there’s a little bit to it. But from a business model, it’s not too dissimilar. But yeah, there’s definitely some technicalities that get into the buying, selling, carrying your own notes, and things like that.

Slocomb Reed: There may be an interesting opportunity to do that where I am here in Ohio too, Mike. The Cincinnati, Dayton, and Columbus metro areas, especially between Cincinnati and Dayton right now, kind of seem to be merging. I75 from Cincinnati to Dayton, and then I70 from Dayton to Columbus… Anywhere you saw a farm 10 years ago is now a subdivision or some sort of major retail. All that stuff along there is getting bought up.

Mike Deaton: Yeah. That’s a similar story across the nation. We just moved to the mountains here a couple of months ago. It has kind of been a dream of ours. But before that, we were living close to Boulder, Colorado. Boulder itself, the city, as with a lot of cities, has become geographically restricted for a couple of different reasons. One, you have mountains on one side of it, but the other is the city itself is just not really developing. They’re limiting any type of building permit, so it’s just ringing out. And that’s what’s getting bought up as farmland. The same thing with Dallas Fort Worth, that’s where I’m from. I go back there and it’s just farmland converted into these massive neighborhoods. Yeah, it’s I guess the price of growth.

Slocomb Reed: Yeah. For someone who’s flipping land, if you can call it that, that’s a pretty exciting prospect. Let’s get back to the key partner deal. You said you guys bought it back in November. It sounds like a fairly classic value-add opportunity, underwriting to a five-year hold. When you were sharing this as an investment opportunity for LPs, what were you projecting? What were you offering?

Mike Deaton: So this deal is a little bit better than a 10% annual cash on cash. We put 100% in and get [unintelligible [00:14:35].09] on average.

Slocomb Reed: Is that a 10 pref or is that structured some other way?

Mike Deaton: No, it’s an eight pref.

Slocomb Reed: Okay. Got you.

Mike Deaton: But we’re projecting 10 average over the five years. Also, it’s a double after five years, so it’s about a 20% average annual return. You put your money in and at the end of five years, it should just tick over 100%. That’s the investor ROI pitch anyway; it was almost an 18% IRR on this one, so… Really nice returns.

Slocomb Reed: Now the 800 units where you’re GP is the 168 [unintelligible [00:15:11].01] included in that?

Mike Deaton: No. these are separate units. A good chunk is up in Northwest Arkansas.

Slocomb Reed: Okay. That’s the question here, Mike – you are an active partner on almost 1,000 doors. Where are they?

Mike Deaton: They’re spread out a little bit. We have about 250 units in Des Moines, Iowa, that my partners and I closed on early in 2021, and then there’s a good chunk in Fort Smith, Arkansas; in Northwest Arkansas, we have — I think it’s close to 175 units there. And then we’re partners in some multifamily units in Lubbock, Texas, and then there’s this one here in Waco, Texas.

Slocomb Reed: Gotcha. Now, there are several MSA is within Texas, and then within the states surrounding Texas. Did you pick these deals because of the market, or was it the deal that took you to the market with these?

Mike Deaton: With some of our earlier deals, it was really the deal itself that brought us into the market. We have a broad group of partners, we’re part of a syndication group, so we network widely within that. As partners come up with deals, we all look for partners to help plan to deal. With some of the later ones though, our primary focus is really in the Texas market. I’m from Texas, I’ve lived there pretty much my whole life. I’m from the Dallas Fort Worth area, I love Dallas Fort Worth. It’s just a super competitive market. I really love, like I said, some of these secondary and tertiary markets, where you can get a little bit out of the metro area, but find a great path of growth. I love Austin, but Austin is just scalding hot right now, it’s nuts. We kind of work the I35 corridor within Texas, all the way down to San Antonio.

There are some good little gyms. New Braunfels – I lived in New Braunfels for a few years. I just saw an article recently that it was named one of the top 10 growing cities in the nation or something, which is crazy; it’s like a tiny little town. Yeah, I think in this market, you can really get a competitive advantage if you are deeply focused within a market. So you can really dial in, what are the actual cap rates trending at the moment, you can look at rents, where are they, and understand where you can take a business case. I know a lot of people who are very diverse and broad, and it’s hard to stand out with other people that are underwriting deals, because they’re all underwriting to some — I’ll say vague; they’re not necessarily vague, but to some more standard type variables… When you’re looking at how much is it going to take to renovate a unit – well, it’s approximately 3,500 bucks, or those kinds of things. I think by really getting deep in the market, you can gain that advantage, get to know the brokers better, and really stand out to land a deal.

Break: [00:17:49][00:20:46]

Slocomb Reed: We’re talking about Austin being a scalding hot market. Austin, Texas, that’s a name that everyone who listens to real estate podcasts hears at least on a weekly basis.

Mike Deaton: Yeah. Probably.

Slocomb Reed: I have a thought about scalding hot markets, Mike, and why it’s difficult to syndicate there. I’m not necessarily saying I’m right, but I’d love to get your reaction to this thought for our Best Ever listeners.

Mike Deaton: Sure.

Slocomb Reed: Scalding hot markets are scalding hot because of how much growth they’re experiencing. Not just from what we’re doing in the real estate industry, but because of economic growth, job growth, they’re poised up for a lot of growth and a lot of appreciation. Places like Austin and Columbus, Ohio, to some degree. Here’s the thought I want your answer on, Mike. It is very difficult for syndicators to get into markets like Austin, Texas, and Columbus, Ohio, because they’re investing with other people’s money. They’re bringing in limited partners, and limited partners at least want to see conservative underwriting. Conservative underwriting is often a very responsible way, and often the only responsible way to analyze a deal as a general partner when you’re considering that you’ll be investing other people’s money.

Places like Austin and Columbus are outpacing conservative underwriting, because the people who are buying there are buying either with their own money, or they’re buying needing less of a return than syndicators need in order to provide returns for their LPs. So it’s because of the way that syndicators underwrite and because of the way that they try to provide a return for limited partners that they feel closed out of places where the most appreciation is happening. Because the people who are capable of buying there don’t need the same underwriting standards. I was a little bit circular there. This isn’t something I had written down or prepared, Mike, but what’s your gut reaction to what I just said?

Mike Deaton: I fully agree with you. It’s a little bit of what I was speaking to earlier, where being deeper and more intimate with a market, you can understand what’s happening at this moment in terms of rent growth, who’s coming in… Like in Austin, for instance – Apple just bought an office tower. Facebook also. There’s a lot of growth. I have been to Austin, I have a lot of family there. It’s busting at the seams; like, you can’t drive through Austin without taking an hour or hours. So there is that aspect, but exactly what you referenced as well. The deals get larger and larger; when you’re playing with institutional money that is willing to take 6% to 7% growth, very solid, very lower risk, you could say, at least in multifamily. Commercial real estate might be a little different animal there in terms of risk, but… I do agree that me, as a syndicator, when I have 25 or 50 individual investors that are coming in and putting their own money, they are conditioned to see a certain return. There are certain groups out there I know of that will take an 8% cash on cash, a seven pref, eight pref, a little less than a double. We typically underwrite even more conservatively. It’s harder to find good deals that fit that model. But in general – yes, the individual investor, they may be even less sophisticated than an institutional player, or a private equity firm, or somebody that’s coming in and buying up these deals. So it is really hard from all of those perspectives; the size of the deals gets huge… We live in Woodland Park, but it’s just 20 minutes outside of Colorado Springs.

Colorado Springs is also a super-hot market. I just toured properties there last week, and there’s a property that is beautiful. It’s a 105-unit property, it’s kind of tucked up in the mountains, it’s going to go for $425,000 a unit; it’s almost $50 million that it’s going to go for. As a syndicator, unless I have private equity coming in and really taking a chunk of what we’re going to need to bring that in, it’s just very unrealistic that I’m going to get hundreds of individual investors and bring them into a syndication deal and compete against other players like that. So yeah, I fully agree with you. It’s really hard in some of those primary markets that are taking off like that. But that’s what the market bears.

Slocomb Reed: Are you ready for our Best Ever lightning round?

Mike Deaton: Yeah, let’s do it.

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

Mike Deaton: Generally, I love giving back to my time. I came from the corporate world, in 2016 I left, and we went into the world of entrepreneurship. I struggled actually too, between should I go back into corporate America or go out on our own and start our own business. One of the things that I really missed was coaching and mentoring other people that were on my team; that was a huge plus in a managerial-type role. I still do a little bit of that. I actually got certified as a professional coach right after I left corporate world. I still try to keep one or two clients, more of a boutique-type style, just so I can focus on business, but also give enough time. Whether it’s in a group or interview like this, I think the power of your time and presence is really our most valuable commodity, so that’s one of the best ways I like to give back.

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

Mike Deaton: Nonfiction, I would say there’s a book called Mindset by Carol Dweck. It’s all about growth versus fixed mindsets. It was eye-opening, not necessarily the concept, although the concept is opening to some people… But just the number of areas in your life where fixed and growth mindset come into play, beyond just business. A fantastic book.

Slocomb Reed: Mike, what is your Best Ever advice?

Mike Deaton: Oh, wow, that’s a huge topic. My biggest advice is really work on your mindset, take the time to reflect on what it is you want personally out of life. A lot of the people I coach, we get right into the… I coach a values-based process, where we really get in and look at the values… And I can tell you without fail, we all have values that are really non materialistic when it comes down to it. So if you’ll step back and look at what you want out of life and then reroute your life such that it delivers more of what you’re looking for and less of what you don’t, then you’ll find a lot more happiness.

Slocomb Reed: The last question, Mike – how can our Best Ever listeners get in touch with you?

Mike Deaton: The best way, I would say – two ways. LinkedIn is a good way, I’m pretty active in there. But on our website at deatonequitypartners.com, I’ve put a special page, it’s deatonequitypartners.com/freedom. I’ve tried to bundle a lot of the things that I talk about. So if you’re interested in land investing, I have a little bit of information that could get you started in land investing. If you’re interested in multifamily, there’s a bit about that. I have contact information, phone numbers, social handles, things like that. That’s kind of a one stop shop for people. So I would say just go to deatonequitypartners.com/freedom and you’ll find a way to get in touch with me.

Slocomb Reed: Great. Well, Best Ever listeners, thank you for tuning in. If you enjoyed this interview with Mike Deaton, please follow and subscribe to our show. Leave us a five-star review and share this with someone who you think could benefit from what Mike has shared with us about land investing and about apartment syndication. Thank you and have a Best Ever day.

Mike Deaton: Thanks, Slocomb.

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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JF2708: How Teens Can Work Toward Financial Freedom Through CREI ft. Dan Sheeks

How much closer would you be to hitting your goal of early retirement if you had started when you were just a teenager? Author Dan Sheeks believes teenagers should have the opportunity to learn about financial freedom and the way real estate investing can help them achieve their financial goals. In this episode, Dan shares how to get teenagers involved in learning about and achieving early financial independence.

Dan Sheeks | Real Estate Background

  • Founder of Sheeks Freaks, a community in which young people can learn finance skills to help them reach early financial independence.
  • Portfolio: Own 17 units of residential. Their portfolio includes STRs, long-term, single family, small multi-family, out-of-state properties, and BRRRRs. They also rent out their basement in their primary residence.
  • Full-time job: Public high school business/marketing teacher.
  • Published a book with Bigger Pockets Publishing, First to a Million, which is a teenager’s guide to achieving early financial independence.
  • Based in: Denver, CO
  • Say hi to him at: www.sheeksfreaks.com

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Joe Fairless: Best Ever listeners how are you doing? Welcome to The Best Real Estate Investing Advice Ever Show. I’m Joe Fairless. This is the world’s longest-running daily real estate investing podcast, where we only talk about the best advice ever, we don’t get into any fluffy stuff. With us today, Dan Sheeks. How are you doing, Dan?

Dan Sheeks: I’m doing great, Joe. Thanks for having me.

Joe Fairless: Well, I’m glad to hear that and it’s my pleasure. A little bit about Dan. He’s the founder of SheeksFreaks, which is a community in which young people can learn finance skills to help them reach early financial independence. He has a portfolio of 17 units, and he just published a book, congrats on that. It’s called First to a Million, A Teenager’s Guide to Achieving Early Financial Independence. It was released through Bigger Pockets publishing. It’s a book specifically for teenagers, and talks about real estate and how they can get involved. Based in Denver, Colorado. With that being said, Dan, do you want to give the Best Ever listeners a little bit more about your background and your current focus?

Dan Sheeks: Sure, yeah. As you said, I’m based here in Denver, Colorado. My wife and I have a portfolio of 17 units, all residential. My main gig, however, is I am a high school business teacher, been doing that for 19 years. I absolutely love my job, I love working with young people every day; they energize me, and they kind of get me out of bed in the morning. I teach business classes like entrepreneurship, personal finance, marketing. My wife was a teacher as well and she retired a couple of years ago. She manages our real estate for us and we’re just living the dream here in Denver.

Joe Fairless: I was not offered those classes in high school. Are you employed by a private school?

Dan Sheeks: I’m at a public high school, it’s a large public high school. When I was in high school, they didn’t have these classes either. But most large high schools nowadays offer a variety of business classes, but they usually are always electives. Not every kid’s taking them but they are available.

Joe Fairless: That’s awesome. I’m glad that that is the case and I’m glad there are teachers like you who are teaching these subjects to teenagers, also, ideally to adults, and everyone, honestly… Because a lot of us didn’t get this education that early on and some of us still don’t have that education. I’m glad that you’re getting the word out.

So I’d like to focus our conversation on your area of expertise, which is teaching teenagers these financial topics. I’d like to hear what you have to say about how to share a message with teenagers about financial independence, about real estate investing, and sharing it in a way that resonates with them. Let’s start with that. How do you communicate with them about this topic in a way that resonates?

Dan Sheeks: It’s a little tricky. Not every teenager is in a place where they’re ready to, not just learn about personal finance and financial independence, but actually, be motivated enough to put what they learn into action. That’s okay. But I do believe that every teenager should be exposed to, absolutely without a doubt, just basic personal finance education, so they are financially literate. Unfortunately, in our country, that’s never been the case. Most high school graduates graduate high school without any personal finance education. That’s slowly changing, but it’s a long road there.

To get young people interested in these topics, I do what I can. First of all, with technology, social media, the internet, and stuff today, many, many young people, as well as adults, are finding these topics, these concepts, these strategies on their own, through Tik Tok, through Instagram, through YouTube, through blogs, through podcasts like this one. So a lot of young people I meet are already somewhat self-educated on these topics, and they’re just burning to learn more about how they can create a financial future that looks very different from the average person. But in my classroom, it’s a little bit different. Most of those students are probably in the class because they want to learn a little bit about personal finance, but the idea of early financial independence, which is what my book is about – that’s a very foreign concept to them, and honestly, to most adults in the US. The idea that you can stop working and be financially free before age 65 is not something that’s commonly known.

I’ll do things like I’ll throw out there “Hey, what do you think about retiring before your parents? Wouldn’t that’d be kind of cool?” That’ll get a lot of ears to perk up. Or I’ll say something like, “Would you like to be a millionaire before you turn 30?” This is absolutely doable if you make some right decisions around your personal finance. Or I’ll all talk about the idea of financial freedom. The term financial freedom is much more attractive and interesting to teenagers than the term retirement. I stay away from that word. To them, that is so far in the future and such an abstract concept because they are teenagers. But financial freedom, many times will get them interested enough to learn some stuff.

Joe Fairless: Let’s talk about, you wrote a book, First to a Million, A Teenager’s Guide to Achieving Early Financial Independence or financial freedom. What is the guide? How do teenagers achieve that?

Dan Sheeks: Well, as a teenager, I don’t think they can. It’s going to take five or 10 years at a minimum to reach financial independence. But the teenager can start and should start learning about personal finance, learning about early financial independence topics. The book covers many different areas, everything from the mindset in entrepreneurial topics to things like frugality, earning extra income, side hustles, investing in real estate, index funds, and all the different things that most of us and your listeners know that if we could turn back the clock and go back to when we were teenagers, we wish we would have known all of this stuff. It’s really not that difficult to set yourself on a path to early financial independence and get there in a few years. It’s not a pathway for everyone, I tell all my kids that. This information you should know but it may not be the right path for you. You and only you can decide if early financial independence is something that you want to strive for. If it’s not, that’s totally fine. There’s nothing wrong with working until you’re 65. What I do think is wrong is if you think that’s the only option and no one tells you that there are other options out there.

Break: [00:06:48][00:08:26]

Joe Fairless: What are some tactical tips that you provide regarding any of those items, mindset, entrepreneurialism, frugality, extra income, or side hustles index funds?

Dan Sheeks: There’s a lot. I’ll go over things as basic as building a credit score as a teenager, if you’re 18, you can get your own credit card and you should. You should also use it responsibly, which I talked about, but you should start building that credit score’s early as you can. If you’re under 18, then the best choice is to get added to your parent’s credit card as an authorized user and that will build your credit score even before you’re 18. Then going into things like earning income as a teenager. That could be as simple as a part-time job, it could be a job that what I call a higher-level job where you’re working in an industry or in an office that has to do with something that you’re interested in. Many of the readers of my book are interested in real estate investing so I talk about maybe getting a job at a property management company, or a real estate brokerage firm, or with a contractor so that you’re in the real estate space and you’re learning and connecting with others who have that like interest.

Frugality, I talk about paying yourself first, which I think is maybe the most important topic in the book, that concept of paying yourself first. Even as a teenager, your income isn’t probably very high but you probably have some income even if it’s just an allowance, mowing your neighbor’s lawn, or a part-time job. The idea of saving a certain percentage off the top every time you have money come into your life, setting yourself up for a high savings rates and then investing that money is something we talk about a lot in the book as well. There are many other tactics even teenagers can employ, just learning, just self-educating, and continuing to read books, listen to podcasts, or watch YouTube videos. There’s so much free information out there nowadays that it’s easy… I should say it’s simple, but maybe it’s not easy. Because teenagers want to spend time doing other things like video games and Netflix. But many of them are willing to spend some time learning as well.

Joe Fairless: What are some of the topics that you find really resonate as it relates to the subject with teenagers? And what are some topics that ideally would resonate but don’t really land as well as the other ones?

Dan Sheeks: I talk a lot about being trapped in a job, living paycheck to paycheck, that lifestyle. When I do that, I know a lot of the students, they think immediately other parents. They see their parents go to work every day, sometimes really stressed-out checking emails at night, maybe working on the weekends, talking about their job negatively. Maybe it’s just that they don’t like their job or maybe it’s that they hate their job. What really resonates with students I think, is saying that the life of being trapped in a job isn’t one that you have to lead. You can make certain decisions now and over the next few years, to allow yourself to have the option to work.

You can still work if you have a job you love as I do, then continue to do it by all means. But the freedom of knowing you don’t have to work and you’re doing it because you want to, or you change your career, or to start a small business that you’ve always wanted to, to follow a passion, to give back more, to volunteer to be of service. The freedom of having those choices is so empowering that teenagers, I think even get that at a young age, especially when they have parents who are trapped and they see the stress in their family around money.

Joe Fairless: On the flip side, what’s part of a guide that will help them achieve early financial independence that you wish would resonate a little more but just isn’t quite doing it?

Dan Sheeks: I would say it probably is that self-education piece. When students are in my classroom, they really don’t have any other choice but to listen to me. I mean, they could tune out in they sometimes do, we all have those moments. But without a doubt, I think, Joe, you would agree that making smart financial decisions, especially when you’re an adult and you’re out there in the real world, so much depends on your own knowledge, your own confidence in making the right choices. Teenagers just don’t have that yet, they haven’t been exposed to enough information. To get them to do those things I was saying, like listening to one or two YouTube videos a week, or a podcast a week, or read some blog articles, or read a book, some of them are motivated enough to do that but it’s a tough battle. Teens have such short attention spans and they’re still in that amazing life, which I miss. High school and college where you’re around dozens and dozens of friends every single day so there’s so much trying to pull your attention away from self-education. It’s only the most motivated students who are really going to go all-in on that route.

Joe Fairless: Which makes sense that you created SheeksFreaks. I haven’t been to your website yet but I’m reading in the bio that it’s a community of young people that can learn finance skills and help them reach early success. I read the word community, so is there a forum component to that?

Dan Sheeks: Yeah. The SheeksFreaks community has been around for a couple of years now. It’s a place for young people 15 to 25 years old, young people, who are actually those motivated individuals to just go out there and crush their financial future. It’s a small percentage of teens and young people that would actually take action and join a community to be around like-minded people. But there’s enough out there that the community is thriving. We have our own platform now and soon we’ll have our own app. Once they’re in the community, they have to join, there’s a free membership, there’s a paid membership, both have a ton of value. But once they’re in, the biggest feature, the most important feature is that they can connect with like-minded individuals. As we know, you are the five people you surround yourself with, the five people you spend the most time with, that’s what your future looks like, that old Jim Rohn quote.

That’s the biggest feature or benefit of the community is being around other people, they can connect with them, message them, share resources. We have about 45 different groups in the community that are more niche, real estate investing, house hacking, index fund investing, cryptocurrency, entrepreneurship, mindset. They can join the groups that they want, that they’re most interested in, connect with others even on a more niche and more specific level. We have a weekly zoom call every Sunday night where we have different guests, we have different topics, we have check-ins, accountability, all that stuff. It’s really fun for me as a facilitator of that group to watch these young people just crush it and they are doing exactly that.

Break: [00:14:49][00:17:46]

Joe Fairless: It makes a lot of sense because when you were saying, and rightfully so, there’s a lot of competition for their attention as there is with everyone’s attention. But when they’re in high school, or maybe just graduated, there’s a lot going on there in that stage of life. So having these peer groups to be able to connect with on self-education content is necessary in order to continue that path. You mentioned the Jim Rohn quote, the one that comes to mind for me is Tony Robbin’s learned from Jim so I’m sure that he just modified that. Tony talks about how people’s lives are a direct reflection of the expectations of their peer group. It’s great…

Dan Sheeks: I love that.

Joe Fairless: …that you’ve cultivated that type of community. Anything else that we haven’t talked about as it relates to messaging to teenagers to help them achieve early financial independence that you think we should before we wrap up?

Dan Sheeks: I would just say that I think, Joe, your listeners likely have teenagers in their lives. It could be their own kids, nieces, nephews, neighbors, their friend’s kids. I think probably most of your listeners, we would all consider ourselves pretty lucky and pretty blessed to be in the arena of real estate investing and all the benefits that come from that. If your listeners are interested in sharing that wealth-building knowledge with young people, which I hope they are, I’m sending them to the book biggerpockets.com, I’m sending them to the SheeksFreaks community, sheeksfreaks.com, mentoring them, helping them, guiding them, and maybe even holding them accountable. If you buy the book for them, tell them you’ll pay them 100 bucks if they read the book. Because it can actually really change their lives drastically, at least their financial future drastically.

You’ll maybe read the book with them. There’s a workbook as well. The book kind of lays the foundation and there’s a First to a Million Workbook that I actually think is more valuable and more meaningful because it tells the teen what to do, when to do it, how to do it, and it lays everything out in four month increments of time, we call them freak phases. Every four months, they have a checklist of 10 things that they need to get done, but the workbook tells them exactly how to do it every step of the way. That workbook covers like a five-year period, it’s very flexible as far as how old they are when they start. Get them that workbook too, work through the workbook with them and just watch them take off. Pretty fun.

Joe Fairless: Dan, thank you for being on the show. How can the Best Ever listeners learn more about what you’re doing? I know you just mentioned ways to get access to the book, is that the best way?

Dan Sheeks:  Getting a copy of the book is definitely one way, but in sheeksfreaks.com, there’s a ton information on the website. There’s also information about the community that they can join on the SheeksFreaks community, on our website. Or anyone who wants to connect or talk more about any of this stuff, I’m always willing to do that. You can just shoot me an email at dan@sheeksfreaks.com or find me on LinkedIn, Instagram, Bigger Pockets, any of those will work.

Joe Fairless: Dan, thanks again for being on show. I hope you have a Best Ever day and talk to you again soon.

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JF2705: Beyond the Pandemic: Adapting Investment Strategies to the New Normal ft. John Chang

We’re sharing the top ten sessions from the Best Ever Conference 2021 as we gear up for the Best Ever Conference 2022 at the Gaylord Rockies Convention Center in Colorado this February 24-26th.

In this episode, John Chang shares his top strategies for managing your investments during the pandemic, including how to navigate the economy, understanding the market changes, and what you should be aware of moving forward.

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

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TRANSCRIPTION

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

John Chang: I’m going to cover four things in my presentation today. I’m going to cover some information about the economy, some of the economic factors affecting our business, some of the top headlines we’re all seeing today, and give you an understanding what’s really going on behind those numbers, some of the leading real estate trends that investors are looking at, and some of the outlook performance there, as well as top strategies for the current climate.

I’m going to start in with kind of the key ingredient here, which is that the pandemic is the one big thing. It is causing a great deal of the issues that we’re facing as a business. Until we get the pandemic under control, the economy cannot heal. We’re already making significant headway into what’s happening with the vaccines; that, of course, is the key ingredient to driving forward economic recovery. But there’s still a lot of headwinds; we still are facing some challenges over the next six to nine months as we grapple with this global health crisis. We can see the light at the end of the tunnel, but it’s not there yet, we still have a ways to go, and that’s going to be something we’re battling with.

One other thing that we’re seeing as a major challenge has been jobs. We lost a record number of jobs, right as we came into the pandemic. We basically gave up 10 years of growth giving back 22 million jobs. As we came out of our lockdown, we got half of those jobs back, we got 12 million jobs back but it was really just not enough. We hit a point where it flattened out and we started losing momentum. That really weighed on the economy and our ability to move things forward. There are specific sectors that captured the worst of this. There is the restaurant industry, the hotel industry, and those areas are still in the process of recovering.

When we look at what happened with retail sales, they’ve been fragmented. Again, we went into this downturn, we got to bounce back as we got that stimulus, and we got those stimulus checks, and it helps support our economic growth. We actually grew, we hit a new high point last fall as people spend all that stimulus money and unemployment benefits. But as the Cares Act burned off, we can see that we started giving that back and that happened with the jobs. We got that bounce, then it started slowing down, and then we started losing jobs again. Again, there are specific sectors that are being impacted far worse than anything else. That’s again, restaurants and bars, apparel industry, electronic sales, all being hit very hard. Whereas there’s other parts of the sector of the economy like home repairs and internet sales that have hit an all-time high. We’re seeing different parts of the economy perform differently. Depending on what happens with the vaccine, the timeline to recovery could vary. But I do need to point out that once we get through this, once we get to the back side of distributing the vaccines, once we hit that herd immunity or that critical mass, we start to see a couple of new things come into play.

First of all, the amount of money in money market mutual funds hit a new peak over the last few months. It’s come down a little bit since then and the amount of money that people have put into savings over this cycle is 2.8 trillion greater than normal, what I would call normal. Because if you look back historically, basically this number doesn’t change a whole lot until the pandemic. We have all of this money sitting on the sidelines and it has the potential to come back into the economy very, very quickly after we get to a vaccination. Sometime in the second half, we could see this wave of money, four and a half trillion dollars start to come back into the economy. We’ve already had $2.2 trillion put in with the Cares Act, we had another 900 billion added to the economy through the second round of stimulus. Well, this is what could be the fourth round… We may have a third round of stimulus coming out shortly. This could be a fourth round, four and a half trillion dollars in cash flowing back into the economy. That’s why many economists have raised their forecasts for 2021. Right now, the baseline is right around 5% expectation of growth, which is fantastic. We haven’t hit that number in 30 something years for an annual rate of growth.

Break: [00:05:49][00:07:28]

John Chang: On top of that you could see some huge gains. Morgan Stanley is at the top of the pack. They’re saying, “Hey, we’re expecting 2021 to have 7.6% growth.” A lot of other economists are saying 6.5 or 6% growth and everything in between, it really doesn’t matter. If we break 5%, we haven’t done that in forever, that’s going to be huge, that’s going to drive our economy forward, that’s going to be a key ingredient to our success. Now one of the other things that, as I was preparing this, I saw so many baits happening online, in the news, and arguments. I look at so many of these things and I just shake my head because I don’t know where people get this information. It doesn’t make any sense to me. I want to dispel some of these top myths that I see all the time.

The first one is that there is this huge wave of evictions coming, that as soon as these restrictions on evictions burn off, as soon as we get to the other side of this, and all these, evil landlords are getting ready to kick all of their tenants out because they have been paid. But the reality is far different from that. What we’re seeing across the media is that rent collections are actually far better than people expected. Things are actually going relatively well. Yes, they’re down. If you look at the graphic there in the bottom left, you can see that the spread between those two lines has widened up. That’s because the first package of stimulus was burning off and the second round hadn’t started in yet. People’s unemployment benefits were burning off, people didn’t have cash anymore, they burned through their savings, and their ability to cover their payments was becoming a challenge. So yes, rent collections have tapered a little bit, the spread. I compare it between 2019 versus 2020. The news always talks about “Oh, rent collections are only 90% or 85%, or whatever it is.”

But you have to compare it to 2019, what’s our normal behavior, and that’s where I’m drying up that spread. It varies by class, it’s those bars in the top left hand corner of the slide. If you look at the map, you can also see it varies dramatically by metro. It’s hard to remember this. We’re all living within the context of our own little world. If you live in the Northeast right now, you’re thinking about snow. I’m in Phoenix right now and I’m looking out and it’s sunny and 80. There’s your own reality within this and that’s true with the pandemic, when you look if the experience of somebody in San Francisco is entirely different from the experience of somebody in Dallas. You have to look at what are the rent collections doing in different cities across the country? How are they performing? What about my asset class? What are the experiences there? But I can say that the numbers tossed around in the headlines are not going to materialize. They’re exaggerating this to capture the headlines.

The next big topic I see all the time is this wave of distress, that there’s this huge, huge issue with investors ability to pay for their properties, and you see these distressed numbers, and that there’s going to be foreclosures, and there’s literally hundreds and hundreds of billions of dollars in distressed funds, targeting assets that are going to come to market when the owners can’t pay. Now, this has been a very severe recession, we fell into a very, very, very big hole economically, and we’ve had those challenges. But we are definitely not seeing a massive wave of distressed sales. In fact, distressed sales are only about 1% of the total right now, and I don’t expect a huge wave to come afterwards. When you look at the CMBS loans, that’s those bars on the right, and compare it the peak of the financial crisis against the current situation. Industrial,1.3% of industrial loans are 60 days late, 2.5% of apartment loans. These numbers are well below anything that anybody would call a distressed market. Of course, if you look at retail and you look at hotels, yes, there are a lot more late payments, particularly in CMBS.

But I can say with CMBS, the number that gets thrown around all the time because that’s a number everyone has, only tracks CMBS loans. Well, the CMBS lenders were the ones who were not given forbearance. They’re the ones who have the most late notifications. If you look at local banks which are the biggest lender right now, they have very little loans that are late because they are partnering with their investors and helping them get through this. This is why your lender becomes such an important part of your team as you’re going out and looking at how do you acquire assets. Lenders are a critical part of that and they are a team member just like everybody else. Make sure you have the right lender, make sure you understand the types of lending that you’re going to be using. They have different strengths and weaknesses and are applied to different parts of business.

When you look at the other big one was that this is the death of retail. I’ve been listening to this for the last five to 10 years, it’s not true. There are parts of retail that are going to be impacted. When you look at year-by-year vacancy rate change of different types of retail centers against other types of investments, like apartments and industrial properties, actually the movement in vacancy rates has been comparable for the most part. Now you got those old shopping malls out there. Yes, absolutely, they’re a problem, they’re not going to be fixed soon. That’s where a big chunk of that vacancy rate is coming from and that’s where you’re going to see challenges. Those are really redevelopment projects. But when you look at your neighborhood and community centers, I’ve been working with investors a lot on those lately, those neighborhood centers with a grocery store and a lot of necessity retailers are great, they’re doing very well.

The next thing is that the rent collections at retail actually almost fully recovered a huge portion of the spectrum. If you look on the right side of this graph, you can see that there are sectors that face headwinds. Things like health clubs, and entertainment venues, restaurants, not all paying, that’s where you’re going to see problems. But if you’ve got a bank, a grocery store, a pharmacy, and a home improvement store in your retail center, you’re doing great. You got to look underneath the surface, when you see things in the media, don’t take it at face value.

Shifting over to some of the key trends and what we’re seeing there. We look at the apartment supply and demand trends. The net absorption has actually been holding up very well, but we are facing record levels of construction. When you look at the right hand graph here, you can see the class A vacancy rate is coming up very dramatically, the class B and class C are pretty stable. In fact, darn near record low vacancy rates. Those are doing very well but we are seeing record levels of construction in 2020 and we will see about the same level of construction in 2021. But then it’s going to taper and it’s going to taper for all property types, the pace of construction. First of all, because of the pandemic and the construction pipeline, but second of all, because the cost of building materials are at a record high as well. That’s lumber, that’s concrete, that’s copper, that’s all the things you’re putting into a building are really at an elevated price point right now, and that makes it difficult for builders to get a project to pencil.

The next thing I want to talk a little bit about is self-storage. Again, as we went into the pandemic, a lot of the self-storage investors were cutting their rates and saying, “Oh, man, we’re going to be in for some tough times.” It actually turned out not to be a tough time for self-storage. In fact, the national occupancy rate in self-storage hit an all-time high in the third quarter of last year, which is our most recent data. We’re seeing some really strong momentum behind self-storage. Yes, there has been a lot of construction over the last few years but that’s also starting to burn off and come back. We could see a new wave of construction in 2022, I don’t know yet, it’s speculative. But one thing about builders is that when they see something hit a record high occupancy rate, they want to go ruin that for everyone. So, there you go.

Break: [00:15:52][00:18:48]

John Chang: The next thing, I’m going to touch on all these other different property types very briefly. As I mentioned, retail doing better than most people expect, vacancy rate up to about 5.6%, and it’s going to continue to climb this year. I think there’s a lot of dark space out there that hasn’t been captured in that number yet. When you look at office, basically leasing activity is on hold. There’s a lot of uncertainty, people don’t know if they’re going to come back after the vaccine or not, but it is still unknown. We’d had this terrible negative absorption because nobody was leasing anything so vacancy shot up. We’re not at a peak yet, we could reach a peak in 2021 but it’s still unknown. Then industrial, which everybody is loving right now, is going to continue to outperform. But there is always the construction wave on that one as well.

I’m going to talk a little bit about some of the key strategies as we move toward a wrap up here. We’re navigating what has turned out to be this massive black swan event and has significantly impacted our business. We all had plans, right? Two years ago, a year ago, we all had plans of what we were going to be doing, where we’re going to go, how we were going to invest. Everybody has a great plan until they get punched in the mouth according to Mike Tyson, and I think he has pretty good knowledge of that. Basically, we were humming along the first two months of 2020, commercial real estate sales were doing great, and then this pandemic hit, the sales activity collapsed going into the second quarter. It’s been kind of on this recovery cycle since then and we are generating a lot of momentum. We are starting to get back to close to normal. We’re not going to get back to normal for a while yet, the vaccine is a key ingredient. Like I said, there are real questions about certain parts of our industry, about certain types of real estate that are going to restrain those as we go forward.

The next one, Wayne Gretzky, “Skate to where the puck is going not where it’s been,” fantastic advice. I’m going to tell you a little bit about where the puck is going right now. When you look at demographics… Actually, I shared this slide two years ago before we hit a pandemic and before any of that was happening. I said, “Look, there’s this wave of young people, there’s this huge generational wave of millennials out there. They’re in a prime spot from a renter standpoint, but they’re moving towards tipping points on other items. They’re looking at getting married.” Now, two years later, the peak of this wave has moved in. 60% of millennials are age 30 and older, a larger and larger share of them are getting married, a big piece of them are moving into that first time home purchase. We saw this wave of home purchases that were sparked by the pandemic, that was momentum that was already moving. We’re just catching up with it, it’s just catching up to the news.

We’re seeing this tremendous wave of people moving out of New York, moving out of the Bay Area, moving out of the Northeast in general, and they’re going south. Again, two years ago, actually, five years ago, we were already talking about this trend as we mapped out the demographics and lifestyle changes. People move to the suburbs, they move to smaller cities when they get older, and they’re moving out of that early phase of career growth. That was driving our urbanization. The pandemic has accelerated this movement and pushed a shift to the south. We have tailwinds and a lot of southern US cities, and we have headwinds in the Northeast and in California. This is not entirely pandemic-driven, this is mostly demographics-driven. As you can see here, when you look at the suburban versus the urban, and I have both apartment vacancy rates, and office vacancy rates up on the screen here. You can see just this dramatic shift in vacancies in the urban core.

Now a big piece of this is new construction, right? Because two years ago, builders are still working on a business plan they developed five years ago and they were plowing new development into the urban core. Now, we shifted and we shifted fast. We had a transition point early in the pandemic where people could work from home, they left and they move out to the suburbs. You can see that the suburban vacancy rate, it went up too, a little bit because of construction, but not nearly as severely as the urban core. Because people don’t need to be downtown anymore to work at their job. We’re seeing a similar trend, although not as significant with office space, we’re seeing the demand for suburban office space gets stronger, and the demand for urban office space get weaker. But again, that trend is still materializing. There’s a lot of uncertainty whether people will go back to the office and what that will look like when they do.

Finally, my third big piece of advice comes from Tom Brady. His statement is “I don’t care about three years ago, I don’t care about two years ago, I don’t care about last year, the only thing I care about is this week.” I’m not sure when he said it, but I don’t think it was just before the Super Bowl as a Buccaneer. I think that this is something he’s been saying and living for a very long time. I was thinking about what’s happening with investments and where people are focusing. What happens so often is an investor buys an asset in 2018 or 2019 and they have a plan for where that’s going to go. Well, the world changed. When the world changes, you have to adapt your strategy. Don’t stick to the plan you made two years ago. It may be a great plan, it may still work, but don’t simply stick to your guns because you think you need to. You can always adapt, you can move capital out of one asset and put it into something else.

When you look at the yields today and the spread over the cost of capital, it is about as wide as it’s ever been. Right now, because the lending climate is so strong, because the lending rates is so low, that investors have a window of opportunity to acquire assets. I don’t want to spoil it but we have a debate later today focusing in on where the interest rates are going. I have a personal opinion on that that I’m going to share today, as well as the four other fantastic speakers. I’m not going to spoil it. But I think that this window we’re in today, with very low interest rates and stable cap rates, it really is something people should be considering as they make their investment decisions. Don’t fall in love with the assets you bought two years ago or three years ago, you need to remember this is about return on investment. If you need to reset your strategy like Tom Brady, then you should do that.

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

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JF2698: Best Tips on Housing Forecasts with Kathy Fettke

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

In this episode, Kathy Fettke—Co-CEO of Real Wealth Network, Host of the Real Wealth Show, and author of Retire Rich with Rentals—shares what to really look for when forecasting the real estate market.

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

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TRANSCRIPTION

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

Kathy Fettke: I’m going to be giving my 2021 housing market update. I usually do this for an hour, so I’m going to fly through it. I’m going to be focused mainly on one to four-unit buildings. But it’s important, if you’re in apartments, to understand what the one to four units are doing, because it could affect your business.

Again, I’m going to go through this, and a quick disclaimer – do not rely on this information. These are my ideas and how I forecast. I’m not an economist, I am an investor, and I interview a lot of people in the Real Wealth Show and get their information from economists that have studied it.

But my background is I did work at ABC7, I got my degree from San Francisco State in broadcasting, and I was in the news. I tell you that because it’s important to understand that a lot of times the headlines we see are not exactly the full story. Headlines are meant to gather eyeballs, so that new stations can sell advertising. I know that from the inside and I think it’s just really important to understand that.

But when I married that hunky guy that you can see there, Rich Fettke, in ’97, we bought that white house the same year we were married; we had two kids, and we came out with his book, Extreme Success. Everything was amazing, we felt like we hit the pinnacle. It was right in 2002, after he was on his book tour traveling around on all kinds of national news, he was diagnosed with melanoma. They thought it had spread and the doctor told Rich that they thought he had maybe six months to live, at best. So our world came just crashing down overnight; I refused to believe it, but at the same time, I wanted to make sure that I could take over the finances. I had quit my job in the news, because I didn’t want to be chasing fires and murderers with two little children at home, I just wanted to be home with them. Rich was doing great with his coaching and speaking career that I could do that, until this moment. I wanted to take over the finances, so that he could enjoy his life and get better, just in case the doctor was right. He was wrong; Rich is as healthy as can be today. But at the time, we really didn’t know. And we blew through our savings, we blew through our 10% in investing, our 10% for emergencies… It just wasn’t enough for the medical bills and him taking the time off.

So this is what brought us into being real estate investors. It’s important to remember that sometimes the worst things in life wake us up and have us do something we would never do normally. So we had bought this big house, we had this massive overhead, and all of a sudden, Rich really wasn’t working, and I was trying to start a new career after being a stay-at-home mom. So we just started renting out rooms; we rented out the bottom of the house. We turned the left part into an in-law suite. It was kind of already an in-law suite, but we rented that out through Craigslist. On the right, we turned the little office into a little studio, and in the back, we created another studio. We turned our home into a fourplex. That basically had us there living for free. That’s when I learned about passive income.

Also, from my broadcast career, I had a show in San Francisco on KSFO called The Edge, but I changed it to the Real Wealth Show, because I thought, how do I do more of this? How do I create more passive income so that we can raise our children, that Rich can spend the time that he wants, doing the things he wants to do? We really got very aware that our time is limited; money is not, but our time is limited, and how do we make the most out of it?

On the Real Wealth Show, I just started interviewing people that could tell me how they’re creating passive income. Because it was a big station, I was on in San Francisco, I was able to have people like Robert Kiyosaki on. It’s from him that I started to learn about market cycles. It was right around 2005, he had come on the show, and he had made so much money in California in that year and the year before – I mean prices practically doubled in a few years. He said he was selling everything, he knew that those loans were going to reset, and he was 1031 exchanging into Dallas.

We’re going to talk about, during this presentation, why he advised me then and why the same fundamentals are in place today, and work, even through downturns.

So Rich and I jumped on a plane, we were like, “If it’s good enough for Kiyosaki, it’s good enough for us.” We bought five of these properties that you can see there in Rockwall, Texas, for between $120,000 and $140,000. They rented for $1,400 or so each. At the time, we could do no money down loans, it was crazy. And it totally makes sense. It was like, “Ah, we could never do something like that in California, buy a $120,000 house like that and rent it for $1,200 to $1,300.” So it just made sense. We got good property management in place.

I talked about it on the show – suddenly, we had lots of people calling saying, “Who did you use? How did you do it? We want to learn.” We thought, “Okay, there’s really a need to understand this.” That’s when we created Real Wealth Network, which is alive and well today. We have 54,000 members now and we still help people buy in emerging markets.

But how do we know what’s an emerging market and how do we know what’s coming? Well, after finding out that we could sell at the peak as we did in California, and buy at the beginning of an emerging market, and that our investors who did that did not even feel the recession, the biggest housing recession in history, and that then we could come in and buy foreclosures and help fix up neighborhoods that had been hammered by the recession, I started to get interviewed. I got to actually debate, as I was saying earlier, I got to debate Robert Shiller on Fox News, because in 2012 he thought and said it was a terrible time to invest. I’m like, “This is an amazing time to invest. It’s the best time ever, it’s the bottom of the market, and things are only going to go up.” By the end, he actually agreed. That led to a lot more interviews, and it led to me to doing more forecasting, which is what I’ve been doing.

So let’s talk about the fundamentals, what to really look for when forecasting. So many times we look at days on market, we look at pending sales, and cancellations, and price increases or decreases… But those are things that happen after the fact. We have to be able to forecast those things before they happen. So what do we look at? At Real Wealth, we look at, for sure, demographics. Where are people moving and where are they slated to move for over the next 10 years? Because really, if you’re a buy and hold investor, you need to know that. Where are people going?

Then we also need to know where the jobs are going, because that’s going to attract the people. And supply versus demand – where is there more supply and more demand? We want to be in places that have less supply of housing and more demand, because of course, you’re going to have what everybody wants, and that’s generally going to drive rents up and prices up.

Then the biggest thing that we look at now is fiscal stimulus. This is not really probably anything people really learn in economics school. I didn’t take economics, but I’ve been learning it for the last 15 to 20 years that we’ve been investing. Fiscal stimulus is a game-changer, and it’s a manipulated market, but we’ve got to understand it so that we can be on the right side of the manipulation. Honestly, that’s the truth.

So going to these metrics – let’s look at population. The US population is growing with a net gain of one person every… What does that say? 26 seconds. That’s amazing. You can see here, this is a chart going way back; I love looking at these kinds of charts… You can see a massive population in the US. This is not true for places like Japan and Europe, that are actually declining. They’re not having enough babies; we are having babies. Now with the Biden administration, there’s probably going to be increased immigration, so this is population growth. And guess what? People need housing. But when you really dive in and look at the demographics of this massive population, you can see here that blue section is the Gen Z. Those are the young people, up to my daughter’s age, up to 21. Well, what are those 21-year-olds doing? I’m in San Diego right now in a hotel room, you could probably tell, and she’s living with friends, renting; because at 21, that’s generally what people do. They’re in college or getting out of college, and they’re renting. We have a large population of future renters. That’s important for us to understand.

Break: [00:08:59][00:10:37]

Kathy Fettke: Then you look at the yellow, those are the millennials. There were a lot of talks that millennials weren’t going to be buying. That is not true, they are buying; they’re the biggest home buyer today. I’m going to show you on the next graph – Gen Z, and they kind of got hit hardest by the last housing recession. So a lot of people are now just getting back into it. Then we’ve got the red, the baby boomers; there was a lot of belief that they’re going to either move into condos downtown, or downsize… We’re not seeing that happening; they’re staying put. So that’s a huge population that is not releasing the homes that they’re in. That’s really tying up a lot of the inventory.

Now, a lot of you may have seen Harry Dent’s spending wave. This basically shows that at age 26 – that’s again, the typical age that people are renting. And then 31 is the typical first-time homebuyer age. 41 is the move-up buyer age, because people are having kids and they need more space, and then age 45, 46 to 51, these are the biggest spending years, because you’re sending kids to college, you’re buying lots of potato chips, birthday parties, all this stuff. Then it starts to taper off, as people in that baby boomer generation start to buy these vacation homes, they’re going on cruises, and they’re doing different things are spending differently.

When you overlay Harry Dent’s spending wave over the demographics, you can see this little arrow, the blue arrow there – that is the largest group of the millennials. We already know the millennials are the largest generation today, but the largest segment of the millennials is age 28. It’s that little lump on that yellow section that is now 28 years old.

Well, in three years, the largest percentage of the millennial group is going to be at home-buying age; that’s important for us to understand. And in some ways, COVID has accelerated that. We also, as I said, know that there’s this big wave of young people right after them. So where’s the population moving? We know there are a lot of people, but where are they living? Well, when you see the dark green on this slide, this is over the last 10 years where there’s been the most growth. And in the dark green, it’s the highest growth. Well, we know it’s Texas and Florida; but Texas is getting hit really hard. God bless you all that have properties in Texas who are living there. I hope we can know how to help you guys. Anyone who’s needing help, please let us know. But Texas and Florida are the two fastest-growing areas. Then you can also see in there, you’ve got Arizona, Nevada, Colorado, Idaho – these are the fastest-growing areas. The lighter green is also growing. The two areas that aren’t growing as quickly – you can see that Illinois is one of them. Those are things to pay attention to.

Now, over the next 10 years – this is really important for us to understand – what’s the projected change? Once again, you can see that Texas and Florida are projected to continue to grow over the next 10 years, along with other purple areas, the Carolinas and so forth. So keep your eye on these areas.

Another way for us to understand where growth is happening is by looking at U-Haul trends. That’s basically who’s getting the U-hauls and moving. U-Haul tends to be more of the, I want to say, it’s your do-it-yourselfers, so a little bit lower income. The Atlas migration trends are going to be people maybe with higher pay. But we’re going to be looking at affordable housing, that’s what we focus on at Real Wealth, because we believe it has higher cash flow. The U-Haul migration trends show that Tennessee, again, Texas, and Florida are at the top of the list of where people are moving. Ohio is on the list, too. A lot of people say people are leaving Ohio – look at this. I think that maybe in 2020 – here’s my theory on it – that people who were working from home, with their kids running around, they’re losing their minds in their little condos in downtown big cities, and they’re like, “Uh-uh, I’m moving back home. Your mom and dad or someone can watch these kids.” That may be part of what’s going on there.

Well, you look at number 50, the place where people are leaving – California, my state. Again, you can see Illinois on there, New Jersey, Massachusetts. The high-tax states, they’re just not getting it; people don’t want to be highly taxed. They’re moving to areas that are tax-friendly. Again – Florida, Texas, Tennessee; they’re going to see more and more people, the more tax-friendly it gets.

Let’s talk about 2020, the obvious. We’re getting through this pandemic, but a year ago, when we were at Best Ever last year – boy oh boy, it was the beginning of it. We didn’t know what was going on. Let’s talk about 2021 and beyond, how is this pandemic going to affect us in the future? There was so much talk about this housing crisis that was going to come… Did it? Will it? What’s really going to happen? Well, when you look at this, this tells you a lot. This is unemployment claims – a major skyrocket of it at the beginning of the pandemic, and then a recovery. Unbelievable. I use this chart from Federal Reserve because I wanted to show how unprecedented this was. When you look at all past recessions – they’re the vertical lines – we definitely had unemployment claims nothing like what we saw, nothing like an entire economy just shutting down overnight. Massive job losses. But then look what happens when you turn the switch back on. People still need food and things and clothing and all that; they still need things, whether you’re in your house or not. So we saw a pretty major recovery, very exciting.

The unemployment rate – the same thing. We were coming from historic lows – bam, COVID hit and look at the recovery. I mean, we’re back to like 2014, 2015 levels. That is phenomenal; that says a lot about our economy. We’ll talk about really why it happened. We know that a lot of the jobs were not affected at all. In fact, look at this chart, you’ll see that the finance industry was barely affected. It was just -1% from last year. And then we have some industries that are actually doing better now than they did a year ago. But we also know that leisure and hospitality got hit so hard, and that affected certain cities, certain metro areas that are more dependent on leisure and hospitality.

The hardest-hit cities you’ll see on this list – Las Vegas at the top. Las Vegas – well, we know, is very dependent on leisure and hospitality, conferences, and people just being in the same room. That ended very quickly, so a lot of job stress there. But ironically, the housing market is really strong in spite of it. It just makes no sense.

New York, second-hardest hit. But when you look at these, this is why – there was 12% jobs lost, but a huge percentage… I think it says 57%, I can’t even see it very well; 57% were in leisure and hospitality. So a massive amount of jobs lost in Las Vegas were in restaurants and things that may never come back. They probably will, they most likely will; probably when the vaccine works, and when people have really understood this, and we have herd immunity, Las Vegas is going to come right back. But it was definitely the hardest hit.

New York City, 12% job loss; very similar to Las Vegas. A very large percentage of the jobs lost were leisure and hospitality. We know that in the finance industry, it didn’t lose very many jobs, but the jobs that were lost in New York had a big enough impact because of so many in leisure and hospitality. Now there’s a lot of talk about these finance jobs moving to Florida. That’s an interesting turn.

Now, here’s a list of the least affected cities. When you go to the very, very bottom, you’ll see Salt Lake City and Indianapolis, barely affected by this pandemic. Isn’t that fascinating? Let’s talk about why. In Salt Lake, there were only 2.5% of jobs lost in 2020, but many, many jobs were added. Salt Lake City is one of the cities that has actually more jobs than last year at this time. It’s incredible.

Indianapolis, 3.9% job loss. It’s a very stable market, it’s one of the reasons we’ve been investing there at Real Wealth, and helping other investors buy in Indianapolis, because it’s so stable; because we called it recession-proof, and bam, it proved itself true. Only a tiny percentage of jobs lost were in leisure and hospitality. A lot of people don’t understand or don’t know that Indianapolis has very strong biotech, and was very much at the forefront of some of the solutions for the Coronavirus. Also, FedEx has a huge hub there, they bought an old airport and they have a huge hub. Of course, FedEx was very, very busy during this time when people were at home. So that city really did well during this particular recession.

I can tell you from firsthand experience that we bought a bunch of lands at Real Wealth, we syndicated land and developed it… And boy, when you buy land, you’d better be good at forecasting, because it takes forever to get a development off the ground. So we bought some land in Park City with a builder out there, and came out with the first phase. Can you imagine? We came out with the first phase in 2020, in March. We were freaking out like, “Oh my gosh. What bad timing. We’re never ever going to sell these homes.” Well, guess what? Phase one sold out, because as soon as the shock of the Coronavirus was over, and people started to realize that we could manage this thing, and that people wanted to be buying, and interest rates were so low – boy, it just was a quick turnaround and this project sold out. We haven’t even broken ground on phase two.

Havens like Dallas and Atlanta lost some jobs, but they’re growing as well because what we learned during this pandemic is that there are certain areas that are very, very business-friendly. Even when there’s pressure to shut down, these are the areas that did not completely, so they continue to grow.

As a result, we have a GDP that continues to grow. You can see from this graph that over time, our GDP has just been on a rocket ship. It has gone up. And what we went through was kind of a blip in that, but it sure looks like a V-shaped recovery to me.

Alright, and wages – look at that, wages continue to rise, even during one of the craziest recessions we’ve ever seen. We saw in March, of course, amd everyone freaked out, and the market crashed for a minute, and boy, some smart investors jumped in and bought stocks, and made a bunch of money in the last year. Look at that, complete recovery; a checkmark recovery in the stock market. Just unprecedented, unbelievable. Existing home sales – same thing. Look at that recovery, it’s a checkmark. When you look at the Case Shiller price index, you see the whole blip, and then whoop! We saw prices go down a bit, of course, during the great housing recession, and they went up, up, up, up, and then continued to accelerate last year.

Break: [00:21:04][00:24:00]

Kathy Fettke: Why? Why would this happen during a pandemic? Then the Fed now predicting, there was a lot of talks of are we in an L-shaped or a K shape — what kind of recovery are we in? Well, the Federal Reserve is saying they increased growth to 4.2% expected for next year. That’s pretty good. By 2023, the Fed expects that the jobless rate will fall back to where it was, around 3.7%. So that is good news coming from the Federal Reserve. Remember, they monitor the economy, so they kind of get what they want, because they can control it by just printing more money or lowering interest rates. Printing money is exactly what they did. You can see from this chart, printing money has become very common. It didn’t use to be; ever since 1971 when we got off the gold standard, our politicians said “Free money; let’s just keep giving away stuff so we can stay in business, and get reelected.” That’s my personal thoughts on it.

But look at what happened in just one year. Massive money printing, a massive increase in the money supply; this is what caused this checkmark recovery. Money. When you throw in trillions of dollars into an economy, there will be an impact. Generally, that impact is higher stocks, higher real estate values. That is what we saw. The Fed announced in March – and I know you all know this – unlimited QE, and so much of that money went to our industry. It went to buying mortgage-backed security, so that banks would continue to lend, at a time when it was terrifying to lend. But the Fed came in and did unlimited, this is unprecedented, to keep mortgages going. What does that say about what the government and what the Federal Reserve thinks about real estate? They want it to work. And with it, buying those mortgage-backed securities kept rates low; all-time, historic lows. That, of course, is what has driven so many people into buying.

I’m close to my time here, but this is really what we’re looking at – demand, demand, demand. You look at demand, its job growth, we’re seeing it in some areas, population growth, we just talked about it; affordability, debt, interest rates, and so forth, loan options, price to rent ratios, desirability, and tax incentives. And then fear; in this case, COVID fear has driven people into buying a house; they just want to have a space of their own. And because interest rates are so low, when you look at these checkmarks, you can see that really, for many people, prices were back to 2018 levels because of these interest rates. You could have bought a $260,000 home back then, you could buy a $317,000 home right now, for the same payment. That is why people are buying and that’s why prices are going up.

Plus, credit card debt is down 14%, because many people took their stimulus checks and paid off their debt, or they just weren’t spending as much, because they’re home. A lot of people were saving right up, and that created the down payments they needed to buy housing. That’s driven such demand, while not creating a lot of new housing, so we have short supply across the nation, and again, that is driving prices up. Record low inventory. What’s affecting that? Well, there’s just not enough new inventory and the cost to build is so high. Lumber went up 60% this year; well, the builders like me, we’re going to pass that on to the buyer. We’re almost doubling our Park City properties right now, because there’s nothing else on the market, and we’re so lucky to be the ones who have the inventory. That’s the sweet spot is if you have the inventory.

Regulations make it tough to build. And available land. It took us 10 years to get the Park City properties going. Really, timing was very good for us. Natural disasters can affect supply; you’ve got places like in California where a lot of properties burned down, so there’s more demand, of course, for properties.

Let’s go to the next slide. Alright, so a slow pace of new construction, because builders are being cautious, they want to make sure that they could sell the inventory. As a result, there are very few ready lots available, and new inventory is very low, and not as affecting demand.

So the housing forecast for Fannie Mae is that interest rates will remain low for the next couple of years. That means they’ll probably be more demand, more sales, and more increase. There’s this question – will there be foreclosures from all the forbearances? Lots of headline news out there about all these millions of people that were going to go into foreclosure. Well, what wasn’t discussed in that is that 2.3 million of them got their forbearance extended, and they will probably get a loan modification and just have to pay those missed payments at the end of their loan. They’re not going to get foreclosed on. 2.3 million of those people that signed up for the forbearance found out they didn’t really need it. But they did it anyway, just because why not? It didn’t really affect you negatively, and you could just pay it later. That’s part of what went to the savings rate. 500,000 were just paid off or sold, so we’re really down to about 80,000. It’s not going to be a huge flood of foreclosures, much to the chagrin of investors.

But what about commercial real estate? We thought that people were going to be leaving apartments and moving into single-family homes, and we just have not seen the effect on cap rates. Maybe a little bit in retail and office, but not as much as was predicted because things are bouncing back. In fact, some offices need more space because they need to have their employees come back, but they need them to be separated. A lot of things we didn’t expect. We really are so lucky and not lucky at the same time that the Fed was willing to bail out the economy.

These are some markets, this is just off the presses from Mueller. You may already be doing a presentation here… But there are some markets to be cautious of that may be in hyper supply to keep an eye on, but in general, housing is in great demand. Again, the Fannie Mae forecast is that we’re going to not see a recession, we’re going to see continued growth. It’s good news.

So what are the risks? Well, the risks are what everybody’s talking about. There are consequences to printing so much money. You just can’t do that. There are no freebies. So what we have is massive debt; debt to GDP is increasing. But it’s not as bad as some other countries, it’s not unbearable yet. But what it does mean is we could see stagflation, which means that maybe not robust economic growth, but prices increasing anyway, which is what we’ve seen in housing. They’ve gone up double-digit last year, but wages didn’t. So what this means most likely is that the divide will continue to grow, the middle class will be more challenged, the wealthy and those who have assets that inflate and those who don’t. If you’re a renter, you’re going to see your rents go up. If you’re an owner, you’re going to see probably your rents go up. So which side do you want to be on? We really believe at Real Wealth, it is imperative that people acquire assets that will be on the side of inflation; otherwise, you’re going to be stuck just paying more for things, rather than getting more income from those things.

So that’s why at Real Wealth we are just on a mission to help people acquire real estate, even if it’s you getting into your first property, one to four units, get 10 of them, get as many as you can max out your Fannie Mae loans, you can get 10 of them, be in the right markets where you can still cash flow, where there’s growth expected, where a lot of people from New York and New Jersey high tax markets are moving, so that that big New York money is moving into areas that haven’t been affordable historically, but probably won’t be much longer. We’re going to see prices go up in certain areas. On our website, we have a list of those cities at realwealthnetwork.com, you can find out more about it if you go there.

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

Website disclaimer

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

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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JF2691: The Devastating Impact of Climate Change on Your Real Estate Investments in the Next 10 Years with Neal Bawa

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

In this episode, Neal Bawa presents how climate change could greatly affect the real estate space.

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

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TRANSCRIPTION

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

Neal Bawa: You’ve heard about climate change. Maybe you’re a believer in its destructive impact or maybe you don’t believe in it. In fact, there’s anecdotal evidence that over 50% of the real estate community in the US doesn’t believe that the climate is changing. Or maybe they think that the climate is changing but that humans have nothing to do with the change, or they reckon that climate change has nothing to do with real estate. After all, if it doesn’t affect our daily real estate hustle, then maybe it’s not worth worrying about. Right? Well, unfortunately, wrong, completely, unequivocally wrong. In this 18-minute talk, I’m going to prove to you beyond any shadow of a doubt that if you’re buying apartments, your livelihood and your investors’ profits are going to be impacted by climate change.

When I use that word “impacted”, I am sugarcoating it bigly. I am going to make the case that in fact, the impact on real estate is the greatest of any industry in the world. So get out your pain meds because this one’s not going to be a walk in the park, unfortunately. Now, I’m not going to waste your time arguing that climate change is real, or that we should be doing more to stop climate change from happening, or that it represents an existential threat to humanity. No, sir. I am going to show you why you absolutely need to worry, regardless of your beliefs, about climate change. Alright, let’s get started.

Our story starts with a credit rating and risk analysis company named Moody’s. Now, many of you remember that this particular company was partially to blame for the 2008 real estate crisis. Remember, Moody’s gave A ratings to mortgage-backed securities that were filled with toxic single-family loans that were in default. That crashed the real estate market, it kick-started the Great Recession. As you can imagine, Moody’s was then beaten black and blue by Wall Street for doing such a horrific job of rating the mortgages. So the big dude at Moody’s said “Never again, never again will we be caught with our pants down like this.” So what did they do? They revamped their credit rating system. To do that, they started looking at future risks to investors. When they did that, their research told them that everyone was ignoring the biggest risk to real estate investors, the impact of climate change.

Moody’s research indicated that only one company in the US knew how to evaluate the impact of destructive climate change on real estate, a little-known company named Four Twenty Seven. This company was already working with the world’s largest investors, asset managers, commercial banks, and government agencies, people whose job it is to look 10 years into the future. So Moody’s went out, they bought this company Four Twenty Seven, and they started learning more about climate risk to real estate and also other types of businesses. And what they discovered was absolutely mind-boggling.

Four Twenty Seven was tracking extreme climate events in the US, stuff on the screen like flooding, extreme heat, wildfires, droughts, hurricanes, typhoons, tidal flooding. They started tracking the losses from each of these different events, and they looked at the dollar numbers. And they were massive, people; over $80 billion a year lost.

They started reading headlines like some of the headlines on the page and investigating if anyone in the US was paying attention. No one, absolutely no one was. Unless people were talking about these rapidly skyrocketing losses, then we’re talking about the real estate market crash in 2006. In the gray box on the page, you can see that one lone CEO, Chris Hartswan, is talking about how assets in the US are priced in it completely irresponsible way given what we know about climate change. So Moody’s said, “We have to fix this or investors are going to lose trillions of dollars.” So they took the six-step Four Twenty Seven models shown on the left, and they started applying them to the United States for all kinds of real estate. The results were, again, stunning. As you can see from the page, 104 million people with hurricane risk, 169 million people living in areas running out of water, 92 million living in areas that are facing either extreme heat or extreme rainfall. And as they track these disasters, they realize that these disasters were like the Coronavirus in one key respect – they were on an exponential growth path.

Remember how the US had 20 Coronavirus cases in early March and two months later we had millions. Exponential curve. These events were on a very strong exponential curve, so they started extrapolating, figuring out the risk into the future five, 10, 15 years, so they could rate real estate risks in all of these areas. As you can see from the comment at the bottom of the screen, Miami Dade County has already lost nearly half a billion dollars in value in a 10-year time because of reduced real estate values. But look at the future projection of value on the page – not half a billion, not one billion, but 35-billion-dollar decline in real estate value. And South-East Florida is just one example.

Break: [00:06:25][00:08:04]

Neal Bawa: We all remember when Hurricane Sandy smashed into New York, turning the New York Public Library into a large swimming pool, turning Wall Street into a waterpark. We’ve chosen to forget the colossal damage of 65 billion dollars from just that one little hurricane. Try to remember pictures of Manhattan with submerged cars and overturned trucks, no power, no heat for weeks, for millions of people. New York is now moving forward to building a seawall that will cost about 200 billion dollars. We hear that they plan to raise that money by massively increasing taxes on New Yorkers, including massive increases in property taxes. How’s that going to affect your investments in New York or Miami when massive tax hikes are used to build these sea walls?

Or maybe instead of jogging your memory about what happened in New York, maybe you just want to read in any newspaper or online site in America today. Texans are dying because of a record cold snap where parts of Texas had zero degrees Fahrenheit. Millions are without power and gas. The governor says that every single source of power in the most power-rich state in the US is compromised because of climate change. A Texan is dying every hour from freezing cold in what used to be one of the warmest states in the country. Republican politicians are screaming about reforming Texas’s power grid to bring it into the 21st century. The cost? Tens of billions of dollars. Where will that money come from? Well, there’s no state income tax, so it’s likely that the money will come from property taxes, which are already one of the highest in the countries. Well, how will that affect your Texas investments, I wonder?

And then there’s California. Boy, California, California, California… Earlier this year –I live in California by the way– I felt like Elon Musk had transported me to Mars or to some dystopian future. The sky was deep red, there was thick gray ash falling everywhere, every door was shut, and not because of COVID, but because a significant portion of the entire state was on fire. In fact, in California, the six largest wildfires in history were all in 2020. Imagine the top six quarterbacks of all time – Brady, Manning, Montana Favre, Elway – all breaking their throwing records in the same year. How ridiculously bizarre would that be? Well, only about as bizarre as California’s wildfire season in 2020. Do you get my point? 10,000 homes and commercial buildings burned down, tens of billions in losses in it, and inevitably, huge insurance hikes. By one conservative estimate, the wildfires will double again from their 2020 level in just five years, and could quadruple in just 11 years. I wonder what the impact to California’s cap rates would be when it quadruples.

And it’s not just the damage from the wildfires. California, Oregon, Washington, they’re the three states that have the largest number of ski resorts at risk. Ski resorts have super expensive real estate. But imagine that you’re an investor in real estate in a West Coast ski resort, let’s say Soda Springs in California. And you start noticing that the ski season starts a day later on average each year and ends a day earlier on average each year. So you get curious and you start researching future predictions about Soda Springs, California. And you discover, to your shock, that projection shows that Soda Springs won’t even be a ski resort in the future. And while that’s going to take decades, within the next 10 to 15 years, the ski season would become so short, that ski operators could not make money; they’d be forced to shut shop. Would you then think today about moving your investments somewhere else? And if everyone did it, wouldn’t some of those fancy ski resorts look like abandoned mining towns in 10 to 20 years? Think about it.

But hey, Neal, these impacts are years in the future. Five years, 10 years away, who gives a s**t? We will worry about it 10 years from now, right? Well, wrong again. Because of Moody’s, these guys started to plug their future projections of climate-related losses into their ratings in the last few years and built risk scorecards like the one on the screen. When they did that, the insurance industry started to wake up and smell the risk. The insurance industry started to hike insurance premiums left and right. Insurance was going up 10% every year, 2018, 2019, 2020, 10%, 10%, 10%. Then the apartment industry took notice; they started screaming at insurance companies crying foul. This huge hue and cry have started to force these insurance industries to move away from a one-size-fits-all insurance model.

More and more insurers are now saying, “Look, if Miami is going to get flooded every year, we can’t penalize Oklahoma apartments. If Northern California is going to be on fire every year, should San Diego be paying so much more than insurance? It’s not fair.” So guess what’s happening? Insurance companies have now started to buy climate change data from Moody’s, and are developing city by city and state by state models for insurance based on climate risk. We’re moving towards a future very quickly where insurance in Miami, a city very high in risk ratings, could easily be 10 times the insurance in Austin, a city that’s rated very low in climate risk. This information alone should convince you that you as a syndicator, you as a holder of people’s money, you as an investor, you have to learn more about climate change risk. But I’m just getting started.

Break: [00:13:41][00:16:38]

Neal Bawa: Massive insurance hikes are really bad for business, we know that. But you know what’s worse? City downgrades. Moody’s and S&P Global are using climate risk to downgrade entire cities. We haven’t seen any states downgraded yet, but Florida and California better watch out. On the slide, you can see that a city as big as New Orleans was downgraded from a medium grade BBB+ down to a B, which in Moody’s words is considered speculative, subject to high credit risk.

So what happens when a city gets downgraded because of climate risk? Well, the city’s ability to borrow money goes down, borrowers are skittish, they charge much higher interest rates. This prevents the city from rebuilding infrastructure after a major climate change event. That makes people in the city leave, which creates a destructive spiral from which the city may never recover. And if you, Mr. Investor, were investing in a city like this – well, you may never recover.

Do you know what is much worse than city downgrades? An end to the 30-year mortgage. Take a look at the New York Times headline on the right side of the page. Now the 30-year residential mortgage, it’s an American institution. Americans have come to believe that the 30-year mortgage is our right, like it’s something that Jefferson actually wrote into the Constitution. Well, the ugly truth is that the only reason that the 30-year mortgage actually even exists is that lenders believe that the homes being financed will be worth more 30 years from today. So what happens if the lenders start losing that belief? Well, it would be disastrous. If lenders felt that 30 years from today half a million homes in the US will be flooded each year, would they actually provide a 30-year loan? Would they provide a loan to ski resorts with no snowpack in 30 years? Would they do it for cities that are projected to be hit by category five hurricanes every other year, 30 years from now? Step back and think about it. What bank would be crazy enough to offer a 30-year loan on a property that is almost guaranteed to be unlivable in 30 years?

So right now, today, in virtual conferences around the United States, members of mortgage banking associations are huddled around their iPads and making lists of cities that will switch to 20-year mortgages or even 15-year mortgages. Imagine the catastrophic impact to home prices in those cities. The residents are already battered by ever-larger climate change tragedies every year, and now their homes are falling in value. Would they be inclined to move to areas that have no climate change impact? And wouldn’t those areas become the new multi-decade American Gold Rush? Think about it. There are worse things happening than city-level downgrades, like increasing cap rates. Let’s be honest, people like you and me, we don’t set cap rates anywhere in the US. The people that set cap rates are the ones with the gigantic multi-billion-dollar portfolios, the big movers and shakers like BlackRock, the largest asset manager in the world. $24 billion real estate portfolio that they’re doubling over the next five years.

BlackRock is openly saying, openly saying, that climate risk is now central to its asset selection process, its entire strategy. They’re not just saying that about their $24 billion real estate portfolio, they’re saying that about their $7 trillion overall portfolio, 7000 billion. And when they’re applying climate change risk, it’s forcing BlackRock to slow down, or even stop investing in areas with high climate change risk. But they’re not stopping there; BlackRock is using its massive political influence to force state and local governments to take action against climate change. When they see cities and states not doing anything, they’re voting against them with their wallet, their 7000-billion-dollar wallet. This is creating winners and losers at a scale where we could see certain states and cities go up half a cap over the next 15 years, and others go down half a cap. We all know that those are absolutely gigantic, humongous numbers, right?

And before you start clogging the chat here with comments, “This is all in the future, Neal,” let me bring up one of my scariest slides. If you thought that climate change has not already forced the market to offer discounts, you’ll be wrong. Again, parts of major cities like Miami, San Francisco, Boston, New York, Tampa, are today seeing discounts of 7% for properties with just sea-level rise exposure, forget about hurricanes. Remember that this discount was 0% 10 years ago. It’s entirely reasonable to speculate that this discount is going to go from 7% to 15% within the next five to seven years. A 15% discount is the difference between a winning deal and a money-losing deal.

So let me summarize this… You now know that simply because you don’t believe in climate change, it doesn’t matter, it’s going to hurt you. This is a train that has now finally left the station. Because the people who set ratings, like Moody’s, and the people who set cap rates, like BlackRock, they believe it. So do the lenders who are figuring out whether the 30-year mortgage needs to go in certain parts of the US.

Insurance providers are factoring in climate change and are increasingly punishing investors who invest in high climate risk areas. Cities have figured out they need to fight climate change with sea walls, dams, and new power stations, and they’re going to charge real estate investors for those investments. The bottom line, this is a huge deal. It’s as big a deal as the Coronavirus but worse because the impact lasts the next 10 decades, and every year the impact is higher than the year before. What can you do? Well, arm yourself with knowledge. I offer no immediate solutions, this is just the beginning. I suggest that you sign up at my website, which is multifamilyu.com, and you’ll get an invite in the next month to a two-part deep dive climate change series. I’m going to tell you which cities are going to see a gold rush like the likes of which we have never seen before and which ones will have an exodus. I’ll give you tips on new opportunities and even new business models that are emerging from this crisis. Most importantly, I’m going to give you tips on how you can navigate this crisis safely for your properties and come out looking like a hero or a prophet.

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

Website disclaimer

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

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

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

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

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

Click here to know more about our sponsors:

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TRANSCRIPTION

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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TRANSCRIPTION

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

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

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

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

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

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

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

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

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

Ben Lapidus: Yes, please.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Ryan Smith:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Ben Lapidus: You’re good.

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

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

Ben Lapidus: Thoughtful words.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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