JF2774: The BIGGEST Challenges Multifamily Faces Today | Actively Passive Investing Show with Travis Watts

In this week’s episode of the Actively Passive Investing Show, Travis Watts highlights the major challenges multifamily investors are currently dealing with and shares his insights on how to successfully tackle each of them:

 

  • Systematic risk. When it comes to publicly investing — for example, through REITs — you are subject to the volatility of the market. If the stock market at large is down in a big way, whatever real estate you’re currently holding will likely be down as well. 
  • Interest rates. Because the Feds anticipate raising rates in order to tackle inflation, real estate pricing will be negatively impacted. However, when investing in a private placement or syndication, you can underwrite with these rising rates in mind. This works for factoring in the possibility of cap rates lowering as well.
  • Financing. Luckily, there are many advantages when it comes to financing real estate. You can negotiate flexibility, use agency debt to lock in a great rate, or get private loans with no prepayment penalties. Purchasing interest rate caps is also an option.
  • Political risk. While investors have little control over political events, controlling your reaction is key. For example, during the eviction moratorium, Travis saw syndicators maintain excellent communication with their residents to provide them with the information and opportunities they needed. 
  • Other obstacles to executing your business plan. There are many unforeseeable issues that can throw a wrench in your plans — for example, the supply chain issues many investors are currently facing. 
  • Wage increases. With today’s rising wages, inflation, and labor shortages, properly underwriting and anticipating raises for maintenance personnel, property managers, and contractors is a must.

Tips to combat these challenges include:

1. Start by identifying your goals.

2. Get educated.

3. Only work with operators in the space that match and meet your criteria.

4. Do your due diligence.

5. Start building your passive income stream.

 

Click here to know more about our sponsors:

Cornell Capital Holdings

 

 

PassiveInvesting.com

 

 

Follow Up Boss

 

TRANSCRIPT

Travis Watts: Hello and welcome, Best Ever listeners, to another episode of The Actively Passive Investing Show. I’m your host Travis Watts. In today’s episode, what we’re focusing on are the biggest challenges that multifamily apartments face today.

We’re basically revealing the elephant in the room. We’re in a rising interest rate environment, we’ll see how far that goes. There’s turmoil around the world, we’ve got Russia-Ukraine stuff going on, we’re in a very high inflationary environment… That’s a lot to digest, and it’s on a lot of people’s minds as to what this means for multifamily or how to interpret this kind of data. As always, I’m going to take the complex, try to make it as easy as I can to digest and understand. We are going to address these challenges in today’s episode. Alright, let’s get started.

I’ve made five quick points that I want to cover with you guys. The first point is the great thing about multifamily real estate is that it is essential. People do need a place to live at the end of the day, despite what’s happening with the economy, the stock market, or what’s happening overseas, or even domestically, for that matter. Multifamily apartments and more specifically, affordable housing or workforce housing, is very much in demand right now, and has been for the last 20-30 years.

A different way to look at it would be this. Think about a lot of different stocks out there. Not every company, I would argue, is completely essential. We’ll take a stock like eBay, for example. None of us have to use eBay, it’s not part of our livelihoods, I guess; maybe if that’s your career or something like that, or your side hobby. But for most of us, we could let a stock like that go or sell it off and be fine. For most of us listening to the show here, we can’t do the same with our housing. We deem that to be pretty necessary, pretty essential.

Something to think about when it comes to choosing what you’re going to invest in, whether you’re currently a real estate investor or currently a stock investor, or not an investor at all, always think about the demand and the essential-ness – I don’t know if that’s really a word, but think about how essential it is to society. With apartments, in my opinion, there’s a little bit of risk mitigation already built in from the get-go.

The second point that I want to make is that multifamily apartments, when stacked up to just real estate as a sector in general, tends to be the most stable and the most consistent, if you look at the actual stats and facts of this asset. Think about real estate at large, let’s involve all commercial, malls, warehouse, retail, office, hospitality, and self-storage – multifamily apartments really are not that volatile and they really are that stable. So again, from the investor perspective, when you’re thinking about what to invest in, it’s important to understand your own risk tolerance. Can you stomach volatility?

There’s also publicly traded real estate versus private real estate. When you’re investing publicly, in a REIT or master-limited partnership, or whatever it is, on the stock market, you are subject to the volatility of the market itself. You have both cyclical risk, but systematic risk. Systematic risk refers to if the stock market at large is down in a big way, let’s call it 40%, more than likely, whatever you’re holding as far as real estate is concerned is down with it as well. At least to a point; it may not be all the way 40 but it’ll probably be down.

The third point I want to dissect, because it’s what I mentioned at the beginning of the episode, and that’s interest rates. The feds come out to say, “We anticipate raising rates, we have to tackle this inflation that’s happening.” That is, historically speaking, that’s negative for the pricing of real estate, because people can afford less when interest rates are higher, when mortgages are higher. Makes sense, right? But here’s the cool thing about private real estate anyway, if you’re going to buy, whether it’s a single-family home or you’re investing in a real estate, private placement or syndication – you can underwrite for that actually occurring. If the numbers still make sense, even after factoring in the interest rates may go up, it might still make sense to do the deal.

I’ll give you an example. You’re buying a property today, whether it’s single family, multifamily, whatever; you’re going to get, let’s call it a 4% interest rate. But you believe that interest rates might be up to 6% here in just a few years, so you just run your underwriting and your math based upon that. Then, again, if the whole IRR returns still makes sense, you might still want to move forward with the project, rather than letting a factor like that scare you off completely.

Now, again, when you’re in some of these evergreen funds, which means that they continuously are buying and selling real estate, or if you’re in a publicly traded REIT on the stock market that’s always buying and selling properties, unfortunately, they can’t underwrite in the same way… Meaning, if I got in one of those funds 10 years ago, well, that wasn’t the environment we’re in today. So then, when the Fed comes out and says, “Okay, we’re about to hike interest rates 1%,” that stock is very likely to fall, because people are thinking it’s going to hurt the price of the real estate. In the private sector, not so much the case; in the public sector, that would be the case. Another pro to investing privately in real estate versus publicly.

On the same note, I’ve talked a lot about cap rates. I did an episode a few back where I analyzed cap rates, what that means, how they work, the definition of them. With cap rates, every syndicator that I partner with as an investor underwrites conservatively. If we’re going in and we’re purchasing a property today and the cap rate is 4%, just for example purposes, they’re going to underwrite for a softer market condition down the road. Now, we don’t want that to happen of course, that’s not a good thing.

But they’re going to underwrite to sell the deal it, let’s call it a five cap, or even I’ve seen as much as like a 6.5 cap from four, which. It means that, of course, they’re thinking that the price of the real estate could actually come down. Again, if the numbers still make sense for you, the investor, it doesn’t have to be something that scares you off. Because if you look at the 50-year chart, or 20-year chart of cap rates, they have just come down, down, down just like interest rates have. What’s the probability they go lower? I don’t know, they might.

What’s the probability that they start bouncing up and go higher? They might. Let’s always think about the worst-case scenario, hope for the best but plan for the worst. Again, as an investor, you’re always looking at your criteria, you’re always looking at your risk tolerance, you’re thinking about things like volatility, you’re thinking about private versus public, you’re thinking about individual asset versus fund model. There’s a lot to factor in but keep these top of mind.

The fourth point I want to share with you is about financing and about getting loans. Another great thing about real estate is that you can negotiate flexibility within the loans. You can do a certain period of interest only, for example, you could use agency debt like Fannie and Freddie for longer-term holds on properties 10 years plus, let’s say. One advantage to that is sometimes you can lock in some really great rates and have a low fixed-rate mortgage on it. But one of the cons to agency loans is that you can have a high prepayment penalty. If you get an off-market offer, or you want to refinance sale early, something like that, you can be affected by that negatively.

But to the point of saying that this is a pro topic here, you can also get private money and private loans that may have no prepayment penalties, or much lower prepayment penalties, or only have, let’s say, 12-18 months from a lockup period perspective, to then allow you to offload your properties in the future in a shorter timeframe. Additionally, what I’ll add to this is that you can purchase interest rate caps. Think of it like an insurance policy. If you’re getting a 4% interest rate today and you think they’re going up in the future, you could buy a cap at 5% which means if you’re holding that property and the Fed decides they’re raising rates to 7% or 8%, you’re going to be capped at 5%. It’s just a way to mitigate risk in a rising inflationary and interest rate environment like we have today.

Break: [00:11:25][00:13]:

Travis Watts: The fifth point and really kind of the final take home point for this is that you can insure real estate. That’s also a beautiful thing when you’re thinking of it as an investment and not just your owner-occupied home. There could be a flood, there could be a fire, vandalism, theft, hurricanes, tornadoes, you name it, it can be tricky to insure a stock portfolio back to the example I gave earlier of purchasing an eBay stock. It can be tough to insure something like that. There are some risks, I guess is the point that I’m making, that can be addressed proactively with real estate.

But then, let’s talk about some additional risks because, quite frankly, it’s not all rainbows and butterflies. There are some definite cons and this could be said to any investment. But let me share a few of these. There are risks such as political risk that’s really not in any of our control, there’s really not much any of us can do about it besides vote. That would be what we saw during the pandemic where the government says we have eviction moratoriums in place. You cannot evict your residents even if they’re not paying your rent, that was a tough one to battle.

The groups that I partner with in these syndications, they did the best that they could, they kept great communication with the residents. They shared with them what opportunities are out there, job-wise and stimulus-wise and rent relief-wise. It’s really about all you can do in that scenario, and then just hang tight and hope for the best. But it is a risk to consider when you’re investing in an asset class like this.

There’s another big risk that a lot of folks don’t talk about and it’s the risk of not being able to execute your business plan for any given reason. Again, the folks that I partner with when I do a syndication investment have a track record. They use really specialize in one kind of business plan, they’ve got proven results, and it’s about all you can go by. But then you have these risks like what we’re seeing right now with the supply chain, that’s another big risk happening. It’s tough to get supplies and, as you all know, with new cars and the microchip, we’re just so behind right now in so many different things.

Of course, I’m making this up for example purposes. But let’s say we’re renovating a ton of apartments or a big 600-unit apartment building, and we’re going to put a value-add business model over it. We’re going to put all new appliances, kitchen flooring, countertops and all this, let’s say they stop manufacturing appliances, refrigerators, stoves, microwaves. Well, then we can’t put them in the property. If we can’t buy them, then we can’t properly execute the value-add plan. Now prospective renters come in and they see these old 25-year-old appliances and go, “I don’t think so, I’m not going to rent here.” That’s going to hurt our ability to raise rents and to effectively do a value-add business plan.

Something else to keep in mind, that’s really tough, supply chain. I guess you could pre-order as much as you can and store it somewhere, but the logistics around that could be challenging. Just keep in mind that there’s risk to any kind of investment. Those are just a couple examples of what we’re seeing in the environment right now. Another headline you guys may have seen here lately is that wages are on the rise. Obviously, when inflation happens, things get more expensive, people start demanding more money, we’re in a big labor shortage as a country. If our maintenance personnel goes from $25 an hour to $40 an hour, that’s going to matter.

If that happened, that means that our onsite property managers probably want to raise too, that means any contractors we’ve worked with want to raise too. If you’re not properly underwriting and anticipating this kind of thing, then you might be in some real trouble. It’s important to work with groups as an investor who are very conservative in their underwriting. If you’re doing your own deals, remember that real estate is a people business, it is a team sport. Anytime you’re working with people, you need to think about people problems. One of those being wages.

Here’s a few final thoughts to wrap up this episode. If you’re going to invest in multifamily apartments in 2022, here’s what I suggest. Number one, start by identifying your goals. What is it both short-term and long-term that you’re trying to achieve? Is it net worth, is it passive income, is it send my kids to college is it retire early? You need to get clear on what you’re really doing before you even get started. This is just aside from multifamily, this is just becoming an investor, get clear on your why first.

Number two, get educated. Read books, listen to podcasts, find mentors, get a coach, paid or unpaid, just attend events, attend meetups, launch a meetup, get out there, get on forums like BiggerPockets. You need to be educated, at least from a fundamental perspective so that you can grow and launch from there and that you understand, again, your goals, your mission, and what you’re trying to accomplish.

Number three, only work with operators in the space that match and meet your criteria. This is a big problem that people get into is this analysis by paralysis. They get out there and they get on 100 list for all these syndication deals and are being sent deals left and right, and they don’t know which ones to pick or what to do. You got to start with steps one and two to get to step three. I’m in the business these days of unsubscribing, quite frankly.

I don’t know how my email has been circulated out there to literally hundreds of groups. I’m constantly unsubscribing when I see something that doesn’t match my criteria. Like new development, or maybe it’s some crypto thing. Again, I’m not saying that new developments bad or that crypto is bad. They don’t help me meet my goals and they don’t match my criteria for someone who lives on monthly cash flow and passive income, those, generally speaking, are not going to help me accomplish that.

Number four, do your due diligence mostly on the operator themselves, their background, their track record, who it is they are as people, then focus on the deal in the market second. Because again, one of the biggest risks is that they can’t actually execute the business plan. If that can’t occur, nothing else really matters. If you’ve got a terrible operator in a great market, you’re likely going to break even or lose money.

Last but not least, my whole philosophy on life and the reason I do these shows and try to help inspire you and other listeners, is start building your passive income stream so that you can focus more on the things that you love doing and you can spend less time on the things you do not enjoy.

Thank you so much for tuning in to another episode of The Actively Passive Investing Show. I’m Travis Watts, let’s connect on social media. I’m on bigger pockets, I’m on LinkedIn, I’m on Facebook, I’m on Instagram, I’m on joefairless.com, I’m on ashroftcapital.com Let’s connect, let me help in any way that I can. I appreciate your feedback, comments, likes, subscribes. We’ll see you next time on another episode of The Actively Passive Investing Show.

Website disclaimer

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

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

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

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

Oral Disclaimer

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

Follow Me:  
FacebooktwitterlinkedinrssyoutubeinstagramFacebooktwitterlinkedinrssyoutubeinstagram


Share this:  
FacebooktwitterpinterestlinkedinFacebooktwitterpinterestlinkedin

JF2767: 5 Fundamental Tips for Investing | Actively Passive Investing Show with Travis Watts

Actively Passive Show host Travis Watts has dedicated his career to investing. After years of working in investor relations, reading hundreds of books from expert authors, listening to podcasts, and attending seminars, he’s compiled the top five fundamental tips he has heard again and again from expert investors:

 

  • Focus on the fundamentals. People often confuse investing with speculating, Travis says. They also try to time markets, but no one can consistently predict what will happen in the long term. He argues that it’s best to be a long-term investor who focuses on the fundamentals rather than speculation.
  • You can’t be good at everything. It’s important to double down on what is working for you. Travis recommends the 80/20 rule when it comes to risk-taking: He allocates 80% of his personal investment portfolio into what he knows and understands the best, then allocates the other 20% experimentally into things he’s still learning and grasping.
  • Learn, learn, and learn some more. You have to continually educate yourself in order to produce long-term success. As Warren Buffet has said, “The more you learn, the more you earn.” Whether it’s books, podcasts, YouTube videos, seminars, or through mentorship, never stop self-educating.
  • Not all your investments are going to be amazing. You’re not always going to hit it big with every investment you make. You’re occasionally going to lose money, and sometimes you will miss opportunities, Travis says. That’s just part of the unpredictability of life. “You have power over your mind — not outside events. Realize this, and you will find strength.” —Marcus Aurelius
  • Don’t unlearn old tricks. Don’t forfeit the old-school principles that got you where you are today. Of course, it’s great to learn new things, but it’s also important to remember and continue to practice what made you successful in the first place.

Want more? We think you’ll like this episode: JF2382: Cap Rates, Waterfalls, And Preferred Returns | Actively Passive Investing Show With Theo Hicks & Travis Watts

Check out past episodes of the Actively Passive Investing Show here!

Click here to know more about our sponsors:

Deal Maker Mentoring

 

PassiveInvesting.com

 

 

Follow Up Boss

 

TRANSCRIPT

Travis Watts: Welcome back, Best Ever listeners, to another episode of The Actively Passive Investing Show. I’m your host, Travis Watts. Today’s episode is very exciting. It is not clickbait, it is genuinely five investing tips that I firmly believe can help lead you to a better life.

The overarching theme here is there are a lot of people who genuinely know how to invest their money and there are an awful lot of people out there that are claiming to know the investing game. With all the noise in social media out there today, it’s really tough to decipher the two and to know who to listen to. One of the things I’ve shared many times on the show is that I myself am not a guru here, I am not the end-all-be-all. What I came up with years and years ago is when I wanted to learn something like investing or something more specific like multifamily investing, I would go out and I would listen to the so-called experts. I would find 5 to 10 individuals that I felt were doing things successfully, and I would try to find the commonalities between all of these people. So I wouldn’t so much tune in to the differences of opinion, but I would find what all of them agree upon.

That’s really the basis of this episode, our five fundamental tips to investing that not just 5 or 10 people agree upon, but I compiled this list from years and years of working in investor relations, number one, with one of the largest brokerage firms in the United States and private equity groups in the real estate space, so there’s that perspective. There’s also the perspective that I’ve read hundreds of books from expert authors on these topics, and I’ve listened to – oh my god, I don’t even know how many podcasts, and attended so many seminars and things like that. This episode encompasses the five tips I find are most congruent among thousands and thousands of different articles and sources and individuals.

Years ago, I dedicated my life to investing. I dedicated my career, I should say, not my life, that sounds pretty dramatic, but I kind of did, in a sense. I recognize not everyone has the time to go read hundreds of books or fly around the nation or the world doing seminars and conferences, and all this kind of stuff, getting mentors and getting coaches. I’m willing to do all of that stuff on my own terms, but then my way of giving back is to take all of that information which is very complex and long-winded and simplify it for you. Just kind of extract, here are five things I think are most practical from 13 years. That’s what this episode is, not to be too long-winded on the intro.

The goal is twofold, it’s to help you succeed, it’s to make your life easier, simple as that. I encourage you, on this particular episode, to write this information down, get a pen and paper, pull out your notes under your phone or your computer, and seriously, at least jot down these five things. Go ahead, I’ll give you a second right now to hit pause, grab the pen and paper, grab the phone, grab the computer, and then we’ll get started. All right, I trust at this point that you are going to dedicate this to memory or write it down.

Number one is focusing on the fundamentals. A lot of people think of trading as buy-low sell-high, flipping houses, day trading stocks, and making money quickly. While some of these strategies can work, and certainly at certain points in the market cycle, it is not a long-term strategy, unfortunately. House flippers, for example, got crushed in 2008 and 2009, and crypto traders over the last six months, or probably a lot of them have lost money when it peaked out, you get the point, there was a massive decline.

I was just reading an article by Citi A.M. this morning and it said the average stock investor now today in 2022 has a lower account balance than when they first started investing. That is insane, that is crazy. But a big reason for that is that people confuse investing with speculating. I made an actively passive episode on this, it was probably six months ago, give or take, you might go back and search for that if you have an interest in diving deeper into this topic.

The other thing is that people try to time markets. I talk a lot about how impossible it is to time markets even when you use technical analysis. We’ve got this Russia-Ukraine invasion happening, you can’t control what the Fed does, you can’t control what the President says or does, you can’t control people’s tweets, things happen in the world, hurricanes and natural disasters. As much as we like to try to think now’s a good time, or it’s not going to fall any further, or we’re going to fall another 20%, nobody knows. Nobody can be consistent long-term with that so just quit trying is the best advice, quit trying to time markets.

The best investors in this world are long-term investors that focus on the fundamentals, this is the point I want to drive home. You’ve got Warren Buffett, Carl Icahn, Benjamin Graham, Peter Lynch, and George Soros, so many names, I could go on and on. All of these are fundamental investors, it doesn’t matter if they invest in private business, the stock market, real estate, whatever it is, they are fundamental investors. The takeaway here is to invest and not speculate, and obviously, pay attention to the fundamentals, that’s the most important part and the key element to invest in.

All right, key tip number two is that you can’t be good at everything. I’m being flooded right now in my head with all these quotes and sayings. You can have anything you want but you can’t have everything you want, or if you try to be good at everything then you’ll be good at nothing. Simply put, you really can’t be good at everything. I talk about this also, as an investor when I’m looking to partner with firms and the particular firm is all over the place. “Hey, we do a little bit of self-storage, a little bit of mobile home park, a little bit of multifamily, a little bit of development.”

The fact is they’re probably not very good at any of that stuff and they’re making pivots trying to find their niche and trying to figure out what does work because obviously, something’s not working, or why make the pivot in the first place? You really need to double down and specialize in what you know and understand. This is why I allocate 80% of my personal investment portfolio to the things that I know and understand the best. I allocate about 20% to what I call experimental, which are things that I’m still learning and grasping. I definitely want the diversification piece to the puzzle, but I also don’t want to be a one-trick pony.

For example, let’s say I was a house flipper. I don’t want to just know how to flip houses but know nothing else about investing, or eventually, I’m going to get crushed, as I mentioned, in a down cycle. My favorite quote of all time was from my mentor. I already mentioned it here on this episode, but it’s “Double down on what’s working.” This is the key component. Everybody’s different by the way, but you really want to understand your strengths, your interests, your passions, and all these things. You just want to double down on what makes common sense to you, common sense is not common to everybody. Double down what’s working for you with what I mentioned in the first step, focused on the fundamentals as well.

Break: [00:10:17][00:12:13]

Travis Watts: Key step number three is learn, learn, learn some more, you got to self-educate. I already mentioned that I’m an avid learner, I’m an avid reader. You don’t have to be as hardcore and extreme as I am but hopefully that’s why you’re tuned in to an episode like this that helps just consolidate it.

If you guys remember, it may still be around, when I was going to college there was something called Sparknotes. If you had the task of “Hey, go read this 500-page book,” it was a bit daunting and overwhelming. You could get the Sparknotes from Barnes and Noble which was like 50 pages and it just basically gave you the key points and the highlights to the book so that you could save hours and hours, potentially weeks of your time. That’s what I tried to be for people basically, that’s my methodology.

The quote here that comes to mind is that the more you learn the more you earn. Continuing education is always the key to success. Again, I like to talk a lot about successful people. If you look at Warren Buffett, he reads between 500 to 1000 pages per day, this is what he’s doing with the majority of his time in his later years, really throughout his career. He probably read a little bit less when he was younger and more active in the business of Berkshire Hathaway. But Bill Gates reads 50 books a year, which was crazy. That was basically one of my most aggressive goals.

Only in one year of my life I said, “I’m going to read 52 books a year,” and I did it. That’s intense. I don’t know how this guy does it but he’s obviously an avid educator and reader. Mark Zuckerberg has been quoted as saying that he reads one book every two weeks, so 24 books a year. I think the average CEO reads about 12 books a year. The point is, you just have to educate, whether it’s books, podcasts, YouTube, whatever, seminars, mentors, you’ve just got to keep the ball rolling and moving to be successful long-term.

Key tip number four is that not all your investments are going to be amazing. This has a lot to do with just perspective and not being delusional that markets have cycles. You know [bleep [00:14:16] happens sometimes, quite frankly. You’re not always going to hit it big with every single investment you make. Just because you made 15% last year on your investments doesn’t mean you’re going to make 15% this year. There are going to be great opportunities that slip through your hands, you’re not going to be able to capture every single opportunity, and you’re not going to be able to ride the wave on every single trend that pops up.

Again, to go back to kind of some successful investors. Warren Buffett talks about missing out on Google and Amazon in their early days. He didn’t see it and those were mega, mega, mega-companies as we know, those could have been, quite frankly, two of the best investments he ever made in his portfolio, but he missed out on those for whatever reason. You’re going to miss out on a lot of opportunities throughout your life and you’re occasionally going to lose money, more than likely.

I lost a ton of money early on in a Ponzi scheme. It was a private equity deal, it was non-real estate related, but it was through this investment group I was in. We thought we were doing something really cool, creative, and unique, and it turns out, it was a big bust. Just lost tens of thousands of dollars, we still don’t even know how much we lost because it’s still ongoing litigation and it’s pending. It’s pretty nuts, but it happens, you guys, it happens. Be prepared for some losses. Just be a realist when you’re an investor. Nobody’s perfect, nobody makes money 100% of the time.

I stole a quote that goes along with this, it’s from Marcus Aurelius. He says, “You have the power over your mind, not outside events. Realize this and you will find strength.” Again, we can’t control political risks in government and the Fed and natural disasters. We’re just going to have to make our best decisions and we’re going to have to mentally deal with that as we go along. Here’s the way I see it, kind of final thoughts on this topic. When it comes to investing, don’t have FOMO, which is fear of missing out. Don’t look back and regret things. You don’t need to win every single time, as I mentioned, you just need to have the majority win, and that’s an overall positive return. That’s the way I look at it in its simplest form.

The fifth investor tip is don’t unlearn old tricks. Don’t forget the old-school principles that got you to where you are today. Focus on the fundamentals. Michael Jordan’s a great example of this. During Michael Jordan’s prime, he was, quite frankly, the best basketball player that there was when he was playing with the Chicago Bulls. He was notoriously known at practices for only focusing on the fundamentals. He would sit there and dribble, he would sit there and pass, he would sit there and just do some easy layup shots, and things like that. But why is he so focused on just the simple things that he’s already the best at? Well, there’s a lesson there to be learned.

He could have taken all this time before a game to try a new trick and to try a new skill. But he didn’t, he always went back to the fundamentals. If the best of the best, quite frankly, is focused on fundamentals and doubling down on what’s working, why shouldn’t you and I consider that as well? It’s okay, of course, to learn new things. As I mentioned the 80/20 principle that I’ve adopted, it doesn’t have to be that percentage for you, you do want to be a self-educator, you do want to keep growing, you do want to learn new things. But you don’t want to forfeit what’s already gotten you success and make a big pivot into something new, and then potentially lose everything by doing that.

Funny story on this. My wife and I, years ago, bought a house in Florida. Man, real estate has been my bread and butter for years and years. I knew that we got a great deal on this house, we bought an awesome house, it was newer-built within an awesome location. The fundamentals of the market were solid, we paid less for this house than the previous owner had paid from the builder. We were buying probably just under replacement costs at the time. I knew all of this because I had studied and done real estate so many times, this was like my 30th property or whatever it was. I knew the game and I knew what I was doing.

But this is an example of where I made this mistake and why I’m sharing it with you. After about six months of living in that home, I convinced my wife that it’s too much house, it’s just too nice of a place, we really don’t need it, why are we paying all these bills, etc., etc. I said, “What we ought to do is move,” this is six months into living in this home, “let’s rent instead, and then let’s take that home equity, that down payment that we had locked up in the house, and let’s go invest it. Let’s go do all these diversified investments.”

We got on board together, we made that decision. I’ll tell you, that home, in just the last two years has increased to about $225,000. If you look at that from the down payment that I had in that home, what I was trying to free up to use for investments, was about 175,000 as a down payment. What is that? A 128% return I think is what it was, over two years, or it was at 64% annualized return. Suffice it to say the investments I had made with that money have not done 64% annualized, I can tell you that with solid facts there. Lesson learned, I knew the fundamentals but I tried to pivot and do something different. I should have just stuck to my guns because I made the decision in the first place and knew what I was doing. I second-guessed myself.

On that note, I want to leave you guys with this final thought. If you have something that you want to do or accomplish in life, don’t put it off until you’re 90 years old. I’m an advocate for time freedom, I’m an advocate for building a lifestyle that you want to live on your terms by using passive income. That’s been my approach, that’s been my story. Most people wait their whole lives and it’s always good intentions that, yeah, one day I’ll do that trip and one day I’ll vacation. But if there’s really a goal or a mission that you want to accomplish, I encourage you to start on that now and not later, even if it’s in small form. If you want to travel the world, for example, don’t keep putting it off until “retirement”, start taking an international trip once a year now, today, so at least you’re getting some of that fulfillment along the way. It’s never too early but it can sometimes be too late, so put your plan into action today.

Thank you, guys, for tuning in to today’s Actively Passive Investing Show. I appreciate you guys so much. As always reach out on social media, LinkedIn, Facebook, Instagram, and joefairless.com, I’m always happy to be a resource for you. I will see you again in the next episode. Have a Best Ever week everybody.

Website disclaimer

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

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

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

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

Oral Disclaimer

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

Follow Me:  
FacebooktwitterlinkedinrssyoutubeinstagramFacebooktwitterlinkedinrssyoutubeinstagram


Share this:  
FacebooktwitterpinterestlinkedinFacebooktwitterpinterestlinkedin

JF2760: Market Highlight (Orlando, FL) With Special Guest Stephen Tilton | Actively Passive Investing Show with Travis Watts

Could your next great investment opportunity be in Orlando, Florida? Travis Watts and guest Stephen Tilton dissect the Orlando market, analyzing its growth potential, demographics, and budding opportunities for both active and passive investors.

Stephen Tilton | Real Estate Background

  • Realtor at FLA Real Estate Services, which sources off-market and below market value properties while selling for top market price.
  • Say hi to him at:

Want more? We think you’ll like this episode: JF2597: Single-Tenant Net Lease Opportunities with Randy Blankstein

Check out past episodes of the Actively Passive Investing Show here!

Click here to know more about our sponsors:

Deal Maker Mentoring

 

PassiveInvesting.com

 

 

Follow Up Boss

 

TRANSCRIPT

Travis Watts: Welcome, Best Ever listeners, to another episode of The Actively Passive Investing Show. I’m your host, Travis Watts. For any of our active listeners to this segment of the show, you know we don’t have guests on the show. We’re nearly 100 episodes in. It used to be myself and Theo Hicks, my co-host, but we have never had a guest on this show. But today, I have brought a guest on to add value. The reason is that we’re doing a market update on Orlando, Florida. I was trying to figure out how I was going to present this information, and the last thing I wanted to do was pull a bunch of data stats and facts and just read off a sheet to you guys. So I thought let me bring on a market expert. That’s who we have with us here today. His name is Stephen Tilton. Stephen, welcome to the show.

Stephen Tilton: Hey, Travis, thanks for having me, man. It’s a privilege to be here with that kind of introduction.

Travis Watts: Well, you bet. I appreciate you. We’ve done a lot of deals together, we’ve bought sold real estate, we’ve talked a lot about investing over the years, we’ve attended conferences together, so I think you’re a very knowledgeable resource for this particular market. The reason we’re covering Orlando is, as you know, there’s been a tremendous amount of interest in the Orlando market. You and I live in Orlando and surrounding markets ourselves. Even Ashcroft Capital has been investing in this area, Winter Park in Orlando, for the last two, three, almost four years now. I think it’s a worthwhile discussion, a lot has changed since COVID started… Why don’t you tell the listeners a little bit about yourself, your background, your journey, and then we’ll dive in and get started?

Stephen Tilton: Very good. Well, thank you. I got into real estate originally as a listing agent. I had a little background, because both my parents were agents heading into the 2008 crash, and our lives kind of got turned upside down through that. I took a break, started another business, sold that off, and decided real estate was really the way to go. Along the way, listing properties and becoming an expert at selling, I began to find all of these properties below market value as well in my hunt. I said “Hey, wait a minute. If I can sell them for top dollar and find them at a discount, this is a match made in heaven.” But the problem we kept running into was contracting. We couldn’t get properties from dilapidated, below market value, to retail-ready. So in 2020, we started a contracting business. I like to keep my finger on the pulse of the market, and I think that’s what you and I enjoy is being able to talk about those market dynamics and frankly, why people love Orlando so much.

Travis Watts: I appreciate you sharing. I just want to make this clear, that this is not just a biased episode just because we live in Orlando and we want to promote Orlando. If you just look at the nation-wide stats on where companies and businesses are relocating to, Orlando is top of the charts. Florida in general. But I brought you on because you’re the expert in the Central Florida area. So a lot of investor interest, a lot of multifamily interest, a lot of single-family interest; there’s just a lot of interest. Let me ask you this, Stephen – you and I both invest individually, our personal capital into this market. But I want to ask you, why do you invest in the Orlando market?

Stephen Tilton: Russell Gray from The Real Estate Guys has been a great influence on me. I want to shout out to him for what they do for the real estate investor community. They have a saying that says “Live where you want to live and invest where the numbers make sense.” With Orlando, I think it’s really both. I love living in Orlando, I think there are a lot of people who enjoy it. But it also has really strong market performance, which is what’s been driving investor sentiment and investor interest.

Mainly we’ve got strong migration trends, people coming from high equity states like New York and California, where they may not like the policy, the taxes might be higher, and maybe it’s colder. So they’re coming to Florida for the weather, the lifestyle, relative affordability, and unbelievable market absorption. When we consider what D.R. Horton is doing with 80 plus communities here in the Orlando area, it’s a pretty strong commitment that they’re making with their land acquisitions and building projects they’ve got going on.

Travis Watts: There’s a lot of migration in general, just to the Sunbelt regions. I’ve been talking about that on the show for years now, not just on this show but on podcasts for years. It’s funny to watch the trickle-down effect, the New York, the New Jersey, to your point, high taxes, the politics, the landlord-tenant laws, trickle-down through the Carolinas and through Georgia, and then of course to Florida. It’s funny driving around and I know you know this because you’re driving around all the time with clients. But all the out-of-state tags, especially up and down the East Coast, are just phenomenal. I know you helped me buy a property back in, what was it? 2017. Man, things have really changed in this market.

Stephen Tilton: There’s been so much construction happening on all fronts, not just residential, but definitely commercial. I’m curious, Travis, what is it that you love so much about Orlando?

Travis Watts: Yeah, it’s a good question. I think, for me, generally speaking, I’m a full-time limited partner as you know, I’m a passive investor. What I’m doing is I’m partnering up with firms that are buying multifamily, mostly value-add stuff. There’s a lot of research out there we can all look at, Marcus and Millichap, CBRE, and CoStar. They’re kind of running their own analysis, where companies, where jobs, where people are moving to, and it just so happens that Orlando is one of the really hot markets. You got markets like Tampa that have exceeded statistically what Orlando’s done, Jacksonville’s done phenomenal.

Again, this isn’t “Invest in Orlando, it’s the only place to be.” But I live here so I noticed it, and it’s so crazy right now for anybody who is here visiting here, the changes. To answer your question, I go by their analysis, I go by the nationwide stats. Right now, I’m bullish here in Central Florida, but ask me in five years, if things change, something crazy happens, Florida says we’re doing a 10% state income tax, people are going to be exiting like crazy, and who knows where they’re going to go. That’s a little bit about what I look at.

Stephen Tilton: Yeah. I think one of the really interesting things we talk about jobs here in Orlando, is there’s a large contingent of people. During the pandemic, we thought maybe everybody, all information work can be done from home. But there’s a pretty large contingent now, maybe it’s 15% or 20% of the information workforce, but they can move wherever they want to go geographically, and they can simply do their work at home. Suddenly, they are faced with the decision of “Where do I want to live independent of my workplace?” I think a lot of people decide they don’t like snow, they don’t like high income taxes, they love Disney World and the other world-class attractions.

Break: [00:09:40][00:11:36]

Travis Watts: A lot like say in California, there’s a lot of dynamic to Florida. As you know, Panama City is nothing like Miami, and Miami is really not a whole lot like the Florida Keys. There’s a lot of in-between, Tampa is not Orlando. There are a lot of local places that you can go to, to your point. Whether you’re a beach person, the beach is what? Maybe an hour and 15 or something from Central Florida, it’s not an incredibly long commute, and of course, Disney and all that kind of stuff. On that note, I just want to add this to the listeners, markets change and markets evolve, and Orlando is one of those markets now.

You and I Stephen, we were out at this real estate conference a year ago or something out in Houston. A lot of investors have this connotation about Houston that it’s all oil and gas. When oil and gas are down, Houston’s a bust. It’s just not true anymore, that was somewhat true at one time in the history of Houston but it is so much more diversified now, it is so much more built out. They have all kinds of industries there from tech to health care to you name it. It’s the same thing with Orlando. What I hear most as an objective from investors about Orlando is that it’s a tourism city.

While that has some truth to it, of course, we have mega attractions, Disney, Universal, SeaWorld, etc. But there’s so much more and they’re building microchip factories in the whole tech hub over by Lake Nona as you know. There’s just so much more that’s happening here. That’s something to consider when you look at job diversification. As an investor, I don’t want to be in Detroit, Michigan in 2006 and 2007 right before the collapse because you’re built on really one industry. When it goes down, we all know what happened in that story.

Stephen Tilton: The job sector and Orlando really is more diversified than people think, to your point, Travis. A lot of people just like Houston where they think it’s oil and gas, they think about the 78 million visitors that come here annually and over the $50 billion dollars in economic impact that tourism brings, which is great. I’ll tell you, the city of Orlando loves that 10% hotel tax, they build stadiums and all kinds of things with it, it’s been really great.

The lesser-known industry that’s really larger than the tourism industry, but it’s sort of not marketed as much it’s a little bit of secrecy, it’s military and defense. We actually construct missiles here. The irony is when you’re on the Orlando eye, on one side you’ve got International Drive, and on the other, there’s literally a Lockheed Martin missile factory and a research and development center. It’s sort of this perfect microcosm of the jobs market here. Not just on the military defense front, we have more military simulations happening here, computer-type simulations than anywhere else in the world. It’s the military simulation capital of the world.

Not to mention what we have going on for our medical industry. We have a great place, which is an awesome private-public partnership known as Lake Nona Medical City. They have put a number of medical research hospitals there including Nemours Children’s Hospital. When we think about that and the UCF medical research facilities, these are really world-class medical facilities that are attracting top talent, and not just in software, military defense like engineering, but also in the medical industry. Those industries really pay so more than when we consider jobs like hotel cleaning person or somebody like a ride operator, those jobs are making 15 an hour or something like that. You’re getting six-figure jobs in some of those other industries.

Lastly, but not least of which is our education industry. We’ve got incredible technology research facilities here at UCF. It’s a phase one university so they’re doing all kinds of research in a number of different fields. But engineering is really the specialty. They have a track, if you’re living here in Orlando and you’ve got a kid coming up college-age, they can be local, stay in your home and get an amazing education at UCF, and basically be direct tracked into Lockheed Martin, or Raytheon, or one of these other major defense contractors. It gives people major upward mobility here in the future.

Thinking about Valencia College, I hear Bernie Sanders talk about free education or free college education regardless of your political views on it. In the state of Florida, it’s essentially free, they’ll pay you if you’re a low-income earner to get your associate’s degree. At risk of going on too long, basically, if you’re a full-time student, you get complete tuition paid for Community College and the federal government will additionally step in with another benefit that’s almost three times as large. Meaning, to get your associates, you actually profit if you qualify. It’s an incredible place to live and it’s an incredible job market.

Travis Watts: There you go, couldn’t agree more. There’s probably a different program you were just describing, but when I went to college, it was out here in Orlando so many years ago. There was the Bright Future scholarship and it was if you have a certain GPA and some community service, the same kind of concept. I at least had an associate’s paid for at a public school. That program, if it’s still around, it was funded by the Florida Lottery. Some cool things that they’ve done structurally.

You mentioned politics which is always a big mistake so let’s talk a little bit about politics and dive into that. More importantly, let’s talk about the Federal Reserve real quick, as we kind of wrap up, let’s look at the macro-level of real estate. We’ve been bullish, bullish, bullish on this episode. But let’s talk a little bit about interest rates. I’d like to get your thoughts on what do you think we might see or what’s happening now in that space.

Stephen Tilton: Well, nobody ever knows what’s going to happen. The wise man says, “Well, it depends.” So, it depends. But I think what is likely to happen is something similar to what we saw in 2018, 2019, when the Federal Reserve begin tapering their asset purchases. They had some favorable tax policy that gave them a little bit of breathing room to begin scaling back those asset purchases, and that’s what they did. But as they began doing it, we saw the yield curve flatten and then eventually invert. Especially since 2020, we have a really strong track record. When the bond market yield curve inverts, it precedes a recession every single time since 1971.

We’re already seeing a flattening of the yield curve just with the Federal Reserve talking about raising interest rates, and yet, we see inflation roaring. I think it’s obviously two sides. We’ve got a supply chain problem, and as that’s alleviated, that should help. But we’re also getting the worst kind of inflation, that’s where the public becomes psychologically aware of inflation, and they begin demanding more from their employers, which of course, drives the cost of production up, begins this negative feedback cycle. The Federal Reserve is really in a tough spot and I’m curious to see how it’s going to pan out. As it pertains to real estate, Travis, I’m curious what your thoughts are on how things will materialize?

Travis Watts: Yeah. Well, like you, no one’s got a crystal ball. What I’ve shared here with the listeners on this podcast before is that there’s a lot more that plays into it than just interest rates, that’s the short-sighted thinking as well. If interest rates go up, then the real estate crashes. Well, to your point, you have supply chain issues, we have a severe lack of inventory on affordable housing, we’ve been behind since the year 2000 of providing enough homes for Americans. 2008, ’09, ’10 slowed that down more, COVID slowed that down more. We’re millions of households behind. I shared that a couple of episodes ago, I don’t have the stats in front of me.

You’ve got to factor in all of this. The way I look at it is this, maybe the Feds not going to be able to raise interest rates from, what’s a mortgage today? 3% or something, all the way to say 6%. Maybe that’s way too aggressive, and the reason you might want to consider that is, one, the amount of national debt that we have, obviously, what that would do to markets, to real estate, to the overall economy. We’ve already seen, to your point, them stepping back from that. But here’s another perspective to think about. I ran the numbers the other day on a $300,000 single-family home purchase at a 3% interest rate today or a potential 4% interest rate next year just in theory. That changes your payment by 150 bucks a month.

Is $150 a month really going to stop somebody who really wants to buy or own a home from purchasing? You can kind of apply that theory to the larger assets as well. Multifamily has primarily driven off net operating income so if you’re still buying a stabilized cash flowing piece of property, you still think rents are below market and you can bump them up with inflation that we’re seeing right now at 7%, I still think there’s a bullish case to be made for real estate in general but also for multifamily. I’m not an expert but that’s kind of my take anyway.

Stephen Tilton: Great point, Travis. When we are making our investments, we’re sort of beginning with the end in mind and expecting some of these marketplace dynamics to change. For me, when I’m in an uncertain market and I’m purchasing anything with that, I am most focused on cash flow even more specifically, my expense ratio relative to my gross income. For some of the investments we’re buying, we’ve got expense ratio as well under 50%. What we know from studying past downturns is that typically rents don’t go down much. If they do, it’s something more like 20%. If we feel making those kinds of investments, obviously, much smaller single-family properties where we’re able to accomplish some of those kinds of numbers, we feel pretty comfortable regardless of what happens here in the short term with interest rates.

Travis Watts: That’s a great point, Stephen. Rents are pretty inflation-sensitive too. As long as we’re seeing some form of inflation, they tend to keep up, or actually, they’re in excess of that. I’ve shared that statistic too on the show. They’ve been 583 basis points above the government inflation since 2012, so just something to think about. Right now, we’re seeing a 7% inflation rate. Number one driver to NOI on commercial is the rent bumps, so we’ll see what happens. I appreciate your insights, I appreciate your sharing.

Now, Stephen, if anyone’s looking in the Orlando market, whether they’re looking to buy an investment property or just a home for themselves or whatever, how can listeners reach you?

Stephen Tilton: You can send me an email at tiltonteam@gmail.com.

Travis Watts: Well, with that we’re going to wrap up. As always, appreciate your time, Stephen. Best Ever listeners, take Stephen up on that offer. Reach out if you have any questions about the Orlando market. Make sure to like, subscribe, and comment. Appreciate you guys, as always. We’ll see you next week on another episode of The Actively Passive Investing Show. Have a Best Ever week, everyone.

Website disclaimer

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

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

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

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

Oral Disclaimer

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

Follow Me:  
FacebooktwitterlinkedinrssyoutubeinstagramFacebooktwitterlinkedinrssyoutubeinstagram


Share this:  
FacebooktwitterpinterestlinkedinFacebooktwitterpinterestlinkedin

JF2755: How She Used Instagram To Raise $1,000,000 In Private Money ft. Soli Cayetano

Investor Soli Cayetano was able to retire at the age of 23 thanks to her popular Instagram account, Lattes and Leases. In this episode, Soli reveals the social media strategy that helped her connect with private money lenders to fund her deals and how she plans to grow in the future.

Soli Cayetano | Real Estate Background

Click here to know more about our sponsors:

Deal Maker Mentoring

 

PassiveInvesting.com

 

 

Follow Up Boss

 

TRANSCRIPTION

Slocomb Reed: Best Ever listeners, welcome to Cincinnati’s Best Ever Real Estate Investor Mastermind. We meet on the last Tuesday of every month in the Deer Park Community Center and we hope that you listeners have the opportunity to join us. Here with us today we have Soli Cayetano.

Soli is in the process of moving to Cincinnati from the Bay Area in California. She is a 24-year-old real estate investor who in her first 15 months as an investor has bought 25 doors, consisting of a few flips and buy-and-hold properties ranging from one to 10 units. She’s used a combination of conventional financing, commercial private money partnerships, and hard money to finance these projects. She has met some of her private money through social media, which is something I hope we get to talk about. Soli, why don’t you give us a little bit more about your background and what you’re currently focused on?

Soli Cayetano: Sure. Thanks for having me. I’m excited today. I’m originally from California and my background is in commercial real estate. I was a broker for quite a few years and then transitioned into residential investing. I decided to come to Cincinnati to invest because of my background in commercial real estate. We were doing a big deal here in Cincinnati; I saw the market, eat some really good food, met some great people, and was sold. I bought my first house mid-pandemic, it was June of 2020, and was hooked on real estate investing after that; I bought a bunch. Over the last 15 months, I flipped, bought, and held, I’m launching Airbnb next month, which I’m really excited about… And that brings us here today.

Slocomb Reed: That first one that you bought, was that in Cincinnati?

Soli Cayetano: It was, it was in Norwood.

Slocomb Reed: While you were living in the Bay Area.

Soli Cayetano: Off of Zillow, 2500 miles away. I bought it sight unseen, put an offer in sight unseen. I guess it sounds a little bit crazy now, but it wasn’t so bad when I did it.

Slocomb Reed: Gotcha. Well, if I can ask briefly what has come of that single-family bought off of Zillow sight unseen since then?

Soli Cayetano: I put about 15 grand into the renovation. It appraised for $155,000.

Slocomb Reed: What did you buy it for?

Soli Cayetano:  $100,000.  Yeah, I wish I could still find a $100,000 house in Norwood. It appraised for $155,000, six months later, I refinanced all but $7,000 out. It rents for 1,500 bucks a month which makes me about 600 bucks a month. I still self-manage that one.

Slocomb Reed: Yeah, so your return on investment is about 100%.

Soli Cayetano: 80% to be exact.

Slocomb Reed: 80%. So only an 80% cash-on-cash return after the refi, nice. I know a couple of things about you – this isn’t our first time having a conversation, and one of the reasons that I wanted to make sure I got you in front of these people and in front of our Best Ever listeners is because I know that there are things that you’re doing that I need to learn from when it comes to real estate investing. There are a couple of them in particular that I want to ask you about. The first is, your social media presence I know is a big deal for your investing. I was a freshman in college when Facebook was allowed for any university email address. Ever since then, I’ve gotten further and further away from the cutting edge of social media. Tell me what it is that you do with regards to real estate investing and social media.

Soli Cayetano: So it started as just a way to guess vlog my first property. After I bought the first one, I flew out to Cincinnati. I learned how to use a drill, I slept on the floor, I got food poisoning, I had my car broken into, and I vlogged the whole thing. I guess people grabbed on to the authenticity of sharing on social media, some of the really tough things about your first property. So it started to snowball; I didn’t think anyone would follow me but my mom. But I kind of grew an audience and now I raise a lot of private money off of social media.

I’ve had my Instagram for probably, I don’t know, a year and a half maybe by now, and have raised, I don’t know, half a million to a million from people that I met off the internet. It’s surprisingly easy, because I feel like they know me and they follow me every day, because I blog every day. So when we have conversations, the first thing that usually comes out of their mouth is “I feel like I know you.” It’s a lot easier to build credibility that way.

Slocomb Reed: Nice. So you come to Cincinnati because you bought a house in Norwood, you get food poisoning, and now you’re raising capital through Instagram.

Soli Cayetano: It’s easy. [laughs]

Slocomb Reed: Yeah, right? Well, I want to ask, is Instagram the only social media platform that you’re sharing real estate investing on?

Soli Cayetano: Right now, yes. But I hear Twitter’s the next big thing, which is funny, because it’s coming back around. I hear all the biggest real estate investors and crypto traders and all sorts of things are sitting on Twitter right now, so it’s something to consider.

Slocomb Reed: Gotcha. Instagram has been good for you, just an opportunity to share your experience with the world that has turned into garnering interest from people who have capital and are looking for a return. Can you tell us how that progressed? How long you were posting, how frequently you were posting, and when you started to gain traction?

Soli Cayetano: My first private money lender was my mother. I didn’t ask her for private money, but she told me, “I’ve been watching your Instagram for the past three months. I really want to be part of this. Can I invest with you?” I didn’t even know what private money was at that point, and didn’t know how to structure it, how to raise it, anything like that. But because she asked me, I was like, “Mom, okay. Let’s do this thing.” So I have her as a debt investor, and I guess we’ll talk about the difference between debt and equity. That was my first foray into private money-raising, I guess, unintentionally.

After that, people just started to come to me through my DMs, because I talked about how I raised private money unintentionally. So then the question was, “Oh, what is private money? How do I get involved with private lending?” I think through that and sharing more and more and more about how I use private money to fund deals opens up the door to people who have a bunch of money stacked up and don’t know what to do with it.

Slocomb Reed: What I’m hearing is you were just sharing your experience on Instagram; you were approached by your mother about helping you fund future deals. And as you continued to share your experience in real estate investing as it grew, it sounds like what that became was opportunities to educate people who were reaching out to you through Instagram. Some of those people actually looking for opportunities to get into real estate investing that you were educating them on.

Soli Cayetano: Yeah. I hosted a How to Raise Private Money seminar, which was actually great marketing for me, because I taught people how to raise private money. Some people who are on the call are like, “No, I don’t actually want to go do it myself. But since I just heard your presentation, can I invest my money with you?” I think the more you can educate people on what private lending is and the benefits of private lending, the more interested they become in growing their wealth. Because there’s so much money floating out there in the world, and everyone’s looking for a way to get a return on their money. So where people think that raising money is begging people for money, it’s actually providing an opportunity for people to grow their wealth in alternative assets.

Slocomb Reed: Soli, for the record, you put in your bio your age. I was just told that, so I felt like I had permission to say it. I know through my conversations with you that I can see some clear advantages in your investing to being a member of Gen Z, and how quickly — you wanted to share your experience through social media. Not in an exclusively Gen Z way, but how your age and your generation have been a benefit to you – have you come across times when you feel like your age has been a detriment?

Soli Cayetano: I think I carry myself older than a 24-year-old, so I’ve been told. I don’t usually broadcast my age to people who I meet on the street. Most people don’t think I’m 24, so I don’t think so. I think that people who do know and who know me from social media are pretty impressed with what I’ve accomplished and how well I carry myself, that it’s not about age, it’s about the experience, and I racked up a lot of experience pretty quickly.

Break: [00:11:51][00:13:47]

Slocomb Reed:  Our analytics for the podcast show that Best Ever listeners are already fairly sophisticated, so I just give a quick summary when it comes to Capital Partners and debt partners. What a lot of people are familiar with is apartment syndication or a partnership in which partners who are engaged in a limited capacity or limited partners have some equity stake in the deal, that they’re getting as a result of the capital investment. The performance of their capital in the deal ebbs and flows with the performance of the property involved. Debt investing, however, is where someone is effectively making you a loan, having some sort of interest or guaranteed return, if you can say. And the expectation is that their debt will perform whether or not the property performs as well as expected. You’ve decided that you want to focus on bringing on debt partners. Can you give us a couple of examples of how you structured that now and why you choose to raise debt instead of getting capital partners?

Soli Cayetano: So I can keep the equity. But I think a lot of people who want equity stakes want equity stakes when the property’s doing well. They don’t actually want to consider what happens in a worst-case scenario and people lose money. So if you tell them the extreme case, the roof caves, the building burns down, and someone has to come out with $50,000, do you? Usually, the answer is “No, I want a really passive investment and I want my return that’s guaranteed.” So it’s out of security, I think, it’s a lot simpler to go into debt; then the person’s not as nervous about what you’re doing day-to-day and whether or not they’re going to get the return that they were promised. It’s just whether the building burns down or it doesn’t, you’re going to get the return that I promised you, no matter what.

The flip side is I get to keep the equity, which is great, because I get the depreciation, which is very helpful for taxes.

On your question on how to structure it – right now, I’m doing anywhere between 8% to 12%, usually a nine-month term, and no points. It’s either a personal guarantee if they want it, or it’s a mortgage, like a deed to the property, the first position, if they can fund the entire project.

Slocomb Reed: You said 8% to 12%, it’s nine months. Is that…

Soli Cayetano: APR, so it’s annualized.

Slocomb Reed: Yeah, of course, 8% to 12% APR, and it’s a nine-month balloon. That’s a pretty quick turnaround. I know you do some house flipping with debt like this. Are you also structuring it that way when you buy multifamily?

Soli Cayetano: No, that’s for flipping. I would say that people from the internet want to develop some type of trust. I guess they feel like they know me, but they also want to test the markets with their investment. They probably don’t want to put money in for longer than nine months or 12 months; they want to get that return back and then decide whether they want to reinvest it. Friends and family are more willing to keep their money in longer, a lot more patient money. The longest term I have is three years; there’s one at two years. It’s all flexible. That’s the great thing about private money, is you can negotiate literally anything you want, with whoever you want, any structure you want. That’s for the commercial 5 to 10-unit BRRRs that I’m doing. It takes about a year to reposition them and refinance, so in order to get an extra buffer, it’s two years, and I’ll refinance and pay them back.

Slocomb Reed: When you’re looking at a 12 to 18-month turnaround on a multi-unit, are you making interest-only payments? Is it all accruing and paid out when you refinance? How is that structured?

Soli Cayetano: It depends on the project and it depends on the investor. On all flips, I like to pay back on the back-end, because it helps with managing cash flow. For flips, I’ll pay back on the back end. One of the longer-term, bigger loans for multifamily – they kind of that consistent cash flow if they’re going to have it tied up for 18 to 24 months, so oftentimes we’ll pay interest-only payments on the longer term.

Slocomb Reed: Plus, if you’re talking about a 10-unit building – and I think you have a 10 unit right now that you’re doing this on. If you’re talking about a 10 unit, there should be some revenue generated by the property in the meantime as well.

Soli Cayetano: There should be. [laughs]

Slocomb Reed: Should be, yes. Of course, if you are emptying out a building, you’ve got no revenue until you can get tenants back in there. But that segment of the process is not 18 to 24 months, so it makes more sense. How much are you raising for your deals? For a flip or for a 10-unit BRRRR, are you raising 100% of the purchase and rehab?

Soli Cayetano: For the flips, yes. Someone will come in and fund the entire thing. Usually, it’s somewhere between $150,000 and $200,000, something like that. The multifamily – no. So we’ve been raising the down payments and the construction funds. For the 10-unit, we raised $400,000-some for the down payment, had a commercial loan for 75% of it, and then the construction is about $350,000. It’s a big one.

Slocomb Reed: Gotcha. That deal is still pretty early on, isn’t it?

Soli Cayetano: Yes, the construction is starting next week. It’s probably a four to a six-month turnaround time for those units, because they’re pretty large renovations, and it’ll be leased up and refinanced probably by the end of the year.

Slocomb Reed: Gotcha. I know you were brokering commercial real estate deals before you started investing here in Cincinnati; you’ve been here investing for 15 months… I know that you flip houses to build capital to invest in buy-and-hold deals. Have you been doing it long enough yet, or are you intending that the people who reach out to you through social media fund 100% of the cost of flipping a house and get all their money back in six to nine months? Is the plan to convert those private capital partners or lenders into lending on larger buy-and-hold deals in the future after you’ve garnered more trust?

Soli Cayetano: Absolutely. The thought is a smaller amount of private money lenders are better quality, so they’re coming with more money, say half a million to a million dollars. They have more trust in the process, because we work together, we’ve proven that we’ll pay them back their money in the time that we told them we would, and then they feel comfortable keeping their money in long-term.

Slocomb Reed: Awesome. Well, Soli, are you ready for the Best Ever lightning round?

Soli Cayetano: Sure.

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

Soli Cayetano: I knew these were coming and I’m still stumped. I really liked The Comfort Crisis. It’s a book on doing really hard things and some of the benefits of stretching your comfort zone.

Slocomb Reed: I’m going to have to read that, I haven’t heard of that one yet. What is your Best Ever way to give back?

Soli Cayetano: Probably teaching people who want to get into investing, spending time teaching them how to get started. I think I’m pretty new, relatively; I still remember a lot of the feelings that I had and I still have a lot of feelings toward investing. So I think I can relate a lot better to people who are just starting out, because I was in their shoes not too long ago.

Slocomb Reed: What is the biggest challenge you’ve overcome in real estate investing?

Soli Cayetano: Managing hundreds of thousands of dollars of renovations from California.

Slocomb Reed: In Cincinnati.

Soli Cayetano: In Cincinnati. [laughs]  That’s tough.

Slocomb Reed: Do you have any tips or lessons learned for people who are facing similar things, investing remotely with six-figure rehabs that they have to manage?

Soli Cayetano: I really think it comes down to having the right team in place. I did not the best job vetting my contractors prior to hiring them, and then I made the mistake of putting one contractor on four projects, and then having to fire that contractor and pick up the pieces on the back-end, which is why I’m here today. So I think it really comes down to vetting people, talking to multiple people, not giving someone too much too fast, and letting them earn your trust.

Slocomb Reed: Yeah, contractors have been tough the last couple of years. It’s definitely felt like whoever has the labor makes the rules, the rest of us just have to play by them. Soli, what is your Best Ever advice?

Soli Cayetano: I’d say don’t let not knowing stop you from doing it. I think a lot of people wait until they know and they feel comfortable. Even like starting investing, starting raising private money, hiring somebody, hiring VAs, training a team, everyone wants to get really comfy before they jump in. But if you just jump in and figure it out, sometimes you fail fast fail often and you get further faster.

Slocomb Reed: Absolutely. Now, aside from attending Cincinnati’s Best Ever Real Estate Investor Mastermind, how can people get in touch with you?

Soli Cayetano: Probably my Instagram’s the best way. It’s kind of funny, but it’s @lattes.and.leases. I made the name when I thought no one would follow me, and now it’s just stuck.

Slocomb Reed: Lattes and leases.

Soli Cayetano: That’s where you find me.

Slocomb Reed: Nice. Awesome. Well, Best Ever listeners, thank you for listening in to our podcast. If you got some value from this conversation with Soli, please follow and subscribe to our podcast, leave us a five-star review and share this with a friend so that we can add value to them, too. Thank you 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.

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

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

Oral Disclaimer

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

Follow Me:  
FacebooktwitterlinkedinrssyoutubeinstagramFacebooktwitterlinkedinrssyoutubeinstagram


Share this:  
FacebooktwitterpinterestlinkedinFacebooktwitterpinterestlinkedin

JF2753: How Much Do You Need To Retire? Should You Stop Working? | Actively Passive Investing Show with Travis Watts

In this encore episode, Travis Watts and Theo Hicks provide their insight on reaching early retirement, navigating financial freedom, and setting goals following retirement. 

Want more? We think you’ll like this episode: The Best Ever Q1 2022 Multifamily Update | Actively Passive Investing Show with Travis Watts

Check out more episodes of the Actively Passive Investing Show here!

Click here to know more about our sponsors:

Deal Maker Mentoring

 

PassiveInvesting.com

 

 

Follow Up Boss

 

TRANSCRIPT

Travis Watts: Hello Best Ever listeners and welcome back to another episode of The Actively Passive Investing Show. I’m your host, Travis Watts. Today we have something a little bit unique, it’s called an Encore Episode. The topic is how much do you need to retire, and should you stop working when you retire?

It’s come to my attention that a lot of our viewers and subscribers here are relatively new to the channel, so there were a lot of episodes we recorded in years past that haven’t been heard. So instead of trying to recreate or repeat myself, we decided to do something a little bit different and we did a bit of a mash-up of a few different episodes that were recorded about two years ago, and I want to extract the answers to these questions from those episodes. I think they were well done. It’s back when I had my co-host, Theo Hicks, with me.

The topic at hand has just been something that is very relevant today. I mean, in the last probably month or two just working in investor relations, I’ve had a lot of calls with baby boomers retiring or looking to retire or recently retired. A lot of people are asking questions like these. I’m never giving financial advice, I’m not a financial planner, so please seek licensed advice, but there are some good key concepts to consider and think about, so we’ve addressed them here in this encore episode.

I’d love to hear from you guys too if this concept is something you like, where we can extract some of the best bits and pieces of previous episodes to address maybe a new question or a topic at hand. So like, subscribe, comment, reach out anytime if I can be a resource. Enjoy today’s episode.

Theo Hicks: How to know when to retire? How much is enough? Now, before I let Travis describe it, I don’t see many people asking this question, I don’t see many blog posts covering this topic. I think Travis did a really good job explaining what we need to do in order to, number one, just be aware of this kind of stuff in general, and then number two, what we should do to figure out when, if ever, we have reached the point of maybe we don’t need to work as much, or continue that grind. I’ll let Travis take it away and then we’re going to have our back and forth.

Travis Watts: In this blog, I use the story of a CEO of a tech startup company. It starts with the tail end of this guy’s career, saying he just took his company public, he’s got stocks that are going to vest over the next five years. Once they do, it will be estimated this guy will have about a $5 million payout. That kind of sounds like the ultimate American dream. But as we dig a little bit deeper, we get a little more into this story and we figure out that the way this journey started was this guy worked at a Fortune 500 company for the first decade of his working career, had a high salary, had some stock options there as well, so in those first 10 years, walked away with approximately $2 million in total investments, a paid-off home, things like this, and then launched his own company afterwards, went into business for himself. He had actually previously sold a company, that was his second venture and out of the second decade of his life. Then here, we’re taking a look at the third. So the question really is, as much as that looks like an amazing success story to a lot of folks potentially, how much is enough? Was it possibly enough when he had a couple of million dollars and a paid-off home? Could he have potentially retired in his 40s, maybe in his 50s? Now he’s 60, looking at a couple of kids in their 30s that he wishes he could have spent a lot more time with in his life. A lot of people get caught up in these success cycles. It’s just one business to the next, to the next, to the next; I made one million, now I need to make two. I made two, now I need four. I made four, I need eight. But where do you stop?

Theo Hicks: I was talking to someone — I can’t remember what his name was, maybe two weeks ago on the podcast. He really had an exit plan right when he started. He knew exactly how much money he wanted to get in real estate before he fully stepped away. Let’s say I know what enough is – then what? What do I do after that?

Travis Watts: Identify first what is important to you, what are the most meaningful things in your life, what does that look like, what brings you the most fulfillment You got to write this stuff down; this can’t be just done in your head one time, this is just setting goals for a lifetime. Then you have to reverse engineer now. How much is that going to take?

I think what a lot of people find, myself included, is when you really nail this stuff down, you might find it’s a lot less expensive than you might think. The problem is, in general, we don’t stop to think about these things. We just think, “I’m working now, I’m going to work till my 60s, whatever.” We don’t give it much thought and we just go on the treadmill. Then one day you’re waking up in your 60s thinking maybe either, “I have a few regrets, maybe I could have actually pulled the plug back in my 40s or my 50s, spent more time with my kids, maybe travel a little more, had less stress, if nothing else.” And the purpose is not to say quit working or retire in the traditional fashion, especially if we’re talking about someone in their 40s; I think it’s about finding what you’re truly passionate about.

Theo Hicks: I know some people’s goals in real estate are to actively invest until they’ve built up a large enough nest egg that they can passively invest with someone else, and then live off of that interest.

Travis Watts: Yeah, that’s exactly it. That’s my big message to the world, too. Obviously, I’m a huge advocate for passive income and passive investing, that’s my story. The point is you and I, Theo, are very fortunate to have jobs and careers that we genuinely enjoy. We like to be creative and expressive, we both write blogs, we both do the podcasting stuff in various outlets, and that’s amazing. But you also have to remember, most people aren’t doing that; most people are caught in the golden handcuffs. Either a nine to five situation, or they’ve climbed this corporate ladder so high that they make a really nice salary, so they’re kind of trapped. So until you start putting some of your income towards investments, whether it is passive investments or not, it’s hard to branch away and have this balance that we’re talking about no matter what your approach is. But I think we all need to get there, we all get there at one point or another. What’s the average American retirement like? 67 is the retirement age; I don’t know, something like this. You’ve got social security, you’ve got possibly a pension or your 401K. This is basically passive income at that point. You’re not having to exchange your hours and your labor in exchange for money. So we’re going to get there somehow, at some point, hopefully. It’s just a matter of if you focus on the stuff earlier in life, you can get there potentially a whole lot faster than perhaps your 60s or 70s.

I was introduced to this video and came across it on YouTube. Unfortunately, this is on the fly right now, I can’t remember what the guy’s name is, but if you type in, I think, “retire at 36” or something like that, “retired at 36”, there’s this guy who had a passion for boats and sailing. That was really his life purpose, it was his hobby. He was a consultant, if I remember right, an IT-type consultant, made really good money, worked full-time, grinded it out up until 36, ended up just buying the sailboat and just living out on the boat and in the Caribbean. He “retired” at 36. He’s the one that introduced me to this concept of “enough.” He said, “That’s the hardest thing to do, is to pinpoint that number, this number would be enough for me,” and then take action when you hit it. Because that’s the scariest part, is taking the leap and saying, “God, I hope this is enough. I hope I’m right.” But it was for him, and this guy is, who knows, in his 50s now or something. But it’s an amazing story. His alternative was just more and more and more and more money, but then that would have kept him longer and longer and longer away from sailing. And what if he had passed away or came with a debilitating disease or something? I mean, you never know, life is short. Something to think about.

Theo Hicks: When you’re sitting there saying, “What’s enough? Well, “I want to have a BMW, and I want to have a million-dollar mansion, and I want this,” which is obviously fine. But that “enough” number is going to be way higher than if you’re just going to graduate from college and you’re in an apartment. Like, “I really just want a three-bedroom house and it’d be nice to have a car and to be able to go out to a restaurant once a week.”

Travis Watts: Yeah, that’s a great point. As far as things like talking about a BMW or a 10-bedroom house or this, that, and the other, you’ve really got to ask yourself why are you doing that? Is it because you genuinely wholeheartedly love BMWs, and you’re passionate, and you’re a car fanatic, that’s your hobby and interest? Or is it because you’re keeping up with the Joneses? Or it’s because you think, “Well, society expects this of me. I’m a dentist, or a doctor, or a realtor. I’ve got to drive this really fancy car. What will people think of me if I don’t?”

You’ve got to really understand, this takes a lot of soul searching and looking deep, but at the end of the day, it’s probably the ladder in most cases for most people. And nothing wrong with those vehicles; I’ve owned nice vehicles like we talked about before. I chose to buy them used, pre-owned, and I have owned luxury vehicles. So there are ways to go about it, but is it you’re doing it for yourself and not trying to impress other people?

Break: [00:12:22][00:14:18]

Travis Watts: Okay, so you’ve gotten to the point of let’s say early retirement or retirement in general – does that have to mean that you don’t work anymore? What happens when you retire early and you’re in your 30s or 40s? Does that mean that it’s time to go move into that retirement community and start playing pickleball?

Theo Hicks: I definitely fell into this early on, for sure. I think I’m slowly getting out of it, and your blog posts definitely solidified some of those things in my mind. So with that being said, let’s go through it.

Travis Watts: The idea here is that we all have a lot of preconceived ideas about what retirement is, what that means. I think that we all want to would be contributing in some form or fashion. Successful individuals that are far beyond what they need financially to retire – why is it that they keep “working?” Well, it’s because they have a mission, they have a purpose. That, to me, is really what financial independence is all about. It’s having the option to work, but not the obligation to work.

Theo Hicks: Well, then maybe rather than just quitting and going into real estate full-time, try to figure out a way to transition into a job now that will help you reach your long-term goals.

Travis Watts: Yeah, and there are usually two types of people. There are those that love their career and they’re passionate about it, and then there are those that really despise what they do. I was in the latter part of that initially, and then the passionate side later. But the point would be this – if nothing else, for either side of that, just get started. Again, to the whole theme of this blog about not having to quit work – it doesn’t have to be so extreme, like “I work a W2 job today, and tomorrow I quit and go full-time real estate.” Just start, just have a rental property, REITs. In the stock market, you can get in with $10.

Most people think of investing in terms of capital gains, in terms of equity, in terms of fix and flip a house, in terms of buy a stock at 10 and hope it goes to 15 and sell. That’s how most people associate investing. But I flipped that into passive income, cash flow. Specifically, living on cash flow and creating multiple income streams early in life, to where you’re actually putting yourself in the situation that statistically 60 and 70-year-olds are in, in retirement. I’m passionate about helping people reach those levels, so that they can do essentially their highest and best work.

Theo Hicks: The other thing you said too that I wanted to also mention about what retirement actually means – is it just doing nothing? It’s continuing to do something that you want to do. Again, you also gave some examples of things that you’re doing now that anyone can really do now to start to figure out the type of life that they should be living once they retire. Do you want to talk about that too?

Travis Watts: Sure. A lot of passive investors, I’ve come to learn, are just simply highly paid professionals doing whatever it is they do, and they’re looking for a place to park capital that’s not going to require their time. Think about being a dentist or a doctor, and then taking two days off a week, Saturday and Sunday, and going and trying to fix and flip houses. You can’t even day trade stocks, it’s the weekend. So a lot of this active stuff just doesn’t make sense for certain types of people.

When a doctor, an attorney, or an engineer reaches financial independence, what they have is an option. An option to – and here’s the three things I point out. An early retired doctor might set up a smaller practice that operates without the pressure of optimizing profits, and without dealing with the hassle of insurance companies, one of the biggest headaches in the industry. An early retired attorney might refuse all cases that are based on questionable ethics. You have an option to say “I’m not going to do this work, I’m not going to take on stuff like that.” Or you can be a lot more picky and choosy with what you do. And the engineer might continue working. For example, they might contract instead of being a W2. They might go part-time instead of full-time, or they might be compelled to create new software. So those are just some things to think about of what we’re talking about. None of these folks in these examples stopped working, but they were able to move on to something that was more fulfilling and brought more into their life.

Theo Hicks: Yeah. Another example, more real estate related too, if you are someone who wants to transition from active, retire from that and become a passive investor… I’ve talked to a few people recently who were full-time active real estate investors and then they hired someone to oversee the company. I’m sure they took some time off, but then once they were ready to get started again, they started some sort of consulting program or mastermind group where they teach other people to replicate what they did. That’s just another example.

The other thing that I really liked about this blog post that you mentioned – the question you want to ask yourself to figure out what you should do once you retire is what you value. You gave the example – and we talked about this in a past episode – if you value stuff too much then you’re going to have a hard time reaching that number. Because you’re going to have this luxurious lifestyle that’s going to cost you a lot of money to maintain, and you’re going to need a higher passive income to cover that. You gave examples in here about things that were high costs, but resulted in low happiness, and then things that were lower in cost that resulted in higher happiness.

You talked about how you could upgrade to a Ferrari or Lamborghini, but would that ultimately make you happier? Maybe once you buy it and then when you’re driving it once a month, or once a week, whatever, but it would bring you further away from your financial goals, your family goals, and your travel goals, because of that reason, “Now I need to make that much more money, invest in that many more deals to cover that Ferrari cost.” So you gave other examples of things that resulted in happiness. I’ll let you talk about what those are.

Travis Watts: When I was a kid, Theo, I remember when I first was learning about money and how much things cost, and I would see a Lamborghini or Ferrari and then ask or research how much those are. I’d think, “Oh, my gosh. That car is $200,000. That’s not even in my world, that’s not in my reality. That’s insane.” As you progress through life and one day, you’ve got a couple of 100 grand and now you’re thinking “I could really buy that car cash.” Then you think, “How dumb would that be? How much happiness would that give me, versus what if I invested it and I got 1,200 bucks a month in cash flow? What could I do with 1,200 bucks for the rest of my life?” For most people, that’s social security benefit right there, 1200 a month; that’s crazy. And maybe less.

A couple of things that have added some tremendous value at a low cost were my wife and I went and backpacked Europe for our honeymoon, and I bought the custom-ordered shoes, like a forever sole, breathable, washable, they collapse down, you can roll them up, you can put them in your pocket… They’re amazing. They were like 100 bucks and I can’t even begin to tell you how much value that added, not only to that trip, but every vacation we take, I’m wearing them. I love them. And they don’t wear down; they’re just phenomenal.

The other thing is my wife’s got scoliosis, so her spine’s like an S-shape. I bought her an inversion table. We’re always trying to experiment with things that make her life easier, and eases the neck tension and the back pain. It’s just a little table, you strap your feet in, turn it upside down, and it decompresses your spine. I don’t know how much they retail for, probably a couple of hundred. And I can’t tell you, man, every time she gets on it, she’s so happy; it’s so fulfilling and physically rewarding.

This whole thing is about finding things that bring value and happiness into your life. What we really value is travel, vacations, spending time with family, and these little things. A nice pair of shoes that are comfortable. Just to wrap it up, that’s the whole point, I think.

Theo Hicks: My dad, for example, he retired as a bus driver. He loves talking to people, and so every morning… Not now, but before COVID. Every morning at [6:00] AM, he’d go to the little bus shop, where the buses are, and other retired bus drivers are there and they’d just talk about whatever for two hours. He really enjoyed doing that. Again, it could be something as simple as “I like talking to people, so I’m going to do a part-time job where I’m doing something as simple as driving a bus, or being a cashier, where I get to hang out with people all the time.”

Travis Watts: You just made me think of it. I know we’re both Tim Ferris fans, so 0 I forget which book, 4-Hour Workweek, or one of them… He’s sharing the story of the New Yorker business guy that goes down to Mexico on a fishing trip. This guy takes him out on the boat for a few hours comes back and he says, “Alright, thanks. That was great. It was amazing. Do you have more customers today?” He said, “No, I only do one trip a day and get some fish for my family and do this.” He says “Well, why don’t you do more? Why don’t you do like five trips a day? You’ve got plenty of time to do it.”

He’s talking about, “Well, I like to come home, take a nap, visit with my wife, play with my kids. In the evenings have some tequila or whatever, and play music with my friends. That’s my life.” And the New Yorker is like  “Well, can you imagine though, what if you did more of these trips, made more money, you could buy two boats, then you could hire employees to run those boats, and then you could have a whole fleet of ships. When that gets successful, you bounce out of the business, then you could headquarter in the States, then you could run this big operation, and then you could franchise…”

The guy keeps asking “And then what? And then what? And then what would I do? And then what would be after that?” He goes, “And then you can retire, come down here, have a quality of life, spend time with your family and your friends.” The guy already had all that, he already had the quality of life. That’s one more example of having enough.

Theo Hicks: That’s a perfect story to end with. Is there anything else you want to mention before we sign off?

Travis Watts: I guess for anyone listening, just think about this question – are our goals and your aspirations more set around the quality of life, or having quantity? Meaning money in numbers. I was guilty of this early on when I would set goals. It was always money goals. One of my first goals is, “I want to be a millionaire. I want to have 10,000 a month passive income.” But when you dig a lot deeper, it’s what do you really want out of life? How do you want to live your life? That’s really what the question is.

Theo Hicks: We’ll end the episode on that note as well. Thanks, Travis, again for joining me for The Actively Passive Investing Show. Best Ever listeners, as always, thank you for listening. Have a Best Ever day and we’ll talk to you tomorrow.

Website disclaimer

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

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

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

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

Oral Disclaimer

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

Follow Me:  
FacebooktwitterlinkedinrssyoutubeinstagramFacebooktwitterlinkedinrssyoutubeinstagram


Share this:  
FacebooktwitterpinterestlinkedinFacebooktwitterpinterestlinkedin

JF2746: 4 Rules For Professional Investors | Actively Passive Investing Show with Travis Watts

Want to enhance your professionalism and authority as an investor? In this episode, Travis Watts shares four ways you can elevate your knowledge, work ethic, and mindset to gain credibility as an investor.

Want more? We think you’ll like this episode: JF2515: Top 5 Best Practices for Effective Investor Relations | Actively Passive Investing Show

Check out more episodes of the Actively Passive Investing Show here!

Click here to know more about our sponsors:

Deal Maker Mentoring

 

PassiveInvesting.com

 

 

Follow Up Boss

 

TRANSCRIPTION

Travis Watts: Welcome back Best Ever listeners to another episode of The Actively Passive Investing Show. I’m your host, Travis Watts. I have another exciting episode for you all today, I titled it Four Rules for Professional Investors. Just because someone is an investor, it doesn’t make them a professional investor. I do think that there are some rules that could “be followed” to help you out, and that’s what we’re talking about in today’s episode. As always, my intent here is to bring you all as much value as I can, in as short of a timeframe as possible.

I’m just going to go ahead and dive right into number one, which is understanding active versus passive income. I’m going to give it to you in my own definition. I know there’s the technical definitions between the two, but just hear me out on this. The simplest way I can put it is active income is when you’re materially participating in the business of making the money. I’ll give you a couple of examples. Flipping a house would involve my time, my effort, my energy. Even if I’m not, say, the contractor that swinging the hammer or putting things together, I am still active in the business of finding that property, running the numbers, trying to work with realtors to list it when I’m done. I am actively participating. In my definition, that is active income. If I’m day trading stocks, for example, and I’m sitting in front of a computer a quarter of the day, half the day, all day, and I’m sitting here and I’m trying to look at trends and markets and graphs and charts and moving averages, and I’m trading in and out of stocks, I am making active income.

Now on the flip side, passive income is rolling in whether or not you actually work or put in any time. It’s something where you make a decision once, you put money somewhere once, and then for the rest of the time, money is coming back to you, whether or not you work. Again, you are not materially participating in the business itself. I’ll give you two quick examples, which would be as I do – I invest as a limited partner in multifamily apartment syndications.

The general partners are the active folks, they are finding deals, underwriting them, managing the business, doing investor relations, sending out distributions… I’m just the guy saying, “Here’s $50,000. I want to invest in that deal.” I sign some paperwork upfront; that’s about as active as that gets, and then the rest of the time is hopefully receiving cash flow distributions, passive income into my bank account.

Another example of being a hands-off or passive investor would be if I bought shares of a dividend-paying stock. We’ll use Coca-Cola as an example, because they have paid a dividend for a very long time, I think it’s a quarterly dividend. Again, I would do a little bit of homework, do a little bit of research, figure out maybe I want to invest in that stock. I make a one-time transaction and buy some shares; the rest of the time, I’m not working for Coca-Cola, I’m not the CEO of Coke, I’m not on their team, I don’t have to actively participate in the business of Coca-Cola in order to receive dividends by holding that stock. So that is passive income.

The big point and the big message I’m trying to make with this is it can be literally life-changing to understand the importance of these two. I’ll just tell you, from speaking with thousands and thousands of accredited investors over the years, the wealthy invest for passive income. I want to make one thing clear with that statement; notice I said, “INVEST for passive income.” Obviously, a lot of wealthy individuals are business owners, entrepreneurs, CEOs, you name it, they are active in earning income in different ways, but they invest passively, for the most part. Obviously, the exceptions to every rule – you have wealthy general partners, we’ll say, who are both active and passive in their investments.

But here’s the deal – you and I only have so much time in a day, so much time in a week, so much time in a year to be active on whatever it is we choose to be active on. Even if we’re the best CEO in the world, you may not want to put more than 80 hours a week in, because you’re going to burn yourself out. So how do you scale your income beyond your salary, let’s say, as being a CEO? You invest passively for passive income, and that way, money starts coming back to you, without you having to be active additionally outside of, we’ll call it, “work.” All that sums up to number one, understanding active versus passive income. Again, not financial advice, not technical definitions, just my take on it, sharing it with you to simplify the message.

Number two, the second rule is get financial education. I think we’re all very aware that our school system doesn’t do a great job at teaching us financial education. They might teach you how to check out a bank balance or balance a checkbook or something kind of crazy like that. I remember, in fact, in high school we did one exercise and one exercise only that even somewhat related to investing, and it was a terrible exercise. But all it was this, they gave us what’s called a paper trading account, which is a fake brokerage account. You just enter how much money you want in there, so we all started with whatever $10,000 or something. We each created a little sign-in. And then it tracked the real stock market day-to-day, but the money we were using was fake. The objective was, we started on a Monday morning, and every day we would do about 30 minutes on this exercise. The goal was by Friday, in this particular class, whoever generated the most money in their fake brokerage account, won. That’s a terrible strategy, because this is how a lot of people try to chase the shiny objects, they try to chase the highest yield, they try to get into the most speculative investments, with the highest risk profiles, without understanding that, which – we’re going to talk about risk here in a minute. Ultimately, it’s a buy low, sell high, and a get-rich-quick kind of mentality. It was the worst exercise ever. I didn’t realize that at the time but in hindsight, looking back, that was just terrible to try to teach people that that’s investing.

So when I say get financial education, most of us weren’t educated even in our own household about true professional investing. Some of us may have been grateful enough to get that kind of message, and we can’t rely on the school system either. So what I mean is listening to podcasts like this one, reading books, attending seminars, finding mentors… You have to be a go-getter, unfortunately. When I say unfortunately, most people aren’t go-getters, let’s be real. So it kind of requires that to be a professional investor. You cannot achieve professional investor status by just turning over your money to some money manager and saying, “Put me in the stock market, or whatever. I don’t care what it’s in, just do what you think is best.” That’s not a professional take on it; you need to do a little more homework, a little more due diligence, and take a little more ownership over your finances if you’re seeking to be a professional investor. Granted, not everybody is, not everybody would care to be, but if you are, and you’re listening to this episode, I’m just sharing what it takes to be a true professional investor.

I named several ways to get financial education; some are paid, some are unpaid, we’re all different. I know people that have paid hundreds of thousands of dollars to attend different conferences and mastermind groups; that’s effective for some of them. And I know people that have really, quite frankly, not spent much money at all – I would gather probably under $1,000 – to get financially educated, because they’re go-getters. They’ll go read 50 books from the library, they’ll go listen to podcasts that are free, and they’ll skim through YouTube to get content for free. So there are a lot of different ways to do it; you have to know a little bit about yourself, and everybody’s different as to which is most effective.

Circling quickly back to that story about me in high school and that exercise about day trading stocks basically is what we were doing… There was nothing taught about cash flow or passive income, which is the way that the true wealthy invest. To that point, that brings us to rule number three, which is invest for cash flow, or passive income, not for capital gains or potential appreciation. And I’ll explain why. The buy low sell high mentality is promoted and marketed worldwide, it’s not just in America. It’s this idea that I’ve talked about on the show many times, that you’re told by either an employer or by Wall Street or by your broker-dealer that, “Hey, just dump some money in your 401K and in your IRA, and then one day, it’s going to be all good down the road.” Well, it’s only going to be all good down the road if the markets just go up and up and up and up and up and up and up forever. And hopefully, when you pull the trigger to retire we don’t have a big market correction or something like that. So my point is, is it possible to flip a house today and make a profit, which is buy low sell high? Is it possible to buy a stock today at $10 a share and then it moves up to $15 in a relatively short timeframe? Absolutely, that’s possible. Absolutely. But you know, one of the biggest factors that help you achieve that goal is the market itself. If the housing market is booming like it is right now, there’s a better chance you’re going to make a profit, and the same thing can be said with stocks. If you’re getting in after the market bottoms and now we’re starting to see a recovery backup, you can virtually just throw darts at a board and make a profit over the next five years.

Break: [00:12:52] to [00:14:48]

Travis Watts: What I encourage you to think about is what about the 401K holders, what about the IRA holders, what about the buy low/sell high strategists when 2008 and 2009 came along? And by the way, we didn’t see a real recovery for many years. It was almost 2011-2012 before the market started making a rebound. So there were years of loss, and then years of settling, and then years of really just kind of flat returns, from ’08, ’09, ’10, and ’11. That’s a long time to sit on the sidelines. I’m not going to beat a dead horse, I’ve talked about the lost decade so many times between 2000 and 2009, where there was almost a 0% return, using a buy low and sell high mentality. So something to think about as an investor, again, being a professional investor, being a long-term investor, looking at the long-term horizon is what is the most stable and consistent and predictable way to grow your wealth? Because it’s great when you’re flipping houses in a booming market as I did in Colorado, along the front range in 2012, ’13, ’14, ’15, and ’16. I did great because the market did great. We are seeing, in some cases, double-digit annualized appreciation. Well, that certainly helps when you’re holding assets in an environment like that. But when the market corrects, as I said earlier, you might be buying at the top and then having to sell low if you can’t hold on to a cash-flowing property.

So we obviously know that a lot of people got crushed in the dot-com era in 2000, when everyone was buying publicly and privately into companies that had a potential to go up, but many ended up crashing and going to zero. That’s all because of the strategy that was being used. But have you ever considered what happened during the year 2000 or 2008-2009 to investors who were holding cashflow positive investments? Whether it be a company that had very little debt and was cashflow-positive, generating great revenue. Whether it was cashflow positive real estate; as your tenant’s paying it down, your occupancy stayed up. That is the key. The cash flow investors did great when the market went up, they do great when the market goes sideways, and not too many lost properties and did terrible when the market went down, as long as they held on to a cashflow-positive asset. That’s the point, you guys – markets can only go up down or sideways. So if the odds are two-thirds to three-thirds of the time, you’re going to be in the profit; that’s my exact point. So you don’t have to sit on the sidelines or take massive losses every decade or so.

Anybody who’s hoping or guessing that the price of something is going to be higher in the future is simply speculating. I know I’m going to take some heat for that comment, but truly consider that. I don’t know the future, you don’t know the future; as we’ve seen over and over on the news, talking heads and CNBC and all these different sources, everybody’s got an opinion every day. Every day, I could pull you an article that says the sky is falling and the market’s about to collapse, and I could pull you an article that says we’re about to start the next phase of the bull cycle, and things are going up from here.

Every single day we have differing opinions; that tells you that people are speculating. It’s the same thing as playing the roulette wheel and asking for people’s opinions. You’re always going to have someone that says, “I know it’s going to be red. I know it’s going to land on red.” Someone’s always going to say, “It’s going to land on black. I know it’s going to land on black.” Let’s accept that that is a form of speculation.

Now, with that being said, I’m not going to bash people who flip houses or trade stocks or do any buy low/sell high investing. I just want you to be aware that it’s really not as professional just to sit on something and ride the ups and downs and the volatility if you’re trying to build steady, consistent income. I’ll say it one other way, which is if you’re a cash flow or income investor, the price may be of secondary importance to the passive income if your focus is the passive income. Back to the Coca-Cola example – I don’t know what the share price of Coca-Cola is today, but just for example purposes, I’m going to say it’s $30 per share. Well, if they’re paying a consistent, steady dividend every quarter for the last 20, 30, 40, 50 years, whatever it’s been, does it matter, is the primary focus that the stock today’s 30 versus 31, versus 29, versus 28, if the dividend keeps getting paid out to you every single quarter, every single year, and you’re using that dividend to live on as part of your income? I would argue the price is secondary. If it happens to fall drastically, maybe you buy some more shares and dollar-cost average. I’m just saying for example purposes.

Same thing with real estate – if you paid 300,000 for a single-family home that you’re renting out for $2,500 a month cash flow, does it matter if the market softens a little and now the estimated value of your real estate is 275,000? If your tenant continues paying $2,500 per month and they’re locked into a long-term lease, I would argue that it’s really not that important, unless you are looking to sell the property, which is back to buy low and sell high strategy, which I don’t use, and a lot of wealthy professional investors do not use either.

Okay, moving on to rule number four. The final rule is to understand risk. Something that is not talked about nearly enough in the industry of investing. But I want to ask you this quick question. Is it more or less risky to rely on one income source or 40 diversified income sources? Well, to me that answer is pretty obvious, but I guess some people have a different take on it. In fact, I want to share one of those stories with you. Several years ago, I was talking to my brother-in-law about investing, just kind of feeling out what kind of investing he does, or if he invests… And it turns out he does not invest; and this was his reason. He told me very specifically that it’s too risky to invest when you have kids. What he was really trying to explain or articulate is that he thought it was risky to take money away from providing for his family to invest, I’m guessing in a speculative sense, because he couldn’t afford to lose that money. Granted, there is some merit to that. Unfortunately, as I said, he’s probably thinking about speculative investing, like in the crypto space or something like that, and not so much in stabilized, cash-flowing real estate. Of course, you never want to invest any money that you can’t afford to lose.

So I did agree with him in many ways, but then I got to thinking about it… But on the flip side of that, he has one income source, and it’s his job, and it’s a high-paying job. I thought, what would your family do or what would he do if he lost his job and his income went to zero? Or what if his company said, “Hey, budget cuts and salary cuts. Sorry, but you’re taking a 30% cut.” Well, this stuff happens, as we all know. He would have no backup income. Hopefully, he would have some savings and some emergency fund, but his income would go from 100% to potentially 0% overnight, and it’s something that’s not necessarily in his control.

So on that topic and to that point, this is why it took me almost six years to realize the real risk in investing in single-family homes the way I was primarily investing in single-family homes, as a buy-and-hold investor. I thought, one, if I had a tenant move out, which I did on the regular, my income didn’t just go from 100% to zero, it went from 100% cashflow-positive to immediate cashflow-negative. In other words, I didn’t just lose my positive cash flow, we’ll call it $300 a month for example purposes on a property, but when someone moved out, whether it was planned or unplanned, I went immediately in the whole negative, because I still had a mortgage payment, property tax, insurance, HOAs in many cases, and I had to pay those bills without having any income roll in to cover it.

So consider this as a quick math example. As you all know, I’m not very good at math, but I’m just going to hit some simple, basic numbers. If I had a single-family property, and it was $300 a month cashflow-positive. That means that the rent comes in, I cover all my expenses, and at the end of the day, I was making $300 per month in positive cashflow. Let’s say one of my renters or the renter on that particular property moved out. And it was all expected, it was that they did a 12-month lease, and at the end, they decided they weren’t going to renew; they were going to go buy their own house or something like that.

Let’s say it took me 30 days or roughly one month to turn the property around. They have to move out, I have to get it cleaned, I have to relist it, I have to interview people, and then the new renters want a one or two-week extension until they can move it. Let’s just say it was one month to get it covered. Some example expenses would be, I might have a $1,500 a month mortgage payment on the property. I might have a $200 a month HOA fee to pay, I might have $250 in property tax. I might have a $100 per month insurance policy that I have to pay, and it might take me $200 to clean the carpets and clean the place up for the next renter.

When you tag all of that together, it’s over $2,000 of an expense. When you look at a property, a single-family home that’s $300 a month cash flow positive, you’ve got to remember that in an event like that, even an expected event that happens every year, could knock out eight months of your cash flow, the better part of a year. And that’s just turning the unit over, not to mention all the maintenance nightmares that I had to deal with, from leaking roofs, to shoddy plumbing, to having to paint properties, to landscaping messed up, to special assessments with HOAs… When you factor in all the risk points of going cashflow-negative, the maintenance, and the unexpected things, it’s awfully hard, in my personal opinion and my personal experience to make good, solid, consistent money with single-family homes. It’s what prompted me to shift after six years of doing all that kind of stuff into investing in stabilized, cash-flowing, multifamily, primarily value-add business plan syndications.

I’m not saying that everybody should do what I did; not saying everyone’s experience was what my experience was. I’m just saying as a fourth point, to understand the risk of what you’re investing in and weigh that out against the potential reward that you’re looking at getting in that particular investment.

I digressed from that story… I hope that you guys found this episode useful. Again, I will recap for you the four “rules” for professional investors. It’s understanding active versus passive income, it’s getting financial education, whether it’s paid or unpaid. You’re on your own to self-educate, unfortunately, in most cases. Number three is investing for cashflow, not capital gains, or hoping that markets always go up, up, up, and away. Number four is understanding risk.

Thank you so much for tuning in to today’s episode on The Actively Passive Investing Show. I’m your host, Travis Watts. Don’t forget to like and subscribe. Always happy to be a resource to anybody, reach out anytime. We will see you in the next episode.

Website disclaimer

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

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

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

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

Oral Disclaimer

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

Follow Me:  
FacebooktwitterlinkedinrssyoutubeinstagramFacebooktwitterlinkedinrssyoutubeinstagram


Share this:  
FacebooktwitterpinterestlinkedinFacebooktwitterpinterestlinkedin

JF2739: How to Analyze a Cap Rate | Actively Passive Investing Show with Travis Watts

How much importance should a cap rate have when analyzing a new deal? Today, Travis teaches us how to analyze a cap rate, and then how to determine how much weight this metric should hold when looking into a new investment opportunity.

Want more? We think you’ll like this episode: JF2382: Cap Rates, Waterfalls, And Preferred Returns | Actively Passive Investing Show With Theo Hicks & Travis Watts

Check out past episodes of the Actively Passive Investing Show here!

Click here to know more about our sponsors:

Deal Maker Mentoring

 

PassiveInvesting.com

 

 

Follow Up Boss

 

TRANSCRIPTION

Travis Watts: Hey everybody and welcome back to another episode of The Actively Passive Investing Show. I’m your host, Travis Watts. In today’s episode, what we’re talking about us how to analyze a cap rate, or also known as a capitalization rate. This is a touchy topic among investors. You’ve got a lot of opinions out there, you’ve got people saying cap rates are extremely important, others saying we don’t care at all about the cap rates. I want to dissect this, I want to give you the simplest definition, the formula on how you figure out what these are. I want to discuss why it may be very important and why it may not be important depending on the situation.

I was on a webinar recently, as an LP investor, I was listening to these general partners talk about their upcoming offering, which was going to be a fund… And as it segued into the Q&A, an investor asked about cap rates, and what they were targeting, or what cap rates they were buying at. And the general partner kind of struck back to completely blow off that question and just say, “Hey, it doesn’t really matter what cap rates are and what we’re buying at. What matters is the stabilized cap rate once we’re complete and through our business plan.” I thought, well, that’s a really interesting ways to address it without giving more context to where he was coming from.

I was on another Q&A call with a different group, and this general partner just confronted everybody listening by saying, “We will not buy any properties that are under a four cap.” Keep in mind, as we go through this episode and I explain all of this, that it is subjective, it is opinionated. My goal is to give you valuable content, so that you can decide if cap rate’s important to you in your business and your business plan or in the deal that you’re looking to invest in.

A quick history lesson – cap rates have been on the decline for many years. If you back up about 10 years ago, they’ve just been trickling down and what we call compressing, as we’ve also seen with interest rates during the same timeframe. Multifamily that used to trade around a nine cap, capitalization rate is now trading let’s say around a five cap, just for example purposes only. That’s how much compression we’ve seen in the space.

I want to give you just the simplest definition of what a cap rate is, because a lot of people get confused and hung up and they get caught up in the analysis by paralysis. All it is, is the net operating income on a property divided by the price of the property. That’s all it is.

I’ll give you an example. You have a multifamily property, the net operating income is $1 million. You divide that by the price; let’s say it’s sold for $20 million. 1 million divided by 20 million equals a five-cap property. Cap rate is simply just a barometer of how the market is doing, or how a particular deal is valued individually. Generally speaking, when you have a higher cap rate, you have more risk. Let me explain. You take a metropolitan area like Dallas, Texas to use them as an example, and cap rates today might be trading around 4%, let’s say. When your cap rate is lower, the price or the valuation of the property is higher. When you buy multifamily apartments in Dallas, for example, you have a lot of people there, you have a lot of jobs there. The probability of you being able to collect rents four or five years down the road is quite high.

Unlike buying in a market like Cleveland, Ohio, for example. Well, in Cleveland there’s a lot less job growth. In fact, a lot of people are moving out of Cleveland, Ohio, so you’re going to have higher cap rates to adjust for that risk. Also, remember that real estate is local; we talk about this all the time on the show. Dallas, Texas, for example, you have to remember, there’s a lot of different neighborhoods within Dallas. Some may be rougher neighborhoods, some maybe richer neighborhoods. And then you have a lot of sub-markets of Dallas as well. A cap rate could be higher in a rougher neighborhood within Dallas, and could be much lower as you get to the core of Dallas or the downtown corridor, where there’s lots of jobs, people, and activity happening. If we say that Dallas, Texas has a four cap, it could range from as much as a six cap maybe down to a two-cap, depending on what type of property and where exactly it’s located within Dallas. Using four is just kind of a generalization for that market.

But here’s the big question I want to circle back to, and what I shared with you in the beginning of those two general partners that had differing opinions on cap rate. The question is, does cap rate even matter? I want to give you two deal types where cap rate could potentially have a different meaning.

If you’re buying a fully stabilized, cash flowing, high collections, high occupancy multifamily building, I would say cap rate is a great metric to look at and to know and understand, because you have all the data in place. That’s where a cap rate can really be an effective measure or tool.

Break: [00:08:06][00:10:02]

Travis Watts: In the second example, if you’re buying a severely underperforming asset, let’s say you have 50% rent collections, or you’re going to do a huge gut remodel on the place because the rents are so severely down, and it’s what I would call an opportunistic kind of play, the cap rate may not be the best metric to look at, because you think about it, a property like that with no cash flow or very little cash flow is not going to have, obviously, a great cap rate. In that scenario, I would say that a metric that you might want to look at is the price per door that you’re paying on that property, and then what the replacement cost per unit would be.

To circle back to the story in the beginning, that is why the general partner, I assume, answered the question the way that he did in that webinar, by saying, “It doesn’t matter what cap rate we’re buying at, what matters is the stabilized cap rate after we execute our business plan.” They were doing a heavy value-add kind of play. Whereas the other general partner that said “We will not buy any properties below a four cap,” was probably buying stabilized cash flowing multifamily. They knew the market very well and they knew, let’s say for example, they could buy at five caps, and so they weren’t going to go below a four at this time in the market cycle.

One small caveat just to put on the side – I know we’re talking about opportunistic and value-add and stabilized properties, but if you’re buying really small multifamily, if we’re talking about a duplex, a triplex, a quad, then cap rate often is not used or it’s not that relevant with such small properties. We’re talking larger multifamily where this really factors in.

So how do you find out what cap rates are in your market? Well, you could go to a licensed and reputable multifamily broker and just ask the question and find out, that would be one source. There’s also a lot of data that gets published through CBRE, CoStar, Freddie Mac, and the list goes on and on; this is all publicly available, most of it is publicly available for free, without subscription. Just google it, cap rates in Dallas, Texas, or in Richardson, Texas, or in one specific neighborhood type. Where you really get into the niche markets is where a broker can really help you analyze and answer the question. Not all data is going to be available for all markets; you may have trouble for example, finding what the cap rates are in Roff, Oklahoma for example. On these national publications, the closest you might get to that might be Oklahoma City or something, which is going to be far different than Roff, Oklahoma. Keep that in mind.

Let’s talk about the strategy here. In a perfect world, what the ideal strategy would be is to buy something at a slightly higher cap rate currently than what the market is trading at. That means that you’re getting a bit of a discount on the purchase price, and then you go through your business plan and you sell at a slightly lower cap rate than what the market is trading at, which means you’ve got a slightly higher price for your property. But as an investor and as a buyer of multifamily, hopefully you want to remain conservative, that’s my point of view on it. What you want to do is, say we’re buying at a five cap today – you want to look at underwriting that suggests a higher cap rate in the future. Obviously, you don’t want that to happen. That means a lower purchase price and perhaps a softening market.

But as you analyze and run numbers, you do want to remain conservative and not overly aggressive, because who knows what the world holds five years from now.

So the bottom-line is don’t invest in a deal just solely based on a cap rate. Look at the business model, see if this is even applicable in your situation. There are other factors to determine, you don’t just want to go chase the highest cap rates in America, because you’re going to end up probably buying in some of the worst places, and perhaps taking on more risk than you wish to take on. So know your risk tolerance, do your due diligence, and I hope that this episode gives you a better understanding of what a cap rate is and how to analyze it a little better.

Thank you, guys, so much for tuning in to today’s episode, another shorter episode of The Actively Passive Show. I’m your host, Travis Watts. Like, subscribe, comment, reach out anytime. I’m happy to be a resource for any of you, travis@ashcroftcapital.com, joefairless.com, Bigger Pockets, LinkedIn, Facebook, reach out, happy to connect. We’ll see you on the next episode.

Website disclaimer

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

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

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

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

Oral Disclaimer

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

Follow Me:  
FacebooktwitterlinkedinrssyoutubeinstagramFacebooktwitterlinkedinrssyoutubeinstagram


Share this:  
FacebooktwitterpinterestlinkedinFacebooktwitterpinterestlinkedin

JF2734: 3 Creative Ways to Find Commercial Development Deals ft. Glenn Kukla

In part two of our interview with Glenn Kukla, CEO of Kukla Capital Partners, Glenn answers audience questions about pivoting his business during the 2008 recession, the most creative ways he’s found deals, and his ultimate strategy for networking.

Listen to part one of this series here: JF2729: 2 Effective Ways to Work with Lenders During a Recession ft. Glenn Kukla

Glenn Kukla | Real Estate Background

  • CEO of Kukla Capital Partners, a real estate development company and investment fund.
  • Portfolio: $4M in net value. Over $50M in real estate projects he has developed and/or financed.
  • Grown and privately held his investment fund over 40% annually since 2009.
  • Based in: Cincinnati, OH
  • Say hi to him at: LinkedIn

Click here to know more about our sponsors:

Deal Maker Mentoring

 

PassiveInvesting.com

 

 

Follow Up Boss

 

TRANSCRIPTION

Slocomb Reed: Best Ever listeners, welcome back to Cincinnati’s Best Ever Real Estate Investor Mastermind. We are here for part two with Glenn Kukla. This is a Skillset Saturday. We’re going to talk about the skills that helped him in his commercial development business to get through the Great Recession. We’ll also have some Q&A for those people who are here, attending the meetup live, in this episode as well. Glenn, let’s dive right in.

All the Best Ever listeners just heard you discuss your career on the whole, with some of the highlights and probably low lights of the Great Recession. We talked about the clear skill that you have developed in building relationships with key partners and critical people, that have not only brought you deals, both buyers and sellers for your deals, but also helped you get through some of the properties during the Great Recession that went cashflow-negative when you weren’t able to make your mortgage payments. Tell us more about how you went about building relationships with commercial lenders for those development deals, ’04, ’05, ’06, that brought two-thirds of them to want to keep working with you when they weren’t getting their payments.

Glenn Kukla: Sure. There’s the old saying that there’s only one thing in this life that you have complete control over, and that’s your integrity. I believe if you conduct yourself in a manner of integrity, early on in the process, middle of the process, later in the process, eventually you will catch up and pay dividends. I feel that when we were putting together these real estate deals and requesting money from these different lenders, it was building on our portfolio of previous properties and showing that we were doing good work, we were being honest, we were being good partners in the community, developing good real estate that was good for the community, bringing in good tenants – that helped build the character of our company and that’s what allowed lenders to keep coming back and giving us money. That’s also what allowed us to get a lot better cooperation when we did have to default on some mortgages. So it’s that transparency when you talk to those people.

Slocomb Reed: What else were you doing to demonstrate that integrity to potential lenders for your deals? Is it really just transparency, open your books, show them everything? Is that the secret, or were there other things that were required of you to build these relationships?

Glenn Kukla: Networking is a big part of it. Before I was a real estate developer, I was actually a commercial loan officer with Cincinnati Development Fund. They’re still around to this day, they’re a great private nonprofit lender, based downtown, and they pull money from other lenders to do deals that each lender wouldn’t do individually. These lenders like Fifth Third Bank and PNC pull their money to take on risks they don’t want to individually take. When I worked for that bank, I got to meet a lot of these commercial lenders; so when I went to private development, I already have a relationship with those commercial lenders. So just getting out there, again, just networking… Even if you network by means of having a different career, but that career pivots you into what you ultimately want to do.

A lot of people start out as realtors, which is a great way to network, and they end up becoming very successful landlords. I’ve met some realtors here tonight, and that’s a great way to build that network and prove your integrity to the community. Some of it also, honestly, is just the quality of the work that you do. These lenders have gone through and done construction inspections, and when you borrow money and they want to see the work in progress, they can kind of tell… Cincinnati is a big city, but every community is small, whether it’s the building inspector, the construction inspector, or even just subcontractors, they figure out pretty much right away if you’re a shitbird or if you’re a good guy. And the good guys seem to be the ones that keep getting the good deals, and word gets out. So again, it’s just conducting yourself in a good way and doing good work… But also just being outgoing, and going to things like these meetups, and listening to Slocomb’s podcast every week. I had lunch with Ash Patel about a month ago, and every time I have lunch with him, I feel like I’ve networked with 10,000 people. Just don’t be afraid to open your wallet and buy lunch for people; I’ll buy you a beer, I’ll buy you lunch, I’ll buy you coffee.

Slocomb Reed: Did Ash let you pay for lunch?

Glenn Kukla: No, he didn’t, although he should have, because I offered. But always offer to pay for lunch; just bribe people to go out with you for beers and lunches and having that kind of connection. If you’re an introvert, it’s going to be harder. There are other ways to build wealth and build a portfolio of real estate if you’re an introvert. But if you’re an extrovert, whether you’re naturally an extrovert or you can fake it, it helps; I’m not going to lie.

Slocomb Reed: Yeah. If you’re an introvert, fill the tank at home and then go network. Another piece to integrity that you talked about in our last conversation – I’m paraphrasing you, Glenn, so correct me here… Part of operating with integrity and valuing your relationships is confronting your problems. When you know that you’re not going to be able to come correct in a business relationship, you haven’t shied away from that. You said there were times when you wanted a property to take the keys back, because you didn’t see a future of cash flow. But when you knew that you weren’t going to be able to perform sufficiently for your lenders, to be able to make your payments to your lenders, a part of your success came from approaching those lenders to say, “We’re not going to make it. We still believe that we’re the best person to operate this asset. [unintelligible [00:08:15].17] still in best hands with us, even when we’re not making our payments.”

Glenn Kukla: That’s exactly what we do. We were proactive. The moment that we knew we couldn’t pay the mortgage, we went to them right away and said, “This is why, and here’s all the bookkeeping, here’s the P&L, and the balance sheet.” Not just in real estate, but in life – if you cause a problem, but you’re the first one to say “I own this problem,” you’re going to get a lot more forgiveness from the other side than if you try to run and hide and then they bust you trying to cover up and lie about it. There are times where you time the information that you want to get out. You don’t want to be so transparent that you’re explicit with information that would be better timed if you waited for a day or two or something to change.

I’m not saying that you have to be transparent about everything all the time; sometimes you do need to be discreet. But in terms of problems, the best way to resolve financial problems is to own them, and you immediately get a lot more cooperation out of the other side. The same thing for contracting. If you hire a contractor and the contractor is not doing a good job because it’s something you caused, and you go to them and say “I’m sorry, I caused this.” I feel like you cand get a lot more cooperation from that contractor and they’re going to be a lot more flexible working with you, versus getting into that blame game thing.

Slocomb Reed: You shared previously about a development deal in Newport, Kentucky, which is just across the river from downtown Cincinnati, where the cost to develop a warehouse into 41 apartments and a bunch of retail was like 5 million, and you ended up being able to buy the note on the property for 2.5. Talk us through the steps in that process. The building is developed, partially occupied, not cash-flowing, you had to go back to the bank, Chase Bank, they agreed to let you continue in operation and make partial payments, and then they sold the note for… Take over from there.

Glenn Kukla: We never found out, but I think they sold the note for about 25 cents on the dollar.

Slocomb Reed: Was it a $4 million note?

Glenn Kukla: Well, there were a couple of lenders involved, so I think some of the lenders just wrote off their piece. But everything got bundled, I think, by Chase, and they sold the whole deal to a private capital company called Silver Point out of the East Coast somewhere. We don’t know what they sold it to them for; we’re guessing 20 cents on the dollar or 30 cents on the dollar.

After we defaulted on the loan, but told Chase Bank that we wanted to work through this and we still wanted to manage the property, they said “Yes, you can manage the property. Just send in your P&L, your profit loss statement, and send it in 92% of your cash flow.” They then sold it to the private capital company who basically was our new lender, so we started sending them the mortgage payment.

They actually adjusted the mortgage down, they said, “Okay, now your mortgage is 2.5 million, so your payment is only $8,000 a month, not $12,000.” At that point, rents were going back up and we were like “Great. We can start doing the full monthly payment of $8,000, now that the payment is lower. So we got in their good graces and we communicated with them very well. We were always in contact with them, sharing all of our financials, letting them inspect the property. And then I think it was just kind of luck. After about a year and a half, they said, “Well, if you want to just go ahead and buy the note from us, you can buy the note. It’s 2.5 million bucks.”

Slocomb Reed: How did you finance the purchase of the note?

Glenn Kukla: We went through First Financial Bank, which is a great lender. First Financial Bank is like one of those lenders, I think, that they’re big that they can do big deals, but they’re based in Hamilton, so you’re dealing with local folks. First Financial Bank did the refinance to take out Silver Point Capital.

Slocomb Reed: And what did that debt look like?

Glenn Kukla: That was about 2.5 million bucks, and I think it was like a 20-year amortization; I can’t remember the rate back then, but it was probably 4.5%.

Slocomb Reed: So you got 100% financing to buy off the note?

Glenn Kukla: Yeah, we did get 100% financing, because at that point, the building had then started slowly appreciating back, so maybe it was worth 3.2 million. We got 80% loan to value, it worked out great. I think maybe we put a couple hundred thousand dollars of cash in, and we built up a little bit of money, putting it back in those deals.

Slocomb Reed: Hopefully, all of our Best Ever listeners and all of you here at the Best Ever Mastermind have learned something about the value of building relationships. We are going to take questions. If any of you would like to get up and go to the mic… Anything that’s come from either of our conversations with Glenn that you want to ask about, feel free to go ahead and get up and ask. And feel free, also, if you want to introduce yourself, just your name should do it.

Todd Kelsey: Todd Kelsey, thank you for your time. I appreciate the insight tonight. Slocomb mentioned most of us are here are residential investors. Could you give us some insight on holding costs and expenses when you’re waiting for that unicorn tenant, as you said, for the school or the other property, that you did when you’re developing those?

Glenn Kukla: You have to budget for those, you have to factor that in because you’re going to pay for those costs as you go in. A lot of times you defer those costs because you don’t put money in until the unicorn comes along, and then you build to suit. So for the storefronts that we would develop, we didn’t do a full development, we’d do a white box, which means you’re essentially turning it into a white box. You’re cleaning it out, you’re putting up some basic drywall, painting in white; you’re not installing a furnace, you’re not installing plumbing, maybe you’re bringing plumbing into the building. So you lower your carrying costs. Your carrying cost is as low as possible until you get that unicorn tenant, and then you build it out to what they need. But other than that, you do have to pay; you can’t go to the bank too early in the process and say “I don’t have any money.” You have to wait until they’re on, when you truly don’t have the money.

Slocomb Reed: Glenn, a follow-up question on that. You find an opportunity to buy a unique property that’s going to require a unicorn tenant. How do you determine how much you’re willing to pay for that property upfront?

Glenn Kukla: As little as possible. Really, sometimes it comes down to the deal, but…

Slocomb Reed: You’re the one with the background in finance; do you have a ceiling for this? Do you have a way to calculate how much you’d be willing to pay? I’m not asking for exact dollar amounts, because it’s possible that someone who’s listening would be a seller. But is there a formula? Do you have calculations for figuring out how much you pay for unicorn properties?

Glenn Kukla: Sure. The three approaches to valuation. There are comparable sales, there’s the income approach, and there’s the replacement value. I think generally you would look at either the comparable sales or the income approach, and you say “Okay, if one’s just like this building are selling for 300,000, 300,000, 300,000, maybe I’ll offer them 250,000.”

Break: [00:14:24][00:16:20]

Slocomb Reed: Did you have a lot of sales comps for a school building in an economically depressed part of Cincinnati?

Glenn Kukla: Not many. That’s why I offer very little. But if I were to come across a nicer school building…

Slocomb Reed: You actually paid 20,000 times more than the asking price for that property.

Glenn Kukla: I did, it was very foolish.

Slocomb Reed: For anyone who didn’t listen to the first episode…

Glenn Kukla: They offered to sell it for $1 and I countered with 20,000. Why did I do that…?

Slocomb Reed: So when you don’t have sales comps, and you don’t know what the income is going to be, because you’re waiting on a unicorn, the first thought that comes to my head is, if I’m buying this, it needs to be cash that I have sitting in an account that doesn’t require anybody else to trust in me, that doesn’t require me to borrowing any money… It’s just a personal gamble that I’m taking, and I know that I’m going to want to keep it small. But I don’t know how to size that bet. So when you don’t have the income approach, when you don’t have sales comps, are you just going with your gut? Are you just keeping the numbers as low as you can? Is it just about, “Okay, for $20,000, I can have some fun putting this together?” What is it?

Glenn Kukla: Sometimes, for $20,000, “It’s fun, I can put it together, so why not just take a chance?” Other times it is, if you don’t know what it’s worth, but you’ve got a motivated seller – that’s when I like to do the pay now some and pay some later, where I’m going to pay you whatever it is you need now to pay off your bills and keep your wife happy and whatnot, but we’re going to share some of the equity on the upside. We don’t know what that upside is. So I’m sharing some of that unknown with the seller.

In a situation like that, I don’t know how much the commercial building is worth but I know the seller is motivated. I’m going to fight like hell to get you to agree to the “I’m going to pay you some now and we’re going to share profit later.” I think that’s almost the only way you can carve out that deal. If you don’t know what the comparable sales are, you can’t do the income approach, because you don’t have a tenant yet, you really don’t know what the building is worth, but they want to sell it, they want to do something with it, then you do the partnership thing.

Slocomb Reed: Have you ever had a situation like that? I’m imagining some of my own residential-like single-family investment deals… The seller wasn’t willing to just do it on a handshake, so there was some sort of seller carry-back financing. So I like these terms, but I want a lien on the property for X amount. Has that ever come up?

Glenn Kukla: No, it has not. It could come up, and it would, but I usually talk them out of it. I like to be in control, and that’s the key, because the property’s in my name and I’ve paid cash. Sure, if you want to put a seller-held financing on it or something, that’s fine. You can get around — I don’t want to say get around that, but you can say “Well, let’s do an operating agreement.” When I did a deal with Jim Carmichael and [unintelligible [00:18:48], put together an interest in the fund that I used to buy the property. So they’ve got some recourse, they’ve got some sort of way to claw back that money if I’ve screwed them over. So they didn’t have the title of the property or the lien on the property, but they had an interest in the money that I used to buy that property, if that makes sense. That got them comfortable.

Slocomb Reed: That also makes more sense, effectively sharing a portion of the company, selling a portion of the company, or giving a portion of the company that purchased the property. It makes a lot more sense too if what you’re offering is a percentage of the profits from your sale, because their profits would just equal their percentage ownership of the company. So that makes way more sense than my idea. Thank you, Glenn.

Glenn Kukla: You don’t need to be on the side, let’s not worry about that. It’s called the ownership of beneficial interests. It’s a legally binding document that protects that person. And you want to get the other person comfortable. You want to say, “Hey, look, I truly have your back. We’re going to make money together. I’m going to give you a little bit of money now, but let me do my thing, and then we’re all going to have a big pile of money at the end of the rainbow. How we get there, we don’t know. It may take one year, it may take three years, it may take five years, but you’re going to be protected and we can put in writing with the beneficial interest document.”

Part of it is just negotiating and selling like, “Look, trust me. I want to be your buddy. We’re going to make money together.” There’s a little bit of puffing up like, “This can be great if we just all play together nicely.”

Garth: Hi, Glenn.

Glenn Kukla: Hi, Garth.

Garth: Building relationships is important, dealing with city people and the government is a different animal… So give us some advice on how you approach building relationships with mayors and those kinds of people. Because you’ve done a great job in Covington and Newport. And obviously, dealing with those people is a little different. Great job with tonight, by the way.

Glenn Kukla: We can break it down into two buckets, at least. Let’s start off with building inspectors first. I’m sure some of you have had building inspectors you tried to deal with. If anybody can smell bull, it’s a building inspector. And once you get on their radar, you’re never going to get off it. So if you’ve got to do things right, it’s with a building inspector. I hate to say it; we hate building inspectors that make us do things we don’t want to do, and it doesn’t make sense half the time. But my God, if you get on their bad side, it takes forever to get back on their good side. So you’d better just go ahead and do the right thing. I think a lot of people get in trouble with building inspectors because they don’t hire an architect and they should have, or they didn’t get a permit and they should have. I know where the gray area is and I’ve pushed it to the gray area, but I’ve never pushed it so far where it pissed off a building inspector. So make sure you treat those people right.

The other bucket would be elected officials. A great way to network with elected officials is to contribute to their election campaign. It’s not bribery, but you’re giving them money. [laughter] Again, this also gets back to networking. If you want to network with people, go to a fundraiser for a candidate and contribute to their campaign by writing a check when you enter that fundraiser. Meet their people, meet that official; they might get elected, and then you know them. So again, that’s the power networking, but it also comes with writing a check. Our lender was famous for it; if there were nine people running for city council, it didn’t matter what party they were in, they all got $50,000, because he wanted them to pick up the phone when five of them got elected.

Slocomb Reed: How has your networking with politicians been advantageous to your development deals?

Glenn Kukla: It’s not like you’ve got people in your back pocket, it’s just you’re putting your networking out there. Whether you’re networking with politicians or just people you meet at a meetup, it’s just one more layer of getting out there and networking. So I wouldn’t say that networking politicians give you some kind of special favors or any kind of magical powers, it’s just one other layer of people you’re networking with, who are keeping their ears open for deals for you. And if you ever need to call them, you get a call back, because politicians are just like other people. Most politicians don’t make enough money to retire on this. Most politicians, especially local city council people, local city mayors, it’s [unintelligible [00:22:31].00] volunteer.

Slocomb Reed: Does anyone else have a question they’d like to ask?

Participant: Thank you for tonight. Question – how did you stay motivated through that whole downturn of 2008? Can you talk a little about that, and how you just kept going? Because it was, obviously, a rough point for everyone.

Glenn Kukla: Honestly, I had nothing else going on. I mean, I had no other alternatives. Part of it is you get emotionally invested. When you own a house or you renovate a building, and you’ve gone through that creative process, now it’s your baby; you don’t want to let go of your baby. There is kind of an emotional attachment. I would say the emotional attachment kept me going. And also just knowing that if you stick to it, things will work out. I’ve read The Art of The Deal by Donald Trump and he talked about that sometimes you actually do want to go through bankruptcy, because then you can renegotiate better terms. So maybe in the back of my mind I was like, “Okay, somehow this chaos is going to bring some kind of opportunity. As long as I’m in the middle of the chaos and not completely checked out of it.” Part of it is just you have to always be tenacious, you have to practice being tenacious by never giving up.

Darren: Hi, Glenn.

Glenn Kukla: Hi Darren.

Darren: We talked a lot about networking and building relationships, so I was curious about the most creative way you’ve ever actually found or gotten a property.

Glenn Kukla: There are a lot of creative ways I’ve gotten properties. One story I like to share was the guy that would cut my hair told me that a house had burned down in Kenton Hills, which is a beautiful neighborhood right by [unintelligible [00:23:53].23] Woods, great view overlooking the city. This guy burned down his house, nobody can get hold of him, the neighborhood is all mad… So I found out who the owner was, and he was this crazy recluse. I went to his house to knock on his door and make him an offer. It was like Silence of the Lambs. It was like, “Hello?” Actually, he wouldn’t even answer the door, but there were about 300 beer cans in his front yard. He would just drink his Busch Light and chuck it out the window. I looked in his window and he was a hoarder. He had these pathways through the garbage in his house.

I saw the back of his head, he was watching TV. I’m knocking on his door, “You better answer, because I want to make an offer on your house”, and he wouldn’t answer, he wouldn’t answer, he wouldn’t answer. I left. So I bought a 30-case Busch Light, and I hired DHL or CityDash to courier it over. But before I sent it over, I typed up a letter and I put it in a weatherproof sheet protector, because I didn’t know it was going to rain that day. The letter said, “Dear Mr. Corman, I’m interested in your house at 1111 sunset. I would like to make you a generous offer.” I used the word “generous”, because it’s ambiguous enough… Generous in favor of who? I don’t know, but it’s going to be a generous offer.

So I had city dash deliver the 30-case Bush Light, and I think it was around December 20th, because he called me back on December 21st and said, “Glenn Kukla?” I said, “Yeah.” He goes, “This is Robert Corman.” I was like, “Oh, I’ve been trying to get a hold of you.” He goes, “Thanks for the Christmas present. Let’s talk about selling my house.” So that’s how I got his attention. He was literally a recluse that nobody could get hold of him because he didn’t want to talk to anybody. But I found the one thing that got his attention.

Now, he also went dark about a few weeks after that, because again, he just was in and out. So I bought the tax liens on the property, knowing that if he ever tried to sell it to someone else, at least I’d have some kind of way of getting hold of him, at least later on in the process. I really wanted that property.

I also got hold of his brother, and again, this is kind of a relationship thing. I didn’t know his brother, but I knew he had a brother who was an investment advisor and lived in a nice part of town. I got hold of his brother and said, “Your brother is going to go to jail, because he’s neglecting this property. It’s burning down, it’s got tax liens, it’s got work orders against it. I will buy it from him and make this problem go away. I will take away all his problems and all your family problems if you just tell your brother to sell it to me.” So the sane brother called the insane brother and said, “Sell the property to Glenn.” The insane brother sold it to me. Part of it is just getting to know the people around the seller, befriending them, and saying “Look, I have a solution to your problem.” The solution is money. But it’s also taking away all that pain.

Slocomb Reed: Awesome. Well, thank you, Glenn, and thank you Best Ever listeners for tuning in to our part two with Glenn Kukla at Cincinnati’s Best Ever Real Estate Investor Mastermind. If you liked this episode, please do follow our show and subscribe, leave us a five-star review and share this and part one with someone who you think could gain a lot of value out of learning how Glenn Kukla has built his real estate development empire through building relationships. Thank you 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.

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

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

Oral Disclaimer

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

Follow Me:  
FacebooktwitterlinkedinrssyoutubeinstagramFacebooktwitterlinkedinrssyoutubeinstagram


Share this:  
FacebooktwitterpinterestlinkedinFacebooktwitterpinterestlinkedin

JF2732: Understanding The Time Value of Money | Actively Passive Investing Show with Travis Watts

You’re offered a deal that will double your investment. Sounds good, right? But there’s a drastic difference between having your money doubled in three years versus 15 years. Today, Travis Watts shares the time value of money and how to calculate if the returns on a deal will fit in with your desired timeline.

Want more? We think you’ll like this episode: JF1957: Save Time & Make Money By (Smartly) Putting Your Money To Work with Dan Kryzanowski

Check out past episodes of the Actively Passive Investing Show here!

Click here to know more about our sponsors:

Deal Maker Mentoring

 

PassiveInvesting.com

 

 

Follow Up Boss

 

TRANSCRIPTION

Travis Watts: Hey everybody and welcome back to another episode of The Actively Passive Investing Show. I’m your host, Travis Watts. This is going to be a very short episode, but a very impactful one if you really take it to heart. Please give me your attention for about – I don’t know, five to ten minutes; I’ll make it as short as I can. What we’re talking about as understanding the time value of money. It’s a more sophisticated topic, but it’s definitely an important topic to understand fully if you’re going to be an investor long-term. Not to be confused with previous episodes I’ve recorded where I talk a lot about the velocity of capital and keeping your money turning over. This is an entirely different concept that I’m sharing with you today on the show.

First, let’s consider this. If we could all live to be let’s say 200 years old, then most of us would become millionaires or multimillionaires. Let’s say we’re 50 years old today, we have $50,000 to go invest; even if we went in one of the most conservative investments out there and it paid us about 2% a year, well, in 150 years, you’re going to have a million bucks. That’s great, but the problem obviously is most of us aren’t going to live to be 200 years old. But the ability to recognize that kind of concept and timeframe is important for anyone who’s maybe putting money in the bank, or buying a Treasury bond at 2%, just kind of be a realist on what that means long term. And that’s what I want to talk to you guys about here today. On paper that may have sounded like a really nice investment, to take $50,000 and turn it to a million, and it would be if the timeframe wasn’t a factor, the time value of money.

Let me give you a different example. Several months ago, my wife and I purchased a house and I did some research and digging on what the previous sales were on this home. I went all the way back to the very first sale, from the developer, when this home was built. What I discovered is since the year 2000, which is when the home was built, the home has doubled in price. Again, on paper it’s kind of a sticker shock and you think “Holy crap man, we could have doubled our money if we had gotten in earlier, right? We missed out.” Or you might think to yourself, “Well, geez, this house is very expensive. Maybe we shouldn’t buy it.” Ah, but if you run the math – and I’m going to run that math for you – what we figured out is it was like a 3% annualized return had we bought the home in the year 2000, and still held it today, in 2022. How we ran that math is simply using the rule of 72, which I’ve spoken about a lot on this show. You take 72 on a calculator, or old school hand math, and you divide by the annualized return that you’re either anticipating getting in an investment, or that you did get in an investment. What it tells you, when you equal it out, is how many years it takes to double your money.

So in this case with the home, we took 72 divided by 3.2, so it’s actually a 3.2% annualized return, equals 22 years; that’s how old the home is. The question that I would ask you or anyone else is, well, is the home a good investment if historically, it appreciates at 3%? I don’t know, it might be right for you, or it might not be.

This is where I’ve made the case in previous episodes about rent versus owned and what makes more sense. But the fact is not a lot of investors and not a lot of industry professionals are talking about this stuff. I very seldomly hear about the rule of 72, very seldomly hear about velocity of capital, I very seldomly hear about the time value of your money as an investor. That’s why I’m making an episode today out of it. It’s one of those epiphanies I had that I thought, “Ah, that’s relevant information that everybody should know.” Thank you for being a Best Ever listener. The benefit to you is I’m taking the complex and the sophisticated, digesting it, breaking it down, making it as simple as I can, and I’m sharing it with you right here at Best Ever. Thank you for listening to episodes like these.

Let me share one more story with you guys. I love this one. There’s a book, it’s called The Men Who Would Be King. I think that’s the name of it. It’s basically the story of DreamWorks production studio, whatever you want to call it, and how that came to be. You’ve got these investors – you’ve got Steven Spielberg, you’ve got Jeffrey Katzenberg, you’ve got David Geffen, and they came together to create DreamWorks; this was sometime around 1993 or 1994 or something like that. Each of them put in about $33 million of their own capital into this venture to launch what would become DreamWorks. They quickly realized after putting about 100 million into the business that it was going to take far more capital to actually launch this business the way that they intended to do it. So instead of putting more of their own capital, they raised capital from investors, somewhere to the tune of about $1 to $2 billion more than what they anticipated, so that’s a pretty big miss there on the projections.

Break: [00:07:43][00:09:39]

Travis Watts: One of the primary investors, one of the largest investors that they attracted was Paul Allen; he was one of the co-founders at Microsoft. Paul Allen put about $700 million of his own capital into this venture. Guess how much Paul Allen made on his investment? Well, he took that 700 million and turned it into about 1.2 billion. Again, on paper, you look at that and you go, “Wow, fantastic return. That’s amazing.” But is it? It turns out, Paul Allen and the other investors involved in the venture were actually very disappointed in the returns that they got from this business venture. Why? The time value of money. Consider this – for you and I, let’s break these numbers down into maybe more realistic numbers. If you or I put $70,000 into an investment and we ended up with $120,000, so I’m just X-ing some zeros out of the equation… Is that a good return or not? I would argue that it’s only a good return if that investment matures in a relatively short timeframe, and this is why. Back to the rule of 72; let’s say our overall return was about 15%, annualized. So you take 72, divided by 15, your annualized return, equals about 4.8 years. That means that we would have put our money in and about five years later we would have realized a similar type of game. But here’s the deal – in the case of DreamWorks, it actually took about 12 years to realize that same kind of game. So you take 72, divided by six, or 6% annualized return, and that’s about 12 years to double your money. But here’s the kicker – they didn’t double their money. They took 700 million and turn it into 1.2 billion; that’s not double. That would be 1.4 billion if they were to double their money. It was actually a sub 6% annualized return.

You might imagine the disappointment among them as you put that much capital to work at that kind of return. I’m sure that was a tough pill to swallow.

The main takeaway here is if you guys are looking at investments that you’re potentially going to partner in, you’re looking at things like equity multiple, and you see that maybe a syndication deal says we have a 2X multiple; what that implies is basically that you’re going to potentially double your money over – what period of time? That’s the question to ask. A 2X multiple may be fantastic on a three-year business plan, or even a five-year business plan; but if it’s a 2X multiple over 10, 15, 20 years, is it a good investment, even though you doubled your money?

That’s the takeaway for you guys today. That was my little spark of inspiration for this episode. I hope you found it useful. If you guys find value in these episodes, I truly appreciate the likes, the subscribes, the comments. Reach out anytime if I can be a resource. Thank you so much for being part of the Best Ever community and we’ll see you on the next episode of The Actively Passive Investing Show.

Website disclaimer

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

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

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

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

Oral Disclaimer

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

Follow Me:  
FacebooktwitterlinkedinrssyoutubeinstagramFacebooktwitterlinkedinrssyoutubeinstagram


Share this:  
FacebooktwitterpinterestlinkedinFacebooktwitterpinterestlinkedin

JF2729: 2 Effective Ways to Work with Lenders During a Recession ft. Glenn Kukla

Real estate developer Glenn Kukla had closed one of his biggest deals when the 2008 recession hit. Unable to pay his mortgage, Glenn worked out a strategy to help stay afloat and survive the economic downturn. In this episode, Glenn shares his tips for working with lenders during a recession.

Glenn Kukla | Real Estate Background

  • CEO of Kukla Capital Partners, a real estate development company and investment fund.
  • Portfolio: $4M in net value. Over $50M in real estate projects he has developed and/or financed.
  • Grown and privately held his investment fund over 40% annually since 2009.
  • Based in: Cincinnati, OH
  • Say hi to him at: LinkedIn

Click here to know more about our sponsors:

Deal Maker Mentoring

 

PassiveInvesting.com

 

 

Follow Up Boss

 

TRANSCRIPTION

Slocomb Reed: Best Ever listeners, welcome to Cincinnati’s Best Ever Real Estate Investor Mastermind. We are here recording live at our local real estate investor meetup here in Cincinnati, that happens almost always on the last Tuesday of the month from [6:30] to [8:30], at the Deer Park Community Center. We hope you all have the opportunity to visit us in Cincinnati and join us at the meetup.

Our guest for the episode today and for our meetup is Glenn Kukla. Glenn is the owner of Kukla Capital Partners, a boutique real estate development company and alternative investment fund with about four million in net asset value. He has 25 years of real estate development and finance experience, over $50 million in real estate projects developed and or financed. He’s served on several local government boards. Glenn has been investing and developing real estate for over 25 years and has grown and privately held his investment fund over 40% annually since 2009. Glenn, can you give us a bit more about your background and what you’re focused on currently?

Glenn Kukla: Sure. With real estate or my other career?

Slocomb Reed: With the real estate.

Glenn Kukla: Okay, sure.

Slocomb Reed: We’ll get to the other career.

Glenn Kukla: All right. It’s hard to start in the middle without going back, but currently, as I said, I’ve got a fund of essentially self-made money that I use to invest, some in real estate, some in the stock market, some in hard money lending. I believe strongly in diversity asset allocation. One of the things that Slocomb asked me about earlier on in this process was “Talk about how you survived the market crash.” We’ll get to that in a little bit, but if there’s one piece of advice I would give anybody just off the street for two seconds, it’s don’t put all your eggs in one basket. If you’ve got limited capital, or even your time, or whatever skills you have, try to do multiple things with that, not all just on one thing.

So the fund that I have, we’ve got some money in real estate that we’ve purchased, some money in the stock market, and some money, frankly, we’re just holding in cash, because right now is a bit of a risky time. We’ve seen a correction in the stock market, we’ve seen a correction in crypto, there may be a correction in real estate, hopefully not… But it’s always good to have some of your money in cash. That’s essentially what the fund does, it looks for opportunities to grow itself. But generally, I like to make money for myself and other people. Most of the things that I invest in involve bringing in other partners, other investors, finding creative ways to do deals where you’ve got a motivated seller, but they don’t want to leave too much money on the table, so you say “Okay, I’ll pay you something now, but I’ll also pay something later when I make money, so that we make money together.” There’s a lot of deals that when I purchase this real estate, I’m not just buying it and saying, “See you later, I’m never going to talk to you again.” It’s, “Here’s a check now, and I’ll give you a check in about 12 months.”

Slocomb Reed: You said a piece of real estate. Give us some examples of some of your development deals.

Glenn Kukla: Sure. The guy that used to deliver my Christmas trees lives in Lockland, out in Kentucky. Every year he’d drop off a Christmas tree and he would tell me about how he has this little cute garden center he runs out of his big old nasty warehouse in Lockland. And every year, I could just tell he was like a little more depressed and more struggling about what he was doing. He was also a realtor, so he’s doing that full-time; and doing well as a realtor. But running this little garden center was his passion, and he would always drop off the Christmas tree and set it up; it was great. One year he’s like, “I need to get rid of my building. Do you want to buy a building?” I’m like, “Well, I love buying buildings”. As an aside, I assume everyone here is probably a motivated buyer. I mean, we’ve got realtors, we’ve got investors…

Slocomb Reed: If you’re a motivated seller, talk to me first…

Glenn Kukla: No, me, me.

Slocomb Reed: I’ll give you my business card…

Glenn Kukla:  I’m just saying, where’s the motivated seller meetup? Where can I sign in to that one? I don’t think there is a motivated seller meetup.

Slocomb Reed: I don’t advertise that one publicly.

Glenn Kukla: We’re all looking for those motivated sellers. So my Christmas tree delivery guy who ran his little garden center out of this big warehouse in Lockland – it turns out he was a motivated seller one day. And motivated sellers…

Slocomb Reed: How big was the warehouse?

Glenn Kukla: It was 21,000 square feet, and it’s set on two-thirds of an acre. And it’s right there in Lockland.

Slocomb Reed: Tell our listeners what you think of when you think of Lockland and a warehouse there.

Glenn Kukla: Most people would probably say it’s pretty crappy. But there are green shoots in Lockland. There’s a lot of activity going on with the GE plant that is investing a lot of money in itself. ODOT, Ohio Department of Transportation is putting like a billion dollars in the [unintelligible [00:07:46]

Slocomb Reed: And those development things that were happening when you bought the warehouse?

Glenn Kukla: No. They were maybe a mile up the road or a mile down the road, so I saw some potential. But worst-case scenario, I’m like, “I might not make any money on this”, so when he said “I want you to buy my warehouse”, I said “Well, let’s go through it and look at it.” The roof is caving in, he had work orders, he was really distressed, he was really stressed out. His wife was saying, “You’ve got to sell this property. Get rid of it.” The city was threatening to throw him in jail… And he was doing the best he could; he didn’t have the means to maintain the warehouse, and his business was going under.

Slocomb Reed: So a motivated seller, physically distressed property, spousally distressed seller.

Glenn Kukla: Exactly. Now we’re all salivating. That’s what we look for, right?

Slocomb Reed: Well, tell us what happened next. You bought it? Did you pay cash? Did you finance? Was it creative financing?

Glenn Kukla: Well, it was creative financing. So I knew that there was some money on the table he didn’t want to let go, but I knew I didn’t want to overpay for it in the beginning, because it wasn’t worth anything. I didn’t want to overpay and have something that was worth zero. So I said, “I’ll give you $10,000 now for this 21,000 square foot warehouse sitting on two-thirds of an acre. But when I turn it around and sell it –and I have a track record of that– we’ll split the money somewhere between 33% and 50%. So you’ll have thirdsies or halves and half, depending on how long it takes and what kind of brain damage I have to go through.” He said, “Okay.” So I actually PayPal-ed his wife the $10,000 just in earnest, before he even signed a document. Like, “I trust you. Here’s the money.”

Slocomb Reed: And you took title to the property.

Glenn Kukla: I took title of the property.

Slocomb Reed: Okay. Did he remain on title or have a lien or anything like that?

Glenn Kukla: Nope.

Slocomb Reed: It was your word that he’d get paid out?

Glenn Kukla: We did a memo. At that point, he was trusting me, and I did put it right. I think memos are a good tool, because they’re not binding, but at least it’s that we are on the same page. “Wait, did you say this? Did I say that?” If you put it in a memo, it’s not as intimidating as something that’s legally binding, but at least we can trust each other that much more.

Slocomb Reed: Yeah. So you own it now for 10 grand and a memo that you’ll give a third or half of the proceeds to the previous owner. And then what?

Glenn Kukla: Well, there was one more thing that I promised, and it really sealed the deal, and this is what sealed it with his wife. I said, “I will indemnify you from any other liens that come against you. If the city tries to find you for anything else, I’ll indemnify you from any other creditor that’s associated with this building. They’re going to go through me.” That indemnification was just more of a gentleman’s handshake, but it was also in that memo. So it was kind of that peace of mind that it brought him, “You’ve got a crappy piece of property, you need to get rid of it. This thing stressing you out. I’m going to take it off your hands right now. I’m going to give you money now, I’m going to give you money later, and from this moment forward, you’re indemnified. If anyone messes with you, they’re going to mess with me first.”

Slocomb Reed: That’s awesome.

Glenn Kukla: So I bought the building for $10,000. I ended up putting about another 60k or 70k — well, totaled about 100,000 in stabilizing the roof, going to the village of Lockland and asking for a vacant building maintenance license, which they didn’t even know what that was. The city of Cincinnati had that, so I pulled the code from Cincinnati and said, “Okay, Lockland, you want me to do this.”

Slocomb Reed: Act like a big kid now.

Glenn Kukla: Yup, act like a big kid. So we stabilized the building, and then started just putting the word out on the street that it was for sale. Hamilton County Development Corporation contacted me, and they were worried that I was going to be a slumlord. They were pleased when I told them I was a greedy capitalist, looking to do something nice. But the first thing that I told the community was, “I want to do something with this building that is good for the community. I don’t want to sell it to the first offer. I don’t want to sell it to the highest-paying person who’s going to do something crappy…”

Slocomb Reed: Did you market it for sale publicly?

Glenn Kukla: No. It didn’t even get to that point. A realtor came to me. I called about ten of the stakeholders in the community, the city manager, other landlords, different development organizations, putting the word out… And within I think two weeks somebody from JLL, which is a commercial broker, called me saying, “I represent Pepper Construction. We’re looking for a new headquarters.” They were renting in Blue Ash and they wanted a marquee building that has some kind of historic story, and said “We’re interested in your building.” It took about six months to work through the deal with them. They wanted to lowball me, I wanted to highball them, so we kind of met in the middle. I ended up selling the building to them for about 340,000.

Slocomb Reed: You were all-in for 100k.

Glenn Kukla: I was in for about 100k.

Slocomb Reed: So call it 240k. How much did the former seller get out of that?

Glenn Kukla: He got a third of that.

Slocomb Reed: He got a third of it. Nice. I understand as well – I know we’ll talk about the recession more later, but you were in a pretty big building downtown when the recession hit.

Glenn Kukla: Yes. Several buildings.

Slocomb Reed: Several buildings. Tell us about that. Tell us about what you were doing in ’07 and ’08 when that happened, and give us a taste of how you got yourself out of that situation.

Glenn Kukla: I was involved in a partnership. We owned several apartment buildings, and we were developing condos. We were kind of over-leveraged; a lot of people back in 2007 and 2008 were, when the recession hit.

Slocomb Reed: What does kind of overleveraged mean?

Glenn Kukla: It means you owe more than what your stuff is worth.

Slocomb Reed: Gotcha. Was that as the market was crashing that that happened, or…

Glenn Kukla: It was actually before the market crashed. We just weren’t good managers of our portfolio, as we should have been. And then when the market crashed, it just got worse. Rents went down, vacancies went up, some [unintelligible [00:12:55].05] products we had, people stopped selling, buyers were handing back their deposits…

Slocomb Reed: What kinds of buildings were these in downtown?

Glenn Kukla: These were historic multifamily, 25 units, 50 units, with some storefronts in the first floor, and apartments above.

Slocomb Reed: Gotcha. We’re talking about the central business district.

Glenn Kukla: Central business district, yeah. Right by the Paul Brown Stadium.

Slocomb Reed: This would be the most in-demand real estate in the city now.

Glenn Kukla: Oh, yeah. In 2008, Cincinnati was emerging, but it was somewhat in demand. But when the recession happened in 2008, 2009, the money dried up, the rents went down, vacancies went up, so we didn’t have enough money to pay the bank. We had to default on loans.

Slocomb Reed: Gotcha. Defaults on loans, give the properties back, essentially.

Glenn Kukla: Well, we didn’t want to, because once you’re invested emotionally, you don’t want to give them back. So here’s how you negotiate. If you ever find yourself where you have to default on a loan, you don’t have enough money, and it’s finally that D-Day, where you’re like, “Oh, crap. I can’t pay my mortgage. I fought hard to not have to get to this point, but I’m going to have to not pay my mortgage.” The first thing you do is call your bank and say, “I’m not going to pay my mortgage.” You don’t run and hide; you be very transparent and you say, “This is exactly the situation I’m in.” More times than not, the bank will actually view you as the best person to manage that property, because you’re the one that developed it, you own it, you know your tenants, you know where all the bodies are buried, you know where all the keys are; you can actually be an asset and an ally to the bank.

“I can’t pay your mortgage, but I can still protect the asset. Let’s find a way to work it out together.” That’s what we did. We went to all the banks and we said, “We can’t pay our mortgages. But here’s the interesting…”

Slocomb Reed: Did all the banks agree to that?

Glenn Kukla: About a third of them said, “We’ll take the keys”, and took them over. About two-thirds of the banks said, “Okay, you send in whatever you can send in, and demonstrate to us that you’re doing as good a job as you can managing the property. We’ll accept a cash flow mortgage, a partial payment, and the rest we’re going to do a forbearance.” So the part that you don’t pay, they just add to the principal. So your principal balance actually goes up, because you’re not paying it down, and you’re not paying interest.

Slocomb Reed: Forbearance is a term we’re a lot more familiar with now than we were two years ago.

Glenn Kukla: Yeah. And a lot of people were very familiar with it in 2008. So the key to surviving any kind of recession, whether it’s a macro recession that we would all go through if the market ever corrected or crashed, or just something personally you’re going through, just go to your bank and say, “This is exactly what’s happened. Would you please work with me? I’m actually the best person to keep managing the property. I want to own it long-term. I need a forbearance, I need a refinance, I need some kind of help here.”

Slocomb Reed: This is primarily a commercial real estate podcast, but we have a lot of residential investors in the room. Correct me if I’m wrong, expand on this for me, Glenn… We’re really talking about the kind of communication that you want to have with a commercial lender. You’re talking about commercial lending is much more relationally driven, so these are people who know you much better than Wells Fargo does, for example, and these are people who have decided to bet on your success by giving you this loan in a way that a residential mortgage lender who just punches numbers into a computer and gets a yes or no spat out. Those are not the people that we’re talking about going back to and saying, “Hey, my four-family is not working out. Work with me.”

We’re talking about lenders with whom you had taken the time to develop relationships already, who you had demonstrated your track record to so they were much more willing to look out at the broader landscape of commercial real estate during the recession and realize you’re not making your payment, but you’re still probably the best person to help us, the bank, made good on this loan. Is that all correct?

Glenn Kukla: Yeah, it’s very correct. All of the lenders that we negotiate with were local people. Like I said, in commercial lending, these are local people that we’ve developed that relationship with.

Break: [00:16:29][00:18:25]

Slocomb Reed: Your investment fund – did you say that it’s exclusively your capital, or do you raise capital for that?

Glenn Kukla: Right now, it’s my capital. At some point we would raise capital, but then you get SEC regulations and a whole other level of accountability, where if you use someone else’s money and it goes down, how do you deal with telling someone else that you lost it. I can tell my wife I lost money, because she trusts me, but if I had to tell you, you’d probably kick my ass. It’s a whole different level of accountability. I don’t know, someday I might.

Slocomb Reed: If you do lose my money, Glenn, please call me and say “Hey, Slocomb, I’m not going to be making my payment this time.”

Glenn Kukla: Work with me, huh?

Slocomb Reed: Work with me on this.

Glenn Kukla: So yeah, give me more money.

Slocomb Reed: Yeah. And 1/3 of the time I’ll ask for the keys. What has been your largest development deal to date?

Glenn Kukla: So we developed Parker Flats, which is a condo building on the corner of 4th and Central. We broke ground I think in 2005, and started selling the first condos in 2007. Great timing, when the market crashed in 2008. The Parker Flats – you actually see it if you’re in Paul Brown Stadium and you look North-West; sometimes you even see it on TV. It’s the very last building in the skyline of downtown. It’s on the corner of 4th and Central right, across what used to be Tina’s Lounge.

Slocomb Reed: It’s a pretty important part of the skyline now.

Glenn Kukla: Yeah. So that was 51 condominium units on top of a three-story parking garage. It was my idea to buy the land. So we owned the apartment building next door. Again, this is when I was involved with a partnership, equal partners called Middle Earth, back in the 2000s. So we owned an apartment building next door and we were renting the parking lot next door from the city of Cincinnati. We went to them one day and said, “Give us this parking lot and we promise to build condos. We’ll increase the tax base and bring more people downtown.” They fell in love with the idea and the proposal, so they gave us the parking lot for free.

We borrowed money from then LaSalle bank; they’re the ones that also financed that one office building, Office 71, that was rusting for about four years by [unintelligible [00:20:17].05] So they were just throwing money out; LaSalle bank back in 2000 were like “Here, take money, take money, take money.” That’s part of what caused that 2007, 2008 crash. So we only had a 25% presale requirement, which is pretty low on condos. So we built the Parker Flats, which – gosh, I mean, really, it ended up being an 11-story building, but each store was a loft, so it was like five double stories in this thing. The top story was a one-story penthouse of two units.

What was crazy at the time – I think the total construction cost for 55 units was only 11 million. Now it probably costs 30 million to build. We sold about half of the units, and then when the market crashed, that’s one where we wanted the bank to take it back, because it wasn’t cash-flowing, and there was no light at the end of the tunnel for us. We called the bank and said, “Would you please take this off our hands?” They said, “Sure.” They literally just said, “Give us the keys, we’re not going to [unintelligible [00:21:06].00] your credit.”

It’s funny, because that whole time the market crashed, my credit didn’t get [unintelligible [00:21:11].11] except for one little crappy loan that I co-signed with an out-of-town lender, somebody who wasn’t local, and they trashed our credit. My credit went all to hell; my credit got down to like 520 back in 2008-2009, from one loan that I co-signed, even though we’ve defaulted on 10 other loans, that we didn’t mean to default on, we just didn’t have the money. Nobody had money back then, everybody was losing their butts. Banks were working with people, but it’s because we were transparent and worked with those lenders that they gave us that second chance.

Slocomb Reed: What about your largest successful development deal? Partner Flats is pretty well known now, especially with people who live or are familiar with downtown. And if it weren’t for macroeconomic factors, I imagine that would have gone very differently. Tell us about your largest deal that did go well.

Glenn Kukla: So we developed the Marx Cromer Warehouse Lofts, which is 41 apartments and 10,000 square feet of commercial storefront, and a parking lot with about 30 spaces in downtown Newport. And I found that by driving around with an intern and a notepad, looking at buildings. You all know this, if you see long grass or a broken window, you’re like “That guy might be a motivated seller, I better call him.” So it was a building that was all torn up, and I was like, “Okay, but that’s a big building. That’s a big, beautiful warehouse. You can use historic tax credits for things like warehouses, and new market tax credits. With my background in financing, I know where all these extra pots of government money are.

So when we saw that warehouse in Newport, I told the intern, “Pull over and we’ll run in the City of Newport building.” I ran into the City of Newport building, I said, “Who’s your zoning administrator?” They said it’s a guy named Greg Tully. And Greg Tully pops out. You know who Greg Tully is, [unintelligible [00:22:40].07] and he’s also drummer in a band, so we had a musical connection… I said, “Greg, what’s going on with that building?” He said, “Well, the housing authority was trying to develop it, but they can’t get their funding. It’s probably going to go for sale tomorrow. Do you guys want it?” I say, “Hell yeah, we want it.” So we ended up buying it.

Again, when it’s owned by a municipality, you should pick these things up pretty cheap, if you make the pitch that you’re going to increase taxes, eliminate blight, and that kind of thing. So we renovated the Marx Cromer Warehouse, which was formerly a furniture factory, and turned it into 41 apartments, 10,000 square feet of storefront. We put about $5 million in it; Chase was the lender, we used federal historic credits, state historic credits, new market credits.

Slocomb Reed: When was this?

Glenn Kukla: This was 2006 when we renovated it, and it went online right in 2008. Again, terrible timing. We had this $5 million mortgage on this big beautiful building, we just renovated it, we’re starting to rent apartments, they’re starting to fill up, the market takes a crap, and the rentals slow down. And we had to default on the mortgage; the mortgage converted to an amortized mortgage. So the mortgage payment was $12,000 a month. We don’t have $12,000 a month in rent, and none of our rentals are generating money. So again, we went to the bank and said, “Okay, this is really bad timing, but we’re not going to be able to pay the mortgage. We’re going to send in what we got and we’re going to keep 8% for management fees, to pay for the insurance, pay for the leasing agent.”

The bank said, “Okay, that’s fine”, because they’re all doing that. So we dropped the rents and made sure that the whole building was stabilized. We leased it up as well as we could; we just made sure that we want to stabilize this property and get it leased up. Got it leased up, got all storefronts rented, still negatively cash-flowing. Chase bank sells the note to some capital company for about 20 cents on the dollar. Four years later, we buy it back for 40 cents on the dollar. So we ended up owning a $5 million building for about $2.5 million after that whole recession. And what I learned from recessions is that they’re very chaotic, and with chaos brings opportunity. So if you ever find yourself going through anything like that, somehow you might land on your feet, and actually, you might be better off.

Slocomb Reed: That’s a great story.

Glenn Kukla: Yeah. So we ended up developing a $5 million property and only paying $2.5 million for it through that whole nearly going bankrupt process.

Slocomb Reed: That’s exciting. What kinds of projects are you working on right now?

Glenn Kukla: I own a school building over in Arlington Heights, it’s 15,000 square feet, it sits on an acre and a half. It’s in an opportunity zone, which means that there are some advantages to using deferred capital gains. We’re going to market that probably in the spring; we’re kind of taking a slow approach. Commercial property is a much slower process than buying and flipping. Buying a flipping house, you want to buy it, you want to flip it, you want to sell it in four months; commercial properties sometimes take three to five years.

Slocomb Reed: So you bought this for the sake of reselling it.

Glenn Kukla: Yeah.

Slocomb Reed: Okay. You just got a good deal, found an off-market seller? Tell us about it.

Glenn Kukla: So once we sold the Stearns and Foster Warehouse, the one that I bought from the Christmas tree guy, and we sold it to Pepper Construction, they are putting $8 million in the deal and they are bringing in $2.3 million in payroll to Lockland. So Lockland was super-happy, and they said, “We’ve got this school down the street. Could you do the same thing to it?” They said, “We’ll give it to you for $1.” I actually paid $20,000 for the building, so I thought it would be more politically okay. “Why are they giving away buildings for $1 to this guy?” We don’t want that story getting out there. So I voluntarily paid $20,000 for a building that I could have paid $1 for.

Slocomb Reed: $19,999, for good PR.

Glenn Kukla: Exactly, $19,999 for PR. So now we own the building, we’re going to put together a marketing plan with some renderings, and essentially look for the unicorn tenant, which would be a company or maybe another developer who wants either a joint venture or just simply buy it.

Slocomb Reed: Not necessarily an ideal scenario, but what kind of tenant are you expecting? What kind of rent are you expecting? And then, if you’re looking to sell afterward, what are you expected to be able to sell this building for?

Glenn Kukla: It really depends on what the tenant needs. It’s kind of hard to answer, because each tenant is a unicorn. In a commercial property, tenants are like unicorns; each one is different. So for the Arlington school, likely it would be somebody who needs distributions, so we would build a high-bay warehouse attached to the school, or it might be a company like a plumber, an electrician who wants to locate their offices there, or just some local medium-sized business. And they would either buy it from me, I’d probably sell it for a couple hundred thousand dollars. Hopefully, the buyer is not listening to this podcast, because I’d ask for more first.

Slocomb Reed: That’s not a bad return on your $1 purchase and marketing budget.

Glenn Kukla: Sure, that’s opportunity cost. But I can start selling it for a couple hundred thousand dollars, but I really like a joint venture where maybe they would hire me to be the developer, we would renovate the building, we would add on a new warehouse, and then I would lease it back to them. Maybe they would lease it for five years with the option to buy it at some predetermined amount.

Slocomb Reed: Gotcha. What would you say are your top lessons learned from your 25 years of experience?

Glenn Kukla: Oh, gosh. Well, surround yourself with good people, which is why we’re all here. We’re all here to network and meet some good people. Diversify your assets, don’t put all your eggs in one basket. And don’t be afraid of risk, but understand that there are different profiles of risk. Some people think that without risk there’s no reward, and that’s not true. There are some risks that have much more downside potential, and there are other risks that have very little downside potential.

Slocomb Reed: Asymmetric bets.

Glenn Kukla: Asymmetric bets, exactly.

Slocomb Reed: Low downside, lots of upside.

Glenn Kukla: Yep. Heads, I win a lot, tails I lose a little. So I would say look for investment opportunities that have little downside. Warren Buffett’s famous for saying that he only follows two rules. One, don’t lose money, and rule number two, see rule number one; don’t lose money. So think of your capital as something not that you first want to grow, but you don’t want to lose. Look for investment opportunities that have very little downside, before you look for the upside. Real Estate, by the way, is a great place to invest, because even if you overpay for something, eventually it’s probably going to catch up in value. You were just talking about, John, you did a deal where the investor overpaid, then they ended up having to go to closing and putting money into it. But eventually, even if you overpay, you wait, and you wait, and you wait, and time will increase the value of your asset. That’s why I love real estate.

Slocomb Reed: Glenn, your natural storyteller. The common thread that I’m hearing in all of your stories, thinking about what may be the most important skill that you’re sharing with us right now – correct me if I’m wrong, but you’re a natural relationship builder. And the stories that you’re telling about your successes, but also mitigating failure come down to you built a relationship, that relationship resulted in someone who wanted to sell you a building, the guy who delivers your trees, or the city of Lockland, or someone who wanted to give you a loan based on the relationship that you built with them. And those relationships have not only led to your biggest successes, but also those are the things that helped you stay afloat in the recession, when a lot of other investors drowned. Would you say that building relationships with key people is the most important skill that you’ve developed over 25 years in real estate investing?

Glenn Kukla: 100% Well, it’s one of the most important. It’s tied for one of the top. But yeah, every good real estate deal that I’ve ever done was a result of a good connection I made with a person.

Slocomb Reed: What about other skills?

Glenn Kukla: Understanding financing, understanding risk, just understanding the law, how to re-lease, developing some bravery, not being afraid to take a chance.

Slocomb Reed: This is really good stuff. I feel like I could ask you questions for another hour.

Are you ready for the Best Ever lightning round?

Glenn Kukla: Sure. Let’s do it.

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

Glenn Kukla: All I read is children’s books. My son just got a book about every creature has a butt, so probably that one.

Slocomb Reed: Every creature has a butt.

Glenn Kukla: Yeah. I’m paraphrasing the title. But yeah, everybody has a butt.

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

Glenn Kukla: Charity is a good way to give back. I give my wife backrubs at least three times a week, so investing in your family, investing in your friends. Really, the best way to give back is to invest your friends and family, time.

Slocomb Reed: Awesome. And what is your Best Ever advice?

Glenn Kukla: I don’t know. There is no Best Ever advice. There’s so much good advice to give.

Slocomb Reed: You’ve given a lot of advice already.

Glenn Kukla: Okay, my Best Ever advice would be that old-school xerox [unintelligible [00:31:00].18] It’s the frog choking the stork. The frog is about ready to die and gets swallowed by the stork, and it says “Don’t give up.” Never give up what you do. Stay focused and work hard. If you never give up, things will work out.

Slocomb Reed: Awesome. Thank you, Glenn, and thank you Best Ever listeners for tuning in. If you got some value out of this conversation with Glenn, please follow and subscribe to our podcast, leave us a five-star review and share this episode with someone who you think would receive a lot of value from listening to what Glenn has shared with us today. Thank you 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.

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

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

Oral Disclaimer

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

Follow Me:  
FacebooktwitterlinkedinrssyoutubeinstagramFacebooktwitterlinkedinrssyoutubeinstagram


Share this:  
FacebooktwitterpinterestlinkedinFacebooktwitterpinterestlinkedin

JF2725: How to Know When to Sell Real Estate | Actively Passive Investing Show with Travis Watts

When is the right time to sell your real estate? Today, Travis Watts shares his insight on what to consider when making the decision to sell, factoring in how value-adds, inflation, and rent increases can affect this choice.

Want more? We think you’ll like this episode: JF2710: 4 Strategies to Scale as a Multifamily Syndicator ft. Mike Deaton

Check out past episodes of the Actively Passive Investing Show here!

Click here to know more about our sponsors:

Deal Maker Mentoring

 

PassiveInvesting.com

 

 

Follow Up Boss

 

TRANSCRIPTION

Travis Watts: Hey everybody, welcome back to another episode of The Best Real Estate Investing Advice Ever Show. I’m your host, Travis Watts, and today’s episode is called Sell Everything, Big Doom and Gloom. But hopefully not, I hope to have a bit more of an inspiring and uplifting message for you in the episode today. As the old saying goes, know when to hold them and know whem to fold them, so in today’s episode, I want to talk more about how do you know, as an investor, when the right time to sell is.

Today’s episode is obviously subjective, it’s opinionated, and as always, I’m never giving financial advice. These are just my opinions, this is just my perspective that I’m trying to help you guys with, for educational purposes only. Please always seek licensed advice when it comes to your own investing.

Alright, so let’s kick it off by talking about all of our favorite topics, which is real estate. I want to talk about value-add, which you’ve heard me talk about a lot on the show. It’s just a concept that’s so embedded in my soul from childhood. When I say value-add, this can apply to anything. I’m thinking back to childhood right now. Let’s go buy a car at an auction that has some problems, and it’s very cheap, because no one wants to deal with it, and not a lot of people have access to it… And let’s fix it up; let’s improve the car because maybe we have a connection through a mechanic or we can do it ourselves. Let’s do that and then let’s have a higher valued vehicle when it’s all said and done, and try to offset the cost. This could apply to furniture. The very first property I ever purchased as an investment — well, I did house hacking in it, so I rented out a spare bedroom and I furnished it, very well cheaply, through garage sales and Craigslist. I was staining, painting, and doing things myself to offset the cost. I added value to the home, to the room, and then to a potential renter who ended up becoming my roommate, who was willing to pay me $150 per month more because I was offering a furnished room that they had to bring nothing to. This was a college student, by the way. So that was really a value-add strategy, without me even knowing what the term value-add meant back then.

But of course, in today’s episode, we’re talking about multifamily or single-family real estate and we’re talking about the value-add component there, where you’re getting a property, hopefully, at a discount, maybe even off-market, and you’re improving it. You’re improving the units and the landscaping, the branding, the signage, the amenities, you’re just making it a better place for residents. The thing is, once you’ve added the value, once you’ve forced the appreciation, that’s the time that myself and many operators that I partner with, find it optimal to go ahead and sell. The reason why is something that I call the velocity of capital. I’ve made an episode on this, it was recorded last year in 2021, so check it out, velocity of capital. What that means is when I put money into an investment, how soon I can get it back, either through a refinance or sale, and then reallocate it into more deals that produce more cash flow, versus sitting in something for the rest of my life and just pays me an 8% distribution.

Money is a lot like electricity, it has to continuously be moving, and when it stops moving, it dissipates and disappears. You’ve got to keep your money turning over all the time, and that hints at the active components of being a passive investor, to the theme of the show. So here’s the simple math. If I put $50,000 into multifamily syndication, let’s say it’s giving me $300 a month in cash flow, and we’ve held it now for five years. Now it’s “Do we sell or do we not sell?” It has a lot less to do with the market, assuming that the market is flat or up from when we bought, but it has a lot to do with this idea that if we sold, and let’s say I doubled my money, that 50k turns into 100k, well, then I get to realize that gain, I get to pocket that 100k, just for simple math purposes. Then I can diversify, I can take the 100k, I can split it into two, and I can go do two new deals with 50,000 each. Then guess what? Maybe I could do each deal with a $300 per month cash flow. So what just happened? I doubled my cash flow in that scenario. So it’s like building a snowball, or it’s kind of like compounding, it’s however you want to look at that. It grows over time, the more velocity you have behind your money.

Let’s look at the equity side of the coin, which I pay a lot less attention to because I’m a cash flow investor. On the equity side of my spreadsheet, speaking personally on my net worth and how I track my finances, if I put 50,000 into syndication, I leave it on my spreadsheet as 50,000 until it sells. So I’m not trying to guesstimate what the value might be, or — appraisals are nice, but it doesn’t mean that you really have an offer, or that in two months the market shifts. So you’re really speculating, and I don’t like to speculate, so I leave it as 50k up until the sale. So I cannot have an increase in my net worth until a sale occurs. That’s nice, to turn the 50k into 100k in that example.

But there are benefits to holding and not selling. I work with a couple of syndication groups that I’ve partnered with probably about six years ago. I’m still in these deals, and they don’t project to sell. It doesn’t mean that they’ll never sell, it just means they don’t project to sell. They might be in a deal for 10 years, 15 years, 20 years, we really don’t know, but they’re are a long-term buy-and-hold multifamily buyer.

The primary benefit is, with inflation and with rent increases over time, usually, the cash flow is ticking up every year. I got in the deals six years ago, we’ll say at an 8% annualized cash flow; by year two it had turned into nine, by year three it had turned into 10, then 11, then 12, and I think now we’re somewhere around 13% distributable cash flow here in 2022. And that’s quite nice. Where else are you finding steady, consistent, what I would consider fairly safe cash flow at 13% annualized? Not many places. So it’s nice to balance out the portfolio that way. But let me ask you this. If that operator chose to sell today, those properties, would the 13% be better to sit and hold as it goes 13, 14, 15 over time, or go ahead and reallocate the funds today? In these deals, I suspect that we would double our money. So again, like the previous example, I could then take the equity that gets returned to me, do two deals that are producing, let’s say, 7% a year cash flow, but I have twice the amount of capital to put to work this time. So that’s actually 14% total cash flow if you look at it from the original investment that I made.

So it’s my personal belief and opinion, it would be better for us to go ahead and sell and reallocate into new value-add deals that not only will we have the same or better cash flow more than likely, we will reset the clock for the value-add, and be able to potentially increase the value of these new properties, and have even more equity upside appreciation. Because the value-add plans have already been executed on these deals, there’s really nothing else we can do but sit and wait for inflation to lift the rents up.

Break: [00:10:24][00:12:20]

Travis Watts: In my experience of working with a lot of different indicators, they project what the returns might be. At the time that those projections get met or exceeded, they’re likely looking to sell at that point, the majority of them. So in today’s world of high inflation and high rent increases – you had about an 11% nationwide rent increase last year and CBRE is forecasting about an 8% 2022 rent increase nationwide… Every market is different; you’ve got Tampa that did 20% last year, you’ve got San Francisco that only did 3%. But again, we’re looking at averages. There’s a good chance that if you’ve already invested or are investing now in conservatively underwritten deals that are saying 3% and 4% rent bumps per year, and we’re actually seeing 8%, 9%, 10%, 11%, that those deals might sell early.

I certainly saw this in my own portfolio last year. I had a handful of deals sell early, that were underwritten for about five years but at the three-year mark decided to sell. This year I’m going to see probably a handful more, again, because of what the market is doing right now.  It’s a beautiful thing, because this helps accelerate the velocity of capital like we’re talking about.

And one more golden nugget I want to leave you guys with… I know this is a shorter episode and I want to leave you with this to kind of think about. I was at a conference speaking on stage last week, and I drew a parallel on the fly about dollar-cost averaging in the stock market, and kind of how I look at my own personal real estate portfolio. I essentially do the same thing, which is I continuously keep putting money to work. Everything is cyclical – the bonds, stocks, real estate, gold, silver, and oil, they all go up, they all go down. The thing is I put a consistent amount to work year after year, and sometimes, quite frankly, I’m investing at the top. Sometimes I’m investing in a downturn or a correction, but over the long haul, I’m getting an averaged out realistic price for what I’m investing in.

So I’m a fan of keeping money working at all times, but not trying to time the market. When a deal sells, what I’m doing is –I call it an opportunistic outlook; I look at the syndication space, I look at mobile home parks, self-storage, note lending, ATM machines, publicly-traded REITs, I look at all these different things that I could potentially put my money into, and I look at what’s the highest and best use for that capital right now at this moment.

Sometimes there’s not one good syndication that’s happening, sometimes stocks are trading at all-time highs, and I want to stay away from it; sometimes stocks are in a 20% decline and that might be an opportunity to buy some at a discount and kind of ride the wave back up. From my personal experience, it’s quite rare to have a private multifamily apartment building trading at a 20% discount. There’s a lot of competition out there, and in the private world, that generally doesn’t happen, especially when it goes through a broker or it’s publicly solicited. It’s really tough to find deals like that. But the stock market can be irrational, and there are times that maybe a REIT has been 30% to 40% down, but the reality is not much changed on the underlying fundamentals. They’re still making a ton of money, just like they were a year ago; nothing really changed. That might be an opportunity to buy in, the dip as they say, and ride back up. You never know how far it’s going down, so it’s this whole concept of just keep putting money into investments. Over time, it’ll all kind of equal out.

Endless stories about people trying to claim the doom and gloom is around the corner, I’m sitting on the sidelines in cash, meanwhile they’re just eaten away in inflation… And let me tell you something, it’s painful to sit on the sidelines and wait when you’ve got a year like we had last year, when real estate was 15% up and the stock market went up 28%, the S&P. That’s really tough to think, “Oh, I will sit on the sidelines waiting for a deal.” Not even the best investors, not even the best economists can consistently predict the market cycles, the outcomes, and what’s going to happen year to year. So I don’t pretend to know either.

To recap in this shorter episode, I like to keep capital turning over and working at all times. I like to basically dollar cost average over time to maximize cash flow and equity. It may not be the right strategy for you, it is the right strategy for me, so again, I’m not recommending or endorsing, I’m just sharing.

As you guys know, my goal with these episodes is to take a lot of complicated information, a lot of strategies, a lot of books, a lot of people I listen to, just a lot of sources and data, and CBRE, and Marcus and Millichap, cram this crap together, try to make sense of it, and to try to share a perspective with you that can help you along your own journey. I try to make things as simple and straightforward as I can. I know what’s worked for me and for the mentors that I have in my life that have been doing this so much longer than I have. That’s what I’m sharing with you in these episodes. I hope you can find some appreciation in that. Thank you so much. Speaking of appreciation, I appreciate you for tuning in. As always, this is The Actively Passive Show, I’m Travis Watts. Please like, subscribe, and comment. I love hearing from you guys. Let’s keep the conversation going. We’ll see you in the next episode.

Website disclaimer

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

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

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

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

Oral Disclaimer

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

Follow Me:  
FacebooktwitterlinkedinrssyoutubeinstagramFacebooktwitterlinkedinrssyoutubeinstagram


Share this:  
FacebooktwitterpinterestlinkedinFacebooktwitterpinterestlinkedin

JF2718: The Best Ever Q1 2022 Multifamily Update | Actively Passive Investing Show with Travis Watts

Will multifamily perform well in 2022? To answer this question, Travis researches and shares market highlights from the first quarter of 2022, focusing on what trends passive investors can expect in multifamily moving forward.

Want more? We think you’ll like this episode: JF2714: Survive Any Market Cycle: 4 Ways to Diversify Your Assets ft. David McAlvany

Check out past episodes of the Actively Passive Investing Show here!

Click here to know more about our sponsors:

Deal Maker Mentoring

 

PassiveInvesting.com

 

 

Follow Up Boss

 

TRANSCRIPTION

Travis Watts: Hey, everybody. Welcome back to another episode of The Actively Passive Investing Show. I’m your host Travis Watts. In today’s episode, I want to give you guys just a quick Q1 2022 Market Update. I’m not sure when this episode is going to air, but I just want to talk about a few things that have been on my mind. As you guys know, I do a lot of research, I listen to a lot of different podcasts and webinars, I talk to a lot of my own mentors, and always listen to economists… I just want to share some of the highlights of things on my mind as an investor mostly in the multifamily space looking forward to this year and the developments that are happening.

I received a question the other day and it was something to the effect of “Will multifamily perform well in 2022?” We have to remember that all real estate is local. It doesn’t mean that you can arbitrarily go throw a dart out there and buy a piece of multifamily and then say “Sure, yeah, multifamily is going to do great this year.” It depends. And in fact, Moody’s Analytics put together a really nice visual on some data I was looking at. We have to remember that there are some markets that are actually projected to go down in 2022 as far as the price of real estate, while others are still anticipating, in some cases, a double-digit return on appreciation of real estate.

A couple of the markets that they alluded to would be Detroit, Milwaukee, and Baltimore as far as a decrease in both population and price of real estate… While other markets such as Atlanta, Charlotte, Phoenix, and Las Vegas are still on a nice uptrend. Also, pay attention please to the politics that are happening. I’ve talked a lot about landlord-tenant laws, and what I’m looking for as an investor is that the laws favor the landlord. I was just speaking with an investor the other day who owns a real property in California. He was telling me that because of rent restrictions or what we call rent control, he can’t raise his rent on this property by more than $54 per month. At the same time, his property tax has gone up more than $54 per month. In other words, he’s locked into this investment that is slowly losing money, which is pretty crazy. Maybe not so much on the price appreciation, time will tell that, but at least from a cash flow perspective, he’s on a downtrend.

We’ve also seen this in the news, markets like St. Paul have also implemented rent controls. I try not to invest in areas like this; it can really limit your potential returns just from an obvious perspective. But it’s actually not a good thing, in my opinion, just economically. But that’s for another discussion so we’ll leave it at choose your markets wisely, do your homework, do your due diligence.

If you want to dive deeper, we recorded an actively passive Show episode back in 2020 – I think it was released around December – and it’s called how a passive investor vets a market. So check that out if you’d like some more info on it.

On a side note here, single-family homes are, as we all know, getting more and more unaffordable for those who are just about to take the leap into homeownership or trying to save at their job to get a down payment put together when we’re seeing — I think it was like 15% price appreciation in 2021. It makes it awfully hard to save and keep up, simultaneously, while you have 7% inflation happening. I’ve been listening to what a lot of the gurus have to say, which – I do not include myself in this category. I’m just a guy who does a lot of research, tries to extract what I feel are the best and most critically important components to that, and share it with you guys in a simplified manner. So I’m not the guru myself, but I am one to listen in to different sides of the coin and try to figure out what’s going on. I’ve heard a lot of people speak out about this affordability crisis, which quite frankly, we’ve had for a long time in this country, but has progressively gotten worse in the last 12 months or so.

Some people think that the government’s going to have to intervene, step in, and expand things like the Section 8 housing program or launch a similar program which is basically rental assistance for people to be able to afford their rent here in this country.

The other thing that’s been on the proposal table, at least – I think it was the Biden administration – some kind of first-time homebuyer tax credit where maybe you get $14,000, or up to that amount off the purchase price or down payment of your first home. But it may be not so great, too; if you think about it, back in the Bush administration, they gave out these first-time homebuyer credits through… I think maybe that was the Obama administration. But I was actually part of this, by the way. I bought my first property with a first-time government tax credit. Well, that brought people out of rentals and into owning homes. So it may or may not be good, financially speaking anyway, depending on what happens.

Alright, moving on. I want to dive in a little more to inflation. I know I’ve talked about a lot on the show recently but I just want to highlight some new things that I haven’t talked about before. We have talked about that inflation is running approximately around 7%, and these are government CPI numbers. So this is not a conspiracy website saying it’s higher than what the Fed says, this is real government data, which depending on your beliefs there, might be much higher than seven. But they’re saying around seven, so let’s roll with that. 2021, a lot of what my personal investment portfolio saw was about 10% rent bumps on these multifamily properties that I invest in, which is just outrageous; certainly not the norm. Most of my portfolio is in the Sunbelt region, so we’ve got some taxes in Florida, and even some other markets, in Colorado Springs, I’ve got some deals out in Ohio… But in general, all these markets perform very well. An average rent tick-up might be somewhere around 3% a year and we’re seeing 10%. That kind of fast-forwards the acceleration of the business model about three years. What that meant is that a lot of sales happened. It was just time from a GP perspective to go ahead and offload the property as we met or exceeded our initial projections.

And I was reading that there were 10 markets in the US –I don’t have them here in front of me right now– that actually went up 20% annualized year over year rent growth which is just astronomical; it blows my mind. Now obviously, the name of the game is to not just bump rents on people, but they have to be able to afford these rents. In a perfect world, the wages would be going up at the same pace that we’re bumping rents, so that no one’s having a more difficult time affording a place to live. To that point, fortunately, we are seeing wage increases happen, in some cases higher than inflation numbers, and in other cases not so much, but still happening. I think we’ve all seen the billboards and the signs “Now hiring”, or a $1000 sign-on bonus to go work at a fast food joint. I saw, in my market, $18 an hour to work in a grocery store. Not too long ago, in one of my first W2 jobs, I was making $7.25 an hour, are you kidding me? I would have killed for a grocery store gig at 18 an hour; that would have just made my dreams come true back then. It’s crazy what we’re seeing in today’s world.

The pros of inflation – I know that’s some good news and some bad news there, but in terms of real estate, the pros of inflation is that multifamily apartments are primarily driven off the net operating income. You’ve got expenses and you have income, so kind of plus and then minus equals net operating income. So when you’re seeing seven, eight, nine, 10% in some markets, 20% rent increases, that is absolutely incredible for net operating income… Because if you have a 400-unit property and you’re able to raise rents 10% per unit, times 400, you literally just made millions of dollars on that property as far as the valuation is concerned. Very bullish for multifamily cash flow, what’s distributable to investors, but also IRR numbers and equity.

Another thing to think about is that rent trails behind the prices of real estate. In other words, if real estate just goes up today – we’ll say in a hypothetical example, it goes up 10%. Now I purchase a property 10% higher than it was a month ago. Well, now I have to bump the rents in order to make the numbers work. So that rent bump though is going to be behind; I make the purchase, I do my renovations, and all my stuff. Then several months behind now comes the rent bumps. I may not do it all at once, I may trickle it in over time, so it’s not such a sticker shock.

The point is the CPI, consumer price index, is comprised about 30% of housing, and it’s not being reflected just yet in those CPI numbers. I still think we have some tailwinds here, I still think that we have some room to grow, and I think that inflation is here to stay, at least for the… We’ll call it the intermediate-term. In other words, I don’t think next month we’re going to see this massive drop off from seven to two, or what the Fed likes to say that their target is 2% by the end of the year. Again, we’ll see, I don’t know; I don’t have a crystal ball. But I do know that things are lagging behind as far as data, and as we catch up, I think we’ll see a true reflection of what’s happening here today.

Break: [00:12:56][00:15:06]

Travis Watts: The bottom line is that real estate is a hard asset, it’s an inflation hedge. The reason that is, is when you’re buying real estate, whether you’re talking about a single-family home or an apartment building, you’re basically buying or investing in a basket of commodities. Think about it – you’ve got steel, glass, lumber, copper, and tile… So if these individual items are going up in price in the real world, if you go to Home Depot and you’re seeing the price is higher, then the price of real estate’s going higher because, essentially, that’s what you’re buying. The reason I love real estate is that it always holds an intrinsic value. A piece of real estate doesn’t just disappear like a blip on radar on a digital screen, it’s a physical place that can be used for different purposes. If nothing else, if it burns to the ground, hopefully, you have insurance. And even if that doesn’t happen, well at least you have the plot of land and something could hopefully be used on that plot of land. So there’s always some kind of value to it.

Alright, switching gears… Let’s talk about interest rates a little bit. The big talk right now is that the Fed says “Hey, we’re likely increasing rates in the nearby future, and we’re going to stop the Fed taper.” In other words, they’re not going to be buying $120 billion worth of bonds. Let’s talk about how that might affect real estate. Well, first of all, a lot of people, as I’ve been talking about for years now, are chasing yield. Cash flow has gotten a lot more difficult in modern times, to get.

I was listening to Tony Robbins, one of his older 1998 Get the Edge series – it’s like a seven-disc CD series of motivational stuff.  One of those discs is on financial, and I just had to laugh, because he said “Money is simple, you can just put your money in the bank, collect 8% on it”, going into this whole strategy about 8% yield in the bank. There was a time when that was true, but that is not true in today’s world. And it’s unfortunate, because we have so many baby boomers retiring and so many pension funds that just really need to get yield. They need cash flow, and it’s tough to find, and prices have been bid up, and the stimulus has just made things really difficult.

So what you’re seeing right now is a couple of different things. Because when you put your money in the bank, you’re basically getting nothing on that money, essentially, almost 0% or maybe 1%. And coupled with that, you’re seeing about a 7% inflation rate. People are trying to get out of cash; they don’t want to be in cash, because your purchasing power –if inflation is 7%– is dropping by 7% a year as you keep cash in the bank. Who wants that? Nobody. So where do you put it? Well, you put it into the stock market and you put it into real estate, hence why we saw a 28% stock market increase last year and 15% in real estate, something to that effect. It’s just been crazy.

On top of that, we have a severe supply-demand imbalance. What that means is we have a lack of supply of affordable housing in multifamily and single-family all in the United States. This is nothing new, it has been happening for 15 to 20 years. But here are some crazy facts to think about. In 2021, there were about 285,000 new livable units or households that were made available. That sounds like great news, but the problem is we had 1.4 million new households looking for a place to live. That is a massive supply and demand shortage. If you want to look at the big macro level, we’re 6.8 million homes behind in general. Good luck delivering that number of homes in a timely manner; it’s going to take years and years. Because of this supply and demand imbalance, that is one reason why we’ve seen prices shoot up the way that they have.

Alright, let’s now talk about the cons of interest rates rising. Generally speaking, when interest rates rise, the price of real estate decreases. Again, generally typically, historically. Why would that be? Well, first we’ll use a single-family home as an example. With a single-family home, if interest rates go up, your mortgage costs more so it becomes more expensive to own a home, simple as that. The affordability becomes less or the purchase price has to come down so people can meet the middle on what payment they can afford per month.

Multifamily, for example, gets accelerated on even a larger scale. If you think about multifamily units going from 3% to 4% interest rate, and now all of a sudden, you’re having to pay 200,000 more dollars per year, that inversely diminishes the net operating income. Now, the purchase price is less because the property generates less income because of interest rates.

Before this episode, I went on Google and I brought up a mortgage calculator. I just wanted to do this for fun for my own amusement, but it’s worth sharing. So if you took a 300,000-dollar home today in 2022, you put 20% down, you went to the bank and financed it, your mortgage payment is going to be somewhere in the ballpark of about $1,012.

Obviously, a lot of variables with insurance, property tax, and all the rest, but just hear me out on this example, $1,012. Now let’s say that the Fed comes out and says, “Hey, we’re bumping interest rates up.” Now that mortgage rate went from 3% all the way up to 4%, which would be a pretty sizable and substantial move up. Now that same mortgage payment is $1,146, so that’s $134 change up. So my question to you in regard to how will real estate be affected or will real estate start to fall in price as interest rates go up is this – knowing that rent is on the rise, has been, is today, will continue to be more than likely, will $134 deter someone from buying a home? It’s definitely something to think about with the amount of money chasing yield, people trying to get out of cash, inflation on the rise, and at the same time, the Fed is saying that we’re going to incrementally be raising rates. It’s a great question, and quite frankly, I don’t have the answer. But I want to pose that as a question for you to answer for yourself. Are you still bullish on real estate, knowing what’s going on with supply and demand and all the rest?

Another way to think of it is if you’re a renter today paying $1,200 a month in rent, which is pretty much on the low end these days, and your rent went up 10% – that’s $120 per month, so almost the same numbers there. Now whether that happens in one year or two years, we don’t know. But the point is, if you bought a home and locked in a mortgage, that payment doesn’t really change. You’re locking in, hopefully, a 30-year fixed rate or something like that. I don’t know what the government’s going to do, I don’t know what renters are going to do, I don’t know what homeowners are going to do, but what are you going to do? That’s what matters.

Thank you, guys, so much for tuning in to today’s episode on The Actively Passive Investing Show. I’m your host, Travis Watts. Have a Best Ever week and we’ll see you next time.

Website disclaimer

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

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

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

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

Oral Disclaimer

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

Follow Me:  
FacebooktwitterlinkedinrssyoutubeinstagramFacebooktwitterlinkedinrssyoutubeinstagram


Share this:  
FacebooktwitterpinterestlinkedinFacebooktwitterpinterestlinkedin

JF2711: How to Invest in the Everything Bubble of 2022 | Actively Passive Investing Show with Travis Watts

How will the events of 2021 affect your investments in 2022? In this episode, Travis reviews the variables that may make you rethink how you invest this coming year, including the pandemic, government actions, supply and demand, inflation, and more.

Want more? We think you’ll like this episode: JF2637: Sued for $68M: Cautions of Inflation and Risk Appetite with Ted Greene #SkillsetSunday

Check out past episodes of the Actively Passive Investing Show here!

Click here to know more about our sponsors:

Deal Maker Mentoring

 

PassiveInvesting.com

 

 

Follow Up Boss

 

TRANSCRIPTION

Travis Watts: Hey, everybody. Welcome back to The Actively Passive Investing Show. I’m your host, Travis watts. In today’s episode, we’re talking about investing in the everything bubble. The headline you may have seen or may have heard here recently, a lot of folks are calling today’s investing environment an everything bubble. Debatable if we are in a bubble, but we’re going to talk about it. We’re going to talk more specifically about the stock market and real estate, dissect what’s happening. Hopefully, this is informative to help you make a decision on what you want to do this year in terms of your own investments.

Prices are up, I think that’s pretty evident. Inflation is here, used cars are up, real estate is up. So where do you place money? Generally speaking, there are two ways of thought here, two schools of thought. There’s “I’m going to wait this one out until we get a massive correction pullback or a dip, and then I’m going to buy in at that point.” Or there’s the dollar cost average philosophy, which is you’re buying in on a regular frequency all the time, and sometimes you’re buying in a dip, sometimes you’re buying at a high price, but over time, you’re averaging out and getting kind of the middle of the road, general pricing.

I’ve shared the story before, but it’s worth sharing again in this episode… When I started investing in multifamily syndications around 2015, one of the first things I did is I started reaching out to the experts in the field, people who had 10, 20, 30, 40-year track records doing what it is I was thinking about doing. There was a syndicator, a general partner with about 25 years of experience at that time. I was talking to him about multifamily. I said, “Please put me on your deal list. I really want to do a deal with you. I’m into this. I’ve read this, that, and the other.” He goes, “Listen, Travis. Unfortunately, it’s 2015. I predict that in 2016, we’re going to see one of the biggest market meltdowns that we’ve seen in history. Quite frankly, we’re not doing any new deals right now, so I’ll put you on our list, but don’t expect to see anything, because we’re really liquidating assets right now and we’re not bringing anything new in. We’re going to sit, wait, and see.”

That was one philosophy, and I’m certainly not insinuating in this example that I’m any smarter than this individual. I mean, this guy’s got at that point and 100% more experience and track record than I had. But what was different was my philosophy. I was of the mindset that there’s always a deal to be had. This was stemming from my single-family flipping, buy and hold, vacation rental days, where I thought that even if there were a downturn or the market went flat for a while, if I was collecting conservative, consistent, steady cash flow streams, it really didn’t matter that much to me about the asset price. If I wasn’t going to sell it, what does it really matter? So I went ahead and moved forward with doing syndication investments. Fast-forward five years later, which would bring us to 2020 in the midst of COVID, my investment portfolio had just about doubled at that point from 2015. Meanwhile, the GP and syndicator had really been sitting on the sidelines. I think they did maybe one or two deals in that timeframe.

Again, not saying that I’m smarter or well-versed, but the point in that story is to decide for yourself what your philosophy is. There’s nothing wrong with sitting and waiting on the sidelines if that’s your thing and you’re very risk-averse, or if you’re into the dollar-cost averaging, just moving forward and riding the wave, then you go with that. Of course, I try to be more conservative than I’m making that sound, but something to think about.

Let’s talk about how do we get here? How do we get to the so-called everything bubble? First of all, there’s still a lot of pent-up demand since COVID, with people being locked down, inside, not really spending, and maybe not even investing, maybe sitting on the sidelines to see what happens… So that is starting to come out and unfold; that’s how we’re seeing inflation is rising simultaneously. There’s been an awful lot of government printing new money, these PPP loans, these unemployment checks… There’s been a lot of money pumped into the economy, that money has to go somewhere. A lot of people have chosen to put that either in the stock market or into real estate, which is why we’ve seen such a massive uptick. Well, I should say that’s one reason why.

We also have all-time low interest rates, the lowest interest rates that we’ve seen in US history. That is a stimulus to encourage people to invest and perhaps take a little more risk, go put your money somewhere if you can borrow at very low-interest rates.

And last but not least, we have severe supply chain issues. This is simply supply and demand; this would explain why rental cars, for example, are up 21% year over year right now. It’s simply because when COVID first hit and no one was needing the rental cars, a lot of these agencies offloaded their inventory. Then we had a massive kickback where people started traveling again – they didn’t have enough cars so it shot the prices up. It’s tough to get new cars right now, as you probably know, because of the microchip shortage that we have going on. So that’s supply and demand 101. The bottom line is there’s a lot of money in the system, and that money needs to find a home, and a lot of people are chasing yield, so that’s buying up asset prices, including real estate, including stocks.

Break: [00:06:32][00:08:11]

Travis Watts: With that, let’s talk a little bit about the stock market, then we’ll talk about real estate. I want to dive in and dissect a little bit about each of these asset classes, because they’re two of the most common that we have at least. This is a real estate show, and then a lot of people are talking about the stock market.

So you’ve got a lot of predictions always in the markets like JP Morgan Chase and Goldman Sachs. Every year they’re putting out their predictions based on their experience. Of course, you have to take any prediction, no matter who it’s coming from with a grain of salt because the truth is, no one really knows. But JP Morgan was pretty dang close on their estimates for 2021 about the stock market and what performance we might see. So their prediction now for 2022 is that things will continue to rise, the stock market will continue to go up, they’re predicting somewhere around 8% annualized.

On the other hand, there’s another school of thought that’s worth noting, which is that we have efficient markets. This means when these headlines come out and these news reports come out, that’s already priced into the market. But if it’s already built-in, and things don’t pan out as expected, there’s a chance the market could actually drop, and instead of seeing a plus eight, we see a minus four, a minus eight, or something like that.

Again, I’m not saying one’s right and one’s wrong. It’s just a question for you, do you believe that everything’s priced into the market currently as we see a lot of optimism at this point? Or do you believe that it will just keep rising and rising? Regardless of which side you’re on, there are certainly some things that we don’t know. We don’t know if there’s going to be any future government stimulus. Of course, there’s a lot of talk about this, and there’s a lot of proposals, but what actually passes, we don’t know, and when that actually happens, we don’t know. Also, future interest rate hikes. Again, there’s been a lot of talk from the Fed that this is going to happen, but when and how much, we don’t know. And as different things come in, different variables, and the situation changes, they could also change their forecast as well. It’s something that’s just out of our control.

Then there’s the virus uncertainty. Will there be new variants? What will those look like? Will they be mild? Will they be severe? Hospitalizations, business shutdowns? We just don’t know what the political environment looks like, and what the health environment looks like moving forward at this point.

Then we have unpredictable inflation and supply chain issues. When will all of this clear up? We don’t know. Will inflation stay the same or go higher? We really don’t know. Again, we have predictions and forecasts, but until the data comes out, we just don’t know. These all have a play in both the stock market and in real estate. Like I always say, when it comes to the stock market, it’s really anyone’s guess. It always seems to be, in my personal experience, it’s 50/50. If I think the Feds are going to speak tomorrow and it’s going to be positive, 50/50 chance it goes up or down.

I’ve been wrong just about as much as I’ve been right and that has caused me to not have very great returns overall when I’ve invested in the stock market. I’m clearly not the expert, I’m just giving you some things to think about for yourself. Take this with a grain of salt, what I’m about to say. This is not a prediction or a forecast, but just me personally, in my own mind, looking forward. I’m saying, I don’t believe that the markets in general, real estate stocks, no matter what we’re talking about, will be as robust as we just saw in 2021. We saw exceptional returns, I think the stock market, in general, did somewhere in the high 20s, like a 28% annualized return. My real estate portfolio did incredible as I had a lot of sales happen in 2021, as things ramped back. I don’t predict the same moving forward, as I look five years out, maybe even 10 years out.

I think a lot of things are priced in the market and I think we are really up there nearing all-time highs. Now does that mean a bubble and a bust? Not necessarily, in my opinion. But it certainly means that things have gone up. But see, here’s the thing about sustainability, this is something I think about as an investor all the time. Anything I do needs to be sustainable, any kind of strategy, any kind of philosophy. This is why I quit flipping homes at a certain point because I realized that this is not sustainable. I could do this while the markets are flat or increasing, but when markets come down, the strategy stops working, therefore, it’s not something I can do for 20, 30, 40, 50 years on end.

The stock market has historically returned between eight to 10%, annualized, depending on if you’re looking at the Dow Jones, or the S&P, or the NASDAQ, or whatever index, but basically, it’s usually in that range as a historic average. When you have a year like we just have in 2021, where you have a 28% return on the stock market, there’s a very high probability that the following year will not be as high. It may be a flat year, it could be a slight decline in that year. In fact, we just recently saw this in 2017, the stock market returned somewhere around 21.5%, don’t quote me exactly, but it was something like that. The following year, which is 2018, was a negative 4% year so that makes sense. Because if you’re going to average eight to 10, you’re not always going to have these 20 and 30% returns year over year. It’s a roller coaster, so if you’re going to park all your capital there, be ready to ride.

Alright, moving on, let’s talk a little bit about real estate. Just like the stock market, there are a lot of predictions. Just like any prediction, you have to take it with a grain of salt. There’s a group called CoreLogic, for example, and they predict that housing will increase another 6% in 2022. 6% is still strong growth and this is, of course, nationwide. But it certainly dwindled down from what we just saw in 2021, which I think was closer to about 15% appreciation over the last year. Then you have other sources. Like realtor.com believes that the appreciation amount will be closer to 3%, not 6%. One thing to keep in mind when we talk about real estate in a general sense going up 3% or 6%, is the fact that most people investing in real estate are using leverage, they’re using debt.

The way to look at that in real terms as far as your return on investment is this… To use simple math because you guys know I’m not very good at math. If you invested in a $100,000 piece of real estate, we’ll call it a single-family home or a condo, and that went up 6% in one year, but you had only put $20,000 down as a down payment, that was your actual investment. You actually invested 20k and then what did you make? Well, if it appreciated 6%, that’s $6,000 that it went up. Again, I’m using loose numbers, we’re not talking about any taxes, realtor commission, or any of this kind of stuff. But $6,000 divided by $20,000, that’s how you find your return, it’s actually a 30% increase or ROI. That is actually quite substantial. That’s why I say, in real estate, if we really did see a 6% tick-up, that’s actually pretty huge.

Another thing to note is that mortgage rates remain historically low, I just mentioned that a few minutes ago. We are literally at the historic lows for the United States. That’s been a huge encouragement for people to get into real estate, both single-family, multifamily, mobile home park space, commercial space, self-storage, all the above. Another thing to keep in mind is that real estate is a local game. There are markets despite these forecasts of three to 6%, we’ll call it. There are markets like Modesto, California, Kalamazoo, Michigan, or Springfield, Massachusetts that are actually anticipated to see a decline in housing prices in 2022. It’s not all created equal, we’re just talking about a national scale on average.

To talk a little bit about rents, because a lot of us are investors or landlords here listening to the show. Rents went up about 10% in 2021 which is a huge increase for rents. A lot of the projections that are in these syndications I do are more like 3% and 4% annualized rent bumps, so to see 10 was quite amazing. The realtor chief economist is predicting a 7% rent increase for 2022. If that really occurs, it is just going to be another killer year in general, for real estate. Especially things like multifamily because you don’t just have one house, one tenant, one rent bump of 7%, you have maybe a 400-unit property, or maybe you’re invested in 20 different deals that are 200 to 600 units. That’s a lot of rent increase.

There’s usually a little bit of a lag in rent bumps compared to asset prices, which makes sense because prices go up. As investors have to pay more, they need to charge more rent to get an adequate cash flow out of the property. No one wants to be investing in real estate for a 1% or 2% return. I shouldn’t say nobody because people do it. But in general, you want to keep your ROI up and therefore rents go up. As I mentioned earlier, with the 15% rise in asset prices and real estate over 2021, rents are now following as these properties get rented out.

Break: [00:17:22][00:20:19]

Travis Watts: Jumping back to the Fed’s saying they’re going to raise interest rates, what effect will that have on real estate? It’s one thing to say that rents are going to grow, etc., but if interest rates rise, that’s generally a negative thing for real estate. But see, there are other factors at play simultaneously. There are the unknowns that we mentioned with the government, with stimulus, and what’s inflation going to look like. Then there’s also the supply and demand issue which is a huge factor right now to where asset prices are. Builders just can’t keep up, there’s just a severe lack of inventory that is pushing prices up.

If we had a whole bunch of supply come on the market, that would soften the prices. But if that doesn’t clear up over the next year or two, prices will remain high, and it will remain a very competitive environment. Real estate is a very slow-moving asset class with the exception of what we saw in 2008 and 2009. It was really the great real estate recession with the exception of that. If you took that off the radar, real estate’s really slow-moving when it trickles up and trickles down, it is not the stock market that real estate’s down 30% overnight, that just doesn’t happen. I think as we progress through this data and through the years, we’re going to see more and more signs and potentially red flags to talk about to help us make better decisions.

Just remember, if you are investing in actual real estate, not publicly-traded REITs, and things like that, they are generally an illiquid investment. So you’ve got to do your due diligence, you’ve got to know what you’re buying, how it performs, whether or not you can actually execute the business plan. Hopefully, you will remain profitable even if you bought a property today, did nothing to it, and just decided to hold it for five or 10 years, you would be cashflow positive.

Alright, swinging back to inflation real quick. We’re somewhere in the ballpark depending on when this episode airs, the last data that I just looked at was somewhere around 6.8% annualized inflation year over year. Now, a couple of things about that. One, that’s the highest inflation we’ve seen in the US since 1982. So in a lot of people’s lifetimes, this is the highest inflation that they’ve seen. The Fed has also said that they’re going to be reducing their stimulus, this is known as the Fed taper. They’re reducing basically their stimulus from injecting about $30 billion per month through the end of March until they’re no longer having to supplement what they’ve been doing since COVID.

We mentioned that the Fed said they will have multiple rate hikes, this is to help tackle inflation as inflation starts. That’s just one of the tools that the Fed has when inflation starts kicking up is to raise interest rates to help fight that. That’s definitely on their agenda, but every Fed meeting, it seems like there’s a little bit of a change so we just don’t know. There have been years that the Feds come out and said we’re raising rates and then they didn’t, or where they did raise rates and then they decided right after that to lower rates again. We just don’t know is the bottom line.

The last bullet point I’ll point out is that at the last Fed meeting that I tuned into, Jerome Powell had said that he anticipates a natural decrease in inflation from the 6.8 that we’re seeing now to the mid twos. To that, I say “We’ll see.” Here are the takeaways I want you guys to have from this episode, 20 to 30% annualized returns are exceptional but usually not sustainable year after year. Since we’ve already seen those in 2021, you may want to lessen your forecast here looking forward. I could be dead wrong, I’m just saying I like to be a little more conservative than that and predict that we will kind of see a softening or stabilization, if you will, of returns.

The number two takeaway is that the gurus and the talking heads are projecting increases still happening. We have the chief relative economist, JP Morgan, Goldman Sachs, a lot of folks are saying that the stock market and real estate are still going to be on the rise, just at a much lower and more conservative level than last year. Hopefully that means another great year for investing, at least that’s my interpretation of that data. If anyone is curious or anyone cares what I’m doing personally, I’m still investing heavily in private equity. I believe you should invest in what you know and understand the most and then try to diversify a little bit outside of that.

I use the 80/20 rule, 80% of my portfolio is what I know and understand. I invest in value-add B class multifamily properties primarily because they’re stabilized, they cash flow, they pay me on a monthly basis, they’re tax-advantaged. And from the data that we just uncovered with rents still on the rise and lagging a bit behind, the primary driver of the value of a multifamily property is the net operating income. When rents go up, that’s it more collections, that’s more income, therefore the price goes up. But I’m never a speculator on what the price will be in the future. I’m simply investing for cash flow and for yield. I like the value-add business model where we’re buying at a slight discount, we are improving a property, making it better, making a better community. For what it’s worth, that’s my take on it, I’m still investing here in 2022. The question is, what are you going to do?

Hopefully, you guys found some value in this episode. I truly appreciate you tuning in. Reach out anytime with questions, comments, concerns. I’m on Bigger Pockets, I’m on LinkedIn, I’m on Instagram, I’m on Facebook, joefairless.com, travis@ashcroftcapital.com. I look forward to connecting with you. Have a Best Ever week and we’ll see you on another episode of The Actively Passive Investing Show.

Website disclaimer

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

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

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

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

Oral Disclaimer

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

Follow Me:  
FacebooktwitterlinkedinrssyoutubeinstagramFacebooktwitterlinkedinrssyoutubeinstagram


Share this:  
FacebooktwitterpinterestlinkedinFacebooktwitterpinterestlinkedin

JF2704: 4 Millionaire Investing Tips for Real Estate Investors | Actively Passive Investing Show with Travis Watts

How can you achieve the same success as a millionaire through passive investing? In this episode, Travis shares four practices that lucrative investors use to generate more passive income and navigate the market.

Want more? We think you’ll like this episode: JF2515: Top 5 Best Practices for Effective Investor Relations | Actively Passive Investing Show

Check out past episodes of the Actively Passive Investing Show.

Click here to know more about our sponsors:

Deal Maker Mentoring

 

PassiveInvesting.com

 

 

Follow Up Boss

 

TRANSCRIPTION

Travis Watts:  Hey, everybody. Welcome back to another episode of The Actively Passive Investing Show. I’m your host, Travis Watts. In today’s episode, I’ve got a very special episode for you called Four Millionaire Investing Tips for Real Estate Investors. A little context and background for this episode. Basically, over the last 12 plus years or so, I’ve done a lot of research on millionaires, I’ve bought a lot of reports, I’ve watched a lot of documentaries, I’ve interviewed hundreds of people, I’ve networked and been able to meet thousands of accredited investors at this point. But this episode is really just to break down kind of the mindset when it comes to investing in real estate. I want to share what’s worked for them and what can potentially help you along your journey.

The first thing that I want to point out is that investing is not just for the rich. This is definitely a tool that anyone can utilize, whether you’re accredited or non-accredited, whether you’re a millionaire, or a millionaire in the making. Hopefully this episode adds some value, as you just get to see some insights to the mindset that it takes to be a multi-millionaire real estate investor. Like I always say investing can be simple, but it’s not easy. Most people make mistakes when they begin investing, because they go in without a plan and without setting goals. We’ve talked about that a lot on the show, is how important it is to reverse engineer, to look 5, 10, 15 years down the road and say, “Where is it I want to be? What is it I want to do? Why is it that I want these things?” And then to start reverse-engineering to figure out what kinds of investments can get you there. Some people need mentorship, which I try to be on a non-paid basis, but I also have limited capacity to do that. It might be on a paid basis, with some consulting; it also might just be somebody that you know, or would like to get to know that’s doing what it is you want to do successfully. So it’s kind of picking their brain, so to speak. I applaud you for listening to this episode, because this is kind of the first step in that direction.

Alright, with that, let’s go ahead and dive into the four tips that I want to share with you today. Number one is millionaires and/or multimillionaires – they don’t save, they invest. This is a huge, huge, huge differentiator. I know that sounds probably pretty simple and basic and 101. But I was the kind of kid who was raised by parents that just said “Save your money.” That’s the whole game, is saving. It’s to use a coupon, and it’s to make $2,000, to try to save $500 of that, and then put that in your bank account for a rainy day. There was nothing taught about investing. But I’m telling you, it is so hard, unless you’re an extremely high-income earner, to get to a stage of being wealthy or being rich or whatever you want to call it, simply by saving and putting money in the bank. Generally speaking, of all those I’ve interviewed and been around, you basically want to save enough to have emergency funds and to have a liquid operating account for your lifestyle, but you don’t want to have hundreds of thousands of dollars potentially just sitting in the bank, earning nothing.

You may have also heard folks like Robert Kiyosaki, author of Rich Dad Poor Dad, I know he’s been quoted as saying “Savers are losers”, which is a bit extreme. I don’t think I would coin it quite that way. But what he’s saying is you’re losing money if you’re saving in a bank. It used to not be that way back when the banks would be paying you five, six, seven, eight, 9% on your money if you just deposited. Well, in today’s environment, as you well know, you’re making basically 0%. You might be making up to maybe 1%, but the government stats show that inflation is running it 4%, 5% and 6% annualized. In other words, you’re actually losing purchasing power if you’re not making at least the inflation amount that the government says exists. Again, that’s why you don’t want to have large sums of money sitting there losing purchasing power.

On this topic of save versus invest, I want to kind of verbally go over something that I’ve had a hard time articulating in the past, so hopefully this makes a little bit of sense to you… The way I Look at it as in the world of finance, there’s two sides of the coin. There’s the personal finance and budgeting side. That’s saving money, not spending more than what you make, understanding how to be a little bit frugal when needed, and all of this. It’s just keeping control over your finances no matter what your finances are. The other side of the coin is investing. The reason I think this is so important is because A, it’s not widely taught, B, it’s how you’re going to become a millionaire, a multimillionaire or beyond. Also, because it’s tragic to me to see celebrities, professional athletes, and high-income earners that make literally millions of dollars in income, but they don’t have the personal finance side of the coin down so they go bankrupt. It’s absolutely insane because you’ve got folks on the other side here that are in the FIRE community, the financial independence retire early, who quite frankly, could live forever off a million dollars invested. That’s the difference, invested. Invested for cash flow, passive income, things like that.

The average US household income is what, or I should say individual income, is around 50 to 60,000 per year or something like that. Quite frankly, someone that had a million bucks invested, that 8% is 80 grand a year, that would be a-okay. Most people would be a-okay with a million bucks invested. Something of the think about and put in perspective. Hopefully don’t need to make $100 million and go bankrupt to figure that lesson out. To circle back, the point is that you can’t just save, you need to invest as well.

Tip number two is that millionaires don’t tend to speculate, they don’t tend to gamble. Again, they tend to invest and there’s a big difference. It’s something that’s not talked about and some that gets confused all the time. I watch a lot of YouTube financial folks and people getting into the crypto space thinking that they’re professional investors because they think or they predict the market’s going to do A, B or C. In fact, I have a really good friend –I’ve talked about him before here on the show– who’s a day trader in the stock market. He’s also now in the crypto space, these NFTs, and all of this kind of digital stuff. It’s funny because he’s always talking to me about 50% and 100% returns. I think this stock is going to double, if you buy this crypto, there’s a good chance you’re going to have a 50% upside here in the next two weeks, and all this kind of stuff. But the reality is, if you look at his portfolio, unfortunately, he loses 50%, if not 100% of his investments all the time. He’ll go put two grand out, speculative, and then something will go bust. It’ll be some kind of rug pools, sham thing, or whatever on some new crypto.

The thing is, risk isn’t talked about enough. I’ve made a full episode on risk and why that’s important and how to evaluate it. You’ve got to understand that if you’re looking at an investment that potentially can go 50 to 100% up in a matter of a very short amount of time, you’re probably taking an awful large amount of risk. It’s like playing the roulette table in Vegas. Is it black or is it red? I don’t know. But you could either boom or you could bust and you got about a 50% chance, actually statistically a little bit lower if you’re playing in Vegas. But anyway, the odds are not in your favor is the bottom line. As a long-term strategy, that’s a losing strategy. That’s what you want to try to avoid is to not be a speculator or gambler.

Break: [00:08:36][00:10:15]

Travis Watts:  A lot of people who invest they subscribe to this buy low and sell high investing mentality. There’s nothing inherently wrong with that. But ask yourself this question, “What if things don’t go up in the future?” You’re buying a piece of real estate because why? Well, I want to flip it, I’m going to buy it for 200 I’m going to sell for 300. What if the market stops going up? What if it starts going down? Then what? The same thing can be said with the stock. I think I’m buying the stock at 10 but it’s going to go to 15. What if the stock market crashes right after you buy it? You’ve got to think about the risk profile associated with these things.

The biggest net losers of the Great Recession in 2008 and 2009 were speculators and gamblers. They were the folk’s flipping homes in 2007, 2008 as the market is falling apart and going down. They were people gambling on high growth companies that are projected to do so great, but yet the market is falling apart. That’s speculative. The best example probably was from the dotcom era in the year 2000 where we’ve got this big internet boom, everybody’s a whatever.com, and everyone’s speculating and throwing money at all these companies that aren’t even generating any revenue. It’s purely high growth speculation. Look what happened, we had a huge bust and a collapse of the whole dotcom market. It might seem like a good way to get rich, and of course, you’re always going to hear about the stories where people did just like you hear about people who win the lottery every day. That sounds great but statistically, that’s a really bad strategy to subscribe to. It’s not something that a lot of multimillionaires embrace, at least not long term. It could have been a multi-millionaire or one kind of gambler speculation on some dumb luck. But if you continue that over and over, you’ll end up losing the portfolio.

Instead, if you’re looking to produce income over a lifetime, if you’re looking to produce generational wealth to pass down to your kids, family, or charity, you’ve got to look at cash flow, you’ve got to look at passive income, you’ve got to look at interest, you’ve got to look at dividends, you’ve got to look at royalties, you’ve got to look at being paid on a monthly or quarterly basis through the types of investments that you choose. Again, I don’t want to beat a dead horse. I’ve talked about the lost decade a lot on the show. It was a 10-year period in the stock market that if you went with the buy low sell high mentality, you really walked away with $0 in your pocket, additional from what you invested over a 10-year period because there really wasn’t a cash flow or dividend strategy. You were buying the stock market in general saying “I think it’s going to go up, I hope it goes up.” It did go up and it did go down, and it did go up and it did go down, and it did go up, but you ultimately hit a flat spot for about 10 years. That’s what you don’t want to do. You want to constantly have money coming into your pocket. I find that that’s a very common theme among millionaires and multimillionaires.

The biggest reason I think this isn’t taught to many people, the reason I think this isn’t widely marketed is because it does, in some sense, take money to make money. That’s not always true in every situation. But think about this. If I had $5,000 to invest and that’s all I had, that’s where I’m starting, I invested in something that produce passive income or cash flow or whatever, and it paid me 8% a year, that’s $33 per month. Not very exciting, I can’t even pay my cell phone bill with that amount of passive income. However, once I build up a nest egg because I’ve got the financial side of my coin, my personal budgeting down, and I figured out how to be frugal where necessary, now I have $500,000 to go invest at 8%, now I’m talking about $3,333 per month. That starts to make a big difference, that could now be a mortgage payment, that could be a luxury vacation every single month, it could be so many things. That’s really kind of the turning point is when you start to build a nest egg and now it’s “What do I do with this?” Hopefully it’s not just “put it under my mattress for a rainy day,” it’s “start investing.” Cash flow investing is playing the long game and the long game, quite frankly, is how you win.

Third tip, multimillionaires and or billionaires invest in assets that appreciate in price and have cash flow components typically. I’ve referred to this in previous episodes as what I call the holy grail, it’s the best of both worlds. When I go out and I invest in real estate, what I’m ultimate looking to do is invest in real estate that’s at a discount today or below market value. Then I want that either me or the group I’m investing with will add value or renovate it to make it more valuable so that we can justify raising rents. That’s what gives us the equity upside, it’s also called forced appreciation. But while we hold the property, even if we failed on that execution plan and we didn’t end up renovating it at all, we just bought it and sat on it, in either case, it’s a cash flowing asset as well. It’s putting money in our pocket every single month and I’m not having to do anything to produce that. It’s just people living there and paying their rent. Of course, this being a real estate show and me being a bit biased towards real estate in general, that would be to me a holy grail kind of asset to invest in. Now, I don’t always just invest in real estate, I invest in some things that only produce passive income. That’s it, there is no equity upside.

An example of that might be note lending or hard money lending where I am making a high yield interest return, say eight or 10% of my money. But there’s no upside, there’s no actual asset that I’m participating in the growth of. I’m just using that for passive income to live on. There are other investments I’ve made that are more equity focused and a lot less cashflow focused where sometimes, to diversify, I do use a little bit of the buy low sell high. If you know you’re getting, for example, a really good discount on a piece of real estate that you think can turn around and get better, you might sacrifice a bit on the cash flow. You might only be getting three, four, or 5% cash flow for a while, but once it’s stabilized and occupied hopefully, then your cash flow might jump into the double digits, you never know. I do have some investments like that as well.

The last thing that I want to point out for a tip is a huge one and something I underestimated when I got into real estate 12 plus years ago. Millionaires and multimillionaires are definitely looking to invest in something that gives them a tax break or a tax advantage. Again, the reason I don’t think this is so widely marketed is because you have to really be a high-income earner to recognize how much you’re really spending and tax money. I’ll give you an example of that. Imagine that you’re a supervisor at a company, you’re a W2 active income earner, and you make $50,000 per year as a salary. Well, your federal tax bracket, I’m going to leave state out on the side because every state is different, but your federal bracket is probably going to be 10 to 12% that you owe in tax. If you break that down, just to use rough numbers, that’s about $5,000 per year that you’re paying in tax, not a huge bill.

Now imagine if you’re the vice president of that same company, you’re also an active income earner, you’re a W2 employee of the company, making $500,000 per year in salary. Well, that all of a sudden puts you in about a 35% tax bracket, it could be higher, and now all of a sudden, you’re paying $175,000 roughly in taxes every year. That’s a huge amount. We just jumped from 5000 in tax to 175,000 in tax. Without a doubt, you’re going to be saying, “Hey, how do I pay less than tax? That’s a lot.” Some homes in America sell for 175,000. You’re forfeiting buying a home or a rental every single year because you’re paying Uncle Sam instead. You guys, just a quick disclaimer, as you know, I’m not a CPA or tax advisor so please always seek licensed advice. I’m just giving you this as an example purpose and something to think about that, again, when we’re talking about millionaires and multimillionaires, we’re generally talking about high income, high net worth individuals, and they’re more inclined to look for tax advantages, quite frankly,

Break: [00:19:06][00:22:03]

Travis Watts:  Again, back to real estate. Real estate is an awesome asset class that has historically always had great tax benefits, it continues to have great tax benefits today. We’re still operating under a tax code, as this episode airs, that Trump put into play in 2017 that even enhanced the real estate tax benefits even further. It’s kind of a golden era right now, quite frankly, for real estate and multifamily.

In one of the earlier episodes here on The Actively Passive Show, I broke down one of my favorite books. It’s called Tax Free Wealth written by Tom Wheelwright, he’s a CPA. I love what he said in his book, though. He says, “The IRS is actually your business partner. You want to partner up with them and you want to find out where they’re going to give you the most money.” I’m paraphrasing what he said, but basically, hear me out on this example. You’re in a 35% tax bracket and there’s an investment you can do. You can take $100,000, you can go place it into this investment, and you’re going to get a 100% write-off or deduction for making that investment. What the IRS is essentially doing in this situation is saying, “We’ll give you 35% off your investment.” That’s an immediate tax savings of 35% or $35,000 in this case, just for making the investment. This is how Tom Wheelwright sees that as a partnership.

They’re saying, “Look, we know that there’s risk in investing. If you take your 100,000, you can go put it in the bank, you can go put it under a mattress, and it is what it is. You’re going to pay all your taxes and we’re not helping you at all. Or you could go place it into real estate, or oil and gas, or some kind of investment over here and we’ll let you take, –for example purposes– 100% deduction. They’re basically just allowing you to pay 35,000 less in tax or they’re just giving you $35,000, in a sense. This is how powerful the tax code is to learn. I highly, highly recommend everybody get a competent CPA that specializes in what it is you’re doing or that you want to do. It’s a pretty sweet deal. I’ve come to recognize now, of all these deals I invest in, all these syndications that have come full cycle and they’ve sold, I’ve worked with my CPA and I’ve asked a lot of questions that it is an amazing tax advantaged asset class. It really is. Of course, everyone’s situation is different and I’m not a tax advisor. But definitely multimillionaires have their eye on the tax code.

Let’s recap the four tips here in the episode. Millionaires and or billionaires don’t save, they invest. They don’t speculate, they invest. They invest in assets that appreciate in value and have cash flow components ideally. They invest assets that give great tax benefits.

I hope you guys found this episode useful. I really enjoy doing these. Look, I’m only sharing my perspective, I’m only sharing my opinion. You might agree, you might disagree, you might have a different take on it, and that is totally cool. We’re all different. But my mission and my goal is to help spread the word on things that I think are worth listening to, things that have helped me, things that have helped a lot of people, that I’ve seen help a lot of people, and I want to share them with you. I just want to bring them to surface and bring them to light and these little short snippet episodes of 15 to 30 minutes long. I hope that you guys really find some fulfillment because I really get a lot of fulfillments from sharing with you guys. It’s great when you reach out and say that something helped or that it puts you on a different trajectory in terms of investing and things like that. Always reach out and connect. I’m on Instagram, I’m on LinkedIn, I’m on Bigger Pockets, I’m on joefairless.com, travis@ashcroftcapital.com. Always happy to be a resource for you guys. Thank you so much. I’m Travis Watts, host of The Actively Passive Show. Thank you for tuning in. Have a Best Ever week and we’ll see you in the next episode.

Website disclaimer

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

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

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

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

Oral Disclaimer

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

Follow Me:  
FacebooktwitterlinkedinrssyoutubeinstagramFacebooktwitterlinkedinrssyoutubeinstagram


Share this:  
FacebooktwitterpinterestlinkedinFacebooktwitterpinterestlinkedin