JF2690: How to Network at Conferences – The Best Tips For 2022 | Actively Passive Investing Show with Travis Watts

Attending conferences and events is one of the best ways to expand your network. But how do you make sure you make the most out of your experience? In this episode, Travis shares the critical elements to networking at conferences and how to create your own game plan for your next event.

Looking for your next real estate conference? Join us in Denver, Colorado at the Gaylord Rockies Convention Center from February 24th-26th for the Best Ever Conference! Register here: www.besteverconference.com

Want more real estate advice? We think you’ll like this episode: JF2668: 3 Ways to Grow Your Business at a Networking Event with Ben Lapidus

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JF2681: $20,000,000 Closed in 100 Days? Here’s How He Did It with John Casmon

In just 100 days, John Casmon closed $20,000,000 in multifamily deals. In this episode, John discusses how to find good deals during a pandemic, how to adapt your strategy, and how he was able to close on his profitable deals in such a short amount of time.

John Casmon | 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 John Casmon with us here. How are you, John?

John Casmon: Hey, Slocomb, I’m doing great. Thank you for having me today.

Slocomb Reed: Great to have you. John is the founder of Casmon Capital Group, which aims to help busy professionals invest in real estate without taking on a second job, focusing on multifamily investments. Current portfolio of $40 million as GP, total investment experience as a GP is over $100 million. He’s closed $20 million in 100 days in 2021. He was on this podcast five years ago, and the title was something like from two units to 13 units. John’s been busy. He also has his own podcast called Multifamily Insights. A lot going on, John…

John Casmon: Yeah, man. There’s been a lot of growth since that very first interview around five years ago. Ironically enough, it was around the same time of the year when we did the interview at that point. It’s actually really nice to be back on the show and happy to be talking to you.

Slocomb Reed: Great to have you. So tell us about this 20 million in 100 days. Is that the past 100 days?

John Casmon: Not literally the exact 100; within 100 days. It was basically from late July to early November. The short of it is, and I think the key here is when we were looking at our business, for these two deals, they just stacked up where we were able to close them back-to-back. Now, that may not seem that big, but for us the thing that was actually important was we didn’t do a deal in 2020… Between COVID and so many other factors, we actually didn’t close on a multifamily apartment building in 2020. Even though we had plenty of experience in other deals prior to that, in 2020 we didn’t do a deal. So to go from not doing a deal to doing $20 million worth of real estate in 100 days; it took a lot of work and took a lot of action, and quite frankly, talking to a lot of other investors and just getting them back online, and let them know what we’re working on. It took a lot of communication, but we’re really excited to close on both of those assets and continue to grow from there.

Slocomb Reed: And the market is a lot softer this year than it was last year. It’s just so much easier to find deals now.  That’s a joke. Where do these come from, why is it–

John Casmon: I was like, “Man, is he serious?” [laughs]

Slocomb Reed: I was just making a joke. These two deals now… It’s not like multifamily went on sale when COVID happened, so not buying in 2020 makes a lot of sense. I didn’t buy anything in 2020 either, come to think of it, other than some small little single-family flips. Now you’re buying in 2021 – what changed? Is it a shift you’re seeing in the market? Is it your underwriting criteria? Is it just you having more time now to adapt to the market that we find ourselves in?

John Casmon: Yes, a great question. I actually intend to blog for the Best Ever blog, so that’ll be up soon, and I go into it a little bit. There were a couple of things that were really important to make this shift. The first thing was I had to step back and I had to get some advice… Because the reality is there were people around us doing deals, and I knew there was something that we must have been missing. There was something that we weren’t doing, something we were missing. We had to step back and understand what are you looking at when you’re doing these deals? What’s your approach? So I spoke to my advisors and I got some counsel from them to say, “What are you seeing? What are you doing? How are you adjusting?” That really informed the strategy from there.

The second thing was getting a bit more creative. I think sometimes we sit, we underwrite deals, and if it doesn’t fit to how we’ve been investing in real estate up to this point, we don’t do it. Well, the reality is the market is very different today than it was five years ago when I was on the show after doing the eight-unit property. The market is different, the numbers are different, the investing strategies are different, the capital that is looking to go into real estate is different. If you’re investing with the same strategy that you had five years ago, you’re not making any progress.

So we had to step back and recognize that we need to get a bit more creative, we need to figure out where there are opportunities to adjust our approach while still staying true to our fundamental principles. I think that’s the key part, you have to have strategy, and principles, things that you stand for, things that you believe in. But there have to be other elements where you are willing to be a bit more flexible and adjust your approach so that you can react to the market as it is today, and also what to anticipate the market to be in the future to protect yourself.

The third thing that we did a little bit differently was really starting to get more aggressive. When I say aggressive, I’m not talking about the underwriting, I’m talking about our actions. So how many deals are you actually underwriting? How many deals have you torn? How many offers are you putting it? How many conversations are you having with people? At the end of the day, if you’re not seeing enough deals, putting in enough offers, then you’re not going to get that deal. We had to step up the number of deals we’re looking at so we could actually get something that worked.

Slocomb Reed: That’s awesome. John, aside from getting more aggressive and just getting in front of more opportunities in 2021, what other tangible ways did you adapt your strategy to get these deals?

John Casmon: Well, I think we took a different approach. Typically, we’re looking at medium value-add deals where we can come in, renovate the units, add value, look at other ways to add value, and increase the NOI. Part of what we try to do is, say – you and had I play poker together before, and part of it in this market is instead of playing chess or checkers, sometimes you’re playing poker. You’re trying to understand that other owner, what are they looking for and how do you craft an opportunity where it can be advantageous for yourself?

I was speaking to Ash Patel the other day, and I know Ash is pretty involved in this show as well. What Ash and I talked about were properties that were mis marketed or mismanaged. If you could find those properties that are mismanaged or mismarketed, then you can create value. That’s where that poker aspect kind of comes in, because now it’s not about me trying to beat every other investor in the world looking at the same property, it’s really a matter of understanding what that owner is looking for, or that broker if a broker is involved, and then how do we create a win-win solution for ourselves, the owner, and the broker.

Slocomb Reed: These two deals in 2021, were you direct-to-seller or were they brokered deals?

John Casmon: Both were brokered, but they were both pocket listings, I guess you could say. One was actually an expired listing and the other one was a listing, but it was being mismarketed is the way I would characterize it.

Break: [00:07:33][00:09:12]

Slocomb Reed: Expired listing still went out to the public, mismarketed listing also going out to the public. What is it that you saw that other people who had the opportunity to offer on these didn’t see?

John Casmon: Well, great question. On the one that was expired — and I guess technically didn’t expire, but they stopped marketing it. So it went from being listed and available to it wasn’t being shown, they weren’t talking about it. But the owner was still interested in selling. And times changed. When we underwrote the deal, I think it was 18 months prior to that or two years prior to that, the numbers just simply didn’t work. Over time, as cap rates compressed, and we see more upside of the market, rent start to go up, and the operations improve, now this started to make more sense that there was an opportunity. In addition to that, we also expanded our exit options and we saw that there was more value to be created than we initially anticipated when we first looked at that deal. So that’s one of the things on the first deal. On the second deal, they didn’t understand the story. In my opinion, I don’t think they understood the story, the broker–

Slocomb Reed: The brokers didn’t understand the property.

John Casmon: I’ve never seen this before, but the offering memorandum was seven pages, and that included the cover page and the Contact Us page. There were five pages of information on this property and I just don’t think they did a good job of really highlighting the value-add opportunity. It’s an opportunity where we almost passed on, we almost didn’t underwrite the deal because we didn’t see the story right away. It wasn’t until we got on the phone, talked to them, and really learn more about the property and where things were that we saw where there was an opportunity for us to take this to a different level; really digging into the comps, figuring out where the market was, and understanding how we could create an opportunity here. So it took some creativity on our side, but to be honest, we almost passed on the deal ourselves for the same reasons other people did. They didn’t tell the story, and in this market, brokers are extremely savvy. So they understand how to show you all the ways you can make money on a property, even if it’s not generating that income today. And because this deal didn’t do any of that, we almost missed the opportunity.

Slocomb Reed: Where is this property?

John Casmon: That was in Louisville, Kentucky.

Slocomb Reed: What part of the story was not being told? You’ve closed on this now, right?

John Casmon: We closed on it, yes.

Slocomb Reed: What is the value that you’re adding or what is it about the market that was not being recognized?

John Casmon: Well, first of all, in the OM and the offering materials that were sent out, none of the story was being told. They basically said, “Here’s the property.” You only have five pages of real information that just say, “Here’s the property, here’s where rents are, here’s when it was built.” It didn’t tell a story at all, it didn’t show how you can create value, it didn’t highlight that there was an upside in the market. So initially, we didn’t think there was either.

We dug into it and look at comps and it took some work to really understand the market and this property, because this property was a new asset. It’s a new asset, but it’s a B-class asset. It was difficult for many investors to understand how they could create value on a new B-class asset. We love that fact, because one, we’ve got a better-quality property than what most of the B-class properties have. But on the same note, we don’t have…

Slocomb Reed: You’re talking about a new construction in a B area?

John Casmon: 2019 built property, yes, but in a B area, that’s right. A property, B area, which typically, we wouldn’t want to see. But because there’s so much demand in the market right now, we actually believe in trying to get higher quality assets today.

The way I would think about it is if you’re buying a car — used car prices shot up during COVID. If you’re buying a brand-new Cadillac, and let’s just say they want $60,000 for it, and a five-year-old Cadillac has been available for $55,000, you might say, “Hey, for the same amount of money, or for something very close to that, give me the new Cadillac.” And at a certain price point, you’d rather have the higher quality asset than trade down and have to increase the value and all that yourself.

Slocomb Reed: And for the next five or 10 years, it should be lower maintenance, right? Both the Cadillac and the apartments.

John Casmon: That’s exactly it, and that’s the logic for us, was to say, “Hey, you know what? We actually think there’s more opportunity here, because we won’t have all the repair and maintenance expenses that you typically see when you’re buying a 40 to 50-year-old property. You’re buying something that was built two years ago.” So that was really important for us as we underwrote that deal.

We also had to step back and rethink and re-approach the way we underwrite a deal, because it wasn’t the 40- to 50-year-old property where you expect a certain amount of things to break every single month. You do expect the property to maintain itself a little bit better. Now you still have to have some repair maintenance for sure. All properties, no matter brand new or 50 years old, all properties need some kind of repair maintenance, but certainly not to the same extent as maybe an older C class type property.

Slocomb Reed: Sure. How much has the pandemic rent growth factored into the way that you’re looking at deals now?

John Casmon: Not much. We don’t really boost up our numbers based on that. Obviously, right now, demand is really hot, but we don’t foresee that being the case for three to five years down the road. So really, we’re buying based on current market rents, where we think we can take market rents too, and we’re using some of our historical averages as far as the rent growth opportunities going forward. But we’re not banking on double-digit rent growth. I don’t think that’s realistic to put into your underwriting, so we’re not using that at all.

Slocomb Reed: The Best Ever listeners know now that you and I are friends, that we know each other outside of this podcast. I hold your opinion and your experience in high regard, John, so I’m going to get selfish and state an opinion here that my personal opinion would be pretty close to this. I want to know what you think of it, and I want the Best Ever listeners to get a couple of minutes of us having this conversation. Please, whether you agree, disagree, hit me as hard as you can… I want to know where you’re coming from on this.

The majority of my current portfolio right now would be C-class. Workforce housing is not a term I always enjoy, but it qualifies in this regard. One of the things that I’ve seen during COVID, including at the end of March 2020, which is when the state of Ohio got our shelter-in-place order, a lot of people lost their jobs, but a lot of employers jumped in with $15 an hour jobs, all over the place. Anyone who lost their job could go make 15 bucks an hour somewhere; there were opportunities available.

We’re seeing, not necessarily the minimum wage on a federal or legislative level going up, but we’re seeing within the C-class employment that wages have gone up. I don’t think that’s going to go anywhere, I don’t think that people are going to be willing to work for eight or nine bucks an hour anymore now that they know that they can get 15 somewhere. I think that also does a lot for the rent that those people can afford, and I see C-class rents rising and staying higher, because wages are staying higher. Volatility in the job market – yes; but there were jobs available to these people all the way through COVID if they were willing to change industry, learn something new, go make 15 an hour and be able to afford higher rents than they could before. So C-class rents are going up, they’re going to stay up, and anyone who’s buying right now is going to be able to see increased rents in C-class workforce housing. Alright, John, what do you think?

John Casmon: Man, it’s a very interesting observation. I agree with much of the observation. I do not believe you’re going to be able to get people to go back to 7,25, or whatever the minimum wage is right now, if you can find jobs that are paying 13, 14, $15. With that said, as an investor, I think the minimum wage is not a thing you should be focused on. Because first of all – we’ve got an international audience. When you’re thinking about this, you have to think about your market. What’s really important is understanding affordability. When you think about affordability, you’re talking about people who have maybe 30% of their income is what they should be spending on rent. If you’re in a market, or you’re talking about C-class residents who are spending more than that, then it’s not affordable. If they’ve got to spend 45% of their income on rent, that’s not affordable. So yes, they can make more money but the reality is, is that they’re still pretty tight. Those individuals just don’t have the bandwidth for different expenses that may pop up, and a lot of times there’s lifestyle creep.

Slocomb Reed: To be clear, John, to your point, I’m in Cincinnati, I’m in a Midwest market. I’ve pulled into too many Wendy’s recently. When every Wendy’s is hiring at $13 an hour, that makes a big deal in the C neighborhoods in the Midwest and in the South. I’m really talking more specifically about these higher cap rate cash-flowing MSA’s. But please continue.

John Casmon: Yeah. But to your point though, what I think it does is it raises the floor. In these markets where we invest in the Midwest, and part of the reason is we believe that rents will continue to go up in a lot of these markets, because they are very affordable, and as people are making more money, they will have a little bit more disposable income. Lifestyle creep will definitely kick in, but you’re also going to see that they’ll have a little bit more money and they’re willing to pay that. That’s why you are seeing rents in some of the markets like Detroit and St. Louis – these markets have had 12%, 17%, I believe 11% growth in rent from the previous year. The only way you’re able to see that kind of rent growth in what many would consider a stagnant market is because they were pretty affordable to start out with. When you look at New York and San Francisco, you saw rents come down in markets like that. The reason is there’s a level of affordability where there’s a supply and demand side that comes into play. And people recognize that “Hey, the rents we have here are really affordable.” Now if they’re making more money, they can afford to pay more. And there’s also the quality of housing that’s available.

So I do think that you will see rents continue to increase, especially in the C-class properties, but I think you should pay close attention to affordability. Just because we’re talking about this doesn’t mean you should go out there and expect to get $1,000 for a studio if you are in Cincinnati or some of these markets; you really need to understand what’s affordable to the resident and understand rent projections based off of that.

Break: [00:19:30][00:22:27]

Slocomb Reed: I want to boil this down to one quick question and get your answer. In these higher cap higher, cash flow Midwestern and Southern markets where we’ve seen serious lower-income rent growth, if we can find places, John, where lower-income wage growth has outpaced lower-income rent growth, we can project increased rent growth. Yes or no?

John Casmon: That will be step one. I think you also understand supply. How many apartments are there? What’s the rent growth? Because rent growth is not about how much someone makes; rent growth is a matter of demand and what are their options. If you’ve got 100 new apartments there, then you’re competing on your rent number based on those 100 other apartments. If you’re the only play in town, if you’re the only thing that’s affordable, then you have a lot more leeway as far as what you can charge there.

So I think it’s more reflective of supply and demand, but I will say that wage growth absolutely opens up the door for rent growth, because people can and will pay more. Think about it logically – if someone was making say $10 an hour, they get a pay increase that’s 50%, they go to $15 an hour. What’s going to happen? They’re likely going to look for a better apartment than the one they had before. So now there’s more demand for maybe a B-class property or a B-class apartment. What happens to that same person who was making $40,000 and now they’re making 60,000, or whatever it is? The point is, they’re all trading up. In a great market, people trade up for better quality properties and then rents go up all around because guess what, there’s more and more demand for these kinds of properties.

So I do think you’ll see that trend play out but I think it really comes down to demand and you really need to dig a little bit deeper into the numbers to understand what’s really going to play out from in your neighborhoods.

Slocomb Reed: So you can track wage growth as a correlation to rent growth, but you also need to be tracking inventory supply, to make sure that that wage growth will actually translate to people being willing to pay higher rents for what you have, as opposed to trading up.

John Casmon: Yeah, and I think people typically want to trade up to something nicer. So if there are new developments happening in the market or something like that, that may have a pretty big implication or impact on where you see your rents as well.

Slocomb Reed: What is your Best Ever advice?

John Casmon: Take action do the thing that’s a bit scary. When I was on this show five years ago, it was the first time I was ever on a podcast, and didn’t think that I was ready to be on a podcast. Here we are. And I’ve hosted my own podcast now for four years, and we’ve done over $100 million worth of real estate. Part of that comes from taking action and doing the little things that make you a little nervous and maybe give you some trepidation. But it can snowball. Those things are really important if you do want to see success in business or your life. You’ve got to take that first step. So take action, do the thing that seems a little bit scary, and continue to build on those steps of success.

Slocomb Reed: Awesome. John, are ready for the Best Ever lightning round?

John Casmon: Let’s do it.

Slocomb Reed: Great. What is your Best Ever way to give back to the community?

John Casmon: Search for Water. Search for Water is a nonprofit organization that invests in sustainable water solutions for global communities. I’ve been a part of the organization for four years now. I just love that every dollar that is donated goes directly to the field and directly to help people in need in countries like Dominican Republic, Haiti, and we have three or four other countries; the Philippines… We’ve got about three other countries that we impact.

Slocomb Reed: That’s awesome. What’s the Best Ever book you’ve recently read?

John Casmon: The 80/80 marriage; not really real estate, but your home life is so key to having success. It is a relationship book. The book basically talked about not shooting for 80/20 or 50/50 in your relationships, but trying to shoot for 80/80, which means both of you go above and beyond to help take care of anything that your family needs. Or in this case, if you’re talking about real estate, that the business needs. So less about looking for equality and more trying to over-deliver on your side and hopefully you’ve got a partner that is looking to over-deliver as well.

Slocomb Reed: That’s awesome. And John, where can people get in touch with you?

John Casmon: The easiest thing to do to get in touch with me is we have a free sample deal on our website. You can go to casmoncapital.com/sampledeal and check that out there. Whether you’re going to be passive or active, it gives you a sense of the kind of information you should look for in a deal if you’re going to work with investors. The other thing is to check out our podcast called Multifamily Insights.

Slocomb Reed: Great. Well, John, appreciate you being here. This has been very insightful. Best Ever listeners, we hope you have a Best Ever day and we’ll see you tomorrow.

John Casmon: Thanks for having me, Slocomb.

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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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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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JF2662: 5 Evolutionary Ideas for Your Business with Joe Fairless

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

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

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

 

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Deal Maker Mentoring

 

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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, Denver, Colorado. You’ll hear all the new keynote speakers, you’ll meet some new business partners, you’ll learn some insights from the presentations and from the people you meet, that you can apply to your business today. Here is an example of a session from last year that is still relevant today and will be beneficial for you.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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JF2656: Expanding Your Comfort Circle: From Youth Ministry to Multifamily with Slocomb Reed

From youth minister to now commercial real estate investor, Slocomb Reed isn’t afraid to take chances to grow. He’s taken his portfolio from the ground up and now owner-operates over 65 units. In this episode, Slocomb discusses his past deals and how risk taking has paid off big time.

Slocomb Reed Real Estate Background

  • Director of Investment Services for The Chabris Group of Keller Williams Seven Hills Realty, the largest real estate sales team in Greater Cincinnati by number of sales.
  • Began investing in 2013. Went full-time as a sales agent in 2015 while continuing to invest.
  • Portfolio: Owner-operates over 65 units ranging from single-families to apartment buildings with 20+ units.
  • Based in Cincinnati, Ohio
  • You can find him at www.linkedin.com/in/slocomb-reed-b7145b1a/

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TRANSCRIPTION

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

Slocomb Reed: Doing great. I’m grateful to be here, Joe. Thank you.

Joe Fairless: I’m glad to hear that and I’m looking forward to our conversation. Slocomb is the director of investment services for The Chabris Group of Keller Williams Seven Hills Realty. It’s the largest real estate investment sales team in Greater Cincinnati by the number of sales. He began investing in 2013 and he went full time as a sales agent in 2015 while continuing to invest on his own. In fact, he is an owner-operator who has over 65 units ranging from single families, to hold and flips, to apartment buildings with 20+ units. Based in Cincinnati, Ohio. With that being said, Slocomb, do you want to give the Best Ever listeners a little bit more about your background and your current focus?

Slocomb Reed: Absolutely Thanks, Joe. I came to real estate investing as a full-time professional youth minister with a bunch of side hustles. I read Rich Dad Poor Dad in the spring of 2013, kind of in preparation for my wedding actually, which was in May of 2013. I fell in love with the Rich Dad books, read several of them, landed on the strategy of owner-occupying a two to four-family as my go-to side hustle. I didn’t know it was called house hacking at the time, because I didn’t find Bigger Pockets until a year or two later. I fell in love with real estate. We bought a four-family, closed on it on Valentine’s Day of 2014, moved in, it turned out I was a natural at dealing with tenants. I’ve never been handy so that was definitely the first thing I hired out, was fixing toilets and things. But I loved the math of real estate. It looked like a space where there was ample opportunity so I decided to dive full-time into real estate.

It looked at the time like becoming a residential sales agent was the best way to do that. I still think that’s a great move for a lot of people. Plus, a youth minister’s salary is pretty easy to replace. I kept a quarter-time youth ministry gig for a few years after that though, while I was in sales full-time. As I did that and used my experience as a sales agent to become a better investor, to represent investors, and learn about the market, the industry, build my own skills, continued investing, bought my second deal, which was a BRRRR deal, in 2016. I have been off to the races since then.

Joe Fairless: As a sales agent, you learned a lot about investing. What are some things you picked up as an agent? Because I ask that for people who are looking to become a real estate agent and transition to investing full-time. I just wanna hear what you learned.

Slocomb Reed: Becoming an agent gives you the opportunity to think like an investor and analyze deals like an investor, effectively for a salary. It’s a commission but you’re getting paid for getting deals closed, whereas most buy and hold investors are putting out money when they purchase. Part of what they’re putting out is going to you in the form of income. So it gives you the opportunity, when you get investor clients, to do a lot more deal analysis, to get yourself in front of other investors, learn what they’re doing, learn by helping them accomplish their goals. Also, when you have a lot of investor clients, you are in and out of a lot of buildings that you’re showing them, getting the opportunity to see what they think about the condition, what issues concern them, what issues don’t, attending inspections, and asking inspectors questions.

Basically, you get to dive head-first into some of the biggest decisions that real estate investors ever make without having the financial risk of putting your own money into them, and in fact getting commissions for doing it. It definitely accelerates the learning curve, for sure.

Joe Fairless: Do you make less money working with investors than you would non-investor clients?

Slocomb Reed: That’s a great question, Joe. I think the best way to answer that for an agent or a prospective agent is that you should find your niche, you should figure out what it is that you’re passionate about. In real estate in general, whether as an agent, some other service provider, as an investor, one thing that’s really helpful is finding the hard work a lot of people don’t want to do, that you enjoy.

For me, I needed time to swing into working with investors full-time, but I enjoy investors more. On a transaction-by-transaction basis, the most important thing for an agent, especially representing buyers – your ability to earn is not only linked to the purchase prices of the properties that your clients are purchasing, it’s also linked to how much of your time is used up representing your client in that transaction. As you get good at sales, and as you get good at understanding investors and their needs and their goals, I got to the point rather quickly where it did not take a lot of my time to help my investor clients find the properties that they wanted. So I would spend a quarter as much time helping my client buy $150,000 investment property as I would helping a $300,000 single-family owner-occupant homebuyer find their home, because I could dial into the investor’s mindset just looking at the property online; I knew which ones they needed to get into and I know which offers they needed to write. So I could get four times as many deals done in that $150,000 duplex range as I could with a $300,000 owner-occupant homebuyer. More income for me, because that was my specialty and that’s the work that I wanted to do.

Joe Fairless: You did single-family homes. When did you buy your first, we’ll call it, five-plus unit property?

Slocomb Reed: My first five-plus unit property was a six-unit, in April of 2019. I had been using virtual assistants in the Philippines to help me with lead generation. I build out a list that they call, and then they basically schedule follow-up appointments with me with the people that they’ve found to be motivated sellers. They scheduled a follow up call for me for a property like this, the amount that the seller wanted for it, made it a really good deal, so my partner and I took it down.

Joe Fairless: How many purchases had you made, either exactly or approximately, up until that point?

Slocomb Reed: That would be four.

Joe Fairless: Four purchases. Okay.

Slocomb Reed: Two house hacks and a BRRRR, a three family and a BRRRR duplex.

Joe Fairless: Okay. You and a partner on the sixth unit, how did you structure it?

Slocomb Reed: He was a client who I actually met when I was presenting at our local meetup here. This isn’t his Best Ever real estate investor mastermind. I was speaking, he came up to me and said, “Hey, it sounds like you need to be my agent.” I said, “Great.” I helped him buy a couple of things and he was hearing about these BRRRR (buy, rehab, rent, refinance, repeat) deals that I was doing, where I was getting all of my starting capital back, and then some, within 12 to 18 months of purchasing. For him, the math made enough sense that he proposed to me, “Hey, if you can find a deal for us to do together where I get all my money back within 12 to 18 months, I’ll fund the deal entirely and we’ll split it 50/50.” I said, “Yes, please. Thank you.” So I found it, I negotiated it, I did most of the management of it while we owned it, and he funded the deal. We ended up actually selling that one rather quickly. We bought it for 225, we sold it for the equivalent of 325 about 16 months later, without needing to do too much work to it in the meantime.

Joe Fairless: So like 5000 in improvement dollars, or if that…

Slocomb Reed: We probably spent 10 grand in improvement.

Joe Fairless: So all in 235, and sold it for 325. How quick was that turnaround, from buy to sell?

Slocomb Reed: It was about 16 months. We listed it in order to sell it, having owned it for just over a year, so we’ve paying long-term capital gains. But also, while we were in escrow, COVID-19 was announced as a pandemic and all the banks that were underwriting loans, at least in the Cincinnati area, started reconsidering those loans. Our buyer lost his loan, and we had to go back to the market. So we were really trying to sell it after 12 months, but ended up at like 16.

Break: [00:09:34][00:11:07]

Joe Fairless: What was the next deal after the six-unit?

Slocomb Reed: The next deal after the 16 was…

Joe Fairless: Did you say 16 or six?

Slocomb Reed: Sorry, six. Only six. My bad. The next deal after the six-unit was a 24-unit on the west side of town that I had actually found off-market for a client of mine who bought it. He’s a non-local investor, he was having trouble finding good management. So I ended up buying it from him about 18 months after he purchased it, and basically paid him what he had in it, and we took over to get it. It was at like 50% occupancy, and some of his tenants didn’t want to pay rent, so we had a lot of work to do to get it up to performing at market. But that was a really good deal for us.

Joe Fairless: Alright. You just bought a 50% occupied property. It’s the largest property you’ve ever bought, by four times. What gave you the confidence that you could turn it around, and then how did you do it?

Slocomb Reed: That’s a great question, Joe. I enjoy expanding my comfort circle, one rung at a time. I probably took on two to three…

Joe Fairless: That’s four; those were four rungs.

Slocomb Reed: I probably took on a couple of rungs of that one. The learning curve was steep to be sure because that was definitely a C-class neighborhood. So we’re talking affordable rents, for sure. There were a lot of things about managing in lower-income areas that I had to learn. But really, what we were looking at was that the deal was good enough on paper. Like what Robert Kiyosaki says, you make money when you buy. And we knew we were getting a good enough deal that no matter how difficult it was to get this place turned around, it will work out for us.

Let me give you an idea of those numbers and you can tell me if there are any more details you want to get into. We bought it for 635, the average rent was around 515 a month, 24 one-bedrooms. We were told that rent would never go above 575 in that area for a one-bedroom apartment like ours. We spent a little under $100,000 getting it totally up to snuff, so in it for around 735. We ended up filling all of the apartments at 650 a month.

Joe Fairless: Wow.

Slocomb Reed: Yeah, when we went for our cash-out refi to finish the BRRRR process. Because it’s a depressed area and there are very few comparable sales, because there just aren’t a lot of apartments in that part of Cincinnati, we were given an 8.6 cap. But even at an 8.6 cap, it appraised for 1.1 million.

Joe Fairless: Wooh, doggies! There we go.

Slocomb Reed: It was a juicy one. Yes, there was a lot of…

Joe Fairless: You said 1.1 million, and you’re all in at 735.

Slocomb Reed: Correct. At an actual eight cap, it would have appraised for one and a quarter. But we couldn’t get the appraiser down from that 8.6. This means it also has a sweet cash flow, because of how high the cap rate is. But yeah, that was a big one for sure, and we knew going into it — we didn’t know that we’d get 650 as easily as we did, we didn’t know that we’d get the 1.1 valuation; we were expecting to be in the high eights, hopefully. But even in the high eights, we knew that we’d have a really nice refinance and we’d have a great property. We actually put it on a 15-year fixed rate mortgage at 4%. Our plan at the moment is to actually let it get paid off and to own it free and clear 15 years from now, because 15 years from now my partner’s younger daughter and my daughter will be graduating from high school. So maybe the coolest phone call I’ve ever had in real estate was calling my parents right after that cash-out refi to tell them that I put a 24-unit apartment building in my daughter’s college fund.

Joe Fairless: Nice. That’s cool. That’s something I know she’ll appreciate, even if she can’t say it now. Or I guess she could say, but even if she doesn’t understand the benefits that will take place as a result that.

Slocomb Reed: I bring her to my projects whenever I can. I’m working on a 26-unit right now, she spent Sunday at Home Depot with me. I was carrying the paint buckets into the apartments and she was carrying the tape. Whenever she gets into a new place, she always says, “Daddy, this house – amazing.” Every time; it’s awesome, it’s adorable.

Joe Fairless: I’d like to get into some more details of how you’re able to turn it around though. Because there’s that 50% occupancy, and I’m glad that we went over the detailed numbers. So that’s what happened, but now let’s talk about the how. How did you go from — and you mentioned “we”. First off, who’s we?

Slocomb Reed: We is my partner and me. It was the same partner I bought the six-unit with. He actually did bring all of the funds to close the 24-unit. Then it ended up being my funds that did a lot of the renovating.

Joe Fairless: How did you do it? How did you get it occupied, stabilized, and get the right people in there, all that stuff?

Slocomb Reed: The first thing here, Joe, is that we got really good debt. I use a commercial mortgage broker here in Cincinnati named Kurt Weill, and he really has his ear to the ground with what local banks here – which ones are hungry to lend to real estate investors and apartment investors, which ones are going to get aggressive and give us really good terms, and which ones are really sitting on their hands and letting the market play out, based on the way that banks run their own numbers to determine what kind of risk they want to take. We were able to get a loan with interest-only payments for one year, and a construction second that covered a lot of that renovation cost. When we took over a 24-unit with 15 tenants in it, and only nine of them felt like paying rent, we had an interest-only mortgage which made it a lot easier to make those mortgage payments with the cash flow from nine of 24-apartments. But also, we had a construction loan with $70,000 of funds coming back to us after we did things like resurfacing the parking lot, replacing all of the original windows and sliding glass doors in these two 1978 12-plexes, and start turning apartments.

Financially speaking, the interest-only debt was really helpful. And the fact that the first 70 grand we spent came back to us from the construction note helped us accelerate that renovation as well. I am doing something similar with a 26-unit right now.

Kind of the steps in that process are 1) establish myself as new management, demonstrate that I respect the current tenant’s homes, and that I expect a level of respect from them that they have not needed to demonstrate before… Because I’m typically taking over from management that’s not as active as we are. The first thing I do is any major capital improvements that are needed. In both cases, this 24 we’re talking about and the one I’m doing now, the first thing is resurfacing the parking lot, getting rid of all the potholes, getting nice, good asphalt, restripe all the spaces, making sure we have enough parking spaces to meet the demand of all of our tenants having cars. In affordable lower-income areas, it’s really important to me that I know I can get tenants with cars… Because having wheels is effectively an employable skill especially when something like COVID happens, a lot of smaller businesses are closing, and a lot of bigger businesses like Amazon and Kroger, the largest grocer here in Cincinnati, are hiring like gangbusters. I want to know that my tenants are the ones who are able to go get those jobs when they get laid off. So resurfacing parking lots is a capital improvement that tenants feel strongly about. It also changes the aesthetics of the exterior a lot. Go ahead and make the property a nicer place to live, and then get the apartments on the market at the higher rent that I’m expecting. And when they start leasing at that higher rent and I know I can get that higher rent, that’s when I raise the rent on the inherited tenants, to whom I have already demonstrated that I’m going to make this a nicer place to live than they had when they moved in.

Joe Fairless: Resurface parking lot… What other things do you do initially to make it a better property that is noticeable to the tenants?

Slocomb Reed: A big part of what they notice, Joe, comes down to communication. We are very proactive in communicating with our tenants. For example, with the 24, when we replace all of the original casement windows and sliding glass doors with insulated vinyl, we made sure our tenants knew that that was going to bring down their electric bills, because these buildings have electric heat and electric air. So they are covering the expense of heating and cooling their own apartments. So not only are the windows and doors nicer, but they’re also going to reduce our tenant’s bills. We introduce it that way when we explain the hassle of having people come into their home and take out their windows, replace them with other windows, and then have to take care of the walls and the pain afterwards.

We did a lot of renovating individual apartments, putting down new LVP, swapping out tubs and vanities, some cabinets, some cabinets we left, and countertops, light fixtures, outlets, switches, covers, paint, of course… Then also, when we had the majority of the apartments renovated and it was time to raise the rent on the inherited tenants, we gave them the opportunity to move into a newly renovated apartment at that same raised rent, which would give us the opportunity to get into their old unit and get that one done, so we can get good rent there as well.

Break: [00:21:20][00:24:13]

Joe Fairless: Really quickly, that’s a 24-unit. The 26-unit, which I heard you say you’re doing a similar process that you did on 24-unit… How did you find the 26-unit?

Slocomb Reed: I’ve found the 26-unit through networking with property managers. I connect with property managers for a couple of reasons. One of them is I effectively am a property manager. I am the manager of my own property, so sometimes I have questions, issues that I’m working on, the opportunity to pick their brains and figure out if there’s something obvious that I’m missing within management and dealing with difficult situations with tenants… But also, I am asking property managers about the clients they have who are a pain. The ones who just want the apartments filled all the time and are never willing to fund renovations, or they’re only willing to fund half of what the property or the unit needs in order to command market rent, and then those owners panic when their only half renovated apartment sits empty for too long, so they ask the manager to put someone in below market just to get it filled so their expenses are being covered… I reach out to property managers to ask about those clients of theirs, and whether or not I can make an offer, let the property manager get the commission for representing the seller, and take the manager’s problem properties off of their hands. I take it over, I manage it, they get a juicy commission.

Joe Fairless: I love that. And you closed on a 26-unit with that approach?

Slocomb Reed: Yes, closed on it last month.

Joe Fairless: Taking a step back, what’s your best real estate investing advice ever?

Slocomb Reed: My best advice ever is to do the thing that you’re thinking about. Go ahead and jump in the pool. Be willing to expand your comfort circle.

Joe Fairless: We talked about how you went from the 6-unit to the 24-unit, so putting your advice into action, and then recently closed on that 26-unit. We’re going to do a lightning round. Are you ready for the Best Ever lightning round?

Slocomb Reed: Let’s do it.

Joe Fairless: Best Ever way you’d like to give back to the community.

Slocomb Reed: I love being involved in youth ministry and the church. I also love doing things like hosting meetups and advising newer investors, people who are going where I’ve been.

Joe Fairless: What deal have you lost the most amount of money on and how much was it?

Slocomb Reed: You know, I haven’t lost money on any deals. Basically, I’ve held things long enough to profit on them. I have had contractors steal tens of thousands of dollars on a property. I bought it well enough that I held on to it long enough that it appreciated and I made a small profit.

Joe Fairless: What deal have you made the most amount of money on and how much was it?

Slocomb Reed: The 24-unit that we just discussed would be the biggest numbers, but frankly, I bought my four-family house hack for 170k in 2014, and just earlier this year, it appraised for 500k. When you look at the fact that I bought it on an FHA loan and I paid 170k for it, and now it’s worth half a million, I’m going to call that the most money that I’ve made on any one deal. I still own that, it was a cash-out refi.

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

Slocomb Reed: The best way to get a hold of me would be by email, at slocomb@tlp-management.com.

Joe Fairless: Best Ever listeners, I want to let you know first that Slocomb will be a new interviewer; he is currently an interviewee right now. He will be a new interviewer along with Ash Patel on the show. I’ve known Slocomb for eight years or so…

Slocomb Reed: Yeah, around six or so years six.

Joe Fairless: Six or so years. Okay. Thank you for fact-checking that. Around six or so years, and I know him originally through the meetup that we do here in Cincinnati. I can tell you that I handpicked Slocomb, and I’m grateful that he said yes to do interviews for this show. Because when I hosted that meetup – I don’t really host it anymore, I don’t really attend it often anymore… Slocomb now hosts the Cincinnati meetup. But when I was hosting it and I would be interviewing people in front of the group, Slocomb always would stand up and ask pointed questions that were very insightful, and I knew from that experience that he’d be a great person to interview guests on this show. In addition to that, as you heard through this interview, he is doing larger deals, and he’s doing them in a way that he’s getting hands-on experience, so he knows the owner-operator front and he’s doing them in a creative way too, which I thought would bring another good angle to the show. With that, I’m grateful to officially announce that Slocomb is going to be doing some interviews. I will still be doing interviews, but I’m scaling back the amount of interviews that I do. Ash and Slocomb are going to be doing more.

Slocomb Reed: Joe, I’d like to speak on this as well. I’ll be quick. We met because I put a super clickbaity post on Bigger Pockets to connect with as many investors in Cincinnati as would comment. Those investors were the people who were going to your meetup, and they told me that’s where I needed to be. Joe Fairless had a meetup in Cincinnati in-person, and there was a great opportunity for me to come, learn, ask questions, take notes, meet a lot of people. I met a lot of clients and a couple of business partners in that room. And as you grew that meetup, Joe, I took advantage of every opportunity I possibly could, to basically ride your coattails and build my own business through the meetup that you created. I was very grateful for the opportunity to start hosting that meetup when it was time for you to step away from that. I’m also very grateful to have this opportunity to be helping host the Best Real Estate Investing Advice Ever Show.

The saying “A rising tide lifts all ships”, Joe – in real estate investing, you’re the tide. And I’m very grateful for the opportunity to be one of these ships that have the opportunity to rise with the tide that you’re building through all the work that you’re doing – your podcasts, your books, your meetups. Thank you, Joe. I’m very grateful.

Joe Fairless: I appreciate that. Best Ever listeners, the quality of interviews will continue to be high and probably even higher, so I’m grateful that we’re able to bring someone on like Slocomb. With that being said, Slocomb – great conversation. Looking forward to everything we have together in the future as well. Talk to you again soon.

Slocomb Reed: I appreciate it. Thanks again, Joe.

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JF2649: The 4 Best Ways to Manage Your CRE Investments with Your Full-Time Job with Jaideep Balekar

It can be a struggle trying to break into commercial real estate investing when you have a full-time job that occupies most of your schedule. How do you even find the time to dive in, let alone keep up with your investments? Jaideep Balekar was in a similar situation when he started actively investing while working full-time as a cybersecurity consultant. In this episode, he shares his advice on how to navigate and persevere through these challenges.

Jaideep Balekar 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, Jai Balekar. Jai is joining us from Cincinnati, Ohio. He works as a full-time cybersecurity consultant and is primarily an active real estate investor, but also has one syndication as well. Jai’s portfolio currently consists of 30 doors, and he’ll soon be adding 95 additional doors by the end of this year as a JV partner. Jai, thank you so much for joining us and how are you today?

Jaideep Balekar: Thank you so much for having me Ash. I’m doing fantastic. How are you?

Ash Patel: Wonderful, man. It’s our pleasure to have you here. Jai, 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?

Jaideep Balekar: Absolutely. Basically, the way I got started in real estate was I was always fascinated by real estate. I did a lot of reading, Bigger Pockets, books like that, a lot of books that a lot of people have read. Rich Dad Poor Dad is the first one that got me started. But I had a travel job, I’ve always had an IT job, and it kept me away from taking that leap of faith if you will. Then COVID happened and I started working remotely. Right before that, I had invested in my first investment property, which also happened to be a very heavy lift down to the studs renovation. So it kind of worked out. I know COVID had a big impact on many people’s lives, but it was a blessing for me because I was able to take some time away, not have to travel, and focus on real estate investments. That’s kind of how I got started. After that first project turned out well, that confidence was definitely bolstered, and I was just able to keep going deal after deal.

Ash Patel: You tell me about that first project. What was that?

Jaideep Balekar: Absolutely. So the first project was essentially two fourplexes or two quads, right next to each other, in Cincinnati. One thing that I was very confident about was where they were located. They’re very close to a neighborhood called Oakley in Cincinnati, which is more of a Class A location, with a lot of good restaurants, and a lot of millennials like to live in this area as well. It’s also right off of an interstate, so very close to downtown. Because I was kind of confident about the location, I’ve always heard from all the books and mentors, one thing that you cannot go wrong about is location. That’s one thing you cannot fix. You cannot force-appreciate an entire neighborhood and location. So I was like, “Okay.” These two houses were extremely scary. These were on MLS, by the way, and when I went to see these two quads, I saw a lot of people turning away. They were like, “Oh my god, this is just way too much knob and tube wiring, and stuff like that.”

But I took a chance I was like, “Okay, anything can be fixed.” The inspection came to be relatively okay in terms of the structural aspect of it. I was like, “Okay, the building is structurally okay. Everything else we’ll manage to fix.” Of course, one of the lessons learned is always to have a huge contingency on the rehab costs. That was my first major rehab and I had no idea how to estimate rehab costs. What I had estimated versus what it ended up really costing was three times as much. But all in all, it was a fantastic learning experience. I think I had, fortunately, enough buffer to actually cover those additional expenses in terms of rehab. Then I also ended up self-managing the property, and I still do, and that was another next layer of learning, if you will… That once you have actually stabilized the property, how do you run it more efficiently, as efficiently as possible to keep those cash flows up? So it’s been a great ride. That first deal was definitely one of my best ones.

Ash Patel: And you did this all on your own? You didn’t have partners on this deal?

Jaideep Balekar: That is correct. Yes.

Ash Patel: Can we dive into the numbers?

Jaideep Balekar: This was purchased in the late 2019 or late 2020 timeframe. We paid 400K for eight units, so 50k a door, then we paid about 200K in renovations, and about 20k to 25K in holding costs. All in, we were at about 625k for eight units. These properties were rented at 400 a door before the rehab, because they were severely distressed, so it was significantly below market rents. Once we fixed it all up, which was essentially all-new exterior, roofing, soffits, fascia, decking, new framing, asphalt, retaining walls, and an all-new interior. So that was new plumbing, new electric, new floors, you name it; new everything, basically. We were able to get the rents from 400 to $1,000 on average. So 2.5x rent increase. Initially of course, when I did that, I had a good idea that I will be able to push the rents, but I didn’t know I would be able to push the rents so much. It was a blessing in the end that I was able to actually exceed my projections.

Ash Patel: That’s great. What are these two properties worth now?

Jaideep Balekar: These are worth close to 800k.

Ash Patel: Okay. The joint venture that you’re working on now – can you tell us about that?

Jaideep Balekar: Sure. There’s a 32 unit that I’m working on with a partner I know through the real estate community and have been in touch with, an out-of-state investor. So my value proposition is to be boots on the ground, again, a deep value-add project. So I’ll be involved in overseeing the value-add component of it. It’s 32 units, mostly two bedrooms. Again, what we love about this deal is the location; it’s in College Hill. Just a few years ago, College Hill was a bit of a dicey neighborhood, but things are really looking good. A lot of new construction is appearing in all different areas of College Hill. So location and ability to push the rents post-renovation, and then ending up with a nice renovated building that won’t have a whole lot of problems in the next five to seven years. That’s really our business plan.

Ash Patel: You’re a GP on that 32-unit deal?

Jaideep Balekar: Yes.

Ash Patel: Are you investing capital as well?

Jaideep Balekar: I am investing very little capital. So a portion of the equity that I’m getting is in exchange for the sweat equity that I’m putting in, and a small portion is based on the cash that I’m putting in.

Ash Patel: Are you also bringing investors to this deal?

Jaideep Balekar: We only have two more investors, and they’re primarily putting in all the capital.

Ash Patel: Got it. And numbers on that deal? What’s the purchase price?

Jaideep Balekar: We are at 1.6 purchase, so 50k a door. We are roughly at about 10k a door for rehab, interior/exterior combined. This is more of a cosmetic rehab than a true gut job renovation. There’s no new plumbing or electrical required. But we are hoping to complete that project in 18 to 24 months, all of the rehab, and then push the current rents, which are about 600 a door, to 850 to 900 a door, which is what we are actually getting. So me and my partner, we both have other properties in College Hill, and we are getting those rents, so at least we know that we can meet those comps.

Ash Patel: Seems like a great deal, Jai. How did you guys find this?

Jaideep Balekar: This was off-market. It came through a broker but I think this individual who got we got the deal from, his main business is a construction company, he does some brokering on the side and he has his network of investors he sends deals out to. So we got that deal from him. I live very close to College Hill, immediately within the hour; I went and did swing by, took some pictures, and I’m like, “Let’s put an offer.” Because time is everything. I’m sure if we didn’t get back to him in a few hours, he would have sent it to somebody else and somebody else would have locked it up.

Ash Patel: How long was your due diligence on this project?

Jaideep Balekar: Due diligence took a little longer than anticipated. I think we had asked for 21 days, but it took longer because it was a mom-and-pop seller. So the records were not all in order. We had a lot of missing leases, so we had to get an Estoppel agreement signed. All of that took a little bit longer, it almost took 45 days. But we are glad that the due diligence period is behind us now, and we are set to close in about 10 days’ time.

Ash Patel: Did your earnest money go hard immediately?

Jaideep Balekar: No, it went hard after the DD period was done. But in some markets, you have to do hard EMD on day one. At least in Cincinnati, it’s not that crazy yet, for the most part.

Ash Patel: So this is a typical GP-LP structure with investors?

Jaideep Balekar: Yes, it is a GP-LP structure. But being the JV, there is no preferred returns or hurdles, if you will. It’s just a Class A, Class B equity, and simple line split.

Break: [00:09:17][00:10:50]

Ash Patel: You work a full-time job. Are you back to traveling?

Jaideep Balekar: I think I will be back to traveling very soon here.

Ash Patel: How do you manage gut rehabs with working a full-time IT job?

Jaideep Balekar: It’s definitely difficult and very stressful. I’m not going to lie about that. Although the last couple of years of my investing journey has been the best couple of years of my life, at the same time, they’ve also been the most stressful years of my life. But if you’re truly enjoying it, then it’s fine. I’m okay with the stress. Initially, in the first few projects where we were doing smaller properties, I built my own teams of plumbers, electricians, HVAC, GCs. I was coordinating all the dependencies between them, I was hauling material myself and making sure materials are on site when they need it, stuff like that. But that was taking up way too much of my time.

At that point, it made sense, because I got to learn a lot, I got to learn how much the material truly costs. So if tomorrow somebody tells me that plywood is $100 a sheet, I would know that they’re BS-ing. Those aspects were a few aspects that I wanted to get a hang of. But going forward, to manage 30 to 65 or even bigger deals, I’m partnering up with… As a matter of fact, just last evening, I had a meeting with a GC [unintelligible [00:12:10].29] they have all trades in house. We are willing to pay them 5% to 10% in construction management fees for better efficiency, being able to source the materials at wholesale pricing, and things like that. That way, I can focus on investor relationships and finding deals or acquisitions.

Ash Patel: Okay, so you’re the boots on the ground for this 32-unit acquisition. What’s your role going to be? What does boots on the ground entail?

Jaideep Balekar: Right. Now, given that I’m not the project manager on the rehab, I’m more of an oversight person, my role is going to be, if things are not going well, swing by every day, and make sure they are going well in terms of the rehab. If things are going fairly well, swing by at least twice every week to still provide that oversight. That way, folks on the ground know that there is somebody, an owner, who is actually here keeping an eye on all the work. That keeps everybody honest and on schedule, essentially. So that’s my main role. But my role is not to get all the materials and literally be there for day-to-day management. That’s my role on the 32-unit.

Ash Patel: Got it. Jai, a lot of people that work full-time jobs contemplate whether they should get started in real estate. Deep down, they may be making excuses, “I’ll wait for the next downturn, the next recession”, or “Maybe I’ll do this when I retire.” What’s your advice to that person who’s on the fence, works a full-time job, and is thinking about investing in real estate?

Jaideep Balekar: That’s a great question, Ash. I think there are multiple ways of investing in real estate. You could invest passively as a limited partner in a syndication, and that’s almost as easy as investing in stocks or bonds. It’s a very passive investment. I would say, if you’re really worried about how much time it’s going to take and if you’re a very busy professional, then that’s a good way to start. But for me, because real estate always fascinated me, the operations, and the ins and outs of it fascinated me more than just cash flows or the money, I wanted to be an active investor. If you want to be an active investor, if you’re just waiting to take that plunge, I think it’s really taking the chance on yourself too, understanding how big of a motivation you have. What are you really investing in real estate for?

For me again, like I said, it was not just the money in cash flows, but it was really freedom of time, having control over my schedule, rather than being stuck in Zoom calls every day, and even if my wife brings me lunch, I can’t eat it, because I’m on a Zoom call. I didn’t want to live that life for the next 30 years. So that was my motivation, having freedom of location, and really trying to build a life that you don’t need a vacation from. That was the end goal. If that means having to compromise and downsize for a couple of years, that was a choice that me and my wife made collectively and I’m so glad we did it. I think it’s really truly understanding what your motivation is.

Ash Patel: Can you talk more about the compromises? Because a lot of this sounds very appealing. Freedom of time, freedom of location… But at what price? This is what often doesn’t get discussed. We see all of these successful people, the cars, the boats, the lifestyle that they live, but there’s a price that a lot of us pay early on. And you’re paying that now; I mean, you’re working full time, you’ve got your plate full with real estate. So give people a little bit of that struggle, just so it’s a true depiction of what it’s like starting out in real estate.

Jaideep Balekar: Absolutely. I think the struggle is on two fronts. Sometimes, of course, if you are flushed with cash, then on the financial side, you might not struggle. But most people are starting out just as I am, and you don’t have unlimited capital behind you. The other aspect is time, and that’s probably the bigger struggle. Time management becomes crucial when you’re trying to juggle multiple different things, and especially if you already have family and kids, it becomes even more crucial. So I think the biggest challenge has been time management, being able to time block, and block time evenings and weekends, so that all of these things, like reviewing operating agreements, leases, doing your due diligence – all of that is done correctly and properly. When you’re starting out, you don’t really have a team, it’s all on you.

If you miss one thing, you might get penalized for it pretty heavily. You miss something on that deal.

So I think one aspect is time and being able to compromise on your free time, on your Netflix time, and dedicating that time to real estate. That willingness has to be there. And number two, I think if you’re willing to compromise a little bit in terms of how you’re spending your money or your lifestyle, that can help propel your real estate journey as well. Because we used to live in a single-family home in a suburb, and we definitely had way more room than we needed. It was a very comfortable lifestyle, but we made a choice that we will sell this house, get all the capital out, and invest in investment real estate. We are now house hacking in a four-family.

Now, going from a relatively big single-family home with a yard to sharing walls with people, there is a compromise. I won’t lie about that. But again, it’s really about what your end goal is, and are you willing to do really anything to get there. Truly, it’s not even like I’m not living on the streets; it’s still a pretty comfortable lifestyle. But you have to be willing to give away some of the creature comforts of your life. Maybe sell that BMW you have and get a Corolla hybrid, save money on gas and stuff like that; cut down your liability, get rid of the expensive watches that you bought when you immediately got a job and started getting those paychecks. That has happened to me, I was just always looking for stuff to buy. But now we just passed Black Friday. I didn’t even open a deal site or anything. Because I know that I don’t want to buy any more materialistic stuff and I want to focus my investments truly on building liabilities.

So I think it’s really the personal choices that you make every day. Eating at home instead of eating out every day, as an example – that has a huge impact by the end of the year. You’ll be surprised how much you end up saving, which now can be used to buy passive income-generating assets.

Ash Patel: Amazing insight. Thank you for sharing that with me and the Best Ever listeners. Make no mistake about it, Jai has a very successful career in cybersecurity consulting. He should be enjoying a lot of the fruits of the years that he’s put in, and he’s making all these sacrifices. So I love hearing that mindset. Thanks again for sharing that. Jai, you’ve got a syndication investment as well. Was that before you actively invested or after?

Jaideep Balekar: That was actually already after I had started to invest actively. The rationale for that investment was, one, I’ve always heard; investing in a syndication is where you get paid to learn. I do want to throw in a caveat there though. When you invest in a syndication, the learning is fairly limited. Because as an LP, you get these quarterly distributions and quarterly reports, but you’re not really involved in the day-to-day operations. But that was my initial, I would say, reason for investing in that syndication as an LP. Two, I also wanted to see that how does a big deal go down? How does the due diligence happen, agency lending, and so on? This property also happens to be local, in Cincinnati MSA. So at least when the rehabs are going on and stabilization is going on, I can always swing by. It’s not like in Phoenix or somewhere else where I haven’t even seen the property. But those were some of the aspects.

The person that I’ve invested with is a great guy, John Kasmin. I still have faith in John, and I wanted to invest in a deal with John. Given an option, I could have always invested that money in my own deal, in an active investment, but I wanted to invest in John’s deal. That was another motivation that I had.

Ash Patel: I appreciate that as well, because when you give your money to somebody else to hold, grow, invest, you understand the mindset of your own investors. They’re putting a lot of faith into you, with their hard-earned money. I think it’s very important to grasp the mindset of the investors. I think a lot of syndicators should also invest passively in other people’s deals as well, for that reason.

Jaideep Balekar: Absolutely.

Ash Patel: What’s the hardest lesson you’ve learned in all of this investment?

Jaideep Balekar: I think the hardest lesson, I would say, is just the importance of having reserves. Right now, we are in a great market, but the importance of having good reserves is going to be highlighted whenever a market correction does happen. We all know it will happen, nobody knows when. But when that does happen, people who are over-leveraged and have less reserves, they’re going to have a hard time. I’ve talked to a lot of lenders who have commercial lending experience of 25 plus years, and one question that I always ask is “What was your lesson learned from 2008?” Some of the lessons learned that they share – they’re experienced people, they have seen how the financial industry suffered and the real estate industry suffered… And I take that and implement that with the way I operate.

On all of my properties, at least six months of BT reserves, CapEx reserves, and repairs reserves on top of that. I keep a lot of reserves for all of my properties. Sure, I could invest that somewhere else and start doubling that money. But for me, peace of mind and a good night’s sleep is way more important than doubling every dollar that I have in my pocket. I think reserves are, I would say–

Ash Patel: How do you get financed? Is it just traditional lending?

Jaideep Balekar: Depending on the location and the condition of the asset. We are now looking at a 13-unit that is extremely heavily distressed. There’s really nothing, not even studs in the property, just load-bearing walls at this point. So for a property like that, I’m looking at private lenders like Lima One Capital. If it’s a stabilized property that meets certain debt service coverage ratios, DSCR ratios, then I’m working with a lot of the local banks, if it’s under a million-dollar loan balance, if it doesn’t qualify for an agency. Then we’re also looking at agency options, where the loan balance is big enough for agency loans, post-stabilization.

Break: [00:22:56][00:25:49]

Ash Patel: When you present yourself and your deal to a lender, do you bring your portfolio with you? Do you have a binder or folder that showcases the deals that you’ve done?

Jaideep Balekar: Yes.

Ash Patel: Do you emphasize that you’ve got six months of reserves for each property?

Jaideep Balekar: I do. Adn when then the lenders hear that, they just love it. I’ll share a story. I’m currently working with a local lender on the 63-unit. Most of my investors or capital partners are all Bay Area folks. Initially, I could just sense that right off the bat, he just wanted to turn our deal down. You guys come in and you buy property here in Cincinnati, but you have no idea how to operate the property. Lenders have gotten burned by out-of-state investors overpaying for properties here in Cincinnati. So that was the initial response. But then we were like, “Okay, let’s schedule a coffee meeting and meet up.”

When we met, we talked about how we run our properties, how we run the rehabs, how much we have in the reserves, and I talked about my portfolio, how I had stabilized, and what were the pre and post rents. When he heard that entire story, that was it, that sold the deal, and we just got approved on the loan. The terms were beautiful, better than we expected. When it comes to local banks and local lenders, it’s really about that relationship. If you can actually provide them with the confidence that you can successfully take this deal down and operate it well.

Ash Patel: I learned that much later than I should have. But having that narrative or that story is so important. For years, I would just send my lender, “Hey, here’s the next deal. Here’s the contract. When can we close?” I had enough of a relationship with them that they would always follow through. But when I started writing a narrative, it was so much easier and faster to get that approved. The board would hear this — it’s not just “Here’s another deal Ash is doing.” It’s like, “Oh, what a cool story. Okay, yeah, awesome. Let’s go.” It also makes you more memorable to both the lender and the decision-makers. So yeah, kudos for doing that, man. Jai, what is your best real estate investing advice ever?

Jaideep Balekar: I think really — again, this is something that probably everyone has heard a million times… But the biggest hurdle is getting started. A lot of people get stuck in analysis paralysis, they do a lot of reading and research, but they never get started. I think even if it’s a JV deal where you’re doing a very small portion and you’re getting equity just for bringing in the capital, or even if it’s an LP as a syndication like I just said, just jump in. I think that once you jump in, it becomes a lot easier. My first deal was the hardest; I learned the most in that deal. But after that, everything became almost like an assembly line. I already had my team set up, I knew where to source the materials from, and I had some lessons learned that I was able to implement in deal number two. But once you do that first deal and jump in, it becomes a lot smoother then onwards. I think jumping in is the biggest hurdle. So just get over it and start investing in real estate.

Ash Patel: Jai, your first two four-unit buildings – you did all by yourself. You’ve subsequently had partners on deals. Would you recommend people on their first deal work with a partner, or do it alone?

Jaideep Balekar: I would say it never hurts to work with partners. You also want to be careful about who you’re partnering with. But if you know you have the right partner, a friend you grew up with, someone you trust, you always learn way more when you work in a partnership, and now you don’t have to do it all. You can play to your strengths and your partner can play to his or her strengths. I’m personally –you know that well, Ash– I’m not a detail-oriented person. I’m more of a high-level big picture. But for these deals, I had to dive into the numbers, I just had to. Because if I missed something, it would cost me a lot of money. But I didn’t enjoy it. So when you work in a partnership, the stuff that you don’t enjoy, you can have your partner do it who has perhaps complementary skill sets. So I always recommend working with partners. In my mind, that’s the only way to scale.

Ash Patel: I agree as well. Jai, are you ready for the Best Ever lightning round?

Jaideep Balekar: Absolutely. Let’s do it.

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

Jaideep Balekar: Recently, I would say Who, Not How. That’s been my recent read. I’m reading Rocket Fuel now, and they’ve both been phenomenal books. Both of these books have had a tremendous impact on my mindset in terms of how I think about teams, delegation, and playing to each other’s’ skillsets.

Ash Patel: Disclosure, Best Ever listeners, Jai and I are friends. We both live in Cincinnati and those are two books that changed my investing. I recommended those to Jai. What’s the biggest takeaway you had from those books?

Jaideep Balekar: I think the biggest takeaway from those books is recognizing the fact that a lot of times realistic investors have that mindset starting out, especially the do-it-all ones. That you can do something in the best possible way and nobody else can do it better than you. I think when I started working with people, I realized that there are many aspects of this business that others can do it way better than me. Then why am I spending time focusing on those things especially on top of which when I don’t even enjoy doing those things? I think that was the biggest aha moment for me from both of these books. And really finding your who is not just about delegation because people talk a lot about delegation.

It’s not just giving work away, but you are helping them and they are helping you. It’s more of a mutual. Because for them, you are their who, and for me, they are my who. Because they are not probably good at visioning and I come in and play that role. But they are probably really good with details and execution, and that way they are my who. It’s very much a partnership mutually beneficial relationship. I think that’s how you got to see business partnerships. That was the big aha.

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

Jaideep Balekar: Best Ever way I like to give back is in two terms really. I think giving back time is more valuable than just giving away donations. So I also donate 10% of all our profits to a charity in India that focuses on the education of kids in poverty-ridden areas. I also really try my best to have as many calls as possible with people who are starting out in real estate, and share whatever I’ve learned to help them get started. I truly enjoy doing that. I love having those conversations. I’m hoping that the time I dedicate to these folks will help them tomorrow to become good mature real estate investors.

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

Jaideep Balekar: The easiest way to get hold of me is via Facebook or by email. On Facebook, my first name, my real name is Jaideep, and my last name Balekar. I’m very active on Facebook and also email which is info@compoundingcapitalgroup.com.

Jai, thank you again for sharing your story with us today. The struggles of having a full-time job and growing a very successful real estate company. Thank you again for sharing that.

Jaideep Balekar: Thank you so much for having me, Ash. It’s always a pleasure speaking with you. I really appreciate the opportunity.

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

Website disclaimer

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

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.

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

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JF1747: Air Force Captain Builds His Real Estate Portfolio For A Side Hustle with Payton Pearson

Typically for a side hustle, people will Uber or work part time somewhere. Payton is taking another route and building his real estate portfolio on the side of his full time job. He’s just getting started with real estate, currently with three properties, with very lofty goals. Hear what his plan is to accomplish his big goals. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

Best Ever Tweet:

“To get good loans at good rates, you have to prove to your lenders that you can pay it back” – Payton Pearson

 

Payton Pearson Real Estate Background:

  • Research analyst, and former Air Force Pilot
  • 1000+ hours of flying experience, owns 3 properties, in process of acquiring 4th
  • Based in Dayton, Ohio
  • Say hi to him at terr547ATyahoo.com
  • Best Ever Book: Rich Dad Poor Dad

 


If you’re a passive investor wanting to learn more about questions to ask sponsors in order to qualify the opportunities, sponsors, and the markets opportunities are in, visit BestEverPassiveInvestor.com.

We created this site just for passive investors to have a free resource providing the questions to ask and things to think through. BestEverPassiveInvestor.com


TRANSCRIPTION

Joe Fairless: Best Ever listeners, how are you doing? Welcome to the best real estate investing advice ever show. I’m Joe Fairless, and this is the world’s longest-running daily real estate investing podcast, where we only talk about the best advice ever, we don’t get into any of that fluffy stuff.

With us today, Payton Pearson. How are you doing, Payton?

Payton Pearson: I’m doing great, how are you?

Joe Fairless: I am doing great as well, and welcome to the show. Payton is in the Air Force, he’s a research analyst, he’s a former Air Force pilot; thank you, sir, for what you are currently doing and have done for our country. He’s got 1,000+ hours of flying experience. He owns three properties, he’s in the process of acquiring his fourth. Currently based in Dayton, Ohio. With that being said, Payton, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?

Payton Pearson: Sure. Hello, everybody. As you said, in the military, I’m currently a captain. I’ve been in for about seven years. I went to the Air Force Academy prior… I got my degree in electrical engineering, and then went to become a pilot and decided to come on over here, in Dayton, Ohio, working at Wright-Patterson Air Force Base. I’m also going to [unintelligible [00:01:53].11]

I hopped into real estate back in about 2017, just a little bit ago. I bought my first property, which is the property at which I am living… And really started to figure things out, like — I was looking around at the rental properties that were comparable to the one that I had just bought, and realized “Wow. The mortgage is significantly lower than what they’re renting out the properties for.” And the mortgage was very low for me to begin with, so I was thinking to myself “Well, shoot, this might actually be very profitable.”

My family, especially my father, has been really wanting to jump into real estate for quite some time. It’s kind of the hereditary thing, if you wanna say that, but… Either way, I got in just a couple years ago, and I have a whole business proposal that I developed as a result… And considering my life goals, I have a very, very aggressive growth model set up for myself, which involves something to the effect of buying at least two apartment complexes per year for the next 5-10 years, and then upping the ante a little bit to much bigger properties. So I’ve got an outlook of very aggressive growth, and I’m really just getting started now, but the momentum is going.

Joe Fairless: I think you mentioned you had a business proposal with your father, or you created one… If I heard you correctly, will you elaborate on that and what you did?

Payton Pearson: Oh yeah, so a business model/proposal is what you wanna do if you’re gonna get really serious into whatever venture you decide to go into. If you’re really inspired, it’s gonna just kind of happen naturally, which it did with me. Basically, I wrote up a plan; I literally wrote it up in Microsoft Word, just explaining what my process was going to be, what the tiers would be. I was gonna start off just to get my feet wet and figure out how real estate works, and how to make it profitable, figure out numbers like returns on investment, net operating income, cashflow positive, the cashflow quadrant, and stuff like that, and get a feel of the things that I needed to know prior to doing really, really big things, like buying 100-unit apartment complexes.

That’s what I started up writing in the plan. Basically, the tiered system that I developed was something to the effect of starting off with 4-unit apartment complexes, and then after I’ve gotten at least 40 units, which would be in that case 10 properties, I would then scale to around 32-unit apartment complexes. But of course, this can be kind of an exponential growth model rather than just a staggered growth model, because I’ll be making more income as I buy more properties. And then eventually go into the 32+ unit apartment complexes, then the 100+ unit apartment complexes maybe in 20 years or so, and then once I get really big, get to my ultimate goal… And this is a very goal! [laughter] [unintelligible [00:04:53].21] but you’ve gotta shoot really high if you wanna get really high.

The goal is to build hotels on the Moon eventually, and by about the time that I’m in my forties to even in my fifties is probably gonna be about when humanity is actually establishing a sustainable, permanent presence on the moon, and I wanna partake in that. So it doesn’t have to all be scientific ventures and whatnot.

So yeah, in this plan I developed that procedure, I developed the general plan, so in words what I wanna do, and then step-by-step procedure what I’m gonna do to execute that goal. I also put in the business proposal specific types of properties that were good examples of what I was planning on buying and what I was planning on doing with them. I also put a sample statement of work in the finished business proposal, where I show exactly what I would do to the properties that I would be buying… Because eventually, the purpose of this is to beautify the world.

I don’t just wanna buy properties to make money, I wanna make the world a better place for people who live it, so that frankly – and this might be kind of a dark way of putting it, but I’m just gonna be frank, and I’m gonna be blunt with it… I wanna make the world a less tragic place for people to live in, and the way you do that is you make it more beautiful. And the way you make it more beautiful is you improve the things that you have control over. And the way you improve the things you have control over is you must first have control over them. The way you have control of a real estate is you buy it. Once I have control over the real estate, then I can start making it better, and then I can rent it out to people and make their lives better because they’re living somewhere that doesn’t suck the life out of them.

So I put in that statement of work in the business proposal, and I had actually sent it out to a couple other entrepreneurs just to see what they thought, see if they wanted to work with me… And I also developed an executive summary. I put that all together, put in some sources, and now if anybody wants to see what I’m doing… Oh, my financials are also in the business proposal as well. That’s something that you wanna have to present to get good loans, at good rates. You’ve gotta prove to them that you’re gonna be able to pay it back, type of thing.

But I think I’m probably preaching to the choir to a lot of people, but to all those people who are listening to this podcast who are new, there you go.

Joe Fairless: Did you create that process or that proposal for someone in particular?

Payton Pearson: It was so that I would have it for my own personal reference, but also for my real estate agents that I work with pretty exclusively, as well as my loan officer that I work with pretty exclusively. This is basically to prove to them that I’m not just talking the talk; I actually wanna walk the walk. That I know what I’m talking about and I’m actually gonna execute.

Joe Fairless: In true electrical engineer fashion, you created that process… And I would love to have been in the room when the loan officer was reading through it, and you go through everything, you go through the terminology, you go through the types of properties you’re buying, how you’re underwriting them… And then he sees that you wanna build on the Moon. [laughter] I’m sure he’d be like “Payton, I was with you all the way up to this point, but… Seriously? You’re building on the Moon? Come on…”

Payton Pearson: Well, that’s literally the Moon  shot. [laughs]

Joe Fairless: Well, I love it. You’re the first person I’ve interviewed who has the vision of building hotels on the Moon, so props to you for that. Let’s talk about the three deals you have done. You said you live in one of them, so you’re house-hacking one of them… What about the other two? Tell us the purchase price and the business plan.

Payton Pearson: Absolutely. The first four-unit apartment complex that I purchased was just a nice little four-unit apartment complex in this place called Kettering, Ohio, which is a decent, little suburb. It has some nice school, it’s pretty clean… And I bought it for 143k. That’s the great thing about the Dayton area, at least if you’re gonna buy in a decent part of the Dayton area, because you don’t wanna buy anywhere. You’ve gotta make sure that you’re buying somewhere that you can handle.

So yeah, 143k was the purchase price, and I structured that deal with my parents, actually. They lent me some money, and they get a rental dividend every month, that I pay them. So I pay the mortgage down, I take my share, I pay off all the electrical, and the gas, and the sewage, and the garbage and everything else, and they get their $315/month, and I get my Porsche. So that was the first four-unit apartment complex I bought.

Joe Fairless: How much did they lend you?

Payton Pearson: They lent me $15,000. Just at the critical point where it might not be worthwhile to lend the money; you might just wanna try to raise it yourself and wait a little longer… But it worked out.

Joe Fairless: And how much are they receiving a month?

Payton Pearson: $315/month. They’re going to get all their money back in just about three years.

Joe Fairless: Yeah, that’s good.

Payton Pearson: Yeah.

Joe Fairless: You hooked them up.

Payton Pearson: I did, I did. And basically, the way you make it work – and I know that you know this, but for the audience – the way you give good incentive to the people who are gonna give you money to buy properties is you just offer that you’re gonna pay them a dividend every month, and they give you money so that you can do the down payment, pay for all the bills, pay for all the mortgage and everything else, and take care of the tenants. That way, they get their X number of dollars per month, and then you’re taking care of everything else. You might get a little bit more, but you also have to pay for the mortgage and all the other stuff. That way, their hands are clean and you’ll be able to keep on getting money from these people, and it won’t be a big deal.

Ultimately, my parents wanna do this same type of process with me for about 6-10 properties, which will come to anywhere from $1,800 to $3,000 that they’re gonna be making per month, once they’re done with it. That’s the structure of the first one. I put in about $20,000 for the down payment, they put in the other 15k.

Joe Fairless: Okay. And why did you borrow the 15k? Was it because you didn’t have the 15k, or you didn’t wanna put that in, so you needed to bring on a partner?

Payton Pearson: Yeah, so I had other things where my money was invested, and I didn’t wanna take it out at that time, because those other things are also growing, and they have potential to grow very aggressively… So I wanna leave them where they are.

Joe Fairless: Like what?

Payton Pearson: Well, I have a little bit in 401K, a little bit in a Roth IRA… Those things are not particularly aggressive growth, but nevertheless, I have some in there. I have some in a Robin Hood account, and I have a significant amount in cryptocurrency. That – I’m just gonna let that stay there. I could take it out at any time, it’s completely liquid, but I’m not gonna take it out, because I want that to keep growing.

So I can save with my current job — I also do some part-time jobs on the side, so that I can acquire even more money for down payments, but I can save anywhere from $50,000 to $80,000 a year if I’m really lean with my expenses, which I work hard to be lean. And then at that point, I had about $20,000 that I was willing to put in… And I asked my parents to partake in this with me. I showed them the business model, I showed them the plan, and they told me what they wanted to do, and that’s what we’re gonna do. Right now I have another $10,000 loan that they gave me for the other property that I’ve just bought, and I’m gonna pay them back just straight cash, plus 1k. So that’s not gonna be one where they’re gonna be invested in it with me; I’m just gonna pay them straight back.

Joe Fairless: Let’s talk about that other one. What are the numbers on that other one?

Payton Pearson: The other property I bought was in this place called Oakwood, Ohio, which is the nicest municipality in the greater Dayton area. It’s where there are million-dollar properties and whatnot. But I got a property, a four-unit apartment complex, for $129,900.

Joe Fairless: Wow.

Payton Pearson: Yeah. It was an incredibly good deal. When it was all said and done, the property was appraised (when we were closing) for $179,000. So that was an instant $50,000 to my equity. Plus the $32,000 that I put in the down payment, means that I have $82,000 of equity instantly in the property. So ultimately what I’m gonna do with that is I’m gonna of course let the loan mature a little bit, because it has two, and then in about six months I’m probably gonna take out a home equity line of credit on it, so that I can use that money towards another down payment, for another property. And also for some improvements to the property itself.

The previous owner of it – she’s a nice, old lady, a real estate agent, but she really didn’t take the best care of the property. The property is in decent shape; it’s what you would call “a sound, but ugly property”. It’s got good water heaters, it’s got good HVAC etc. but it’s just dirty, and the carpets need to be replaced, and there’s one or two cracked windows, and the paint needs to be repainted, and stuff like that.

I actually just got one of the units renovated, and it looks sharp. I found a really good contractor that did it for very cheap, and he does really high-quality work. He was recommended to me by my real estate agent [unintelligible [00:14:06].29] who also actually happens to be top 50 in the greater Dayton area. She’s a very good real estate agent, so I basically hit the jackpot with her. So that worked out.

Joe Fairless: How do you do a home equity line of credit on an investment property? Well, I know how you do it, but do you have a lender that will do that? Have you already figured that out?

Payton Pearson: Oh, absolutely. This is something that we definitely wanna talk about, don’t we? Okay, so a home equity line of credit (HELOC), what that is is you’re taking a line of credit out on the selling value of your property. So what happens is a bank will come in and appraise your property. You have to pay for the appraisal, so you need to keep that in mind. But they go in and they appraise your property, and they say it’s worth X number of dollars. In my case, it was $179,000 that the property appraised for. And then, typically they’ll give you anywhere between a 70% to an 85% loan-to-value HELOC.

If my property is $179,000 appraised value, then they might give me $179,000 x 0.8. Currently, I have a mortgage that’s about 97k. If I get the property appraised for 179k, and they’re gonna give me an 80% loan-to-value, or 80% value for the HELOC – I might be messing up my terms here; correct me if I’m wrong – they’ll give you 80% of the value of your property, so it’d be $179,000 which is the appraised value, times 0.8. You can do a calculation on that; it’s something like $150,000-ish… And that value is the value on which you’re taking the HELOC.

I don’t know all the details of it, because I still haven’t done it yet, but HELOCs – one of the great things about it is that they’re simple interest. So they’re not amortized, like your mortgage. They’re simple. If you go to a bank and they say they’re gonna give you a  HELOC for $30,000 and then they say it’s at 6%, then that’s just 6% interest on a 360-day year. It ends up being something like — say you had a line of credit of $10,000. That’d be like $50/day that you’d have to pay back. I haven’t done that yet.

Joe Fairless: But have you confirmed with a lender that they will do that on an investment property?

Payton Pearson: I’ve talked to my loan officer, but we haven’t actually gone through the process. It’s still gonna be a while.

Joe Fairless: Alright. Got it.

Payton Pearson: The loan has to mature first, so…

Joe Fairless: Alright, so there might be some challenges there, but maybe you’ll resolve it. So let’s talk about the four-unit… You bought it for $129,000. What are the rents?

Payton Pearson: The bottom units – one is going for $575; that’s the renovated one. And the one that I’m gonna rent out here soon is gonna be $525. And the two upper units are $450 and $460. Those are way below market right now. The market rents for apartments of similar type and size in that area are right around $575 to $650. They’re way below market rates, and that’s because the previous owner rented them out for way below market rates.

Joe Fairless: Okay. So right now it’s bringing in around $2,010, and you can increase that an additional couple hundred bucks?

Payton Pearson: Well, if I get all the units rented out for $600, that would be $2,400/month.

Joe Fairless: Do you have to do anything to get it move-in ready?

Payton Pearson: No, not really. The downstairs unit that I just renovated was basically the extent of what I had to do.

Joe Fairless: So right now it’s 1.5% on the rent ratio, dividing the rent by the purchase price… That’s solid. And then if you’re able to increase it from $2,010 to $2,400, that’s gonna be 1.8%. That’s a nice cash-flowing deal, and in a  nice area, too. How did you find both of those four-units?

Payton Pearson: The first one I purchased, the real estate agent with whom I work I found through my running group. I’m a distance runner; I run marathons, and stuff like that… And I’ve found her because she’s also a runner, and I basically told her my story and what it is that I was seeking to do. I told her the type of properties that I was looking for… And this was about the November timeframe of 2018. And she said “Yeah, I can help you.”

We decided to go out on one weekend and look at four separate four-unit apartment complexes in the Kettering area. Three of them were pretty horrendous, and then the one that we ended up settling on was just head and shoulders above the other three. The previous owner had bought it for $90,000 – it was a short sale – and he had renovated all four units. He took very good care of the property. He had fixed some of the cracks in the foundation, he had replaced the water heater… He had done a lot of work with it and he made a humungous profit off of it because he bought it for 90k and sold it for 133k. But we did that, and that’s how I found the first one. That’s why I’m continuing to work with my real estate agent. She’s very good.

Joe Fairless: So the first one was that agent, the second one was that agent, too. Right?

Payton Pearson: Yeah.

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

Payton Pearson: What it comes down to, the number one thing, period, end of story, is not just location, but you have to run the numbers. You must, you must, you must, you must run the numbers. If it is now cashflow-positive, then you really strongly wanna consider not buying that property. Now, if you can afford paying more than you’re making off of the property for an extended period of time, then maybe you can consider purchasing it. But that is a very, very strong caution.

Real estate is very forgiving. Inflation rates of properties over the course of several years are pretty consistent at right around 2%-3%, sometimes higher if you’re in Hollywood or something like that, sometimes lower… But they’re pretty consistent nevertheless. Rental rates also go up by about 2% per year. So real estate is very forgiving, but you must, you must, you MUST run the numbers and have them down solid in your mind. You need a net operating income that is positive… At least eventually.

Joe Fairless: Yeah, that’s an important component.

Payton Pearson: It’s the number one thing, because in order to make a business profitable, and therefore solvent and actually last, you have to make money. That’s what it comes down to. Don’t be afraid of tenant screening. If you buy a property that is severely under-rented, it’s probably being rented to fairly poor people. I’m not just talking economically, I’m talking about quality people, poor quality people.

This is not me trying to be mean or anything, but you’ve gotta be realistic. There are people that are gonna damage your property and whatnot, and you can’t work with them; don’t be afraid to find a way to kindly get them to leave, because you’re trying to improve the properties and make the business profitable. It has to be profitable, otherwise you can’t do anything with it.

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

Payton Pearson: Yeah, sure.

Joe Fairless: Alright, let’s do it. First, a quick word from our Best Ever partners.

Break: [00:21:51].26] to [00:22:35].15]

Joe Fairless: Best ever book you’ve recently read?

Payton Pearson: That’s a tough one, I’ve read several… I’m just gonna go with the classic here, Rich Dad, Poor Dad.

Joe Fairless: If you had to start over with no capital, what would you do?

Payton Pearson: What year are we talking here?

Joe Fairless: Right now.

Payton Pearson: Okay, alright. Wow… I would probably look deeper and research more of how to raise funds with private lenders.

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

Payton Pearson: The property that I am currently living in. It’s a single-family home. It is in a blue-collar neighborhood. I bought it for higher than I probably should have, and I’m probably not gonna be able to sell it for a profit.

Joe Fairless: Best ever deal you’ve done?

Payton Pearson: That would be the Oakwood property that I’ve bought for $50,000 below appraisal.

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

Payton Pearson: With the profits that I make from my real estate work, as well as my job, I give 10% back to my church, and as we were talking about earlier, build up the properties that I own, and increase people’s wonder and set a positive example for everyone else to follow, of not giving up, working your butt off, and achieving anything that you set your mind to.

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

Payton Pearson: You can find me on BiggerPockets.com. My name is Payton Pearson, and I’ve got quite a bit of information on there now.

Joe Fairless: Well, Payton, thank you for being on the show, talking about the way you intentionally set up your business very thoughtfully, putting together that business plan, and your vision for where you’re headed… And how you were able to find the deals through relationships, groups that you’re in, and then also the numbers on the deals, and how you navigated some of the tricky parts of those. Thanks for being on the show. I hope you have a best ever day, and we’ll talk to you soon.

Payton Pearson: Thank you! Thanks for having me.

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JF947: You’ll Lose MILLIONS If You Don’t Understand These Tax Principals

The IRS is merciless, and if you don’t understand how real estate investments and the tax laws work together, you could be at a loss. Focus on understanding self-directed IRA’s and the entities you use in the purchase and sale, and don’t just rely on a cheap custodian to help you. This is a great episode!

Best Ever Tweet:

John Hyre Real Estate Background:

– Tax attorney, accountant and real estate investor
– 19 years of experience as a tax attorney/accountant and 14 years of experience as a real estate investor
– Investor in low income rentals and small mobile home parks
– 95% of his clients are real estate investors
– Prior to owning his company, he worked for two of the Big Five accounting firms and for several Fortune 500 companies
– Based in Columbus, Ohio
– Say hi to him at http://www.realestatetaxlaw.com
– Best Ever Book: Grit by Angela Duckwork

Made Possible Because of Our Best Ever Sponsors:

Want an inbox full of online leads? Get a FREE strategy session with Dan Barrett who is the only certified Google partner that exclusively works with real estate investors like us.

Go to adwordsnerds.com/joe to schedule the appointment.

 

tax principals with John Hyre

 

Joe Fairless: Best Ever listeners, welcome to the best real estate investing advice ever show. I’m Joe Fairless, and this is the world’s longest-running daily real estate investing. We only talk about the best advice ever, we don’t get into any of that fluff.

With us today, a tax attorney, an accountant and a real estate investor, John Hyre. How are you doing, John?

John Hyre: Very good, thank you much!

Joe Fairless: Nice to have you on the show, my friend. John has 19 years of experience as a tax attorney/accountant and 14 years of experience as a real estate investor. He’s an investor in low-income rentals and small mobile home parks, based in Columbus, Ohio. With that being said, John, do you wanna give the best ever listeners a little bit more about your background and your focus?

John Hyre: Sure. My focus is making sure you keep it, because you earned it. Most of my practice is tax-oriented, it’s mostly real estate investors, small businesses and self-directed IRA investors. I do the attorney part now, I refer the CPA work, meaning the tax returns and the bookkeeping out.

I also invest on the side, just sort of building a little bit of wealth on the side, mostly high cash flow, low income, which is a whole separate podcast and story onto itself. Those are the basics.

The client base is nationwide, and I’ve been at it for a little while now.

Joe Fairless: What’s the typical client hire you for?

John Hyre: That’s a hard one to break down…

Joe Fairless: Top three categories for why they hire you.

John Hyre: The top three categories… I’ll tell you, the self-directive IRAs, the self-directed 401k practice is absolutely exploded over the last three years. I won two tax court cases and word kind of got out there on that. So I do a lot of that work, and a lot of people call in and say “Look at my whole structure, top to bottom.” Entities, books, taxes, everything. And usually we figure out a fixed fee and then I save them a ton of money.

Finally, a very specific question – someone might call in with a very specific, very pointed question, which I will of course keep the discussion to the parameters that they define. I would say those top three define it.

Joe Fairless: What do people hire you for with self-directed IRAs and 401k’s? Because I’m under the impression – but obviously, it sounds like I’m wrong – that you can just go to a custodian, like iPlan or Pensco or something, and then they’ll handle everything for you.

John Hyre: They don’t handle everything. They won’t do planning advice or structuring, or at least they’re not supposed to. If you read their paperwork, it says they don’t do it, and if they do it’s not their fault if it’s messed up. A lot of the people you talk to on the phone there, while they mean well, are also salespeople and also just don’t have the expertise.

I get a lot of referrals from those custodians that send me people. For example, people will ask “We wanna setup a checkbook LLC. Can we lend money to our uncle? Can we invest in such and such project? How do we avoid prohibited transactions?” Those are a lot of the questions that I get, and I’d say about 70% of my referrals come straight from straight from the custodians, questions they really don’t wanna answer.

Joe Fairless: You won two tax court cases… What was the case about, if you can talk about it?

John Hyre: I’ve actually won more than one, and by winning, we didn’t go to trial. The IRS decided instead of going to trial, they would just tell my client they no longer owed them any money, and could we just call it even and walk away… Which I consider a bigger victory than going to trial, because you avoid the expense. The two cases are specifically self-directed IRA cases.
The first time we had a guy that was a rehabber mostly, with his IRA, and he had done some things in there that were questionable; they were grey, but we convinced the IRS that “No, that’s okay.”

I’ll give you an example… His IRA ran out of money on a rehab, so he put some of his own personal money in there, which is usually a no-no, but we managed to show the IRS some rulings and some case law that indicated, “You know, we have a fighting chance. Do you really wanna go to court with this?” so they decided to back off.

The second guy had a very large Roth IRA and did a lot of investing. We’re talking rentals, buy and sell, lending, a private equity investment… He did all sorts of things, so there was a lot for them to look at. We spent a lot more time on that one because of the number of transactions. We went through a lot of different things, but ended up in the same position. It was kind of like the Obi Wan Kenobi moment, “These are not the droids you’re looking for.” “These are not the droids we’re looking for” – they agreed with that, and so ultimately we got a very happy ending. There was a half a million in taxes at stake, and we got him out for — I think my fee on that one was in the very low five-figure. He was extremely pleased.

Joe Fairless: Just so I’m clear on that second one… It was the same issue that was being discussed, mixing personal money with IRA money?

John Hyre: That one had a multiplicity of issues. For example, he had a trust that the IRA invested into, that he controlled the trust through a friend who was the trustee, so the IRA was arguing the trust was illegitimate, they argued that you can’t have a friend act as a trustee, which – yes you can, as long as it’s done correctly… They also tried to argue that certain transactions were illegitimate based on the details. Those I won’t go into. Bottom line is we persuaded them that they were wrong.

It took a while. The auditor didn’t wanna listen, the appeals people, who are usually pretty good, didn’t really understand IRAs, which is normal, so we didn’t really get any traction until we talked to the lawyers. I do audit and tax court representation all over the country, but what we do is we bring the cases here to Ohio, we have the trial in Columbus, and the attorneys are actually out of your hometown, Cincinnati. So I know who they are; they come up here, and I’m used to dealing with them. Actually, I have to say, they’re pretty reasonable, the IRS lawyers. They can be aggressive, but they’re pretty reasonable.

The client was in Florida, and ultimately we went through the transactions one at a time until they decided “This really isn’t a good case for us, never mind.”

Joe Fairless: Does that mean that we can mix our own personal money with a self-directed IRA and be okay?

John Hyre: You can, I don’t recommend it. If it’s done, it has to be done in a very specific way. It creates complexity and it creates subtle traps, which is why I recommend people, if they can, just not go there. Keep your IRA and personal investments separate. That’s ideal. With that said, can they be mixed if it’s done in a certain way? Yes. Typically, either an undivided interest, especially if we’re dealing with a note, so maybe the IRA lends 70k, I lend 30k, and it’s 100k total.

I’m oversimplifying… There are some tricks and traps in there that we have to watch for. The biggest one is we have to prove that we did not need the IRA money to enter into a personal deal. You can never use an IRA as assets or income to benefit yourself personally, no matter how small or indirect that benefit. So if you needed the IRA to get into the deal, for example, that would be an example of using the IRA to benefit you, so the first thing we do is try and create a record that “Hey, I could’ve done this deal myself. The reason I brought my IRA in was not because I needed it – I have other sources of money – but because it was a good deal for the IRA.” That’s one example.

Sometimes we’ll do joint investment of personal and IRA money through an LLC. Really, it just depends on the nature of the investment and how much time we’re gonna be in the investment and how much liability there is. For example, I’m more inclined to use an LLC where low-income rentals are concerned, because those are high-liability items. But if there’s a loan, lending money is not really high liability. People don’t tend to trip and fall on notes, so usually just a cheaper joint investment, the same way you might invest in a house as tenants in common is a cheaper, more efficient way to do things. Because we don’t wanna overcomplicate or over-bill the client if it can be avoided.

Joe Fairless: What are some issues that you see your clients or prospective clients have from a tax attorney standpoint that can be avoided?

John Hyre: Tons. That’s two or three podcasts right there.

Joe Fairless: You’re booking me up for the month right now.

John Hyre: Yeah, we’ll fill you up. Let’s see here… In terms of IRAs, it’s not getting help ahead of time, listening to the custodians and being cheap and thinking that you know it. The IRA rules are complicated, and the penalty for the IRA for screwing up is death. The IRA dies if you commit a prohibited transaction; that can be horribly expensive. So usually, even if you do some research, get a little bit of help; get an attorney, talk to them about what you can and cannot do. Put some time in up front.

With general taxes, I would say the biggest issue by far that clients have is horrible record-keeping. They’re entitled to deductions, but they never back it up. They never do what they have to do to make it legit in the eyes of the IRS to be able to prove it. I happen to be married, and I can tell you there’s a big difference between being right and being able to prove to your spouse that you’re right. That second step is where investors mess up. They don’t do what it takes to prove to the IRS that they’re right. Scanning receipts, keeping a good set of books, especially for QuickBooks… And it’s normal; entrepreneurs are normally gunfighter/cowboy/can-smell-a-deal-a-mile-away, and they’ll do the bookkeeping work maniana. And maniana becomes maniana-maniana-maniana, and there’s the issue.

Joe Fairless: I’d love to learn a little bit more about the proving — well, I wrote my notes “Prove to your spouse that you’re right…” [laughs] The intention behind that, which is make sure that we can prove to the IRS that we are right and that we have accurate books… You mentioned scanning receipts and having a good set of books. Let’s say we hire a bookkeeper; he or she is taking a look at our credit card transactions, our bank accounts, and putting them in a spreadsheet. So we have that allocated. What do we need to do with the receipts? And do we need receipts at all if we have them in the credit card statement?

John Hyre: You do need the receipts. In fact, because the IRS has had its budget cut and audit rates are down, they’re getting sneakier and trickier. They’re sending out letters that say “Show me February and May receipts for this business.” And then let’s say you’re missing 60% of them, they just allow 60% of all your expenses on the return. You need to have receipts. The best way to keep them – scan them.

What we do is we pay our children to do it. There’s a tax angle in paying your kids. You get a tax deduction; your kids almost certainly will not pay any tax on the income, because their standard deduction is bigger than what you’re paying them, and if you pay them through not a corporation, so any entity, but something that’s taxed as a corporation… If you pay them through not a corporation and they’re under 18, they also don’t pay social security tax. So you’ve shifted money within the family. You still have indirect control of the money through the kids, you’ve gotten a tax deduction… Once they scan your receipts, save them in three or four different places, and name them by the date. I name my receipts – today would be 030117A, 030117B. I don’t even put what it was for, because I will never look at them again unless I get audited, but I can find them by date. If I get audited, I’m gonna show my QuickBooks to the IRS, and they’re gonna say “Show me February receipts for car expenses”, and I can just pull all the receipts for that month and have a VA or somebody go through the receipts and figure out which ones were for cars, and hand them over to the IRS.

Joe Fairless: Do you use a particular app for that?

John Hyre: I don’t. I probably should, and I suspect that kids are out of the picture… The cheap, easy labor of those kids are my app. I don’t even know what app they use to scan things, frankly. They deal with it. So once I don’t have the kids around, I will probably have to discover one of the better apps. I know there are a ton of them out there. Same thing for tracking mileage. There are a ton of apps that will doing if people would just take the time and implement it.

So once you’ve got the receipts, ideally you keep things in QuickBooks; I’d prefer that to a spreadsheet – it’s a lot better record keeping system. As long as the receipts tie to the QuickBooks that tie to the banks statements – man, that’s gonna be a short audit.

Just last year I had my shortest, cheapest audit ever. I charged a guy $1,300 to do the audit and it made me sick to charge that little. But he had a flipping business — more really an assignment business on the side… So he had a day job, he had a side business on schedule C; he was an engineer, he listened well to directions, he took directions well and he was detail-oriented. That audit lasted about 15 minutes of me showing the IRS agent the receipts, and about an hour and forty-five minutes of me flirting with her and passing the time.

Joe Fairless: [laughs] Let’s say you get the letter that states “We need to see your receipts for February and May” and you don’t have the physical receipts. Have you heard of a case where the IRS is “Well, really? Then how about you show me for the rest of the year, too?”

John Hyre: Absolutely. The whole point of those audits is to see if they’ve got an easy target. The faster and the clearer you respond to that letter, the more likely they are to be done and gone. So first rule with the IRS is “Never lie.” The second rule is “Don’t answer questions that were not asked.” The third rule is “Don’t let the audit metastasize”, and that is precisely what you described, how an IRS will metastasize. They smell blood, they spot weakness, they expand the audit.
Joe Fairless: What was the second rule?

John Hyre: Don’t ever answer a question that wasn’t asked. People do that all the time, that’s why we don’t like clients talk to the IRS. They wanna talk and show the good faith and how innocent and wonderful they are, and the IRS agent shuts his mouth and listens, and gets a lot more information than you want. When they ask a question, no matter how stupid or irrelevant you think the question is, you answer the literal question, with the truth, nothing more, nothing less. You don’t expand.

Joe Fairless: Alright, let’s switch gears to your investing in low-income rentals. What’s the last low-income rental you purchased?

John Hyre: It’s not really a rental… I got one I’m about to flip. The last low-income rental – I bought one if my 401k back in May. I am so busy with the practice I’m not out actively looking, but some of my clients are wholesalers and they bring me things. A wholesaler brought me a low-income rental here in Columbus… It’s not a war zone, but it’s not a beautiful area either… But this was a great deal.

It was 15k. I think he made 5k on it. The lady had been in there for 12 years, the rent is 620/month; it needs about 10k to rehab, but not today. I’ve had this thing now for almost a year, and we’re now getting ready to replace the roof with about how half of my net cash flow.

It’s been a great property. The only real quirk with the property is the tenant has been there so long, she’s hard to train. I have a property manager, because when you have something in an IRA or 401k you don’t wanna run it yourself; there are tax problems with that. You really need to have an outside manager.
For her, the manager needs to show up on the third Thursday of the month, and text her on the third Wednesday of the month. She gets her government check the third Wednesday. You have 24 hours, and she will pay you in cash. If you wait 48 hours, that money will be gone. So you have to show up and pick it up from her. She’s incapable of writing a check. That’s the only real quirk. But if you do the numbers, it’s a sweet deal, and it’s perfect in my 401k. I don’t pay tax on it, I’ll continue to reinvest the money.

Joe Fairless: And you’re using the money from the rental to improve the property? Is your goal to sell it in a certain amount of time, or is this a long time hold?

John Hyre: This is a cash flow property. I could sell it right now in this market for probably 30-35. Maybe if I had a California or a foreign investor maybe 40. It’s funny, I tell my California investors “Be careful, don’t tell people you’re from California, because if they hear that, they charge you more, and you pay.” But no, I’m gonna hold that for the cash flow. I am cash flowing about 5k/year on that property, which if you figure I had 15 in it, that’s great.

For the first four years I’m gonna reinvest about 2,500/year into updating the property. For example, the roof really needs replace. It’s still functional, it’s not leaking, but I can tell it’s gonna go, and I’d rather just deal with it now. Plus, keep her in there. If she’s been in there 12 years, le’s make the place a little nicer. It’s a swell return.

Joe Fairless: Based on your background as a tax attorney, is there a particular reason why you choose to do fix and flips, or low-income rentals versus other opportunities?

John Hyre: You know, some of it is based on the tax law, but some of it — it’s a long story how I got into it. Bottom line is I bought a book called Deals On Wheels by Lonnie Scruggs, almost 20 years ago. And to experiment, I started buying mobile homes really cheap and turning around and selling them on payments, and I got to know the low-income way of doing things. It was a hard lesson… I used to be a really nice person, and dealing with low-income tenants will fix that problem quick.

I learned you have to be really firm, you have to be careful with those guys… But I love the cash flow. I love the cash flow – that’s the real reason I do it. One of these days I may look at other types of rentals, but as long as I can find decent management — because I have learned I don’t wanna manage that. I will probably get arrested if I manage for too long, and they’ll find bodies everywhere. “Who’s the tax attorney that took [unintelligible [00:19:41].13] the water tower in this low income neighborhood?” “Oh, that was Hyre.” So we can’t have that. We make sure that other people manage them for me.

Joe Fairless: [laughs] The number one challenge, at least from what I’ve heard, with low-income rentals is the maintenance and the high tenant turnover. Have you experienced challenged in either of those areas?

John Hyre: Definitely. We’ve gotten better at picking tenants. Now, I’m if Hispanic background. I grew up speaking Spanish, my wife’s from South America, so we do like dealing a lot with immigrant tenants, especially of Latin background. Politically incorrect as it is to say it, the first generation comes here to work, the second generation – not so much. So we really like first-generation… They’re gonna bust their butts, and if you take care of them, by and large they’re gonna take care of you. I do find you get a better result when a woman is present. If it’s all guys, that’s really hard on the property.

You’ve gotta get a feel for their job history and background, are the kids in the local schools…? How itinerant are they? Because they can be very itinerant, but if you take care of them, it’s a good property, they tend to stay, they tend to be very good about referrals… You have to be careful with in particular Latino immigrants. They fix the property up for you — and put that all in quotes, “they fix it up for you”… They think it’s nicer and they think they fixed it up, and you look at it and think, “Oh dear lord, I’m gonna have to tear that down and just start from scratch on whatever it is they did.”

They have a different way of looking at saving money, and they really believe they’re saving you money. And based on my experience overseas, living in Chile, for example, that may work there. That approach just doesn’t work here. You really have to control what they do with the property, drive by it periodically, make sure that half their extended family isn’t living there.

Joe Fairless: John, what’s your best real estate investing advice ever?

John Hyre: Tax-free investing. Don’t pay taxes. Do it through an IRA, an HSA, a [unintelligible [00:21:35].09]  savings account, a 401k… There are not deductions that are bigger, and we’ve gotten a reprieve. There was a bill in Congress – in the Senate, specifically – that showed the Democrats game plan for taking apart IRAs. They don’t like Roth’s in particular. And seeing those, how they figured they’re gonna win and they laid out their game plan – everybody was of course surprised by the result – we’ve gotten a reprieve, and we have some time to use this technique and this device before Congress decides it’s losing too much money. It would be lunacy to pass it up.
And I walk the walk. I invest in my properties whenever I can through one of those devices. I don’t wanna pay the tax.

Joe Fairless: With the 1031 exchange you can continue to defer the gains until you die. Help me clarify something… Whoever picks up your property after you die – it can continue to be up until what… Is it 13 million dollars in there…?

John Hyre: We’re mixing taxes, and it’s easy to do. On the income tax side, if you 1031 till you die, which I think is a great strategy, your kids inherit property – or whoever it is that you have inheriting – and you get what’s called “the basis step up”. So let’s say you bought it for 100k, depreciated it like crazy for 28 years or more down to zero. They inherit it, and let’s say when they inherit it it’s work 300. The day they inherit, they have a basis of 300. They can sell it that day and not pay income tax. So that’s the income tax side.

Then what you’re talking about is the estate tax. You can have up to 11 million in your estate with no planning. This is assuming you’re married – otherwise it’s about five and a half million. You can have 11 million with a little bit of planning in your marital estate and not pay estate tax – which is very high. Estate tax is up there around 50%, so you don’t wanna pay any.
Once you get past that 11 million, you need to do some planning in order to not pay estate tax on the remainder.

Joe Fairless: Thank you for clarifying. Are you ready for the Best Ever Lightning Round?

John Hyre: Hit me!

Joe Fairless: Alright, first a quick word from our Best Ever partners.

Break: [00:23:44].12] to [00:24:26].07]

Joe Fairless: Best ever book you’ve read?

John Hyre: Let me think a minute. Best ever book I’ve read? I read so much that I’m starting to smoke through the ears. The best most recent book I’ve read, the one that comes to mind – there’s a book called Grit, and it is about persistence and toughness and just pushing through. That was a brilliant book.

Joe Fairless: Best ever deal you’ve done?

John Hyre: Probably that little rental I’ve just described. I really like that deal. I’ve done stuff that’s close to that, but not quite that cheap.

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

John Hyre: Two things: volunteering as a debate coach. I coach kids debate; I teach verbal violence, and it’s just fun to see the light come on and the confidence in their eyes. Second, there’s a school here in Columbus, St. Charles School For Boys that we like to give to. I plan ultimately on funding a scholarship; they’re a wonderful school, they change lives.

Joe Fairless: What’s the biggest mistake you’ve made on a deal?

John Hyre: Partners. I’ve almost never bought a bad deal, but I’ve gotten involved with bad partners, I didn’t do my due diligence. In one case I didn’t do the due diligence on the spouse, and it turns out that she was two scoop-fulls of crazy, and it caused a lot of problems, big time. It cost me way more money than they property ever could have.

Joe Fairless: I enjoyed the two scoop-fulls of crazy. I haven’t heard of that, I have a good visualization, so thank you for the metaphor. How do you qualify partners and partner’s spouses now for future stuff?

John Hyre: I don’t partner anymore. I don’t have the need to do so, and for now I don’t. If I were to qualify them, I suppose I would do more due diligence, asking around, looking at history, ask for credit record… This one would have been pretty hard to spot. In hindsight, the only way I could have spotted her condition was talk to enough people who dealt with her, because what’s funny is after the feces hit the rotating blade device, a number of people came up and said, “Oh yeah, she’s nuts!” I just wish I would have talked to those people, but it’s the only way I think I could have discovered it, because she was kind of like high-functional crazy. It’s not like I came home and there’s a rabbit’s head boiling on a pot of water on the stove… You really had to dig to figure her out.

Joe Fairless: What’s the best place the Best Ever listeners can get in touch with you, John?

John Hyre: Two places that go to the same website: iralawyer.com or realestatetaxlaw.com. It’s a primitive little website – I’m so busy I haven’t had time to make it nice. One of these days I will.

Joe Fairless: Well, we will have that link in the show notes page. John, thank you for being on this show, thanks for talking through the tax issues and challenges that investors will come across… Keep our receipts, and also the three rules for dealing with an IRS audit – number one, “Don’t lie”, number two, “Don’t ever answer a question that wasn’t asked” and number three, “Don’t let the audit metastasize”, so don’t let it snowball into something; immediately address it.

And the 15k flip, flip/hold that you’re doing, where you’re getting $620/month in rent; it’s worth about 30k, so it’s really not about the money you’re making on the sale, it’s more about the cash flow, and why you invest in low-income producing properties. Thanks so much for being on the show, I hope you have a best ever day, and we’ll talk to you soon.

John Hyre: Take care!

 

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real estate pro advice

JF869: How to Jump into a PARTNERSHIP with NO MONEY

Napoleon Hill spoke of partnerships in his book Think and Grow Rich, and today we hear about another incredible partnership that took place utilizing the same principles. Our guest brought hard work and hustle to the table without a dime in his pocket and eventually became a partner. It took many hours, learning, and extreme hustle to accomplish this, but it can be done. Hear how he did it and how you can sit side-by-side by your next millionaire partner.

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Coleman Nelson Real Estate Background:

– Co-Founder and Director of Finance and Administration of SNS Capital Group
– In 2 years went from 0 to 65 rental units, worth $3.6 million, with no money, while working a full-time job
– Previously worked for a big 4 accounting firm, with majority of his time working with one of its Fortune 25 clients
– Based in Cincinnati, Ohio
– Say hi to him at https://snscapitalgroup.com
– Best Ever Book: Cash Flow Quadrant by Robert Kiyosaki

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JF849: How to Leverage Brokers to Hustle for Deals

Brokers are gatekeepers to many deals whether they be single-family or multi family. Our guest love the multi family sector and has found clever ways to incentivize brokers, organize leads, and convert them over time. Hear how he did it and what he’s doing now!

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Stash Geleszinski Real Estate Background:

– Managing Director at Capstone Apartment Partners
– Certified Commercial Investment Member
– Specializes in multi-family investment real estate in Cincinnati, Dayton, Columbus and Kentucky
– Involved in the syndication and disposition of thousands of apartment units worth more than $100M
– Based in Cincinnati, Ohio
– Say hi to him at www.capstoneapts.com
– Best Ever Book: Think and Grow Rich by Napolean Hill

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JF762: How to Assess, Address, and Fix While Keeping Your Tenants

Never had a big issue that needs to be fixed while keeping a multiunit building? This episode will show you how, or at least what our guest did. It all worked out well, here’s his solution to a very common problem in buying homes.

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Roan Yarn Real Estate Background:

– Founder at HomebuyerPool.com; A real estate exchange portal that connects buyers and sellers
– Over 15 years experience in real estate, which began as project manager of 46-unit building in Miami
– Based in Columbus, Ohio
– Say hi to him at www.homebuyerpool.com
– Best Ever Book: The Art of the Deal by Donald Trump

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JF680: Your “Foot in the Door” Approach to REI and How to Find Your Path

Today, Joe’s book author partner, Theo Hicks, shares his story and how he jumped into real estate. He shares his first encounter with Joe at Joe’s meet-up in Cincinnati and offered help. He took advantage of an FHA loan to purchase a duplex which would be his first investment. Hear about it here!

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Theo Hicks Real Estate Background:

– Co-author of the Best Real Estate Investing Advice Ever Book Volume 1
– Chemical Engineer Major from Ohio State University
– Host of the Unplugged podcast
– Based in Ohio
– Say hi at theohicks.org

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JF618: Where She Found a $60,000 Duplex that Yielded $1,500 a Month!

She is the TOP female real estate agent in her area and sells luxury properties with multi million volumes year after year! She purchased a duplex for $60,000 and earns a fabulous cap. rate. She speaks of gratitude and passion while being smart and investing in excellent school districts. Pull out a notepad and tune in!

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Victoria Valle real estate background:

  • Been a real estate agent since 1999 and has been voted best realtor in 2015 by the Toledo City Paper
  • In the top 1% of all agents in NW Ohio and top female agent in the area
  • Say hi to her at luxuryhomesintoledo.com
  • She invests in residential real estate in the Toledo area
  • Based in Toledo, Ohio
  • Best Ever book: Halftime by Bob Buford

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Do you need more leads for your real estate business and a platform to grab more leads?

Danny Johnson has a solution for you, go to leadpropeller.com set up your website for success and get more leads!

Subscribe to Joe’s YouTube Channel here to learn multifamily and raising money tips:
https://www.youtube.com/channel/UCwTzctSEMu4L0tKN2b_esfg

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Best Ever Show Real Estate Advice

JF613: Should You Hire Employees or Independent Contractors to Grow Your Business? #situationsaturday

A most important decision you will make when it’s time to expand the business is whether to hire an employee or an independent contractor. They are both very different in terms of pay, taxes, and legal safety. Hear this episode to prepare for your business’s future expansion plans.

Best Ever Tweet:

Randall S. Kuvin real estate background:

  • Is managing partner at Flagel Huber Flagel and been there for 31 years
  • Call him at 513.583.4041 or visit website at http://www.fhf-cpa.com/
  • Based in Cincinnati, Ohio

Please Take 4 Min and Rate and Review the Best Ever Show in iTunes. 

Listen to all episodes and get a FREE crash course on real estate investing at: http://www.joefairless.com

Sponsored by:

Door Devil – visit  http://www.doordevil.com and enter “bestever” to get an exclusive 20% discount on your purchase.

Subscribe to Joe’s YouTube Channel here to learn multifamily and raising money tips:
https://www.youtube.com/channel/UCwTzctSEMu4L0tKN2b_esfg

Subscribe in iTunes  and  Stitcher  so you don’t miss an episode!

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Joe Fairless