J Darrin Gross Podcasts -

Ultra Wealthy Investment Solutions with Richard Wilson – CREPN # 260

Richard Wilson 0:00

But very specifically to real estate, families who can understand the strategy and trust the team is most important and they’re much more likely to do the deal. They’re local to the team or local to the asset. Of course they can get to know and build the trust in them faster.

Announcer 0:14

Welcome to CREPN Radio for influential commercial real estate professionals who work with investors, buyers and sellers of commercial real estate coast to coast. Whether you’re an investor, broker, lender, property manager, attorney or accountant We are here to learn from the experts.

J Darrin Gross 0:33

Welcome to Commercial Real Estate Pro Networks CREPN Radio, Episode Number 260. Thanks for joining us. My name is J. Darrin Gross. This is the podcast focused on commercial real estate investment and risk management strategies. Weekly we have conversations with commercial real estate investors and professionals who provide their experience and insight to help you grow your Real estate portfolio. Let’s get into the show.

Today my guest is Richard C. Wilson. Richard is a third generation Eagle Scout. He’s also the founder of the Family Office Club, which has over 2000 registered investors. And his team offers a digital investor platform and sources direct investment opportunities for his 58 investor clients. And in just a minute, we’re going to speak with Richard about what the ultra wealthy are seeking most often. But first, a quick reminder, if you like our show, CREPN Radio, there are a couple things you can do to help us out. One you can like, share or subscribe. And as always, you can leave a comment we’d love to hear from our listeners. Also, if you’d like to see how handsome our guests are, be sure to check out our YouTube channel and that’s Commercial Real Estate Pro Network. With that I want to welcome my Guest Richard, welcome back to CREPN Radio.

Richard Wilson 2:04

Thank you Darrin.

J Darrin Gross 2:06

Well, I’m looking forward to our talk today. And before we get going if you could share just a little bit about your background with listeners.

Richard Wilson 2:16

Sure. So for the last 13 years, I’ve started and grown the family office club, we have 16 full time professionals on our team, we’re usually when there’s not a virus crisis, locking down the world, hosting 30 live events a year. Now instead, we interview at least one investor per day and upload their mandate to our portal and do virtual discussion panels each week and webinars etc. You know, we got about 2000 registered investors as part of our investor club and so we’re not a conference company. We do host a lot of events, but we don’t just do conferences we don’t do consulting. We’re really a helpful resource to anyone starting a family office running one or anyone is looking to raise capital from ultra wealthy investors or core private investors.

J Darrin Gross 3:01

And just for clarification, can you define what is a family office?

Richard Wilson 3:07

Sure, it’s just an ultra wealthy investment solution. So if you’re worth $50,000, and you make a mistake, you know, it’s not going to cost you that much, probably. Hopefully, if you’re worth 500,000 or 5 million or 50 million, you can just imagine that not only is each mistake that much more expensive when you’re worth $5 million, you’re also much more likely to make those mistakes because you have maybe multiple businesses. On top of being on a board. More people are asking for your money and your time you have more employees. So one little selling an asset early or late. It gives you an extra five or 10% tax, you know, hit might have cost you so much might cost you $50,000 at one mistake, you could have hired a full time person just to help you play defense. So family office is just playing better defense, managing chaos for you doing things more holistically, so you can be more proactive on tax planning on writing your operating Businesses on investing in a smart way.

J Darrin Gross 4:03

Got it? Now, you said you’ve been working with family offices for the last 13 years?

Richard Wilson 4:09

Yes.

J Darrin Gross 4:10

Okay. How long have they been a recognized formation for business?

Richard Wilson 4:17

You know, really the term started being used more in the 70s and 80s on a small scale, but still in the 90s. nobody really knew what the term meant even in finance. And when I started in 2007, most people I talked to even in the investment industry had not heard of them before. And if you had now if you fast forward 13 years, just about everybody in finance and investments has heard about a family offices, but still most of the ultra wealthy globally, I’ve never heard the word family office. They have no idea what it means once they learn about it, they want to have a virtual family office or a single family office for themselves. And they want the benefits of one once they hear about it. So we’re really at like the third or fourth inning of this industry really growing and becoming In industry in itself

J Darrin Gross 5:02

So the the the concept is basically Is it is it not creating some sort of like a corporate structure to your you’re managing your wealth is that kind of a

Richard Wilson 5:14

Yeah, that could be one way of thinking about it, I think that no simple way, it’s just a 360 degree management of your balance sheet. Anything that touches your balance sheet should be coordinated at the center. Because what happens if you don’t have a family office, if there’s an investor listening to this and you’re worth 3, 10, $20 million, or much more, you have to remember what your insurance agent said. Remember what your CPA told you remember, you heard on some webinar about tax planning, you know, talk to your wealth advisor, you know, talk to your spouse and next generation, charitable giving, you might just do by yourself and not coordinated and you might do a direct investment into an angel investment or a real estate property. Well, if you knew what percentage of that investment should come from what trust or you had good estate planning in place or you have pride of tax planning, you should have that all central Because the busier you get, the less likely it is you’re going to remember what your CPA told you to do eight months later, when you meet with your insurance agent, or you invest in that deal. You’re just going to make mistakes, the busier you get, it just gets too complex to keep all in your head.

J Darrin Gross 6:14

Got it. So it allows you to just kind of stay on the course or your get a plan and, and actually work the plan as opposed to a bunch of fragmented ideas that don’t have some sort of central coordination there.

Richard Wilson 6:29

Right.

J Darrin Gross 6:30

Seems like a lot of businesses could probably use that.

Richard Wilson 6:34

Right,

J Darrin Gross 6:34

You know, but and then as far as your, your business model, you mentioned the the events and stuff 30 events normally over the year. What are you you mentioned I guess you’re doing daily daily interviews with with

Richard Wilson 6:49

Yes, so the normal events are workshops on Investor Relations and raising capital. Or investor summits, which feature 30 live investors on stage answering questions, discussion panels and giving talks on stage. And the combination gives those who are raising capital A chance to get 35 different capital reasons, strategies in a single day at the workshops, but then go to an investor summit and hear from 30 investors in a day and hear all their opinions, their preferred structures, their preferred feed preferences, strategies, etc. And so a lot of people who come into raising capital, meet with investors when I only meet with 30 investors a month or 50 a month and by hearing from 30 in a day, they can kind of grow their, their capacity to work with investors and be more effective working with them. So that’s what the family office club is all about. And during this virus crisis, we just are pointing people to the 450 investors we’ve recorded on video and we have inside the member portal, and then every day we do a zoom interview for seven minutes with an investor and go into exactly what they’re doing. In an overall, what they’re invested in more than anything else right now, what strategies they want to share with other investors or people raising capital, they’re listening. And we upload that to the portal every day. And we share a lot of that, you know, on our YouTube channel and on the family office podcast from time to time as well. But we do you know, that constant refreshing of investor content to the portal is really the main the main family office club offering.

J Darrin Gross 8:24

Got it? And just to be clear, the people you’re interviewing, are they the ones raising the capital? Are they the ones, the members of the family offices that are looking for opportunities,

Richard Wilson 8:34

So we have both types of members. So if you’re an investor who strictly allocates and you’re an LP investor or family officers looking for deals to invest in, then membership in the family office club does not cost anything. If you sometimes syndicate deals or you’re looking for other families to co invest in your deals, you’re raising capital for a real estate deal or real estate development company. Even if you are ultra wealthy as well. If you’re also raising capital, you need to pay for a membership And the membership options are at family offices calm if anyone wants to check that out, but we have 800 and some paying subscribers on a monthly basis. And then we’ve got 2000 registered family offices and investors on the other side.

J Darrin Gross 9:17

So you are kind of the conduit between the two groups, the people with capital and those that are looking to raise capital.

Richard Wilson 9:28

Right. Right, right. And we’re more powerful to each side because of doing both. So some people say, well, Which side are you helping, and importantly, we don’t take any fees from people raising capital, there’s no success fees we take from them. We are just helping the investors get access to the best quality investments and the investors pay us a performance fee when they invest in something that I helped them find through our community. On the other side, that people raising capital. We help them through we have family office databases, familyofficedatabases.com with a free book on capital raising. At capitalraising.com, we have our workshops, we review the pitch text and all the marking materials of our members once every three months. So the 800 number is usually 25 to 40 months submit their materials and we give them 20 bullet points of feedback on what they could change in the materials to be more effective working with investors. So we really try to make our program holistic, and that if someone joins and they consume that content for 18 months, they’re part of the community, we’re going to really transform. You know how they work with investors, because we’re texting and emailing and calling our investors every day. And we represent 81 investors under contract that are more close managed investors out of those 2000, there’s 81 that we’re working with every day to help access deals and get access to you know, opportunities in our club.

J Darrin Gross 10:48

Got it, got it. So let me ask you, so in 2007, and I’m trying to remember exactly when everything blew up, but it seemed Like 2008 2009 was really kind of more of the recognized, implosion. Can you see any kind of similarities in what was going on when you started to these recent times and just characterize as to how the ultra wealthy viewed the situation or perhaps some of your conversations with what they’re, what are they saying right now?

Richard Wilson 11:33

Sure. Well, is it good time to invest when things are going bad? So you know, many of them are taking positions in the stock market and putting, you know, the time we’re recording this on the first of April, they might be putting, I don’t know, it depends on the family. It’s not a recommendation to anyone listening, but some of them some of them putting 10, 15, 20% in the market. And then throughout April and May they plan to be building up their position. Maybe we have 50 to 60% you know, allocated over the next month or two expecting that by Q1 next year, there’ll be a nice recovery for them, you really don’t know what’s going to happen. But also, we sent an email out last Friday looking for three types of investments for our investors right now. One is that they’re looking for subscriptions at $20 a month and lower that we’re not hurt by the virus, or maybe they’ve grown slightly. So that’s something they’re looking for, if it’s a steady investment, and reoccurring revenue is always of interest. They’re looking for companies that are doing better than ever right now, because their services in need. And then they’re also you know, willing to be a lifeline to someone who’s going to lose their business and maybe the CARES Act and any other stimulus isn’t enough to save their team or save an asset. And they need a lifeline to kind of stay in business or stay afloat. Then there’s some investors who want to get access to those types of investments as well. So those are three areas that are of interest, but very specifically to real estate, families who can understand the strategy and trust the team is most important and they’re much more likely to do the deal. They’re local to them. To our locals the asset, of course, they get to know how to build the trust in them faster

J Darrin Gross 13:06

Got it. And in real estate investments, do they? Are they usually looking to take an equity position? Or is it Are they also perhaps open to lending? Or where is it?

Richard Wilson 13:21

Yeah, they’re open to both I think a lot of people like income they like to income a lot near the end of the cycle and I think they still like it but they’re more questionable about quality of collateral right now and they get an income you know, opportunity and they’re a little bit hesitant right now until we see the worst of what comes out here in April I think, but it’s still a great time to be planting seeds getting to know someone show that you still have a strong team so have your head above water in this type of situation. And getting building relationships right now without the travel that most of us you know typically do each week. There’s more time to be doing videos, zoom calls like this and you know, seeing how you could add value and connect people and and also update your messaging and positioning so that you’re truly unique in the industry, and that you’ll attract more investors. Just like you creating this podcast, you know, creating content. That’s kind of, you know, part of your question was about similarities between 2007 and eight to now, because that’s when we started our business was 2007. And when I started, we it was all built off of thought leadership, sharing best practices, and that’s how we attracted business. We didn’t have a budget to do advertising. So we’re going back to that now. You know, we’re publishing things every day, multiple times a day, where before we were maybe doing one or two new pieces of content per week, and calling it good on our doing, you know, two to five, sometimes seven pieces of new content in a day for our member portal for our public website for social media, etc.

J Darrin Gross 14:46

Got it. And when you say, publishing content, is there any strategy that you’re employing as far as is it basically, just information is it is it direction is it? Is there any kind of an overarching strategy with that?

Richard Wilson 15:08

Yeah, I think the most important strategy is something I got from Gary Vaynerchuk. Just on, don’t worry on the quality being perfect. I’ve got like $40 vistaprint thing on the wall behind me. I’ve got you now I’ve got $180 microphone that looks exactly like yours in black. And I’ve got this $40 ring light that makes us I don’t have this weird dark shadow on the side of my face or my window over here I learned and there’s a little clip on life or $15 I don’t not use it today. But you know, for $250 you can get the setup. But for years, I didn’t have any of that. It was just my laptop with a white background behind me. Just my iPhone and I’m walking down the street recording something and I think that thing I got from Gary was that he just documents his journey so authentically, you can see hey, I’m just at this asset. We’re walking away from this deals. Because it’s not good. Or when I was doing due diligence on a property recently I walked through to record the video of what have been done on the properties, my investors could see that yes, I was there and pointing to the things that they had done. And it’s not about the production being perfect. It’s just about documenting your authentic journey. And also, Gary often says, you know, who cares that I’m in the back of an Uber, like, who cares that you can hear a car outside, if you’re so worried about the production value, then maybe your content sucks, because the whole point is that your target audience will see the genuine, authentic content and you’re hitting them between the eyes of value that’s just for them, and no one else in the world is doing that. And so if you’re worried about the environment as your chief concern, you’re missing the whole point. The whole point is just focus on adding that value. And your members would rather hear value and not hear from you because there was a car noise in the background. You know, and so that really resonated with me as well.

J Darrin Gross 16:50

Yeah, no, I always enjoyed your I can’t remember how it’s been a couple years, but I remember you’d be like in some foreign land and be All sudden down the street and walk along with your iPhone there. And I’ve been like, Wow, cool. I mean, but it was exactly that it’s just kind of like an update kind of a, here’s what I’m doing, here’s what I’m talking about, here’s some of the questions. Right and kind of short, but it was it was topical. And there is there is value in that this is probably something that other people are thinking about. Or I mean, if you’re seeing this in an event, it’s likely that other people are having the same kind of questions and be able to relay that kind of real time as opposed to some sort of a big thought out production and, and, and all that.

Richard Wilson 17:33

Right. Yeah, and I couldn’t agree more. I think that um, the thing is, it’s more interesting when you’re on location somewhere it’s more tangible. You can show someone your oil and gas rig you can show them walking through a before self storage unit and after renovated self storage unit or walk the ground where you’re going to be developing your piece of real estate, show them the lines on the property and the surrounding traffic that’s going by, and I think that that makes it more real and I stole the strategy from a German banker I used to watch his videos on YouTube. And he’d be on the balcony of a hotel in Berlin, they’d be on the balcony of a hotel in Paris, they just watch this guy’s video saying like, Man, that guy, you know, must be a pretty successful guy who’s speaking all over the world in these different places. And I realized that not only makes the video more interesting, but it’s like a positioning strategy of authority or you know, they must know some things and be very well connected is kind of like an underlying message of it. And so I think that when I started recording videos, I just realized that even if I’m somewhat monotone in a video if there’s something really cool behind me plus as some authority positioning it takes the pressure off of me to be like Tony Robbins, Mr. Excited voice person, you know, cuz I that’s not really me.

J Darrin Gross 17:33

Right, right. Right, right. No, that’s, that’s it’s good kind of a storytelling, quality there. I used to watch there was a way still around Casey Neistat on YouTube and the guy was just constantly skateboarding through New York City and holding this camera in front of them there. And just like seemed like a, you know, a crash waiting to happen kind of thing. But it was just there was just this, you know, something was more interesting. Right? So, you mentioned you’re talking about about content and strategy. Do you have like a core message that you’re trying to get to? Or is it more about just trying to speak to what you think your your identified audience is interested in? and expecting to hear from you? Or does that make sense? I mean,

Richard Wilson 18:41

Right? Yeah, no, it makes total sense. So it’s also tricky In my case, because I am trying to be helpful to those raising capital as well as investors. But what I realized is that if I’m helpful to the investors, the more investors that have come into me, then the more that people raising capital are always going to come to me. So I always have to be serving the investors first. That’s why I take the success fees from the investors and not people raising capital to keep that alignment in place. And I’m always trying to think about what are the headaches of my investors? What are the complaints, so They call me, you know, they say something like, I feel like I’m driving through fog. I don’t know what to do strategy wise, I’m not sure who to trust. Or I’ll talk about some frustrations that a lot of my clients have, or how a lot of them have lost money, I could easily be avoided if I could just share that story. And also talk about just frustrations in the industry and inefficiencies. I see if all of my family offices are doing something and it makes no sense at all. That’s interesting. And if 100 family offices will help set up if none of them have their core values and their mission and their wealth story documented, you know, that’s kind of backwards. It doesn’t cost anything to do those things. So I like pointing out like golden threads of like, what nobody should be doing. And everyone learns not to do those things over time, or what everyone does after the patent family office for seven years, or whatever really painful, expensive mistakes are what are some go to models. So I have these ideas in my head and I write them down as a video idea within my project management software. So that when I go and I travel and get on an airplane, my goal every For three videos, every time I go to a city, I’m usually traveling every week when there’s not a virus. And, you know, so that way if I knock out three videos when I travel back in before the virus that was enough content to keep things, keep things updated. So the other I’m sure we could do like a whole hour podcast on it that just that question you asked me, so I’ll stop talking now. But it’s a really good question that nobody’s nobody ever asked me.

J Darrin Gross 21:22

Well, and I think it actually, it goes to the point and I’ve heard others speak to this, especially in these times when there’s uncertainty. And there are probably some, some people that are I don’t think some people think most people are looking for ways to cut costs because of the uncertainty. And right, one of one of the things I think people would would probably lean to cut is those things that can’t measure the benefit of. Marketing is always one of those challenging things is, if you unless you put out a coupon or something in somebody’s direct response comes right in says I’m, you know, I want to buy because of this or I want to invest with you or whatever that is because they have that one piece and you can do the one to one correlation. Now, as is more of a time to not abandon any kind of marketing message, it’s more a matter of time to stay in front of whoever you’re trying to work with, whether it be investors or, or capital raisers, for whatever that that message is. So I appreciate you just kind of sharing a little bit about what you’re, what you’re doing and, and how you’re thinking and how you kind of go back to the basics, like you were back in the beginning. Is is ramping up the messaging not not, you know, hiding or not, you know, not getting in front of people right now. So,

Richard Wilson 22:45

Yeah, we’re just tripling down on that. And, you know, it’s what our company was built on, and it’s what has been attracting people to us. I just was always so busy traveling. Yeah, one day, I’ll get to the point where we could update social media every business day, at least one time and sometimes students Or one day, we’ll interview one investor per day. And then with a virus head, we said, Wow, what are we going to do? We converted our platform into a digital platform with added, you know, 40 new members in the last, you know, three weeks since the virus hit with that new digital offering and just realize that we really have no other choice, but just add more value. And then, you know, even if everyone else keeps on doing their plan, we’ll be providing two or three times the value to potential and current members than we were before through that content.

J Darrin Gross 23:31

Do you find the family offices are more receptive to messages? Are they getting more presented to them now?

Richard Wilson 23:42

I think that they’re more receptive to things which they’ve gotten to know the founder and the principles very well and it, it’s, um, it has to fit one of those categories of, they have a real deep relationship and now makes it so if something is repriced, they’re gonna Be very smart by reinvesting right now. Otherwise, it has to be something that’s doing even better than ever because of the virus or has not been effective because it’s a small subscription or at some reoccurring critical surface, you know, something like phone lines that people are going to drop their phone lines for a month or two, just to cut costs type thing. So it depends. I think that things which are now steady and haven’t gotten hurt out, of course, are of more interest. Real estate deals, lenders, in some cases have pulled lending in the last minute and didn’t come to the closing table. Some people have renegotiated a lot of investors have balked to it committed to ambassador, they’re saying, Oh, well now, you know, I refuse to I don’t want to and so it’s an opportunity for investors who like the investment manager to come in and say, Okay, well, I’ll fill your gap, but I only want to pay performance fees on that extra amount that we’re going to invest to help you out. So there’s an opportunity there for people to negotiate a bit more right now, in some cases to get a deal closed that was at the 11th hour already.

J Darrin Gross 24:57

Gotcha. And as far as the the size of opportunity that a family office might be looking to entertain? Can you speak to kind of the range of size that you’ve seen or that some of your clients regularly entertain?

Richard Wilson 25:16

Sure, yeah, I think that um, some investors like the minimum investment size of just 25,000 or 50,000 because it’s almost an extension of their due diligence it’s not super risky they can get to know someone see how that deal goes and invest more. A really common starting places $100,000 investment minimum, I think a common mistake is thinking, Oh, I want to go to family office world. So now I’m gonna set my minimums in 250 or 500, or even a million dollars because now we’re just gonna raise capital from family offices, but many family offices will look at that and say, well forget that, you know, even if we would invest 5 million, we usually start at 300,000 it start at 700,000. So I would just be careful. You know, you can always set up a more sophisticated rule saying first time investors 25 thousand dollars second time you invest a minimum of 100. And then if you need to, you could always say by the third or fourth time, there’s a higher minimum if you’re doing things deal ideal, but I haven’t seen anyone do that. Honestly, I looked at 350 pitch decks from our members, we review those every quarter for them. And no one has that type of a minimum schedule. They’re all either at 100k, or 500 or 1 million. And I’ve seen one at 25,000. That’s well established, they manage 400 million. And everyone tells them they’re crazy to accept 25,000 per investor, but they say we don’t care what they say, because we’re raising 100 million a year right now. And they have a one investor at 150 million. And they have many investors who have one to 2 million with them. And they started them at any of them at 25,000. But they’re doing several deals a year so they’re able to test them out. Okay, yeah, we like you guys. Then they put in a quarter million then they put in half a million so I always like doing you know, like Dan Kennedy is famous for saying if you’re not sure what to do is do the opposite of everyone else. And will everyone else try to go into the family office? Well, high minimums, thinking that’s the way to go. I like that, you know, do the opposite when possible.

J Darrin Gross 27:06

That’s that’s really some great insight there. I think that you know, the the average capital raiser sees you know, the family offices like the golden goose and thinks that they can just get the audience that that’s the chance to land the other big, big fish kind of thing. And what you’re saying is that just as an opportunity to kind of create and nurture that relationship if you let them in at a smaller price and like even said, like, it’s kind of the cost of doing due diligence almost. That’s me that that’s that’s, that’s great. I mean, I’ve just I hadn’t heard that before and I am so appreciative of you sharing it because it you know, it’s funny how, you know, I go back to what was the The Millionaire Next Door book The perception of wealth and what people think the person is and you know, what they’ve got and who they are versus the real underlying core beliefs or, or who they really are the fabric that they come from kind of thing. So that’s great. That’s great.

Richard, if we could for a minute, I’d like to shift gears here. As I mentioned, I’m an insurance broker by day. And we we do risk management, there’s a couple of different strategies we look to. The first is can we avoid the risk? The second is can we minimize the risk? And if we can’t do either of those, can we transfer the risk and that’s, that’s what an insurance policy is. And I like to ask my my guests if they could consider what the BIGGEST RISK is. And, you know, just for clarification, we’re not necessarily looking for a an insurance related answer. But if you would, I’d like to ask you, Richard Wilson, what is the BIGGEST RISK?

Richard Wilson 29:09

For my company, even though we have good managing directors, I think the BIGGEST RISK is myself, you know, I’m driving forward a ton of the new content. You know, when I when I hang up here, we’re doing a 1000 person webinar. And I’ve got someone on my team that could do a webinar on many different topics, but not the same topics I could, you know, fluidly and so it’s kind of like a key man risk. And our business, you know, would have to go down to, you know, a skeleton crew if I got hit by a truck this afternoon, and move forward as much smaller business. So I think it’s just like many entrepreneurs, getting yourself out of your own way and making sure you’re not the bottleneck to growth and making sure that you’ve got kind of a C level team being groomed and built is part of that but also just thinking through things you know, that are insurance related, honestly related to caveman or life insurance, or just You know, if you’re disabled and can’t work for a while, because think that you know, like most businesses that are like mine with 15 employees, you know, you’re trying to grow into a medium sized business from a small business you’re in that in between world where, you know, you’re constantly trying to push stuff down to the team and get a better quality team.

J Darrin Gross 30:20

That’s, that’s insightful and i think it’s it’s true for most businesses is that this reminder of, if you don’t let people do grow, become more in the business you know, and kind of own that position. It is easy to become that bottleneck or kind of, you know, restrict the growth kind of thing so appreciate you sharing that. Sure. Richard, where can the listeners go if they would like to learn more connect with you?

Richard Wilson 30:52

Sure, pretty simple. Familyoffices.com is where there is details on the charter membership and The Family Office Club. We also have links to a lot of resources like our free book on family offices, etc. And in addition to Familyoffices.com if you’re strictly an investor, not selling raising capital by just someone looking to allocate to deals we serve 81 clients that are all investors. And it takes about five minutes to become an investor client by registering on privateequity.com. So if there’s an investor listening, privateequity.com would be the right portal that for anybody Familyoffices.com is kind of the central hub with all the resources there and options get involved.

J Darrin Gross 31:37

Richard, this has been an absolute pleasure. I can’t say thanks so much for taking the time to talk again today. And I hope we can do it again soon.

Richard Wilson 31:47

Yeah, I hope so too, Darrin, thank you so much.

J Darrin Gross 31:49

All right. For our listeners. If you liked this episode, don’t forget to like, share and subscribe. Remember, the more you grow? Excuse me, the more you know, the more you grow. That’s all we’ve got this week. Until next time, thanks for listening to Commercial Real Estate Pro Networks CREPN Radio.

Intro 32:09

You’re listening to CREPN Radio for influential commercial real estate professionals. For more information on this or any of our guests like us on Facebook, CREPN Radio

Richer Than A Millionaire with Bill Danko – CREPN #259

Bill Danko 0:00

The greater your net worth, the greater the probability that you had investment real estate. Right now those folks who are below the median net worth in America, the vast majority of their net worth is their home value. Those who are the millionaires and living in these, you know, $300,000 houses, which is relatively modest in many respects, are also invested in office buildings.

J Darrin Gross 0:48

Welcome to Commercial Real Estate Pro Networks CREPN Radio, Episode Number 259. Thanks for joining us. My name is J. Darrin Gross. This is the podcast focus commercial real estate investment and risk management strategies. Weekly we have conversations with commercial real estate investors and professionals who provide their experience and insight to help you grow your real estate portfolio. Let’s get into the show.

Today my guest is Dr. William “Bill” Danko. He is the co author of The New York Times bestseller, the Millionaire Next Door, and also his newest book, Richer Than a Millionaire. And in just a minute, we’re going to talk with Bill about happiness and money. But first, a quick reminder, if you like the show, CREPN Radio, there are a couple things you can do. You can like, share and subscribe. And as always, you can leave a comment. We’d love to hear from our listeners. And if you’d like to see how handsome our guests are, be sure to check out our YouTube channel. And that’s Commercial Real Estate Pro Network. And also please consider subscribing. It helps all the algorithms and and lets other people know about us. With that I want to welcome my guest. Bill, welcome to CREPN Radio.

Bill Danko 2:11

Thank you, Darrin. Glad to be here.

J Darrin Gross 2:14

And this is truly the Frankenstein addition here. Bill has been very, very generous with this time already. We’ve been trying to string this one together. So but I’m so delighted to have you on today and did not want to waste the opportunity. Before we get started, though, if you could take just a minute and share with the listeners a little bit about your background.

Bill Danko 2:36

Sure. I was a Professor of Marketing for 31 years at the State University of New York at Albany and I was also a consultant during that time and public speaker. Just having my career path as a as a marketing been, it’s been very rewarding. But at the same time, I’m also a family man. Married for 45 years and three adult children, five grandchildren and life is grand.

J Darrin Gross 3:15

Great. Well, I got to tell you there are a few books in the 90s or before the 90s that I ever read cover to cover and made notes on and highlighted and and kind of set a real frame of mind for me and, and one is my copy of the The Millionaire Next Door. And I’m just so delighted to have the opportunity to speak with you today. As we kind of jump into the topic here. I’d love to get a little bit of a sense of you know, you mentioned you were a marketing instructor or professor you know, How much of your your what were the course of your tech? Teach me in marketing? That’s kind of a broad spectrum of, of, you know, study. Can you get into that a little bit?

Bill Danko 4:16

Yeah, I mean, it really comes down to one course in particular I took with Professor Tom Stanley in 1973. And then that course a consumer behavior course which I did very well in, I got an A. He asked me to assist him with his very first study of the affluent market. And that’s when the ball really got rolling. I mean, so right marketing has so many aspects. I mean, I like to think of there’s marketing and then there’s everything else. Right? Well, in this particular vein of research, we concentrated on survey research and statistical Analysis of who really has wealth in America. And so Tom encouraged me to get an MBA and continue studying with him. And I did. And he also then encouraged me to go get my PhD, which I did at Rensselaer Polytechnic Institute. And the point is, during this period from 1973 to 1993, Tom and I had done a series of academic studies together, as well as a number of consulting studies. But in 1993, kind of a pivotal year he called me up. He was then working in Georgia and I was still in New York. He called me up and described a new project called “Big Hat, No Cattle”, and it was about the illusion of wealth in America. So using our survey, research skills, In fact, while I was at the university, one of the favorite courses that I would teach would be Marketing Research, Statistical Analysis and Computer Analysis of Datasets to infer something about market segment. So using those skills, we did another nationwide survey for the Big Hat, No Cattle project. And by 1996, the book was published. And the rest is history. It’s, it was a New York Times bestseller for three consecutive years. And it changed a lot of lives, changed my life in many ways, in a very positive way. It paid a lot of bills, that’s for sure. And it keeps on giving. It’s It’s wonderful. But that’s how we got there with the plan for a Millionaire Next Door.

Then in 1996, though, when the book was launched, that was also a pivotal year in my life. Which was really life changing in so many ways. I was still teaching, still doing the research. But at that same time, it was when my mother had a stroke. Now, that’s unfortunate, but she happened to be the primary caregiver to my quadriplegic brother. So guess what? I became more involved on a daily basis. Dealing with my brother, his care, and I followed my wife and I vowed to keep him out of a nursing home, which we did. We bought him a house, it was great. And all the problems that go with maintaining somebody outside of a nursing home, but we helped him age with dignity. And he really, during the visits, in fact, that was the weekend aid most of the time because it’s so hard to hire an aide for a weekend. We would have these discussions about life and you know, you Here’s a guy who couldn’t even scratch his nose. And he really had to have everything done for him. And it was really an act of love. And but here I am a New York Times bestseller being a home health care aide. Now. I would do it again in a heartbeat, that’s for sure. But my point is, it’s a humbling experience. And when you realize we’re all on the same path together, you know, we get born we live and we die. It’s what we do in between. That really motivated the research for the Richer Than a Millionaire, which I did with my colleague, Rich Van Ness, who lives in New York State. He’s another professor. And we looked at it in the sense of what lessons do we want to give our children and our grandchildren and in fact our students, who we look at our as children in a figurative sense What life lessons do we want to extend? And the idea is, money is good, but money and happiness are better. And that is how the two books diverged from each other. Millionaire Next Door shows you how to make the money, Richer Than a Millionaire reiterates many of the lessons in Millionaire Next Door, but it takes it to another dimension. It looks at your psychological health. Are you well adjusted, or are you maladjusted? And what are the correlates of those who are happy and wealthy? That’s the path we took. Now want to talk about both of those in more detail of course.

J Darrin Gross 9:45

Yeah, no, I would love to I mean, what a what a crazy kind of a, you know, combination of paths. I mean, in one end, you’re studying the millionaires and you’re having great success and and The way I think most Americans would look and you know if you were to describe wealth or success you know being a best seller on the New York Times and you know all that and then the the human factor strikes and you know the opportunity to have such a human experience with your immediate family like that or I mean your extended family your brother and and that and wow what a what a what a fascinating ride you had there Yeah. So I’m curious you know, because in the The Millionaire Next Door You know, there there are a couple things that I remember you know, specifically it was basically looks are deceiving I guess, because of the way I would summarize it and that the you know, if somebody looks like a millionaire it’s kind of the like you say the no hat or the Big Hat, No Cattle kind of thing. The They may have all the the newest nicest cars and, and all the vacations and all that stuff. But chances are after spending all their money, they’re probably gonna keep it all keeping any of it.

Bill Danko 11:11

This is true. Yeah, this is looks hard to see being that’s probably the number one lesson to be learned here. You know, if you look at the appendix in the Millionaire Next Door, we have a litany of about 150 job titles of millionaires we’ve interviewed over the years, and it’s really quite an eclectic group. Yeah, there are physicians and there are attorneys and there are executives, and there are architects. But also on that list are things like trailer park owners, car wash franchise owners, bovine semen distributors. Yeah, that’s a auctioneers Right. I mean, if you do a content analysis on that list, you find that about 80% of the people on the list would be considered blue collar millionaires, and the other 20% the professions which are, you know, wonderful people. But here’s the problem. We have found, and this has been, repeatedly study after study, that for every person who can actually afford one of the high end items like a fabulous house, or a brand new car on a regular basis, there are four to five others who buy the same item because they want to look like a millionaire. And so we have these people who, again, it’s the Big Hat and No Cattle. They have all the looks, but they also have the mortgage and the expenses that go along with it. But this stuff dove tails into the happiness issue. You know, in the book of Proverbs in the Bible, Chapter 22, verse seven, there’s the line, “the borrower is a slave to the lender”. Well, when you have a wall to wall mortgage, and you have onerous car payments, you can’t get off your economic treadmill. You have to keep working to keep that lifestyle going. On the other hand, when you have these satisfied, in many cases, blue collar millionaires who live in ordinary neighborhoods, drive pickup trucks or older cars, they’re not worried about car payments. They’re not worried about a burdensome mortgage, but they have a lot of financial independence. And that makes all the difference in the world in terms of your outlook on life. You know, having money that’s free and clear, and a positive cash flow is a lot better than Saying I have to get up to work because I am a slave to the lender who lent me this money. And look at the problems we had, you know, 2008 and 2009. I mean, didn’t we get to the point of like zero down payments on houses?

J Darrin Gross 14:16

Oh, yeah, they were they were paying you for a while to take out a loan.

Bill Danko 14:19

And 100% mortgages. I mean, yeah, it was folly. All right. So anyways, we bring these problems on ourselves. When we don’t understand what we’re really getting into.

J Darrin Gross 14:34

Yeah, no, the, the, you know, the whole book. I mean, it really kind of gave me an appreciation for the way my dad lived, not that he was any kind of, you know, Uber, wealthy guy, but there was a contentment in his life that as a child growing up, I couldn’t understand, you know, I, I wanted the new, flashy, whatever it was, and then is As I, you know, got a job and started a career and was trying to, you know, make my way I, there’s a certain sense of like, yeah, my dad didn’t know what he was doing, you know kind of thing.

Bill Danko 15:14

Yeah, in fact, you know, on one of our surveys and and, and the results are included in Richer Than a Millionaire we have a graph that answers the question How much is enough? Now listen to this perspective. When we ask people, what is their net worth? And we’ve asked hundreds of them about this very issue. What is your net worth? And the follow up question is how much you think you would need to feel rich? And basically it goes like this. It’s it’s a curve that says if you have $500,000 in net worth, in actuality, to feel rich, you say you need five times as As much for 2.5 million, and then we ask the people who have 2.5 million, how much do you need? Unfortunately, they don’t need five times they only need twice as much on average to feel wealthy, or 5 million. It’s ridiculous. But right now in America, and it’s hard to say with the adjustment in the stock market this past couple of weeks. You know, one report says we’ve lost 500,000 millionaires in this meltdown. But irrespective of that, basically, of all the households in the US the median net worth is about $100,000. And from 100,000, tough to the million dollar mark, that puts you in the top 12% of all households, to be a one percenter. Basically, $11 million dollars will do it. And so when people say they need these lofty amounts Like, I have two and a half million now I need 5 million. You know, you’re in the stratosphere in terms of where most people’s are not even close to having that wealth accumulation. And so people have this distorted perception as to how much is enough. And so when you talk about your dad, you know, he was well adjusted, I hope, I suspect from what I gleaned from what you’ve said,

J Darrin Gross 17:29

Oh, yeah, he was. Yeah, he was not, you know, chasing some crazy thing. He was, you know, certain he had had leisure, but he wasn’t he was not a spend, didn’t spend every dime he had, you know, he was kind of tight with a purse

Bill Danko 17:47

and was probably brought up during the Depression era.

J Darrin Gross 17:50

Yep, yep. Yep. He’d drive the wheels off a car, you know, it was, you know, which I fully respect now. As opposed to You know, constantly being in the newest, latest, greatest model and, and like you said, just being a slave to the lender kind of thing. And the fact he was a banker too, I think also kind of shaped a lot of that too he was recognized the, the weight of of debt kind of thing and how it affects you. You know, I, there was a blurb in the book, I remember and it was it was talking about, I mean, here you were asking kind of the question is how much is enough kind of thing there was there was a an equation kind of thing that I remember and just refresh my memory here just a bit about how to determine if you’re wealthy. And there was essentially there was a calculation of if you take your age times your your annual income divided by 10. Right. And I was kind of curious because it was funny in my book, there was like a weathered page and I can’t tell you because I think I’ve read this thing, a couple of times how recent it was that I was doing them the calculations, but I’d asked you given the recent times and just all the economic differences we’ve been through. If Do you think that measurement still holds?

Bill Danko 19:16

Yeah, I do. Look, when you’re on the tails of the age distribution, it kind of falls apart. But if you’re between 30 and 60, basically prime working years, that’s tended to be a pretty good predictor. In fact, the way it’s used is, you know, your age times income times 10% are divided by 10. That gives you the number of expected net worth. And if you’re four times that amount, you’re designated a prodigious accumulator of wealth. And if you’re one quarter of that amount, you’re considered to be an under accumulator of wealth. So it’s it’s pretty robust But it’s uh, it certainly was a very useful device in the book to contrast and compare the pause and the odds. And you know, there’s some good illustrations for example, Dr. North and Dr. South in the book, for example, Dr. North and and these were actual surveys but Dr. North meaning Well, you’re, you’re, you’re, you’re you’re going in then above and beyond direction, he would buy used cars. Whereas Dr. South, on the other hand had the equivalent income, but every year or every other year, he would take time out and do a lot of shopping for a luxury car. So you look at how you allocate your time. And Dr. North says, Look, I just need transportation. In fact, having a good luxury car that I bought used, having somebody else give me the gift of early depreciation is probably one of the best gifts I could ask. Whereas Dr. South when he has his new baby goes into a parking lot of a shopping center and gets as first ding kinda takes it personally. Right so it just changes your mindset all together in terms of you know what you expect your money to do for you. And Dr. North says Look, I have good cars but they’re good used cars. And I’m not a slave to that car. It’s already paid for and I don’t want to abuse it but at the same time if it does get damaged, I’m not bent out of shape. Okay, that’s just one illustration, take to heart.

J Darrin Gross 21:43

Yeah, no, no pain and agony for the door ding if it’s, you know, if it’s already got a scratch on it, you’re, you know, you’re not worried about it like you would be if it has got it’s got no scratches and you get the first

Bill Danko 21:56

but it really comes down to also the time value of money doesn’t Right, it’s, you know, like, I used to drive a Mercedes. And it was great. But, you know, then I, you know, I was a sinner, what can I say? But the Mercedes was a wonderful car. But now I drive a Subaru. And it’s great in the snow in upstate New York, I can tell you that. And the point is, I look at the car as just a mode of transportation. And the Subaru is a very reliable mode of transportation, quite frankly. And my wife drives an 11 year old Volvo. It’s, it’s wonderful. But what do we do that, you know, we have these older cars, so we’re not paying for car payments. And so you can take that extra money and start accumulating and investing in a diverse set of assets. And that’s another key here.

J Darrin Gross 22:54

Right. Now, speaking of the asset, I did want to ask you a little bit about some of the diversification that some of the the people you interviewed in the first step, or the first edition there. Can you describe the percentage of people you interviewed that were invested in real estate?

Bill Danko 23:18

Well, I could can’t give you exact percentages. But I remember a graph that I had created, or one of my talks that looked at the greater your net worth, the greater the probability that you had investment, real estate. Right now, those folks who are below the median net worth in America, the vast majority of their net worth is their home value. Those who are the millionaires and living in these, you know, $300,000 houses, which is relatively modest in many respects, are also invested in office buildings.

In my own example, if If I could share this with you?

J Darrin Gross 24:01

Sure.

Bill Danko 24:02

I have some standing timber in the Adirondack Mountains. And you know, you have to wait every 20 years to do a harvest. But the point is, you know it, there are cherry trees. There’s there’s some good lumber there as well as some pulp lumber I understand that. And interestingly, once you own a profit property like that acreage, I got a letter the other day from a solar panel company, saying we would like to lease about 40 acres of your property to put up solar panels. Well, I don’t even know if that’s legal on the Adirondack Park, whether you can do that. But the point is, I am not inclined to let somebody clear cut 40 acres to put up solar panels. It’s just not a good stewardship. I mean, I love the mountains. And I think I have an obligation to help preserve the mountains and doing selective timbering is one thing clear cutting 40 acres is quite another. So it’s but it’s an investment piece of real estate that I own as well as a rental property and as well as some other things besides my primary house. But the point is, you know, more things to keep track of right? More than zero. Well, that’s for sure. But, but it’s good to have each one of these elements as a purpose of my portfolio. Some is enjoyment, some is timbering and the other is a rental property.

J Darrin Gross 25:34

Right. It kind of diversification there, too. It sounds like, you know, in just the, I think the chart that you described there about, you know, the percentage of people that that had some, some wealth attached to real estate, I think is is one of the things that I’ve come to recognize and it’s it’s not exactly buy low, you know, hit the hit the you know.com stock or whatever the newest latest greatest stock is, but it’s it’s a slow path to pretty sure thing I mean, depending on how you do it, I mean it’s obviously if you if you buy in a, in a super depressed market at a low price, your chances of, of having a significant win are greater but but just across the the, you know, all of time. There’s there is some, you know, kind of the the boring. I think the other thing I took away from your book was just how many of the, the occupations were boring. You know, they were

Bill Danko 26:47

Dull normal boring. Yes, like, okay, like owning standing timber. Every 20 years do a harvest. Yeah, you know, there’s a long lead time, but you can keep it in the family. And it’s protecting nature as well. So, right

J Darrin Gross 27:04

in, but just that whole thing and it’s not a flash in the pan kind of thing. It’s, it’s, you know, you basically you put your nose down and you do your work and you, you know, kind of be smart about it, disciplined.

Bill Danko 27:23

I mean, there’s so much talk about, of course, the stock market, especially this past month, but, you know, the stock market portfolio is less and less important, the richer you are, because you have these other diverse assets. Yeah, whether it be artwork, whether it be timber, whether it be rental properties and office buildings, like I’m not minimizing the stress, our economy’s under right now. I mean, everybody is feeling the pinch, that’s for sure. You know, these are unprecedented times.

But at the same time, if we Your wealth is not in the stock market. But you have other assets like physical properties, you can tend to weather the storm somewhat easier.

J Darrin Gross 28:12

Right? And if you if you’ve been able to achieve some sort of equilibrium where you’re not totally beholden to debt, you know, if there are some rough times you’ve got a much better chance to withstand, you know, whatever,

Bill Danko 28:29

Not only that, I can go hunting I my property if I if it comes down to that, and I have a lifetime supply of firewood. I mean, it’s Right, right. I hope it doesn’t come to that. But you can go into survival mode if you have the resources, that’s for sure.

J Darrin Gross 28:48

No, I certainly hope we don’t get to that point. But it is certainly comforting to know that you’ve got that option available to you. So let me ask you, the The newer book Richer Than a Millionaire. I kind of described to you what I considered the the summary and I want to give away your you know, the book I want to urge everybody to go out and and get your book but the this balance Can you describe what, you know, how would you summarize it and specifically that because I think I read a little bit in the, the, some of the stuff I was reading about is kind of like this recognition of the the younger people that basically rudderless not really having that they want to be rich, but they don’t have at least

Bill Danko 29:40

They don’t know what it means. That’s right. You know, well, first of all, the, you know, Richer Than a Millionaire came out in 2017. And that’s readily available on Amazon.com. So I encourage your folks to look into that.

The again being a marketing researcher, there’s a psychology professor, Ed Diener, who made a life work out of looking at subjective well being or happiness. And he put is reliable and valid scale on measuring your subjective well being or happiness, he put it into the public domain. And he has five statements that you respond to on a seven point scale. And the details of course are of a book. But if you score low like a five out of a possible 35 points, you are very unhappy with your lot in life. And if you score high, close to 35, you are very satisfied you have achieved your goals. Well, what we have found when we send out thousands of questionnaires and we look at net worth, whether you’re between 100,000 and a million or a million and above, we’ve purposely left off the under the less than hundred thousand because it would confound me it’s kind of hard scramble when you don’t have any money, and yet there’s something going on. So 100,000 to a million as one group called the near millionaires, and then the millionaires and above what we found using Diener’s scale, that 73% of the near millionaires are pretty satisfied with their lot in life. And 88% of the Millionaire’s are pretty satisfied. Well, the point is, we have a minority in each group, but what makes the happy, different from the unhappy and what we found is a number of correlates.

We go back to the writings of Benjamin Franklin. He wrote an essay and 1758 titled The Way to Wealth. It’s about a 3500 word essay that can be found on the internet. He wrote it under the pseudonym Richard Saunders. As in poor Richard’s Almanack. In his lessons, he talks about the need to be industrious and frugal and prudent. And all the things we talked about the Millionaire Next Door. But he also says, being prudent and frugal, and industrious, is all wonderful. But it’s all blasted, unless we’re also charitable. And so we’d looked at this notion of, well, what does charity have to do with?

Well, you look at the great religions in the world, and Judaism. In Isaiah, specifically, it talks about giving your coat to the to those who have no coats, feeding the hungry. In Christianity in Matthew 25, that what you’ve done to the least of these you’ve done on to me, you know, Lord, when did we see you hungry or thirsty or naked? That what you’ve done to the poor? You’ve done un to me. In Islam, one of the five pillars of Islam is almsgiving being charitable. In the Hindu tradition, being charitable is part of the mindset. So we have the religions, indicating that being charitable is important. We have Benjamin Franklin saying, You must be charitable to your fellow man. Let’s measure it. Let’s measure how much do you give to charity and dollars? How much time do you volunteer to charity? So we have a couple of metrics now, as well as our satisfaction scale. And so we’re then able to look at these As correlates, and then with pre testing and various psychologists and clergy looking at the questionnaire, you know, they come up with good suggestions. So you got to ask questions like, well, is God really important in your life? Are you at peace with your soul? Are you anxious about the future?

What we find is the millionaires and near millionaires, who are satisfied with life are not anxious about the future. They are God centered. They are at peace with their soul. And in contrast, we have those who are dissatisfied with life, or just the opposite of all these. There’s something wrong, you know, and these are very anxious times, especially with this COVID virus thing. You know? I don’t know what the implications are on the long term. But at the same time, you have to look at Well, what’s really important in your life? Is it your love of family, caring for your brother, for example, you know, realizing that the stock market tends to fluctuate anyway. And we do have things like the plague of polio and things like that have come around. And somehow civilization has survived. What kind of lessons do we want to impart to the next generation? And that’s really the motivation for the book. The What do we tell our students? What do we tell our children? What do we tell our grandchildren about how to live? Sure, save 20% of whatever you make, don’t live beyond your means. Buy a good depreciated car. Yeah, I get all that, but at the same time, be charitable. Don’t be anxious about the future. Try to develop a peace with your Soul. So it really, I think is an important life lesson that we’re trying to impart with this new research on Richer Than a Millionaire.

J Darrin Gross 36:12

Now, that’s a definitely some time tested, you know, mottos or four ways of living I, you referenced all the different religious teachings that have certainly made that a kind of a cornerstone of, of, you know, their belief and just the recognition of kind of the golden rule.

Bill Danko 36:32

Exactly. It is the golden rule doing on others. Right, right, but have them do unto you. You know, some cynical people say, well, the golden rule is He who has the gold rules. Yeah, that is so cynical. But this is the kind of stuff that goes on in our culture, our so called culture Yeah, some some basic values that made this country wonderful. And we’ve been slipping away.

J Darrin Gross 37:04

Yeah. You know, I it’s troubling when you look around and you see, and and I think, you know, part of it is just that level of, of satisfaction. And I think that, you know, maybe if you go back and you look at how, how many people don’t have enough, or, you know, have that ability to feel like you’ve mentioned, you know, you if you have under 100,000, you’re not, you know, we didn’t consider you and then you know, to skew so you would skew the results, but, you know, I think really if you if you look at it even in that broader term, how you know, the percentage of people that don’t have that, which creates kind of that anxiety and then there’s you know, I think there’s, there’s all sorts of interesting things playing out right now. I mean, you know, if you’ve been to the grocery store lately, on your your You know, a provisional run to try and, you know, stay out of the public way and not get sick. You’ve been down the toilet paper aisle and notice that there’s, you know, if there is something there, it’s, you know, very, very little interest you see as people that are, you know, taking all the toilet paper, and kind of that fear thing, as opposed to I’ve got enough and I’ll be okay. Everybody needs some kind of thing. And

Bill Danko 38:27

it is it is fear. And it isn’t an anxiety and I know it’s real thing. It doesn’t have to be that way. If you just get down to some basic values. I mean, one of the problems I think we’ve developed in America is the way our higher education system works. I mean, somehow, we’ve convinced everybody that you must go to college. Well, you know, I just think that’s a mistaken idea. You know how Having been a professor for 31 years. Some of my students shouldn’t have been there, that’s for sure. And the point is, they’re accumulating debt with their tuition and all that and didn’t belong there in the first place, but they still have this obligation and what’s wrong with getting a trade? What’s wrong with being a skilled plumber? What’s wrong with being a skilled Carpenter? You know, all these things are, I think, better paths for so many of our young people where they can build a career without incurring this huge expense that we have in the university and college system.

J Darrin Gross 39:41

Yeah, no, I think there is a little bit of momentum behind that. Kind of rethink that. And I see people asking, you know, that that very question. I mean, if you’re, if you’re looking at coming out of a, you know, for a year and that’s, that’s a hope that you can get it done in four years, based on Just all the people that are that are in line ahead of you. And I know my son, he’s a junior in high school and we’re, we’re in the line and kind of, you know, looking at our options and stuff and just come to the realization of how many people there are in the education system, how available the money is and how willing they are to sign up for the debt that it can really prohibit you from, from accomplishing your education fin four years, which then adds to your your time and costs. And then to come out of college with such an enormous load of debt. before you’ve even gotten started. It just really does make you question. You know, the value of that or, you know, the cost benefit. I mean, I know when I was going, I could basically work a summer job and pay for my way through the year. Fortunately, my parents were able to help and pay for my education. But still, if if it had come to that it was still, it was now out of reach.

Bill Danko 41:06

And, you know, and Warren Buffett gave some pretty good advice about how much help should you give your children. You know, he says, give them enough so that they can do anything, but not so much they can do nothing. And so, you know, get them on the right path of economic self sufficiency. You know, one of the problems and it’s highlighted more in the Millionaire Next Door, one of the chapters, highlights the issue of economic outpatient care. What does it mean to subsidize an adult child and paying for tuition or extraordinary medical bills might be very good use of a parent’s money. However, when you start buying cars, and down payments on houses, and subsidizing a lifestyle, you’re creating something that can’t be sustained without the input of the parents. And that can be really dangerous, really dangerous. So I think every responsible parent wants to see their child become economically self sufficient. I can’t imagine any responsible. Yeah, but but it’s also a matter of, but I’m just trying to help. I’m just trying to enhance what you’re doing is creating an economic cripple.

J Darrin Gross 42:28

Yep. You’re making them dependent on it. And now it is a you know, as a parent, I, I look at that, and I hope that I’ve never faced with that, but I do recognize that we go to great lengths to try and minimize the potential for pain. But yeah, the we teach a lesson without burying them in some sort of painful, you know, situation, but it’s it’s a challenge and I think that everybody has to navigate that as best they can. And you know, Who am I to say you’re doing it wrong? Or I’m doing it right. But I do. I do recognize that there’s value in pain. There’s there’s a lesson to be learned in pain. And

Bill Danko 43:12

You know what, in fact, Ben Franklin in that essay that way to wealth, he says, This is not from Nike, he says the actual line in there, there is no gain without pain. It’s he wrote that 250 years ago. And I think he’s right. Yeah,

J Darrin Gross 43:31

no, absolutely. Absolutely. Hey, Bill, if we could. I’d like to shift gears here for a second. I mentioned you before we had to try and rig this thing up that by day, I’m an insurance broker. And one of the things we do is risk management. And we try and assess the risk and try and determine what you know what to do with the risk. There’s a couple of strategies We look at the first is can we avoid the risk? If we can avoid it and we look to see Is there a way we can minimize the risk? And if we can’t avoid or minimize and we look to transfer the risk, and that’s where an insurance policy comes in, which is basically, you know, a risk transfer vehicle. And I like to ask my, my guest if they can take a look at their view of the world. And, you know, specifically I’m not looking for an insurance related answer. Anything you can see think and frame this it would be would be welcome. But if you’re willing, I’d like to ask you, Bill Danko. What is the BIGGEST RISK?

Bill Danko 44:46

Yeah, I think when people are just so blind to well, for example, in Miami Beach right now. There are a lot of people with very beautiful houses on a flood plain or a rising ocean. And one of the things that they’re doing in Miami is raising the roadways and creating culverts to drain off the water. What seemed like a good idea at the time to build a house next to the ocean is, in retrospect, not a very good idea. So sometimes we bring this on ourselves. And, you know, I remember reading a book from the 1950s, how to build your dream house for $3,500. And it was kind of a classic and chapter one talks about first select the building site on a hill as opposed to on a floodplain. Okay. People walk into these problems, I think in a, in a naive way, saying, oh, there’s land available on the build. Okay, so that’s one thing being just not being prudent, okay. But also in minimizing risks. If you do have some pretty good assets, you know, one thing that I have seen with some high net worth individuals and one thing that I use myself is that for example, my timber, my rental property and a lakeside property, I have not my primary house, they’re all individual limited liability companies freestanding, then all three of them are held in a limited partnership. So my physical assets are divorced from my my might, my liquid assets and so having some good legal structure is certainly very good in terms of minimizing the risk as well as having your umbrella policy from your insurance company, but having the ability to separate your assets through like the LLC s and then that limited partnership. That is something that is Well, one thing I use And I endorse. And it works for me. My accountant likes it because he gets to do all these extra tax forms every year. Right? I don’t. But but but it’s okay. It gives me peace of mind. And then in terms of, there’s a societal risk. You know, we talked about a lot of lessons here you know about frugality and the 20% and living below your means and all that stuff. And that’s all important. Those are good, solid lessons. But at the end of Franklin’s essay on the way to wealth, he really summarizes it so well. The people heard the message, agreed with it, and then practice the contrary. The problem is change is hard. People are going to walk into traps. They don’t understand the risk they’re getting into. What we have to do is be better students. And let’s take on some personal responsibility and don’t expect the government to bail us out. But build, don’t build in a floodplain. You know, don’t drive recklessly. You know, a lot of things depend on how our society behaves. And that’s going to be the thing that minimizes risk. So I think risk is all the stuff that we take on ourselves. Because we just don’t do the homework.

J Darrin Gross 48:30

No, I it’s hard to argue with any of them. You know, definitely. You know, do what you can to prevent yourself from hurt, prevent yourself or prevent putting yourself in harm’s way I think is definitely a

Bill Danko 48:45

Yeah, it’s also from a personal risk. You know,one of the references and Richer Than a Millionaire we alluded to a study from the Centers for Disease Control They did a study of death certificates and marital status of people who died after the age of 50. And they found that those who were married at the time of death lived the longest. Those who never married were in between and those who are divorced, lived the least long. And so, when we look at our behavior, and we outlined this more in the book, The benefits of a positive social relationship, a positive household, a harmonious household, really adds to your longevity, that’s for sure. You know, we have a local attorney, the TV commercial, his marriage, his grand in divorce is 20 grand. You get the proportions, right. In terms of the emotional and financial problems you bring on when you have it dissolved marriage. So, you know, go into marriage for the right reasons, build a nuclear family that is stable and loving. And what we have done so many, you know.

One of our senators from New York that the late great Daniel Patrick Moynihan wrote a he was a very good scholar, he wrote a white paper called defining deviancy down. And he was complaining about all the out of wedlock births that we tolerate in society, and all of the burdens that the government then has to take on to solve these problems of you know, welfare and homelessness and things of that nature. He says if we just got back to some basic values, and built the society that says okay, this is how we build the nuclear family. This is how, you know we got a proper education that can build a career. And this is how we do things like, save 20% of whatever you make, and then invest in a diversified portfolio. Boy, we would all be better off, that’s for sure.

Is that enough sermonizing?

J Darrin Gross 51:19

Well, it’s it’s, yeah, it. I welcome the sentiments there. And I think that they’re, they certainly have proven their, their worth over time. You know, it’s just, it is sad when you look and you see the you know, how people are trying and just, you know, not not understanding that there’s, there’s a lot of work that goes into it.

Bill Danko 51:45

Yeah. I mean, the, the metaphor that I think draws us all together. When you ask, how does a train run best when it’s on its tracks? Right. We have a lot of train wreck stuff. We got a lot of train wrecks out there, right. Had I known all this tuition, these tuition dollars we’re going to go for not and now I have this debt. But I’d like to learn have a fancy new car. I wanted to have Lakeside or ocean side property. Right? It’s nice to be there. I

J Darrin Gross 52:17

I want to be on vacation all the time. Right?

Bill Danko 52:19

That’s right, let’s just be a little more prudent in our life and what we expect of the next generation. And, and again, these are the kind of lessons that we try to drive home in Richer Than a Millionaire. You know, you know, Richard Van Ness. He has three grandkids, I have five grandkids. And you know, we would have these discussions as to what kind of lessons do we want to impart before we depart? What lessons do we want to impart before we depart? And so we put it in writing. And hopefully it’ll resonate not only with our grandchildren, but also Well, millions of others who are struggling on the high seas of life like ships without rudders. Just Just trying to give them some direction. That’s all we’re trying to do.

J Darrin Gross 53:12

Well, I am on my way to get my own copy of your latest book and look forward to reading it and recommend that others consider the same and also again, your your first one they The Millionaire Next Door, I highly, highly recommend that.

Bill Danko 53:29

Yeah, that’s what they’re looking for there. How’s that? Yeah.

J Darrin Gross 53:34

Yeah, yeah.

Bill Danko 53:36

Richer Than a Millionaire. I gotta gotta gotta plug it. You got it?

J Darrin Gross 53:41

Absolutely. You got to toot your own horn. Now.

Bill Danko 53:44

I’m a I’m a I’m a book salesman. What can I say? But, you know, it’s been a very good life. I’m glad I’m able to help those who can’t help themselves or being like, no matter What your net worth for all your listeners out there, no matter what your net worth. Never forget to be charitable. Because there’s always somebody worse off than you who could benefit from your time treasure and talent. I am absolutely convinced of that. And not only being charitable, you know, is the right thing to do. It’ll also truly make you happier. It’s it’s one of the key correlates here of being a giver instead of a taker. So my question is, why not be richer than a millionaire? By having these things internalized in your life?

J Darrin Gross 54:39

No, that’s a great way to wrap this up. Hey, Bill, Where can the listeners go if they’d like to learn more connect with you?

Bill Danko 54:47

Yeah, you can go to our website, Richer Than a Millionaire all as one word richerthanamillionaire.com. And you know, We maintain our own website. And we used to just have the word welcome when you signed on to the website. And Rich Van Ness and I and our spouses were down in Marco Island this past winter. And so there’s a shot of these two guys, namely yours truly and Rich Van Ness with a couple of palm trees in the back and a bottle of wine. That’s the opening picture about Riher Than a Millionaire. Grade. So we enjoy it. It’s a boy Marco Island is a wonderful place to be if you haven’t been there. I encourage people to think about it. So it’s a wonderful vacation spot. That’s great. But you know, it snowed yesterday in New York. And so that was a nice springtime surprise.

J Darrin Gross 55:55

The spring I suppose the spring storm. That’d be a big news story. It snowed on Marco Island.

Bill Danko 56:03

Yeah, yeah. So, yeah, so our BIOS are there and plus various articles that we have written, that are in the press, and it’s all good. It’s, uh, you know, what we we have, we have really been blessed to be able to, you know, bring our message out to the public and we’ve, we’re in a good place in our lives. We enjoy, we enjoy good health, but both of us, all of us, our spouses to so far we’re enjoying good health, despite this virus thing in New York State especially.

J Darrin Gross 56:39

Well, I hope that you can continue to enjoy good health, especially in these times.

Bill Danko 56:46

And I wish very same for you Darrin, really you and your family. It’s absolutely critical to, you know, to really assess what is important in life. That’s what’s important in life. You know, being Being this family unit I can continue to serve others in a very positive way. Okay,

J Darrin Gross 57:07

You got it. Hey, Bill, I cannot say thanks enough. This has been an absolute pleasure. I appreciate you taking the time and, and your patience and trying to do this kind of the Frankenstein way we’ve been doing it. But I’ve truly enjoyed it learned a lot. And I hope we can do it again soon.

Bill Danko 57:27

Yeah, I hope so too. We can have a follow up. And let me show you a big fish that I caught here.Can you see that big fish?

J Darrin Gross 57:38

Oh, wow. What is that a brown?

Bill Danko 57:39

Not it’s a rainbow trout.

J Darrin Gross 57:43

Hello. We’re set up there in New York or we’re to

Bill Danko 57:46

Yeah, right. That was up. In fact, there’s a picture of me and Tom Stanley. We were fishing up in ampersand Bay at the Adirondacks and catch that big

J Darrin Gross 58:00

That’s awesome. That’s awesome.

Bill Danko 58:03

Yeah. So it’s, it’s, it’s everything is wonderful. Really is I wish good health continues for you and in the let’s continue to do the right thing. All right.

J Darrin Gross 58:17

All right. All right. All right. Thanks, Bill.

Bill Danko 58:21

All right, my brother Take care of yourself. Bye bye.

J Darrin Gross 58:23

All right for our listeners. If you liked this episode, don’t forget to like, share and subscribe. Remember, the more you know, the more you grow. That’s all we’ve got this week. Until next time, thanks for listening to Commercial Real Estate Pro Networks. CREPN Radio.

Intro 58:40

You’re listening to CREPN Radio for influential commercial real estate professionals. For more information on this or any of our guests like us on Facebook CREPN Radio

Commercial Real Estate BRRR with Anthony Scandariato – CREPN #258

Anthony Scandariato 0:00

The most important thing Darrin, is is track record. Yeah, I have Okay, you bought this property? What did you do to it to add value and what were the returns? So that’s what it comes down to at the end of the day. So we just want to continue to provide solid returns and make everybody happy and you can’t complain about pulling all your money out plus an additional 40% in a year and still own the building and collect you know, cash flow. You just can’t complain.

Intro 0:28

Welcome to CREPN Radio for influential commercial real estate professionals who work with investors, buyers and sellers of commercial real estate coast to coast whether you’re an investor, broker, lender, property manager, attorney or accountant We are here to learn from the experts.

J Darrin Gross 0:47

Welcome to Commercial Real Estate Pro Networks CREPN Radio, Episode Number 258. Thanks for joining us. My name is J. Darrin Gross. This is the podcast focus on commercial real estate investment and risk management strategies. Weekly, we have conversations with commercial real estate investors and professionals who provide their insight and experience to help you grow your real estate portfolio. Let’s get into the show. Today my guest is Anthony Scandariato. Anthony is the co founder of Red Knight Properties. They are a multifamily syndication firm. It’s a vertically integrated doing both investing and property management. And in a moment we’re going to speak with Anthony about both multifamily and property management more specifically. But first, a quick reminder, if you like this show, CREPN Radio, there are a couple things you can do to help. You can like, share and subscribe. And as always, please consider leaving a comment. We’d love to hear from our listeners. And also if you’d like to see how handsome our guests are you sure to check out our YouTube channel. You can find us on the YouTube at Commercial Real Estate Pro Network. And also please consider subscribing. It always helps if we can grow the subscribers so we can also attract more listeners and viewers as well. With that, I want to welcome my guest Anthony, welcome to CREPN Radio.

Anthony Scandariato 2:25

Hey, thanks for having me, Darrin.

J Darrin Gross 2:28

Well, I appreciate you doing this today. I’m looking forward to our talk. But before we get started, if you could take just a minute and share with listeners a little bit about your background.

Anthony Scandariato 2:39

Sure, so So Darrin gave a great introduction. But in a nutshell, Red Knight Properties is a boutique, you know, value add multifamily and mixed use real estate investment and property management firm. So, we’re based out of northern New Jersey about an hour outside of Midtown Manhattan, Western down. And, you know, we own and manage ourselves about 200 apartment units as well as, you know, mixed use properties and by mixed use I mean apartments above retail on the bottom and both suburban and more CBD infill locations. And, you know, we’ve been growing We’ve been in business you know for me full time I was working for another real estate sponsor for a little over five years over the past, you know, since since last year and I went full time with red Knight this year. So we’re continuing to find good opportunities and our focuses on you know, B and C workforce housing apartments, with average rents anywhere from you know, $1,000 to $1,500 in northern New Jersey.

J Darrin Gross 4:00

Well, I wanted to, if we could, given the fact that you guys are vertically integrated, and, you know, do both the operation and the management of your properties, I wonder if you could speak to kind of the the some of the particulars with real estate management, and how, how you made the decision to do that. And then how you find that it helps, you know, with your overall operations.

Anthony Scandariato 4:38

Yeah, so the decision to self manage, was the locality. So, our properties are within 30 to 30 minutes to an hour of where I reside, and my partner, Brian resides. So location wise it made sense and also from a, you know, investment standpoint, the projects that we’re working on do require capital improvements and a very strategic turnaround when you’re trying to sometimes in cases rent increases have gone up 30 40% at some of our properties, and in order to get those increases, you have to be creative and to understand you know, rent control laws, if any, you have to, you know, just really be on top of your game and managing rollover. So for us, it was an easy decision to okay once we’re done with the value add on our buildings, and we’ve gone through, you know, cycles on three different buildings, you know, already. Once we go to the value add, we stabilize, we either refinance or sell. Typically, it’s refinancing them, you know, if we get our money back, we can be flexible with the holding period. But once we’re stabilized and the business plan is executed, then we can pass on the Management. But we want to be hands on and we want to make sure we’re managing the properties correctly, because I can’t tell you how many times I’ve seen, you know, sponsors, operators just passing along the management to a third party. Now, if you buy an out of state, it might make more sense and they’re very reputable. But just because we were so local and I could drive there I can, I can get in my car be there and a half hour. It just made more sense. The only thing that I don’t really do in house is the leasing and because that’s, it’s a big, time consumer. And, you know, we outsource that to a third party brokerage, which is essentially an extension of Red Knight. But, you know, at no cost to me because in a market where I am in northern New Jersey, you know, 99% of the time tenants pay the one month the realtor fee, so it’s really a no cost to to me.

J Darrin Gross 6:56

I thought I heard you saying in there when you’re working through a value add you guys management, you manage the property through the value add and getting leased up. But then do you consider turning over to third party or? Did I hear that right?

Anthony Scandariato 7:12

Yeah, yeah, once we’re done, we haven’t done it yet. Okay, we might might do it in the future, but we’ve been getting the link to self manage. But to be honest, once you get the value out of the properties are kind of on cruise control, depending upon how large they are, what’s your, you know, what your staff looks like. But if you’re buying in our case, we started out by, you know, 10 family up to 10 family of the same family. So, you know, it got to a point where we had 70 of them, and we were still able to manage it is important to have your systems in place. So if you don’t have if you’re tracking all this, rent roll and exploration schedules and payment schedules, outstanding balances on a spreadsheet, it’s not gonna work. You got to get property management software we use Buildium right now. So if we didn’t We’d be dead in the water

Yeah, no it can get pretty sloppy in a hurry if you have a an organized system with that. What about the value add? Are you guys turning that over to a general? are you managing that on a, you know artisan contractor by contractor you can you speak a little bit about that? Yeah, so we have our set of contractors and also subs. It depends upon what what job it is for the most part, we’re not doing anything too too heavy. Mostly, you know, carpet paint, you know, new countertops, maybe new sink, maybe paint the cabinets. So we work with you know, we have a few different contractors in our Rolodex you know, a few different GC we usually do work with GCS and then we manage the construction of that so you know, oversee them. So essentially we do construction management to but our projects aren’t, you know, anything too crazy so far. So we’re able to manage that process.

J Darrin Gross 9:11

So more kind of cosmetic value add.

Anthony Scandariato 9:17

Yep, goes a long way there was a long way.

J Darrin Gross 9:20

No, that’s usually the kind of stuff you can charge more rent for. Right? As opposed to, how are you? Big system stuff that’s hidden behind the walls that the, the, it’s supposed to be there as opposed to, you know, nice new countertops or painter or floor coverings when you guys are searching for a property or when you you know, you find one and you’re going through your due diligence. Do you feel like being a invested as you are in property management that’s given you a kind of a leg up or is it give you giving you a better understanding, going in as to what’s the Gonna be needed as far as trying to estimate or do you still get your contractors involved with getting bids and all that or how do you how does that help you out? Was it worth?

Anthony Scandariato 10:10

Yeah No we feel for underwriting Yeah, it helps a lot for sure. Because you know how much here’s, here’s the type of laminate I want to use, you know, what’s my labor going across? What’s the square footage of the apartments? One of the material is going to quality it’s definitely has its advantages to underwrite better, but we still go in and we do we do bid out, you know, each of our unit turns or project projects. You know, for example, we had like an exterior landscaping project where we were ripping out sidewalks and put in, you know, new sidewalks and also what’s it called, stonework. So, you know, we would we do bid them out. But as you start bidding out projects, you kind of understand, in general how much this is going to qualify. And that’s gonna cost so you kind of get more familiar with it. And every, every location is different. So, you know, cost of Labor’s different in New Jersey as you know, it would be in Ohio or wherever. So it’s, you know, I can actually have a chart that breaks down labor and by part, so we I kind of use that for my guidelines, but we’re getting used to understanding what in general things cost. So,

J Darrin Gross 11:27

gotcha. You mentioned 10 unit properties, or the majority of your properties, like close to a 10 unit, or how do they vary in size?

Anthony Scandariato 11:41

No, so that’s just how we started I mean, personally, I started with two families. But my partner and I started with the 10 unit, and then we bought you know, for other 10 to 20 units together. And then, you know, we ended up you know, we mentioned syndication, syndication is just pooling partners and resources together investors together to go after a larger property. So we did our first indication in December of 19, actually and under contract for a second one, which should close next month, and that’s, that’s April. So yeah, I mean, that’s, that’s essentially what we do and, and, you know, as you start to produce and you develop a track record, which we have, we’ve had to find refinance events, where we pulled out 140% of our equity on one deal, about to pull out 110% of our equity, we only owned it for a year. And then I saw something like 40% IRR. So once you develop more of a track record, you can, you know, present yourself better and, you know, more doors open for you to do larger deals. So, we just started out by the twos and the 10s and the 20s then The syndication really closes at 50. The next one we closed, we’re closing on as 64. So it’s gradually getting bigger.

J Darrin Gross 13:08

Got it? Have you found investors are more receptive to your or to working with you or investing with you given your, your, you know, steady increase in, in, in growth?

Anthony Scandariato 13:26

Yeah, absolutely. That helps. But like I said, the most important thing to add is just track record. Yeah, I have, okay, you bought this property? What did you do to it to add value and what were the returns. So that’s what it comes down to at the end of the day. So we just want to continue to provide solid returns and make everybody happy and you can’t complain about pulling all your money out plus an additional 40% in a year and still own the building and collect, you know, cash flow. You just can’t complain. So, you know, we want to do more deals like That was kind of an anomaly. But now he second deals similar, you know, and the syndication that I closed on, it looks like if we continue the way we are, we’ve already turned over 40% of the rent roll to new rents, and I’ve only only for three months. So if we continue the way that we are, we’re probably looking at a refi. I mean, by the end of the year, and I projected to do a refi you know, in two years, so just under promise and over deliver is what we always say.

J Darrin Gross 14:35

No, that’s, I’m sure most investors would be happy with that. Are you finding that most of the investors are willing to reinvest the equity when you’re returning their their capital?

Anthony Scandariato 14:47

Yep. Everybody has their own different reasons and, you know, timing for certain things, but we don’t require that. But yes, most of the times they do. Yep.

J Darrin Gross 14:59

Got it. Can you speak to kind of the the target kind of what you’re, you know, what you’re looking for in a property condition asset class management, etc.

Anthony Scandariato 15:13

Yeah, so we’re looking for, you know, Class B and C, you know, workforce housing product, which is, you know, not, not the low low low end of the totem pole, but kind of in the middle between, you know, really high end stuff and decent stuff. So, we focus on that and, you know, we, we like, right now we’re in New Jersey, and you know, I’m not saying he has a great story in general because it doesn’t to be honest. But there are certain pockets in the state that you can still buy at a low price for door and a nice cap rate going in that a lot of people don’t know about you know, and that’s that’s where you know, we’ve targeting right Now, actually, I just got awarded a deal over the border in Pennsylvania. So we’ll be moving out moving out there. I do own a small deal in New York State, as well. So we’re kind of in the tri state area, so to speak. But we look for properties, you know, that have that asset class and for rents that are below market due to whether it’s poor management, or they just haven’t really kept up with the building in terms of improvements. You know,

I’ve seen very many different situations. But it’s mostly mostly mismanaged properties. Off market for the most part, some of them we bought, were marketed with a real estate broker. We we picked up but we’re not we’re not buying things at the auction. You know, we’re not doing any of those short sale sort of things. It’s a lot harder to do that commercial anyway, for these types of deals, but in terms of deal size, Anything from like five to 20 million? we would we would close on.

J Darrin Gross 17:06

Gotcha. You mentioned off market are you are you going through brokers? Are you are you marketing direct to sellers?

Anthony Scandariato 17:19

Yeah, so now we’re going through brokers 99% of the time, there’s always that situation where you come across a real off market deal, but it’s just developing relationships in your network. And once you start closing on deals people know about you. And you know, it creates a sense of trust when you’re trying to buy another property from the seller who’s never worked with you before. You know, that definitely helps with one deals just because of that. But 99% of the time, it’s from brokers, especially in you know, this price range. And obviously, once you get to the higher price ranges, it’s even more broker dependent. So

J Darrin Gross 17:59

Gotcha. And as far as your expense, you know, stack as far as you guys are self managing, do you charge? I mean, in your operations? Do you charge a management fee similar to if you were managing, or having a third party manage the properties?

Anthony Scandariato 18:21

Yeah, so we actually charge at least for, you know, if it’s a deal with other investors, and it will charge under when a third party would charge to manage. So we’re always cognizant of that.

J Darrin Gross 18:36

No, I think there’s you know, having to charge for it totally makes sense. I just kind of curious you know, how you guys use that and I would think it would also help just spread the or help support the operations, you know, if you’ve got people that are actually engaged and, and doing things and how many units do you have now.

Anthony Scandariato 18:59

So we have 100 In 140, and then we’re closing on 64 for next month. So we’ll have a little over 200

J Darrin Gross 19:08

That’s great. That’s great. And the timeline since you When was it, you guys got started.

Anthony Scandariato 19:18

So I started about a little over a year ago. I was also working part time. As I mentioned, I was working full time, as I mentioned, but uh, we, you know, I started buying slowly on the side with my partner and, and then one thing led to another and we found a really good off market larger deal. And we put a group together and closed on it. And then that was the catalyst for,you know, for making this a real business. Yeah,

J Darrin Gross 19:50

That’s awesome. See, the I mean, just, that’s a pretty quick timeline as far as, you know, growing that fast and making it happen, so Like you guys are known in the areas as operators and have attracted assuming that the brokers are coming to you now with the fact that you have worked on multiple deals.

Anthony Scandariato 20:14

Yeah, yeah, absolutely.

J Darrin Gross 20:18

Is it a little different than when you first started?

Anthony Scandariato 20:23

Oh, yeah, much different a, for the most part, especially in a close knit community in New Jersey, it’s it’s tough to get a phone call return you know, there’s a lot of people who like to kick the tires so yeah, you take you get taken a lot more seriously for sure. And even you know, age doesn’t mean anything but you know, younger younger guy like me just walking in there and say, hey, I want to buy a property is $10 million. You know, Who who are you? So it’s a lot easier once you you can say, Hey, I own this now that I closed with this person, I know this person. It’s a lot easier. So

J Darrin Gross 20:59

Right Right now I’ve talked with a couple of different people here recently and conversation is kind of alluded to the need to stay with it and stay in it and consistency in order to kind of get some results. But once you, you know, begin to have those results, people start to recognize you as as, you know, capable and and credible and somebody that can close and is not just say kicking the tire. So that’s kudos to you and sticking it through there and in building up that reputation. And what’s the the MSA as far as the size of the area that you’re in?

Anthony Scandariato 21:45

Yeah, um, I mean, Northern New Jersey as a whole. Yeah, I think is actually look it up. But I know it’s at least a million people in New Jersey, but Miss in terms of the sub market, particularly That we’re invested in to some markets 50 to 100,000 people within a three mile radius.

J Darrin Gross 22:09

Right. And are jobs, you know, do you weigh is are upside, are people moving into the area? Or is it more of just kind of a a mature demographic is pretty steady or

Anthony Scandariato 22:28

It depends on the area and in particular, but the areas we invest in are yet people who already lived there or people relocating there for work. And you have to remember, we’re only an hour from Manhattan. So, you know, it’s, there’s so much demand all the time and vacancies are very big, the rates are very low, especially for this types of these types of products. Even, you know, during the last recession, the vacancy rates were extremely Low, everybody needs a place to live. So, yeah, I mean, it’s a combination of both. And in the markets, you know, market we’re heavily invested in is bringing actually like 6000 jobs over the next couple of years. So we do look at you know, employment is already a steady employment base within local economy we do. We do like that, because, you know, if, if stuff hits the fan, then we want to make sure that people still have the ability to work and they have jobs and are able to pay the rent. So

J Darrin Gross 23:33

Yeah, no rent rents important. Your mixed use properties. Can you speak a little bit to you know, how that’s different from a straight multifamily property?

Anthony Scandariato 23:50

Yep. So next uses apartments above and stores in the bottom in my instance, it could mean something else to somebody else. But generally if we’re looking at a mixed use deal, the spread between the going in cap rate going and yield so is generally like 200 to 300 basis points, which is pretty significant when you’re comparing it to traditional multifamily. At least in my experience, it’s definitely went down since we started buying. So there was definitely a spread but there’s a little bit more risk with the retail. We’re buying a building with retail, we’re very cautious and we’re very selective, that retail can’t be more than like 20% of the gross total revenue in the building. And you know, the has to have at least a three year lease depending upon who the tenant is. But most of the tenants we have are like mom and pop. And it’s that a service based so nail salon hair salon, ice cream store can really be disrupted by Amazon. So or you know, any other ecommerce so you No, this is all service based for the most part. And that’s generally what we look for.

J Darrin Gross 25:07

I would think that would be kind of a nice stabilizing factor, I would think or do the do the commercial tend to tend to be longer term.

Anthony Scandariato 25:20

Yeah, yeah. Like I said, usually they sign at least three releases, sometimes five, sometimes 10. Sometimes 15. depends on you know, if you have a credit turn in or if it is like a, you know, a mom and pop or a startup. But for the most part, we’re looking at, you know, service based retail.

J Darrin Gross 25:39

Gotcha, gotcha. Hey, Anthony, if we could I’d like to shift gears for a second. As I mentioned you before we started by day, I’m an insurance broker. And with that I assess risk and try and manage risk for our clients. And there’s a couple of strategies. We will use When we’re trying to manage risk, the first is we look and see Is there a way we can avoid the risk? If that’s not a possibility, we look to see if there’s a way we can minimize a risk. And when when neither of those are options, we look to see if there’s a way we can transfer the risk. And that’s where insurance policy comes in. And I like to ask my guests, if they can take a look at their situation and what they’re doing. And you can identify what they consider to be the biggest risk. And just to be clear, I’m not really looking for an insurance related answer. But more of Ill let you kind of frame that. So if you’re willing, I’d like to ask you, Anthony Scandariato what is the BIGGEST RISK?

Anthony Scandariato 26:52

Yeah, I mean, the BIGGEST RISK is to me it’s always on the buy. So you have to always buy right you have to always run your numbers. You To run a sensitivity analysis, you have to understand, you know, if downside base case and upside, and if the downside scenario still makes sense, then it’s a good deal. So the BIGGEST RISK is people not buying right? You know, we always not running these analysis because markets change, and right now they’re changing every day. So, you know, you have to incorporate those into your numbers, and we always do, you know, what happens if, you know, I can’t get the rents I wanted? Or what happens if I can’t refinance or sell for this cap rate? And, you know, what happens if interest rates go up? And, you know, I have to therefore increase my exit cap by 3300 300 basis points. Am I still gonna make a decent return on my money as opposed to putting it in the stock market? And the answer is yes, then that checks my box. But we have a whole criteria of that but the base versus people overpaying for deals just today. Deal doesn’t necessarily mean it’s a big deal.

J Darrin Gross 28:04

No, there’s definitely a fear of missing out kind of a thing where people are, you know, willing to do some silly things sometimes. So that’s good advice there. Anthony work and then people go, Where can the listeners go if they’d like to learn more or connect with you?

Anthony Scandariato 28:25

Sure, so they can go to our website, that’s RedKnightProperties.com and that’s Red Knight with the K. We also have a LinkedIn page Red Knight Properties and we have a Facebook page Red Knight Properties and on our website, we have a scroll to the bottom of the homepage, we have like a Contact Us form. So you can send us an inquiry there or you have my email on there and also my partner’s email, so feel free to email us phone number is also on there as well for office so happy to hear from you.

J Darrin Gross 28:57

Got it. Well, Anthony. Thanks for taking the time to talk today. I’ve enjoyed it. learned a lot. Yeah. Yeah. And hope we can do it again soon.

Anthony Scandariato 29:09

Absolutely.

J Darrin Gross 29:11

All right. For our listeners. If you liked this episode, don’t forget to like, share and subscribe. Remember, the more you know, the more you grow. That’s all we’ve got this week. Until next time, thanks for listening to Commercial Real Estate Pro Networks. CREPN Radio.

Intro 29:29

You’re listening to CREPN Radio for influential commercial real estate professionals. For more information on this or any of our guests like us on Facebook, CREPN Radio.

Machine Learning AI and Commercial Real Estate with Alex Fleiss – CREPN #257

Alex Fleiss 0:00

Learning from its failures is a very big part, by the way. And in fact, the past performance is a very useful data set, for a machine learning system on top of data, you feed it itself. Its own performance, that’s great helps, and helps it learn. But if you don’t moderate the system, it will try and learn quicker than it should. And then it’s failures will rise more than it should. So we try to keep our machine learning you know, kind of moderate, you know, so that it doesn’t, you know, moderately positive Of course. You know, think of it as you know, singles National League style baseball, I suppose the home runs, will never want it to trade on its highest prediction because its highest prediction will have so much inherent risk in it, that the risk reward is too high to be buying for clients. As a business really.

Intro 0:53

Welcome to CREPN Radio for influential commercial real estate professionals who work with investors buyers and sellers of commercial real estate coast to coast whether you’re an investor, broker, lender, property manager, attorney or accountant We are here to learn from the experts.

J Darrin Gross 1:13

Welcome to Commercial Real Estate Pro Networks CREPN Radio, Episode Number 257. Thanks for joining us. My name is J Darrin Gross. This is the podcast focused on commercial real estate investment and risk management strategies. Weekly we have conversations with commercial real estate investors and professionals who provide their experience and insight to help you grow your real estate portfolio. Let’s get into the show. Today. My guest is Alex Fleiss. Alex is the CEO of RebellionResearch.com. They’re an artificial intelligence company. He’s also an instructor at Cornell Engineering. And in just a minute we’re going to speak with him about AI and the potential to disrupt real estate. And before we do though, I’d like to remind all of you that if you like what we’re doing here with CREPN Radio, there are a couple things you can do to help us out, you can like you can share, you can subscribe. And as always, we’d love to hear from you if you want to leave a comment. Also, if you’d like to see how handsome our guests are, be sure to check out our YouTube channel. And you can find this at Commercial Real Estate Pro Network. With that, I want to welcome my guest, Alex, welcome to CREPN Radio.

Alex Fleiss 2:40

Thank you for having me on. I really appreciate it.

J Darrin Gross 2:43

I’m looking forward to our chance to talk today. Before we get started, if you could take just a minute and share with the listeners a little bit about your background.

Alex Fleiss 2:53

Great. I started programming video games in the mid 90s and then in the late 90s. I got very preoccupied with machine learning, which is the branch of artificial intelligence that deals with the teaching itself. So AI can be any intelligent system, dishwasher essentially one of the most common forms of AI, this planet. But machine learning can adapt its code to a changing environment. And so that really caught my eye in the late 90s. I’ve been dealing with that ever since and RebellionResearch.com has clients in 40 plus countries. We use a base who’s a well known mathematician we use his brand of machine learning and we cover the global economy. So you know, we really at the end of the day are just economic forecasters. You know, machine learning is my passion. and applying quantitative metrics to problem solving is also my passion. But you know, we also do a lot of research Rebellion Research often see it’s in our name, but no, we publish up to 20 pieces. As we know, our contributors will include the head of data science from Accenture, or a well known machine learning author like Peter Cook. Now or he’ll sit down General David Petraeus, or astronaut Scott Kelly is a perspective on technology. So, you know, our primary focus is, you know, really just staying on the cutting edge, whether it’s through our technology research, or through our development of AI, and real estate’s something that you know, really fascinates me. You know, I, I was lucky enough to marry into the Silverstein family who control built the World Trade Center. And so, you know, I’ve been slowly learning about the industry over the last five years. And it’s really a very fascinating industry that is highly quantitative as well.

J Darrin Gross 5:00

Yeah, no. The, you know, you mentioned the machine learning then in the dishwasher had thought of dishwasher with AI and that. Can you expand on that? Just say I mean that example where you how you apply or how you quantify machine learning there.

Alex Fleiss 5:21

Yeah. So as a career, yeah. So basic AI is just any machine that can follow an intelligent set of instructions. And so with a dishwasher, release cold water. Release soap. Release hot water spin, you know, release hot water, again, dry whatnot. It’s an intelligence cycle. And you can open the machine so that you can mix up the cycle depending on the ingredients. And so that’s, that’s all you need for AI. Ray Kurzweil, has spent a whole career making these big grandiose speeches and, you know, I feel like half the time of the speeches. He’s already just explaining to people how simple AI really is. Machine learning is where things get exciting. And machine learning is where, you know, the potential really becomes limitless. Machine learning is very simply the idea of, you know, a, you know, for in layman’s terms, think of it as a robotic brain, one where the system makes its own decision on how to proceed. And you know, it can be if you’ve seen the Dustin Hoffman, movie Rain Man, that gives you a good idea kind of in terms of a vantage point of how this intelligence operates. In that it’s very stupid in most ways, but it has certain applications like counting toothpicks or counting cards where it’s fantastic. Of course, if you move a few degrees, the applications abilities are zero. And so, think of it like an outboard motor for a boat, you know, that might work well in a small lake in Maine, but take that thing to a rough Bay or an ocean and it’s really worth worthless. And the application beyond that is, that’s probably not the best example because, you know, a, a small outboard motor will have some effectiveness in you know, in a bay, but in a combination but most machine learning, it really can’t function outside of its specific application. So you build a machine learning for facial recognition. It will take a lot of work to alter that so that it can work on something else. Be it smart document search, natural language processing whatnot. So you need you need to really work with the technology and treat it like a like a Dustin Hoffman’s characters type and that it’s very fragile. And you really have to spoon feed it as best as possible otherwise your results will fail very quickly very soon.

J Darrin Gross 7:53

Got it. So question for you the the the system In the data that these systems are utilizing, is that is that constantly changing? Are there are there? I mean, is there a, is the machine able to learn, based on the data that it’s receiving isn’t able to decide it needs additional data points? Or is that more of where the programming comes in?

Alex Fleiss 8:26

Well, it’s funny you mentioned that actually, because when we first started in, 2007, I think like a year later, we were giving it not nearly as much data as we’d give it today. We weren’t giving it data on currencies, but our machine learning was able to find data on currencies and use it. And then

J Darrin Gross 8:47

Oh really it was it was it was seeking it out and found it and used it all by itself.

Alex Fleiss 8:51

Yes, yeah. And so we so we started giving it you know, we saw that was using the Euro. And so we started giving it more and more currencies. So that was very interesting. And so, you know, we’re trying to give more data, but the data has to be concrete and consistent. And so like Twitter data, you know, we really can incorporate that. We like an industrial output is something that’s more consistent retail sales. You know, our our technology views the global universe, as you know, very, very, very interconnected when it comes to the economic universe that is rather. And so, you know, when it looks like Chile, for instance, it looks at all of the assets that make up Chile. And, you know, as those assets have greater and less effect over time, you’ll see that like, what’s Australia, from 1990 to 2010, Australia went from like 5% correlation to China to like 50%. So really over 20 years, Australia went from very little sales to China to basically becoming China’s leading trading You know, it’s so that that makes Australia’s you know, data inputs for what is going to predict the economy’s movement very different because you have a different economy 20 years later. The way Apple Computer 1994 is a very different entity, than Apple Computer 2014 sells different goods, different masses at different margins, remember different people. So the idea that it’s a constant asset is almost it’s not it’s extremely changing asset. And it might still be in technology, but a lot of the correlations ends there.

J Darrin Gross 10:41

So the machine is actually able to learn. I’m curious, is that based on the preset programming that was originally the real code that was written or is this machine currently writing its own code?

Alex Fleiss 10:54

No we can also no we that’s how it’s designed to work but you know, we can Also moderate the rate of learning so that it doesn’t learn too fast, because the systems are naturally aggressive. And so they will try to learn as fast as possible, and then become aggressive with what they think will happen. And so, you know, we have to moderate every part of it, we, you know, have to, you know, really kind of treated very, very carefully with, you know, kit gloves as well. And so, you know, it, you know, it’s a fantastic beast, but it really, it must be very monitored and very massaged. And so it’ll overexpose itself to industries, it’ll get to, it’ll decide that it can’t pick natural gas, it should never buy natural gas again, or, you know, it’ll look at its failures and try to learn, you know, learning from failures is a very big part, by the way. And in fact, the past performance is a very useful data set, or a machine learning system on top of data, you feed it itself. Its own performance, that’s great helps, and helps it learn. But if you don’t moderate the system, it will try and learn quicker than it should, and then its failures will rise more than it should. So we try to keep our machine learning, you know, kind of moderate, you know, so that it doesn’t, you know, moderately positive, of course, you know, think of it as you know, singles, National League style baseball as opposed to homeruns. And we’ll never want it to trade on its highest prediction, because high vision will have so much inherent risk in it, that the risk reward is too high to be buying for clients. As a business, really, it’s just, you know, whereas if you scale down the risk, and you scale up confidence ratio, confidence ratio is very important. So there might be a 60% chance of this asset. will go up. But how high is your confidence ratio that that will actually occur. And so the confidence ratio is very low. And we take that very much into account. So that’s a case where, you know, maybe the system likes global foods, but it’ll end up buying Nestle because all the other global food companies are too expensive or have other issues that make it too risky and the competence ratio is too low in terms of moderating the risk. Risk is very, very important.

J Darrin Gross 13:30

Yeah, no, on the different ratio. You mentioned, the confidence versus the I apologize I can’t remember the other ratio. You’re coming down there that are you constantly developing new I guess measures for the words the machine able to pick up and identify other measures that then correlate help to correlate or

Alex Fleiss 13:58

Yes. At the End of the day, we’re pattern seekers, you know, like, from the movie, The Imitation Game with some touring mathematician who helped solve the Nazi Enigma code, you know, so we’re really just trying all the time to find those patterns, those patterns that predict positive or negative performance. And, you know, so you know, the problem with this black swan event of COVID-19 is that we get a strong economy. And there was no reason to go defensive on the US economy except for panic that quarantining would kill everything. And so things change very quickly and it was a it was definitely a it was as Black Swan event, as will come. So it’s very difficult. If you look at all of the a lot of the best computerized firms, some of the results haven’t been pretty there. You know that that’s about the markets not always purely rational. This was this reminds me of 2011. In 2011 the market crashed maybe 35% people thought it was all over for like a month or two, and then the market just ran back up. 25 30% was nine years ago now. But, you know, and of course COVID-19 is, I think, a good more significant issue than the debt downgrade. But once COVID-19 is finished, you know, washing the economy not be what it was, I mean, of course, we’ll lose restaurants and whatnot. But no, it’s, it will see it for us, it’s hard to make predictions like this.

J Darrin Gross 15:33

Right, right. So when you’re designing a system or training, how many data points what’s what’s a minimum kind of a number of data points that you look for, in order to establish some rules?

Alex Fleiss 15:52

Well, for for trade to occur, we need to have you know, 50 to 150, positive factors and each factor relates to a cheap PE Ratio, strong balance sheet strong industry, maybe coppers, you know, flying and this is a copper company, maybe France’s economy is doing great. This is a French company. And so, you know, whether it’s the geography, or the industry or the specific country, you know, we’re looking for, you know, these positive patterns and we want as many positive correlations as possible. So this company correlates to a strong industry, a strong country, strong financials, you know, its pricing has been working, that’s something else, this system tends to sell stocks that don’t work, you know, and so if the markets humming along and one stock goes down for no reason and stays down for months, the system will try and figure out why it’s wrong. It will just move on, which makes for a very tax efficient index. So at the end of the day, you know, we had this AI index on 120 stocks. It’s been running for now 14 years in SP performance, but if you Generally creates a tax loss because it sells the losers within three to five months and holds on to the winners for multiple years. So we you know, I, I always say I challenge anyone to find a more tax efficient index than our index because of how not just how we design but the the nature of the system and that it sells its losers quickly and holds on to its winners for a long time. So that’s a nice benefit of it. .

J Darrin Gross 17:25

Got it thinking of real estate and potential applications? I’m wondering would, would it would it be more useful in commercial real estate or what do you think it would apply well, in residential real estate given the emotional you know, the intangible with a kind of the it’s going to be your home as opposed to a commercial real estate where it’s more about the the numbers.

Alex Fleiss 17:54

I think both are very tricky, to be honest. I don’t think actually AI works perfectly for real estate. I’ve been examining this now for quite a few years. So I actually I think, you know, there’s some trouble, I think it could work more in smaller localized situations, because AI performs best in a vacuum, if you will, when you when you can lessen the factors, it’s best. So maybe like in Manhattan, you could have a machine learning system that’s looking at all the different blocks, looking at the values looking at the sales, and it can spot like an apartment in one complex that’s trading 30% below its comparables, something like that, that’s where it could, you know, help or maybe for you know, like a localized basis. So you know, maybe a area of Phoenix. So you know, there are those potentials. And I think it will be applied. Like I said, just because it’s trippy doesn’t mean it won’t be done. It doesn’t mean someone won’t do a fantastic fantastically well. But I think both commercial and residential real estate, have significant avenues for people to develop them using machine learning for investing in real estate and maybe in time even finding the best broker, what broker will sell this type of partner the most. You know, when people pick brokers, it’s almost like you’re flying blind into the wind. I like this guy. My buddy likes this guy. My college roommates, wife plays poker with her sister, you know? And so okay, but how about what broker sells, you know, three 4000 square foot houses in this zip code for the highest price on average over the last two years? I’d be curious to know who that is. And that would be the broker I would want to hire. Even if it’s only by chance, well, maybe that broker by chance and got lots of rich people overpay for houses. And so there are these kind of these niche areas of real estate, where there’s quite a bit of a market, I think you can make money, whether it’s a broker search, and that’s something that compass is doing and actually, we put on our board. The lead machine learning engineer from Compass. You know Compass is a big dislocator in the real estate world, and we’re excited to have him join. You know, machine learning is still still very at the early stages when it comes to real estate. And so it’s very fascinating watching how it’s applied. And that is,

J Darrin Gross 20:19

What about beyond the the actual kind of the trading aspect where you’re determining value or, you know, one’s better than the other kind of thing, but, but actually in the operations, is there an opportunity for machine learning or AI? With respect? Whether it be reservations or

Alex Fleiss 20:41

Yes, yes, yes, you know, throughout the entire system. Machine learning is a really fantastic way to automate with slight intelligence, a lot of menial tasks. So from reservations, to insurance, And in the actual operations of real estate themselves in real estate measure companies, you know, they are going to be able to automate. I mean, you look at something like energy, and that’s one of the kind of most old school industries out there. Original Cowboys, you know, I’m sure we all saw There Will Be Blood. And you know, we get, you know, you got some, some heavy personalities and energy industry, definitely not a techie place, but energy because of the oil crash. The last six years has really embraced AI because there are a lot of simple parts to the business where you can apply AI save a lot of money. And so I think that you know, if energy and drilling can embrace AI, without a doubt, you know, real estate, the same, whether it’s drones for inspecting houses, you know, or investing in houses or for managing your properties, instead of, you know, having, let’s say a New York management company wants to buy a property in Philadelphia, but their main property guy that you know, he doesn’t want to be driving back and forth for hours. You know, in time, maybe they can have the outside of the property inspected by a drone, as an invention in the inside will be inspected by another drone. And so the idea to virtually inspect your property without having to be there, that could really change the game in terms of cost you don’t know. It’s all about creating intelligent ways to automate a lot of these menial tasks and replace, you know, people and then with that cost savings, you can expand or grow more and overall, more people will be hired. So I always I always caution people don’t think this is like a zero sum game where you lose a job here and you don’t get to there because that’s not the way that automation and innovation I’ve worked the last few thousand years. Over mankind’s history, innovation has consistently made jobs higher, paying safer, and more comfortable. And so jobs that were riskier, 100 200 years ago are less risky. Of course, there’s still risky jobs out there. But the amount of risk has decreased significantly and will continue to decrease significantly. That’s that’s one thing about, you know, technology, but not only does it make these apps actually retreats, more jobs and more jobs. When you look at something like a zoom video, which we’re using today, created by a Chinese immigrant who didn’t speak English, flunk thousands of people created billions of dollars of value. You know, I zoom has enough of a reason to be a capitalist, the whole socialist movement really sick and to me, frankly, because, you know, 40 50 years ago, we serve a country where whether you’re liberal or conservative, realize socialism was a losing cause. John F. Kennedy was a very, very, very, you know, hawkishly anti socialist communist person. So yeah, that, you know, that definitely very much upset me. But yes, as we’ve seen with technology and innovation over time, there are more jobs, more jobs that pay more, that are safer and more comfortable. So it’s really consistently been a win win win for the worker as technology unfolds.

J Darrin Gross 24:17

So speaking to that kind of the history and how it’s moved. How, at what speed Do you feel like AI and machine learning is upon us we’ll be moving as we go forward. I mean, there there is it, I forget, there was some sort of like Moore’s law about technology about how it you know, the the pace

Alex Fleiss 24:41

Yeah, I don’t I don’t. Yeah, I wouldn’t, quote any specific law with the progression of AI. I will say that we are very much at the dawn of the dawn. If this were the New World. I’d say it’s more like Cortez has burned his sails and he’s marching towards Tenochtitlan, but you know, we’re not at Jamestown yet Plymouth Rock. We’re still very, very, very early on singularity, we’re still years from significant cognitive, you know, intuition years from these are still very stupid machines. You know, they they need to be applied in very, very, very direct manners and you need to spoon feed them the data as much as possible, otherwise they will fail. So, yeah, we’re still very early on.

J Darrin Gross 25:28

One of the things it’s, it’s always been kind of the, I think the challenge for for myself anyway with technology is that I get all in with a particular brand or model or style and then thinking that that that’ll it’ll be built upon that or future versions will be built upon that only to be you know, only find out later that that one’s totally scrapped or in a you know, a new one and you’ve got to constantly be learning. Is there is there any kind of like a base level for This, this, I mean is or platform or I mean, I don’t know if I mean giving you the right question or if I’m speaking in a way that makes any sense. But is it does it continue to build upon itself? Or is it something can they can be totally dis unattached, that becomes the new focal point of of how this works that make any sense?

Alex Fleiss 26:23

No, no, it makes sense. Yeah, no, very much academic research is building upon itself. And, you know, as we move forward, moving forward faster, faster. And our progression is, is definitely increasing. And and unlike the previous AI bubbles of the 50s and 70s, this bubble has created a lot of profit. And so there’s a ton of AI companies that make a lot of money. And you have biggest tech companies completely embracing machine learning. The largest companies on the planet, Microsoft, Facebook, Amazon, Google, all They are the ones who are the leaders of machine learning. Machine learning has gone from bubbles to now leading the economy, they are buying the best engineers. And they are getting most of the data.

Data is the, data is the blood that makes the body move. And without blood flow. You have absolutely no sick no human being you have no animal. And so the more the better the bulk blood flow, the stronger you are, you know, I remember Steve Prefontaine, the famous middle distance runner from University of Oregon. Yeah, he was known for having one of the most efficient blood flows in the history of the planet, I think was the you know, the co founder of Nike who was his coach, I had partnered with Phil Knight said that, you know, he never ever wants

J Darrin Gross 27:32

Bowerman

Alex Fleiss 27:36

to If it’s Yeah, exactly, Yes, exactly. Nobody’s, you know, blood was as efficiently pumped as Prefontaine, which allowed him to be not just so good, but also he was a chunky guy, he was a large guy, you don’t typically have guys of that size, able to run that fast. And so with Google, Apple, Microsoft and Facebook, because they have so much more data, their machine learnings, you know, will will be the best on average because they will have the most data to work with. And the more data the system has more intelligent isn’t has to work with working make intelligent decisions. So it’s a race now it’s totally an AI race and AI engineers around very expensive.

J Darrin Gross 28:48

So you mentioned data in the collection of it. Is is the data that’s being collected Is it is it recognized up front is is a data point they want for a specific person purpose? Or do you find that a lot of times the data is being collected, so that it’s available for future analysis.

Alex Fleiss 29:10

I mean, Netflix is trying to collect as much data as they can on their customers and their customers actions, and they’re working on it and every different way they possibly can to better their systems. You know, they have teams, ie these companies and teams and machine learning engineers that are playing with their data, trying to make their companies more efficient. And so, you know, in terms of data, they want as much data as they can, wherever they can get it, your data is it is the new oil and you know, every every little bit of data has become valuable now and so because the you know, the Fang the Facebook, Apple, Netflix, Google have the most data. That’s why they’re gonna naturally be leaders in this industry.

J Darrin Gross 29:52

Yeah, no, it’s interesting as an insurance broker. If you like for years, we’ve been plugging data into the machine. But it’s only like recently that it’s really started to be used. And if that makes sense that you know it, I don’t know if it, I don’t know if that was understood going in or if that’s just kind of reality of the fact that you have now data scientists that are able to, you know, analyze the data and all all different views and come up with different correlations, and then the machine learning etc. That’s been able to utilize it and, and draw some correlations that can then be translated into economic success.

Anyway, hey, Alex, if we could like to shift gears here for a second. As I mentioned you before we started by day, I’m an insurance broker. And I work with clients to assess risk and try and manage it. And there’s a couple different strategies we consider when managing risk. The first is called can we avoid the risk for not able to avoid the risk we look to see if there’s a way to minimize the risks and then minimize or avoid it we look to transfer the risk and insurance is a transfer risk Transfer Tool. And as of late have been asking my guests and and if they can take a look at the world as they see it and their world and identify what they consider to be the BIGGEST RISK. And just for clarification, not necessarily looking for an insurance related answer. But if you’re willing, I’d like to ask you, Alex Fleiss what is the BIGGEST RISK?

Alex Fleiss 31:49

Well, you won’t forget my last name because my cousin is Heidi Fleiss, of 1990s fame and Dennis Hof’s widow, but I’d say the BIGGEST RISK is the unforeseen risks without a doubt, which obviously is manifest in the COVID-19 Black Swan event or the S&P debt downgrade of the US government in 2011. The unforeseen risks is always always the worst risk, but it’s very, it’s very hard to worry about risk, you know, because there’s, it’s almost a it’s really endless. I think about my, you know, my, my, my Papi and 911 some people told him Don’t take any insurance out for terrorist events, and then other people telling him to take more. And so but Terrorist are gonna blow up the building. That sounds ridiculous, but then of course, what six weeks later happened. And so, you know, we’re living in, you know, in times where the unexpected is expectedly happening now. Whether it’s America’s Cup, the best comeback of all time, the idea of winning seven Sailing races in a row. So unlikely I’m a sailor. And so I got to play the odds that are just almost impossible. But, you know, we’re getting to these kind of new. We have such a globally connected world, which obviously has nothing to do wiht sailing. But, you know, it presents more and more and more potential risks against the globally connected world. If a risk arises in India or China, it will travel faster than ever did before because we didn’t have that connection in the world that we have now.

J Darrin Gross 33:30

No, absolutely. We’re a little beyond bird flu. As far as a means for transmitting that kind of stuff, and like so just information in general, just the way we’re so well connected and stuff. It is kind of, it’s a fascinating and almost a scary reality of just how, you know vast is how, how easy, it all moves.

Alex Fleiss 33:53

So I like to think about Carl Sagan, the famous astronomer astrologist, who says, Don’t forget, you know, we’re just A bunch of little creatures on a forgotten rock in a nothing solar system and a ho hum galaxy. There’s nothing, there’s nothing special about it. Now ours our star alignments aren’t special planets aren’t special, nothing about anything about us is special. The fact that our one planet allows our, you know, specimen to live here and other specimens. Look here doesn’t make anything about us. So, and when you start realizing that there’s, you know, another hundred or 200 billion galaxies out there, you know, it’s very small, and the potential for risk gets at most.

J Darrin Gross 34:39

Right, right. No, that’s good. Good to remember. Alex, where can the listeners go if they’d like to learn more connect with you.

Alex Fleiss 34:49

Thank you. So if you want to learn more about rebellion research, go to our website Rebellionresearch.com you can open a brokerage account. Or you can go to our research and read about AI machine learning flying cars, covered hundreds of topics and hope you’ll become a reader and a subscriber.

J Darrin Gross 35:32

Alex, this has been great. I appreciate you taking the time to talk. And I’ve learned a lot and I hope we can do it again soon.

Alex Fleiss 35:42

If it’s not a pleasure is all mine. You have a great day.

J Darrin Gross 35:44

All right. For our listeners. If you liked this episode, don’t forget to like, share and subscribe. Remember, the more you know the more you grow. That’s all we’ve got this week. Until next time, thanks for listening to Commercial Real Estate Pro Networks. CREPN Radio.

Intro 36:02

You’re listening to CREPN Radio for influential commercial real estate professionals. For more information on this or any of our guests like us on Facebook CREPN Radio

People Relationship Key to Deals with Omar Khan – CREPN Radio #256

Omar Khan 0:00

Don’t be like most used car salesman and just come up big deal. Deal. Deal. Deal deal. Take a step back, give the guy a call just like that. Hey, man, what’s up? Yeah, and let’s assume you’re doing a deal. Right? And you know, this guy’s got money, but you know, you’re at the start of your relationship, right? And you. So just be like, Hey, I just wanted to call you what’s going on just a regular jet. And if the person brings up the bill, I know you’re working on this. You’d be like, yeah, it’s going fine. We’re doing good. Don’t worry about it. You didn’t do the hard pitch. People hate a hard pitch. Okay? let that person ask you, but why would that person ask you number one, you’re consistent and in the market number two, you are doing deals. Number three, you are professional. So when you are talking to that person, not about the deal, you want to raise money for it, but just generally, you’re presenting yourself the right way and you’re professional. You know what you’re talking about that person in and of themselves because they are a human being.

Intro 0:53

J Darrin Gross 1:12

Welcome to Commercial Real Estate Pro Networks CREPN Radio, Episode Number 256. Thanks for joining us. My name is J Darrin Gross. This is a podcast focused on commercial real estate investment and risk management strategies. Weekly we have conversations with commercial real estate investors and professionals who provide their experience and insight to help you grow your real estate portfolio. Let’s get into the show. today. My guest is Omar Khan. Omar is a Chartered Financial Analyst. He’s advised on over 3.7 billion of capital financing and merger and acquisition transactions. He’s the principal at boardwalk wealth you The syndicated multiple large deals across the US. And in just a minute, we’re going to speak with him about raising capital, working with institutional investors. And before we do that, though, and remind you, if you like the show where we’re doing here, commercial real estate, pro networks, CREPN Radio, there are a couple things you can do to help. You can like you can share, and subscribe. And as always, please consider leaving a comment. We’d love to hear from our listeners. And also wanna remind you if you’d like to see how handsome our guests are, be sure to check out our YouTube channel, and that is Commercial Real Estate Pro Network. With that, I want to welcome my guest, Omar, welcome to CREPN Radio.

Omar Khan 2:52

Hey, thank you, Darrin. It’s a pleasure being here.

J Darrin Gross 2:55

I’m really looking forward to the opportunity to talk with you today. Before we get started, though, if you could take just a minute and share with the listeners a little bit about your background,

Omar Khan 3:06

So look my background, it’s, you know, somewhat common to a lot of folks who went to like, you know, they stopped in business schools graduate from finance. And you do the whole thing, you know, if you’re in bigger cities, which I was, I graduated from University of Toronto, not the best time 2008 which is not the best time but you know, I never drowned got a go job, the Royal Bank of Canada portfolio management, and its that whole route. Either you go to portfolio management, or you go to Southside advisory, which is investment banking, equity research, or hedge funds. You know, you do that grind for a little while you either stay at one company, we kind of bounced around, depending on what your network is and what you want to do, you know, and I always wanted to do multiple things. And I was on the buy side, which is basically Hey, we’re actually going to be the people acquiring these deals and structuring these deals and also on the sell side, which is the ones people who are advising on these days, like investment bankers are and a lot of these other guys are so which I didn’t know At that time was somewhat unique. I mean, earlier on in the career A lot of people don’t make those switches. I did part of that was because I just wanted a broad based network of understanding what goes on as always very curious. And then I moved to the US A few years ago, age old reason for girl. My wife’s a physician she was right about done with her residency and everything and for her to move up to Canada, she would have to do the entire thing again. And for me in the kind of professions that I’ve been in my skill set is very cross transferable. So I it was easy for me to move just south of the border, and that’s how we started.

J Darrin Gross 4:33

Got it. And and currently you’re located is Dallas, whatever you’re located?

Omar Khan 4:37

Well, right now I commute between Dallas and again, again for girl same girl. My wife accepted a position and a small town in Oklahoma, Home of Blake Shelton, by the way, Ada, Oklahoma, if you listen to country music. I don’t but apparently he’s big deal. And that’s a nice thing so I can move back and forth and bless with my business. Either on the phone or on the internet, you know, you’ve got to take care of stuff and on a plane. So frankly, if you’ve got a phone, Internet, and access to an airport, doesn’t really matter where you are,

J Darrin Gross 5:11

Yeah, you’re in business, right? It is crazy to think just how small the world has gotten. And, you know, just the ability to literally kind of Jetsons, you know, have these video conversations that were just years ago, kind of, uh, you know, somebody thought about it, but I don’t remember

Omar Khan 5:30

Oh, you’d already suffer. You’d be very surprised. I was talking to a friend of mine a few weeks ago. My dad is an engineer, and he was doing a lot of telecommunication stuff back back in the day like late 80s, early 80s, all the way the 90s and Siemens had come out with a broadband link back in the day, so you could video chat. This was like they were prototyping this out and testing this out. And I still remember because I grew up in Pakistan, and they were prototyping it out here. So I think it was 91 or 90 where you were in one city. You know, a bunch of these engineers got together they produced video chat and with their delay, a guy in the next city will reply back with a video. And people’s minds were blown. Oh my god the future. This was like what late 80s, early 90s. Right? And now look, here we are we this is a consumer technology.

J Darrin Gross 6:15

And I it’s funny because I think for me for the the transfer from the industrial or the commercial to the like said the consumer use is really what’s really kind of blows my mind where it is. Now it is ubiquitous. I mean, it’s whether you can do it on your phone, you don’t even need, you know, any special equipment, just push the button and there’s grandma or whoever you want to talk to. So

Omar Khan 6:35

yeah, and what’s funny is if you read a lot of sci fi, like asthma and stuff, we are now becoming like androids. I mean, like the phone is an extension of her body. Right? Right. And without a phone you feel kind of naked a lot of times

J Darrin Gross 6:47

Sad but true. But yeah, it’s you know, and and actually, is we kind of going through the the COVID-19 thing right now it’s almost even more of a tool to keep from being isolated. You know, I mean, there’s Yeah, at least stay connected there. So

Omar Khan 7:03

I don’t even know. I mean, I think a lot of people were getting divorced if they didn’t have a phone, right?

J Darrin Gross 7:09

That’s probably true. Well, hey, enough about the technology stuff there. What I’d really like to talk with you about today is given your experience and your professional experience and your your work as a syndicator is about raising capital. You know, I think there’s, there’s, well, beginning like 2010 12 there’s a lot of people that started syndicating and is that the their experience and success was reported and people recognize it more and more people got in and, and pretty soon everybody’s syndicating and everybody’s trying to raise money. And what I want to recognize now is that we have kind of the markets matured, currently we’re in this COVID-19 see what shakes out. But I want to talk with you about how to distinguish yourself and, you know, raising money from like institutions and professional investors, and how to set yourself apart and what you can you know, speak to that based on having had the experience of being the one that was approached and now I presume you’re here in the the opposite side of the table looking for capital.

Omar Khan 8:33

Yeah, look part. The two most easiest ways of doing this out. Either you’re extremely tight and have a track record operationally or you are just a fantastic marketer, really, but if you’re a marketer, a lot of times institutional capital doesn’t really chase you as much. I mean, you have to do a different type of marketing, right? These people don’t necessarily care about podcasts or I don’t know if he went to some conference on the weekend or something like that. They just want to fend for themselves. Because the reason is they’re already sophisticated, they can already look like for instance, I can look at a p&l. And if it’s in one of my markets within one of my sub markets, I can easily poke holes in it within five seconds and know Okay, all right, here are the big questions. Now, I’m not saying it’s a hole in the sense that it’s wrong. It’s a hole in the center. Why is this not answer? Right? So you need to be really sophisticated, understand your financials inside out, and your operations inside out. So a lot of folks who were talking about saying, you know, in the last few years, they’ve started syndicating a lot of these are part timers. And what happens is, you know, bears make money. bulls make money, pigs make money, but hogs get slaughtered.

J Darrin Gross 9:40

Right?

Omar Khan 9:41

So a lot of these guys that were high on the hog who were below maybe working in IP or accounting or finance or whatever, Doctor what would you name a profession, right engineer, whatever it is, and they were doing this part time, they can’t raise institutional capital, because those people nobody’s gonna give you a stroke. You were $10 million check five times a year, and kind of half expect you kinda have passively do it in the weekends, right? So number one, you need to have a track record of either professionalism, or deep subject matter expertise, right? Because these are already sophisticated pools of capital who already have experience. And by the way, you’ve got to realize, you, you might be the owner, like, for instance, for you, this might be a big deal, right? You’re, you’re talking to this guy, ten million dollar check. And you might do it once or twice here. This guy has ten of these meetings before lunch every day, right? So for you, it’s a one off occurrence for him. It’s an everyday thing, right? So you’re just a number. So what you really need to do is stand out for the right reason and what you’ve got. You just need to basically for the lack of a better word, understand operations just doesn’t mean well, you can kind of haphazardly talk about it to me to show your benchmark, Hey, who are the people on your team? What is the backup behind it organizationally? What is your structure? Then you’ve got to show them okay, this is how our reporting is. A lot of folks can have everything, but they struggle on the reporting side of things because these people have very onerous reporting requirements. Right?

J Darrin Gross 11:00

Right.

Omar Khan 11:00

And you’re never going to make headway, right? So you really need to be holistically combined, you need to have a holistic set of experiences. And if you don’t have that, the best bet is for you go get that first, get a track record, start the ball moving, and then start looking at bigger pools of capital.

J Darrin Gross 11:18

So you mentioned I mean, obviously, all the reporting in that. And just the sheer size, I mean,

Omar Khan 11:25

Just to let you know, by the way, the reporting and all you would think you understand that’s not a real estate related thing, right? It’s not like you could be a fantastic operator and still have really bad accounting. Right, right. Right, right. So if you understand these are organizational things, like how strong and robust is your organization? These are qualitative things that they’re assessing, as opposed to just Hey, do you have a good deal or not? Because you know, all this, this trope about Hey, find a good deal and the money will follow right? Yeah, that shit doesn’t , isn’t really true, man. I mean, I like these one of the ones some guru ads at some conference to saying this as like, Okay, you got $80 million, buddy. I can find you 100 million dollars in profit. To show up at $80 million cash tomorrow, because if you can’t, I mean, then you got to start, you know, let’s talk more walkie Right,

J Darrin Gross 12:08

Right, right. Yeah. No, and given that I think just the sheer size of the deal or not the deal, but the pool of capital that the professionals are looking to put to, to work, whereas the the smaller operator is, you know, looking for, you know, 50 hundred or, you know, a couple hundred thousand dollars type thing. And just the sheer volume, I mean, and how many, how many opportunities they look at on a daily basis. How you said 10 before lunch, how many do you think they look at in a in a year and how many

Omar Khan 12:44

Thousands of them. Thousands and thousands but they have to because you have to realize they the entire job of them and by the way, they are capital providers, but I raise my own money and I’ve run my own projects. I say no to 99% of the opportunity to come across my paper. And I know I’m not the only one who does that, because there are countless other operators that I respect and I, you know, I get their opinion lots of times on things, they do the exact same thing you have in any profession. If you are wanting to succeed or you’re in a position to succeed or you put yourself in a position to succeed, you have to have the ability to continuously scale. You know?

J Darrin Gross 13:20

Right.

Omar Khan 13:20

That’s just the way it is.

J Darrin Gross 13:22

Definitely. So on on the obviously the the team members you talked about and the reporting. Can you go into any kind of like the the depth of reporting, I mean, obviously, you mentioned like the holes and financials I’m assuming that somebody like you that’s, you know, worked on both sides and the experience what are some glaring tells that you would you commonly see when you when a deal is presented to you,

Unknown Speaker 13:51

Oh, number one, everybody says, you know, rents are $200 below market, and this is below sales, like they’re the price at which they’re requiring is below sales comps. You’re like, Yeah, but you pick the comps, right? The comps, hell dude, I’ll pick comps and everything I do is gonna look like the greatest deal in the world. So number one, you know, but again, this comes down to product knowledge, market knowledge, right? So you have to be a product, product expert and a market expert. So for instance, if I’m in Atlanta as an example, and I’m looking at a place like say fear it will Peachtree City in the south or say Marietta Alpharetta coming on the north. I’m not gonna compare that to College Park, which has just different demographics completely right. Because Yeah, I compare that I buy a deal in College Park and on paper, I was like, Look, there’s $800 of rent difference in sales costs are so different. And you’ve got to realize, look, people a lot of newbies say, Oh, well, I’m just taking in from the broker. Well, legation to you, I mean, you’re not the one thing the broker, the broker. Again, by the way, you cannot bring blame the broker because the broker is a salesperson, right? They have What is in their best interest because they do all fiduciary duty, right? Or fiduciary duty to yourself, to your family and to your investors. That’s why, you know, you got to start walking the talk, you can’t just take easy ways out, you got to, you know, you got to put in the hard yards, it’s like any other, it’s like any professional, you’ve got to put in the hard yards, you’ve got to do your research. And if you don’t do that, you’re going to be taken for a ride.

J Darrin Gross 15:25

Right? Now when you’re looking into a new market. Do you physically go there and walk in? I mean, I the brokers and

Omar Khan 15:34

You have to look let me tell you this, a lot of guys for some weird reason still have it in their head that I’m just going to go direct to seller, I just want to bypass the broker. Yeah, let me explain that to you that that that works. If you’re buying a $50,000 house in the middle of nowhere and Podunk Mississippi. That doesn’t really work if you’re trying to buy a $30 million asset in Jacksonville, Atlanta. People don’t have time for this kind of stuff. You know, people tell me Oh, I’m gonna do skip tracing them. Yeah. reboot is like the gambling thing. Just think about it logically, do you think a guy or girl that owns a $30 million piece of real estate? They are that dumb or that unsophisticated and they own multiples of these properties, but it’s not just one of them, right? They own a few of these, right? They’re that dumb. They’re just gonna randomly call and you’re gonna give you a rags to riches story, and they’re gonna tell you Oh, my God, you know, just to help you get yourself up from the bootstraps you go, man,

J Darrin Gross 16:28

Right. No. I’ve been waiting for your call. Oh, my God, you know,

Omar Khan 16:31

All my life. I’ve been waiting. Yeah, you know, your $30 million. I really wanted to burn it into the ground. The only reason why work for it was because I wanted to burn it. Right? That stuff doesn’t really work. You have specialists called brokers. Okay. There’s a reason why these guys get paid so much money and it’s not just because they’ll wear fancy suits are nice guys, because they do our work in nice offices. Look, I can’t it’s like any high pressured, professional. It’s like being a physician, insurance salesperson. Anything all these people who put in the hard years they’ve made relationships over 5, 10, 20, 30 years. So when somebody is even thinking about selling, they haven’t decided how they’re thinking about selling. They pick up the guy called, hey, John, what do you think about this? I’m telling you, even right now, I am a seller A lot of times, and we’ll say the top because every big market only has stopped three or four big brokers. It’s like, it’s like any other business in the world, right? You know, insurance sales, kind of same thing. A lot of times I pick up the phone and be like, you know, I’m thinking about this. This mark, I don’t if I don’t have abandoned the property on the market, right? And thinking about the sub market, what’s your take on the sub market, right? And they’ll be like, Look, you know, rents are going up, but there’s lots of delinquencies, and then immediately the last or what property did you have in mind, right? So you got to be a little coy depending on the situation, but you have to realize they are providing they are in the business of developing relationships so they are providing you information. But you also got to step up to the plate and do your part, right. You can’t be a tire kicker.

J Darrin Gross 18:00

Right, right. Hey, Got it. Got to be ready to respond.

Unknown Speaker 18:05

Yeah, but they want to do this? By the way, just let’s be very clear. They want to do this because a lot of this is this relationship away from them look, think about it. Even if somebody takes three years for sales to happen. This is not like buying $100 pair of Nikes. This is like a $30 million sale. Right? And one guy who does a $30 million sale, I bet you he’s gonna do two or three more sales. Is this just not gonna be a one and done right. So the sales process is very long. But you make like 500 grand a sale. Right?

J Darrin Gross 18:35

That’s worth a couple year courtship there to finish liner. So,no, that’s good.

Omar Khan 18:43

But it’s the same with this institutional people you said you know, a lot of times the first ones they’ll pass again, unless you know, you’ve really good relationship. But again, what people are assessing to see is Hey, are you around? Do you do a volume of deals? If you don’t do a volume of deals, you better have a pretty damn good reason why you’re not doing right. Right. And are you consistent player in the market? Are you one and done? Are you flash in the pan? Or are you out there? because trust me, these exact same people also talk to the same people that you want to talk to they talk to the brokers, they talk to the lenders, in fact, a lot of times, if I have to go raise pref equity, right from some of these guys, they’ll talk to the lender be like, hey, you’ve given this guy three loans. What do you think about him as an operator, right? And a lot of those guys off the books will be like, yeah, I really like this guy. He’s been paying on time, but otherwise, too, when we talk to him, you know, he’s, he’s got it going on. We’re saying, yeah, that guy got a good deal. I don’t really think.

J Darrin Gross 19:37

Right, right.

Omar Khan 19:39

And it’s a small world, by the way, just to be very honest with you. It’s a very small world these days.

J Darrin Gross 19:43

I mean, absolutely. The word spreads. If you’re, you know, if you’re well capitalized, and you’re a good operator, and you do what you say you’re going to do and, and are closer. I mean, we’ve talked to many people about that once you know the The first deal ever I came everything Michael Blanc might talk about that. But just the, you know, once you have a deal than other others tend to present themselves. But again, in these bigger properties and larger capital deals, I mean that the level of your sophistication will speak volumes to the opportunity and whether or not others are willing to back your work today. Yeah. Yeah.

Omar Khan 20:26

And by the way, even if you don’t have any, let’s assume you’re new to the market, but you do have a level of sophistication you understand these things. It’s like industry lingo, right? You’re speaking the same language at the same pace at the same intensity and, you know, like, the top three ways somebody is gonna screw you in a day like this. Right? And you already be like, and somebody’s going to be like, Look, man, come on. Just look and be like, what, come on, man, these demographics are just shit. Right? Right, right. The guy trust me, people don’t no matter what you might think professionals don’t get offended because there is realize it’s a game. And part of playing the game means that you have to keep assessing your Counterparty right it’s like kids you know, you got you’ve got to Yeah, I’ve said I’ve got a kid and another one on the way every single day. My kid is two years old. And he keeps pushing the boundaries. He keeps pushing the boundaries. He wants to keep knowing where is the boundary where my dad will start screaming

J Darrin Gross 21:21

Yep,and it doesn’t stop.

Omar Khan 21:25

Oh it doesn’t stop. Okay, well, that doesn’t help.

J Darrin Gross 21:28

Well, I think what’s funny though, is in in the kid example is that while the boundaries they become known, then there’s a new presentation that you hadn’t anticipated and I just

Omar Khan 21:40

Yeah, I’m learning that the hard way.

J Darrin Gross 21:42

In just that situation I I’ve mastered yesterday. That’s that’s where my point of reference is. And my wife’s always thinking like, you know, weeks, months, years down the road kind of thing. And I just I’m always one of those kind of caught off guard. But but i just i perfected that you know, but even in this in this Real Estate thing, though, you’re talking about you know, and I think what I what I’m hearing from you is more about just the consistency about staying in, you know, whether it be the the brokers staying in touch with them. And, you know, like that creating that relationship, whether it takes three years to do a deal.I’m assuming that the same with a capital.

Omar Khan 21:59

It’s the exact same thing. It’s a continuous Look, a lot of people think it’s really funny. Like, sometimes I joke, I was like, I’m not in the real estate business. I’m in the marketing business, right? Where I just have to keep staying in touch with people. And you know what’s really funny? A lot of times the best results I’ve had are with people. For the first five calls, I felt like, Oh my god, I’m Jesus, right? Yeah, right, right. And suddenly, maybe the timing is right, maybe the guy’s having a better day. Maybe I’m having a better day and I misread the situation earlier, bam, it works the system, but you have to get to the sixth call, right? If you drop out of a third call, or the second or fourth call man doesn’t really work.

J Darrin Gross 23:00

That’s funny, I know in insurance, I think the you know, it’s a free 100% of the salespeople will make the first call, and 50% will make the second call and it drops off dramatically, but the buying starts, you know, way out, you know, 12 plus calls kind of thing. So it’s, I

Omar Khan 23:18

Look a lot of times, it’s disheartening. I’m not gonna be honest. I mean, nobody likes to get like, you know, might not make any progress, but but that’s just the way it is. I mean, what are you gonna do about it, you can complain about it, or you can just go do your job and consider your job. What are you gonna do?

J Darrin Gross 23:32

Right, right. So, let me ask you with the, we’ve talked about kind of the consistency and the presentation. What about just the the security of the opportunity? at a professional level, I think a lot of times, you know, newer investors are they’re attracted to the the high returns or or some sort of You know, high cap rates or or can you speak at all to, to just the the opportunity, not just the numbers, but just just the security, the nature of what they’re looking for? In a return?

Omar Khan 24:16

Look, I mean, the way I look at it is thank God, we live in a free enough country, where we’re all allowed to do really dumb stuff. That’s the way I look at it, thank God, because who would want to live in a country where I can’t even go do dumb things? Right? So all I’m trying to say is if somebody wants to go do dumb things with their money, it’s their hard earned money. And it’s their God given right. Right? Right. The way I look at it as like, if you’re, if you’re smart enough to work, you know, in any profession, you know, if you save $100,000 It’s not easy to save $100,000 right for most professions, right? Which obviously means you you’ve at least understood the concept of delayed gratification to certain degree. Now, if you’re going to take that whatever, 2, 3, 6 months, one years, two years worth of savings, and you’re going to go to some scammy Real Estate conference. And you’re going to have a guy with Gorky, when the shiny suit, value investment deal in five seconds of him being on stage and you’re that desperate lose your money. While this is going to be a really good life lesson for you, right? So I tell people look, if you’re going to be that gullible This is just God’s way of telling you are a dumb ass. Right? And you don’t let this be a life lesson because we all know you you already know the pain it takes to save money over a period of time, the sacrifices you have to make. So take a step back the deal of the century comes back every two every two weeks. And look we’re all gonna make mistakes we’re all trying to do is reduce the level of intentional or avoidable mistakes we can make. We’re all gonna make mistakes, right? So don’t be gullible. Anytime you feel like you want to take you know, you want to take a decision sleep on it, you know that old saying sleep on a thing and you get up in like one or two days, whatever. And, you know, then you decide whether you’re a pet, don’t let people talk to you about deal, but hey, if you’re that gullible, then I got a bridge to sell you Right.

J Darrin Gross 26:04

You know, oceanfront property in Arizona.

Omar Khan 26:06

Yeah, oceanfront property in Arizona. I love that.

J Darrin Gross 26:12

You know, and what’s funny is and funny, sad, but I think that, you know,

Omar Khan 26:17

No it is sad. Look, don’t worry, I’m not I’m not trying to make fun of somebody here. I’m trying to say, look, take a step back.

J Darrin Gross 26:23

Oh, but but I think that across all markets, whether it be the stock market or real estate, or, you know, what have you. The, the big wins are what really gets people’s attention. And, and the, the, the work that was put in before is rarely ever recognized or understood or even considered,

Omar Khan 26:48

It’s the ten failures before nobody looks right. It’s the one when everybody just goes in like this. It looks at

J Darrin Gross 26:53

Right and in just that, it just it captures the imagination and You know, people are not happy with their current circumstances and just thinking man, if I just said that one lottery ticket, you know if I could just get that one thing and Oh, he’s offered a

Omar Khan 27:09

Hey Darrin, I think about it all the time doesn’t mean I mean, look, I mean, I’m gonna be honest with you, I’d love to have a private jet.

J Darrin Gross 27:15

Right.

Omar Khan 27:15

Doesn’t mean I go to, you know, I spend all of my income on lottery tickets, right? My point is, is because this is such a concept lately, which to be honest with you, man, I just don’t understand these days. I was like, Look, what what difference does it make that you want something like, I don’t even understand what difference it makes you want something? I mean, I want I want to be like Michael Jordan. Well, I’m not jumping seven feet into the air. I mean, nobody’s signing me up for a professional basketball contract. So just because you want something doesn’t mean you should get it right. Right or, or the other way around. My point is, wants and needs are different. And it’s very shocking to me these days that people tend to confuse the two.

J Darrin Gross 27:52

Right? Right. So when you’re considering like from From a an institutional or more of a professional capital provider, is there. Is there a margin? I mean, is there a safety that they’re looking at? Or is there an asset class? I mean, I’m assuming that you know, a D property or you know, something like that’s not what they’re going to mean or B’s and I mean, I’m assuming A’s obviously, but are bees are you able to raise money from from institutions?

Omar Khan 28:31

It totally depends on the person or people or institution raising money from maybe there isn’t there there are institutions I can assure you, that just wanted to be properties, but they will by volume. Right? So my point is this is we’re doing your research, developing the relationships upfront and over a longer period of time plays in because then you can truly understand what the person is looking for because as an example, if somebody is looking to invest in safe industrial assets are office assets, and you keep pestering them and multifamily assets right

J Darrin Gross 28:33

You’re not listening.

Omar Khan 28:35

I mean, that’s, that’s a short way of, you know, get going to spam directly. Right, right. But cultivating the relationships, taking, taking a step back and actually understanding, right? Because think about it yourself. You probably, I mean, I don’t, but you probably don’t like getting sold, things that you don’t even want to buy, right? I mean, like, dude, just don’t do that. Right? Yeah. So it’s the same with these people. Because you’ve got to realize just because somebody works in an office wears a fancy suit and drives a Porsche doesn’t mean the person is not a human being. We’re all human beings at the end of the day, a lot. A lot of these I can assure I can tell you from personal experience, the first step is not the money, you got to talk more money right in the end, man. Okay, if you start with the money, pretty much none of your relationships are gonna go anywhere. Okay? You got to understand what people are looking for. You’ve got to present yourself in the best possible light, you’ve got to be approachable and nimble and, you know, easy to talk to, but professional. Take that time, develop that relationship. In fact, don’t be like most used car salesmen and just come up with Deal, deal, deal deal deal, take a step back, give the guy a call just like that. Hey, man, what’s up? Yeah, and let’s assume you’re doing a deal. Right? And you know, this guy’s got money, but you know, you’re at the start of your relationship, right? And you. So just be like, Hey, I just wanted to call you what’s going on just a regular chit chat. And if the person brings up the bill, I know you’re working on this. You’d be like, yeah, it’s going fine. We’re doing good. Don’t worry about it. You didn’t do the hard pitch. People hate a hard pitch. Okay, let that person asked you, but why would that person ask you number one, you’re consistent and in the market. Number two, you are doing deals. Number three, you’re professional. So when you are talking to that person, not about the deal, you want to raise money for it, but just generally, you’re presenting yourself the right way and you’re professional. You know what you’re talking about that person in and of themselves, because they are a human being will ask you over a period of time. Hey, Darrin, tell me about that deal. Or why don’t why don’t you ask us about the deal. Be like oh, well, you know, we were so busy with our other deals. Raising money that I just you know, I didn’t want to bother you. I know you guys are swamped all the time. Don’t worry about it. But you know, next time around you want me to tell you yes or no answer. But yeah, I want you to be okay. I’ll keep that in mind. But what’s going on? What are you doing for the weekend? Right?

J Darrin Gross 28:41

Right. Right.

Omar Khan 31:16

It’s this cannot be the focal point. But look, trust me, when you get to that stage where money is going to change hands when they are going to ask you a question. Trust me, they will ask you the questions. You have to answer those questions. But

J Darrin Gross 31:31

Right, but if you don’t have the relationship, you’re not gonna get to that question in the first place. So that’s

Omar Khan 31:35

Yeah, but you understand you or you still get that question, but you don’t have to present like, five paragraphs worth of answers. Right? Right, right. You can say two words and bam, you’re on to the next topic. But the reason for that is because you’ve established a level of credibility over multiple months and years, which has led to them then when you say those two words, whatever those two words are, right, right. But you know, like we talked about 10 failures and then one success. That is the one success but the failures, failures are the conversations you’ve had leading up to.

J Darrin Gross 32:07

Right now I and I get it. It’s, it’s, I think too many people when they start off and I’ve certainly been guilty of it in, in my career over the beginning is when you’re hungry and you’re desperate, you’re desperate and it shows and it doesn’t. It doesn’t translate well to like, gee, let me let me let me invest with you.

Omar Khan 32:26

Yeah, because look, the more desperate you are, even though you’ve gotten better, you might have a better deal. It’s not attractive. It’s repelling. Right? So you gotta look it’s a game man. I’d be I’ll be honest, it’s a game. You’ve got to play the game. There are the rules of the game. Now you don’t have to like the game. But that’s the game. Yeah, yeah. You know, you don’t have to like I mean, I don’t have like everything I do.

J Darrin Gross 32:48

And that’s, that’s true. I gotta remind myself of that. Sometimes. It’s it’s a game. So

Omar Khan 32:54

Hey man, every day I need to remind myself Yeah, sometimes I get off a call and I want to break a frickin pencil or something right? Right, right,

J Darrin Gross 33:00

right, right, right. Hey, Omar, if we could, I’d like to shift gears here for a second. Yeah. Before we started, I mentioned you by day, I’m an insurance broker. And as such, we do risk management with our clients. And there’s a couple of different strategies we consider. The first is we we asked, can we avoid the risk? When that’s not an option, we look and see if there’s a way to minimize the risk. And if that’s not an option, then we look to see if there’s a way we can transfer the risk. And that’s, that’s what an insurance policy is. And as such, I’ve been asking my guests, if they could take a look at, you know, what they’re doing with real estate, and if they can identify what they consider to be the BIGGEST RISK? And, again, just for clarification, I’m not necessarily looking for an insurance related answer. You know, risk is everywhere. So with that, I’d like to ask you Omar Khan, what is the BIGGEST RISK?

Omar Khan 34:04

Not having enough liquidity. You could have the greatest asset in the world, if you don’t have enough liquidity, none of it, you can survive. A lot of times when you’re in trouble. All you need to do is run down the clock and survive. And liquidity offers you that, that comfort, or another word, a lot of times, you know, we are humans, when we’re put under undue stress, we tend to do things that we would not do when we weren’t under stress. So the liquidity is the cushion that allows you to not mentally put yourself under stress or be backed into a corner for no reason. So even during trying times, you can, for lack of a better word, continue to do business as usual while you’re scrambling to do everything else, right. And you’re not foreclosed upon, nobody hates you, you’re not dying.

J Darrin Gross 34:53

No, I think there’s definitely a liquidity test here. And the making with you know the current situation,

Omar Khan 35:01

Oh geez, I really hope it is I’m sick and tired of being safe and conservative. And oh my god, I mean it better paid off now.

J Darrin Gross 35:08

Yeah, I think your your prayers or whatever, but I think that they’re they’re gonna be a lot

Omar Khan 35:14

My prayers were not for the COVID. My prayers were not for the pandemic to happen.

J Darrin Gross 35:20

Well, we appreciate that. But no it’s it is interesting and you know I think that having you know gotten myself into some deals and stuff and recognize just that you know having capital and and being well capitalized is the difference between surviving and and you know winning surviving winning versus losing big and losing all of your your investment not just your your initial investment but any of the opportunity on the upside there too so

Omar Khan 35:55

And the way I think about it is look a lot of things in life for as long as you live to fight another day That’s a win.

J Darrin Gross 36:02

That’s good. Hey Omar, where can listeners go if they’d like to learn more, or connect?

Omar Khan 36:10

So you can go to our website boardwalk wealth Bo and be as involved boardwalk wealth dot com. Right on the front page. If you scroll like the thing, the second, just like smidgen down, you’ll see a box on the on the right side where you can enter your name, your email address and how you find out about us. And then you’ll get an email you click on the Verify button and bam, you’re in into our distribution list. And you can hear my profound thoughts and get the inside scoop on our deals.

J Darrin Gross 36:38

All right. Well, Omar, this has been great. I can’t say thanks enough for taking the time to talk. I’ve enjoyed it learned a lot and hope we can do it again soon.

Omar Khan 36:49

That was my pleasure. Thank you for having me.

J Darrin Gross 36:50

Intro 37:08

You’re listening to CREPN Radio for influential commercial real estate professionals. For more information on this or any of our guests like us on Facebook CREPN Radio

People, Property & Capital; Raising Money for Multifamily Real Estate with Tenny Tolofari – CREPN #255

Tenny Tolofari 0:00

This guy that says they have big amount of equity to bring to the deal so because of that with the one the boys chasing everybody else that had maybe $50,000 on $100,000 which is a big mistake because if one of those guys said says, you know, at this point is a good time you’re completely screwed, right? So, um, we went ahead and you know started depending on one or two big decoder, big dogs and they disappointed us and at that point you and I said, Okay, let’s go ahead and start chasing the guys that have 1000 or $50,000 to invest in since the concept and every information that would show was new to them. A lot of them do find it find find it very appealing to put them on Institute. Welcome to

Announcer 0:47

CREPN Radio for influential commercial real estate professionals who work with investors, buyers and sellers of commercial real estate coast to coast whether you’re an investor broker lender Property Manager, attorney or accountant We are here to learn from the experts.

Darrin Gross 1:06

Welcome to Commercial Real Estate Pro Networks, c r e pn radio, Episode Number 255. Thanks for joining us. My name is J. Darrin Gross. This is the podcast focused on commercial real estate investment and risk management strategies. Weekly we have conversations with commercial real estate investors and professionals who provide their experience and insight to help you grow your real estate portfolio. Let’s get into the show. today.

My guest is Tenny Tolofari. Tenny is a co founder of Exide Capital Investment LLC, a multifamily real estate investment focused company based in Washington DC. And in just a minute we’re going to speak with Tenny about the myth of finding, find the deal and the money will come and before We get into that. Want to remind you, if you like the show CREPN Radio, there are a couple things you can do. And they’d be greatly appreciated.

One you can like, share and subscribe. And the other thing is you can always leave a comment. We love to hear from our listeners. Also, if you’d like to see how handsome our guests are, be sure to check out our YouTube channel. And that is commercial real estate pro network. And also please consider subscribing to that too. That’s funny how those numbers work. The more more you have, the more attention you get. So appreciate your help with them. With that, I want to welcome my guest Kenny, welcome to CREPN Radio.

Tenny Tolofari 2:43

Thank you very much Darrin. Thank you for having me. Ah, what a wonderful time to be on the show right now. Appreciate it..

Darrin Gross 2:51

I’m glad. Glad to have you and looking forward to our talk today. Absolutely. Before we get started, if you could take just a minute and share listeners a little little bit about your background.

Tenny Tolofari 3:03

Sounds good, I just think.

But um, yeah, I came to the United States in 2010 10. Um, my goal coming to the United States was to get my master’s degree. I had a bachelor’s degree in Electrical electronics engineering back in Nigeria. I was born and raised in Nigeria, to the family of seven kids. I’m a twin actually, with a sister back there. So I came in 2010. To get my master’s degree amongst all countries, I decided to come to the state because this is the land of opportunity. So I went to school I graduated from Boise State in 2012. And I, I go there with my my sense of cybersecurity instead of doing cybersecurity for companies like Boeing and presently have a global consult on to Deloitte and in 2016, I thought, you know, I was actually my American dream, I brought my mom here to visit, but my baby stay here as well to come and get my sister as well. But in 2016, at one point, I said, You know what, I don’t think I want to continue to do this rat race.

And that was because I had an injury. I just said, You know what, I think I need to do something differently. And I got approached by a financial services company. And I started learning about finance. And that’s how I got into financial services. So while I do my cyber security consulting, I have a financial services business background as well. So since 2016, I’ve been doing that. And then in 2019, while I was doing a presentation at at one of my clients office, I met my partner’s wife, which is Leslie. So my wife will give me audience session come to their home and Discuss to them about financial services. And I met this great guy, we had a wonderful conversation. I thought we had a conversation for a while about what I came to do. From there moved on to start talking about personal development, books, your reading, and then we just found a connection. And then from there, we said indoor, let’s meet up and start talking about the future.

So we started meeting up to have a conversation about money instead of playing the Robert Kiyosaki board game. And we started learning about money and one point to say no one, I think it makes sense to just venture into business together and that business I wanted to venture into his real estate. Business already had a lot of background in real estate before. Before I met him. Me I always had this philosophy by Robert Kiyosaki that says, you know, you create a business and you invest, you invested money in real estate. I’ve always had that philosophy and when I met Leslie, I was like, I know what this is the time to implement. So, Allison in 2019 opened up a company called excite capital, which is a real estate investment company focused on multifamily. Like you had mentioned in the introduction. So since then, you know, it’s been an amazing experience. I’ve met a lot of people. And now you know, I’m here talking to DarrIn. So that’s a little background about me. I don’t have to go to details more, but that’s it.

Darrin Gross 6:26

I appreciate you sharing that. So you and Leslie are partners and Exite Capital, correct?

Tenny Tolofari 6:32

Correct.

Darrin Gross 6:33

All right. And so tell me more. What is Exite Capital? What are you guys it is a basically an investment vehicle for multifamily. Are you guys principals, are you limited partners, how are you participating?

Tenny Tolofari 6:49

So the intention, why we formed the company at first was you know what we want to hold on to, to for real estate properties, right?

When we started thinking about investing, we said, you know what people should you buy single family homes and, you know, buy them and rent it. Because we feel like that’s one of the most stable asset class in investing in general. The most wealthy people in the world where they made their money wasn’t real estate. And we were like, you know, this is a good time for us to get in and just start buying properties. So in the process of doing that research, and doing a bunch of research about what asset class to invest in, we came across multifamily. It was understanding more about how multifamily works, how you know, you can come together as a team, or a group of people to buy a property. And we’re like, you know, this makes sense. Instead of we try to do it by own on ourselves on our own dime. We can come together with a group of people, where we all pull funds together to buy bigger property, because the more we’re able to scale, the more we’re able to win for everybody. So what excess capital was fund to bring a pool of investors together to go in there and buy apartment buildings and we manage the property. So we’re basically a principal in in acquiring these assets in great markets across the country.

Darrin Gross 8:16

Gotcha. So are you investing in any particular market center? Where were you investing?

Tenny Tolofari 8:23

Absolutely. So last year, we invested in 192 units apartments, we another group in Marietta, Georgia. Um, this is great class B property. That was what property we invested in. Right now. My partner, we’re looking at all the markets. The market we’re focused on right now like we’re locked in is in Charlotte, North Carolina. We’re also looking at the dorm Chapel Hill area in Charlotte, North Carolina. So the North Carolina, North Carolina market is one market out blue team and will heavily focus on the market right now.

Darrin Gross 9:01

Got it? And, and I just want to make sure I’m on the property 192 units that you’re in. Are you, the general partner? Are you guys limited partners on that? or How are you in that deal?

Tenny Tolofari 9:14

So we are limited partners. But we had an amazing opportunity to come in as general partners. And again, if the conversation going that line or some of the lessons I’ve learned in our journey, I’m able to share you give an example of how we had a huge opportunity to be a general partner in that property. But we thought fell short so but we’re limited partners that deal right now.

Darrin Gross 9:37

No, can you share with us I think it’s interesting, because I think, you know, a lot of people understand the terms. And it sounds like you had an opportunity to be a general partner, but now you’re you’re a limited partner. If you can share a little bit about that. I think it’d be a

Tenny Tolofari 9:54

Absolutely I love to share this story.

So Once I decided to go into multifamily investing, we did a lot of research, we did a lot of investing in ourselves. We invested in mentorship programs, we invested in beautiful relationships with people that are already in the industry that are doing good. In in that process, that’s one of the events that that one of the group we’re part of in terms of our mentorship program. I raised my hands one of these days and say, Hey, listen, you know, I’m in the DC area, and I’m looking for a key principle or a key sponsor in this area, and I’d like to have a conversation and before you know, somebody say, Hey, I know this guy. This group is a wonderful group and he will have a call with them. I can remember they give me about nine names of, of key players in the Maryland Virginia DC area.

And out of those nine to two of those guys picked up my call one of the company is Viking capital. And then the other guy said, You know what? I’m just gonna invest you guys up but I’m not going to be any key principle so I had a meeting with my Leslie had a medium with Viking capital on the individual matches. Vikram writer, grid wonderful guy was top sat on the table with him and had a wonderful conversation and he saw the passion that I literally have when it comes to this and he said hey, listen, if you guys are really interested we have a deal right now that we have on our contract we’re going to be flying to Atlanta to Marietta, Georgia to check out the property and your due diligence. If you guys want to be a part of it. Why don’t you come with us? See, we’re we’re in. We booked our flight ticket unless he couldn’t make it. I flew down, went with them for two days due diligence process on that property. And he said, Hey, listen, this is a great opportunity. If you guys can come in as general partners and raise equity.

That would be amazing. Sure. We got this. And I prior to having that conversation, we’ve met a bunch of people that say they’re interested in buying apartments. Remember our goal is how do we bring people together for us to go? buy property is apartment buildings. And we’ve met a bunch of people that say they have more than $1 million to invest and a whole bunch of stories, right? And I’m sure you’ve heard that where they say, you know, you find the money to deal find a deal, the money call, we had that notion, and we were busy, you know, looking for the deal looking for the deal. And now we have an amazing deal deal Class B property willman property cash flowing, the upside of that property was about $300 that they have throughout the lifecycle of the business plan in the company. So we’re like man, this is an amazing opportunity let’s take it out of there talk to the people that are interested in it now we have some opportunity to come in and GP raise equity and come in at GP now when that these guys that say they have all this money how conversations with them they said you know what, I have money. I’m gonna be ready. So he is you go is a form that you know, the accredited That’s the questionnaire go ahead and fill it out and send it back to us. And cricket.

Cricket

We started getting frustrated at that point, she started getting frustrated and started going to the people, probably our friends we know and started telling him about it. And they’re like, dude, I’ve never heard about this before for you. I know you as a financial adviser, a cybersecurity expert. What are you talking about real estate right now, it doesn’t make any sense to me. And at this point, if I think back, I really don’t blame them, right? Because if I’ve not come before and share with them what I’m working on an offer. All of a sudden, I come up with a $25 million property and I say, Hey, listen, I need to give me money. I’m like, dude, I don’t understand what you’re talking about.

So. So we learned a great deal from that experience. That you know, you want to make sure you do the relationship with people let people know what you’re doing. And then gradually those equity will come and then you continue to find those deals. And was you are you at the right position where you have equity deals, things are just magically Work, Work Work out together. So that’s one of the big setback we had. So we couldn’t raise the capital. And we ended up going in and just put in our own money since everybody else says, You know what, I’m not getting your money, money. So don’t worry, we have our own money, we’re gonna put it put it in as a limited partner. So that’s what we do as a company with that deal.

Darrin Gross 14:23

Got it. So you actually lived the myth of, you know, you find the deal, the money will come kind of thing.

Tenny Tolofari 14:32

Absolutley.

Darrin Gross 14:33

Yeah. So. So how many when you were presented the opportunity to be a general partner, in your mind, how many people did you think you had in your queue that that were available and willing investors?

Tenny Tolofari 14:50

Not a whole lot? Not a whole lot. Um, I think the big mistake that we made was we were looking for the big people that say they have big money so we have this lady, she she said, Hey guys, I see the passion we actually met her in Boston we went for a conference on there to say hey listen, I see the passion here. Let’s these eyes see you guys have integrity. I think I want to work with you. I have a couple of investors like to bring up to $2 million into a deal. So if you find a deal, bring it to our attention. And then we had another folk a lot of folks out there that said, you know, he has a bunch of investors he can bring it up to a million dollars so we have this this guy’s that that says they have big amount of equity to bring to the deal. So because of that when you want to buy that’s chasing everybody else that had maybe $50,000 on $100,000 which is a big mistake. Because if one of those guys said says you know at this point is a good time, you’re completely screwed, right?

So we went ahead and you know, started depending on what No too big, decoding big dogs. And they disappointed us. And at that point you and I said, Okay, let’s go ahead and start chasing the guys that have 100,000 or $50,000 invest in since the concept and every information that was shown was new to them, a lot of them to find, find, find it very appealing to put their money into the deal. So we didn’t have a whole bunch. So right now we’re doing something completely different. And we’re learning from experience and building out our systems and our processes in place to make sure we need to get that problem.

Darrin Gross 16:32

Gotcha. So what I also asked you a little bit about kind of the shock of your friends and family, the response of like, you’re doing what? Can you talk a little bit about that? I mean, you kind of mentioned about, you know, they had no idea that you were doing this kind of thing, correct Talk, talk a little bit about that and what you learn

Tenny Tolofari 17:00

So, um, in the last three years have shadowed my family and friends, you know how they can use advocate plan their finances, you know how they can put in different strategies to help them maybe minimize taxes particular ones and a whole bunch of different things that has to finance I’ve already shared with them real estate, so they must see me as somebody that’s really passionate about real estate. And when I went, you know, my partner, Leslie went to them and I said, Hey, listen, you know, we’re starting to open up this company, and now we’re looking to invest in 192 unit is about $25 million, blah, blah, blah, like, you must be smoking something.

When did you start talking about, you know, apartments, um, and at that point, I was kind of like, Dude is me man, you know, I’ve been talking about money for a long time now. You guys need to listen to me, you know? And all they said was, you know, I understand what you’re saying. standard way where you’re coming from but if you don’t do research you should this is a good asset class. Why do you think this is an asset class? We know you know how to deceive. As you’re doing this business you need to bring your partners you know, I share with them my partners, partners have about 2400 apartment buildings and environment I bought and sold the medical doctors blah, blah, blah, property management companies there’s that then I buy none of that. Like I know you and you’ve not been doing real estate for all this Why? And if you if you’re just giving this giving me these heads up right now you want me to give you my money right now. That’s not gonna fly.

So and you know, I was hurt. But I went back and I thought about it. I’m like, I don’t believe them. You know, if it was me, too, I’ll think about it as they did. They just you know, don’t understand where you are right now. So what me and my partner we’re doing right now is to make sure we continue to educate them on this Understand that, you know, our goal is to come together as a community, my community where I’m from, we have a limited mindset. Very, very limited mindset. People believe in doing their own thing. Like I want to be the best cybersecurity expert and or in the whole us, or in my whole community. And when everybody sees me, they want to see me as though but that’s not my philosophy. If we want to be wealthy, we can all come together and invest in the asset class is very stable, and that’s recession proof. You can buy it and you can maintain it and you don’t have to worry about it except that I got that you get the returns that you’re looking for the equity that you’re looking for. That’s ma’am a partner will find this vague was when they can use to help a lot of people have families and help the world the future. So So yeah, I hope I hope I see a question.

Darrin Gross 19:56

Yeah, so So tell me what are you doing now to To build the, I guess, the identity to where people do recognize you as an investor, how are you, you know, letting them know that you are doing this, and kind of educating them so that, you know, the next time or possibly the next time or maybe even the next time, you have an opportunity that they’re, they’re thinking in the mindset. Yeah, he’s been talking about that for a long time. He, he, I think he knows what he’s doing. How are you working on it?

Tenny Tolofari 20:33

Correct. Thank you very, that’s a good question. Um, so what we went back and did so man less than sat back, you know, after, you know, couldn’t make the GP part of that deal. Went back. I said, as I review what we did wrong. Admission, you know, people don’t don’t feel like we’ve been doing this long enough, even though we have all this team members that were brought to the deal. So right now we’re focused on beauty in our brand, cellular communication. Developed developing materials and sending it to these guys and just continuing to give them in conversations that we have continued to let them know what we’re doing.

Like, for instance, we recently went to Houston, Texas for a conference went to Keystone resort for that conference. Right? We’re going to be traveling sometime in April. Hopefully these home prices go down to market. While I do all of these, I have conversations with my friends and family and let them understand I’m still in the game. I’m still looking at this market. I’m seeing you in deals, I’m still talking to key partners to graduate education is one key component of it. We’re using social media. We have a meetup. We have a Facebook group. So we have all these different avenues that we’re using to send the message out gradually. And with time, that information is going to be viewed on people’s subconscious and they will do understand that I’m in it, not just to make a quick buck, but to build a business

To help a whole bunch of investors out there that like right now, you know, I was talking to one of my friends yesterday he said he doesn’t want to stop right now. And and that was a good avenue for me to share with him. You understand, hey listen, there are a vehicle out there that you can use to give great return rather than just defending the stock because he’s really hurting a lot of people like right now in America and new world.

Darrin Gross 22:27

Nope, that’s that’s a that’s a good idea. Do you have any kind of a census to the number of I mean, the for lack of a better word touches or kind of a timeline and do you have any kind of expectations? You know how long it will take to create this identity where people now think of you and are willing to respond positively to to your request, provided they have money.

Tenny Tolofari 22:58

Absolutely don’t have time. I think it’s, it gets to a point when somebody looks at what you’re doing. And they fall in love with it. And they like the idea. They want to be a part of what you’re doing. At this point, we’re not worried about people that we know anymore. I say, Hey, listen, you must join us. Because one of my mentors, you shouldn’t say, the people you know, don’t don’t hundred percent are supposed to support you when you get started. They’re supposed to self support you because they love you, they might think that you’re crazy.

They might think that the ideas you have a crazy, all you need to do is to prove to them that what you’re doing, you believe in it, and you’re doing it for the long term. And you have the interest of the people you’re working with to the interests at heart, right. So I don’t have a timeline, but I’m sure when you see that I’m in it. I’m not quitting. You know, I went back and so that whole bunch of boys that started this whole went to courses together, went to seminars together. Oh, But I don’t see them anymore. And a lot of the when the seals were still going on Leslie was going that, oh, man, you guys on fire. You know, I love what you guys are doing. I’m seeing your article online, I’m seeing the polls, man when you’re doing something that Senator Mitchell that we’re aware of. So I just think with time, you might be one year, it might be one month, maybe two years, maybe five years, maybe 10 years. Right now, me and my partner, I really don’t care. We care about making sure that we get the right set of information, and just put it out there. And whenever people are comfortable with being a part of our journey and being a part of what we’re trying to do, they will come on board.

Darrin Gross 24:37

You know, it’s interesting, you as you’re speaking, I’m thinking about it and just other conversations I’ve had with others about this. And, and, you know, I think that what I’m hearing from you is that now that you you two have committed you and Leslie have committed this is what you are doing.

Tenny Tolofari 24:55

Correct.

Darrin Gross 24:56

I think as you progress through that and people See that? And there’s not this sense of desperation when you’re, you know, you’re approaching people but they know that this is what you do. And if not this one then you know, keep us in mind next time or however that is that really transfers to you know the recipient of the message into kind of a trust and belief that you are committed to it and it’s not as risky. If I don’t know you and and all sudden you’re asking for money and you know, you haven’t got a track record or any kind of experience in in in doing what you’re claiming to do.

Tenny Tolofari 25:42

Correct.

Darrin Gross 25:43

No, that’s great. All right. Well, so you guys, you’re in your You’re the one deal with your own money as limited partners for it and long. How long have you been in that deal?

Tenny Tolofari 25:57

I think we’ve listed in September of the deal. Closing September of last year of 2018.

Darrin Gross 26:03

Okay. And was at a value add? Or they do an update or what was the what’s the plan with that property?

Tenny Tolofari 26:13

Yeah. So it was a value add on is a property that I’m the owner of the property has gone to, you know, his lifecycle and he’s trying to, you know, move it on to the next investor that we had about 46. Or that of the, for the six units that are required and upgrade. So basically what the company was, what exact capital was thinking about doing with Viking capital as partners was to go in, change rules, do some landscaping, do some painting upgrade for the six units that have not been upgraded yet, and then gradually increase the rate. As of right now, if you know if I can copy it and send it out, sending out statements we actually received our first quarterly payments from them recently in the Properties performance, you know, they’re beginning to increase the reins and and they’ve done the roofs of the of the the apartment building because the roof would not have never been changed or collect very well and a whole bunch of different amenities they wanted to add in the apartment complex syndicate better. So yeah, it’s definitely a value add.

Darrin Gross 27:29

And you’ve had kind of a front seat for the all the inner workings of the deal is that if you had that experience,

Tenny Tolofari 27:38

Yeah, during the the time that I played a key role was doing the due diligence. That’s why I’d pick you roll when I went there. And I met with most of the contractors that coming in, how do we put it in quotes and the property management company now we have a great relationship with them actually the other company that’s going to be managing our properties. Yeah, the Manage properties down in the south southeast region of the United States. So had a good relationship with one of the regional manager there and talked about how they can, how they are coming in to implement the business plan. What are some of the things they can do to make sure that the tenants and people that in the community are confident with what we say we’re going to do with apartments and stuff like that? So, you know, he’s a, this was an amazing experience being down there. And that visit alone opened up other opportunities as well. You know, which if we have time.

Darrin Gross 28:39

Now, what was that the loan? Oh, what what was that you said if you have time?

Tenny Tolofari 28:46

Well, I said that that distance, opened up opportunities as well.

Darrin Gross 28:51

Oh, gotcha, gotcha, gotcha. Gotcha. Yeah. No, I think plugging in the community and getting to know people that would be a strong opportunity for you. Well, this is this is great to me. I feel like, you know what you’ve done. And, and I think, you know, it’s there’s two thoughts coming.

One is the experience, the positive experiences you’ve had, even though it kind of came short of what you originally thought it would be. There’s you’ve been able to plug into and now you’re getting this firsthand experience, which I think will likely transfer to the people that you’re engaging with now sharing your experience and that will that will create credibility for you.

I think the other thing is just that, you know, how you were, you’re able to kind of attack and realize, you know, I think there’s, there’s a lot of people out there look at like real estate, it’s just as easy thing. It’s like, yeah, you just, you know, you just put the money in and you get other people’s money and they just make money. Yeah, that was great. You know, and, and, and, you know, but the reality is that There is a lot of work on this, you know, this is, especially if you’re going to be a general partner, and you’re going to be the steward of other people’s money, there’s a tremendous responsibility and you’ve got to have your you know, first you have to be connected with them.

Second, you have to have a clear through point as to how you’re going to take care of their money, make them money, and then you have to be able to operate and pull it off, you know, and you know, so it’s, it’s it is a process and I think that anybody that can what’s what’s the sad thing about most of life whether it be the stock market or real estate or whatever, is that people hear the highlight reel all the time for the people that bought after the 2008 crash and, and got all these just super cheap deals and they wrote them up and they made all this money. That that’s the story that resonates with People they all think I need to get into that. The reality is, those times are gone. Although as we speak today, there’s the pandemic. I mean, nobody knows exactly how the fallout is, but the economy is essentially running fast with the exception of this pandemic. And, you know, so there’s the, we’re in different times, and I think you just have to be that much more aware of the times and, you know, if you’re in it for the long haul, I believe that you will have success and people will see that and, and want to work with you.

Tenny Tolofari 31:35

Absolutely. That’s how I bought you know, to to make sure that I would time people would understand they were in it for the long haul and we have a big vision and as we go along, we share that vision with them.

Darrin Gross 31:49

Tenny if we could, I’d like to shift gears here for a minute. As I mentioned you before we get started by day. I’m an insurance broker. Okay, and As an insurance broker, we do risk management with our clients. Right? And there’s

Tenny Tolofari 32:08

Excuse me, all right.

Unknown Speaker 32:11

All right. There’s a couple different strategies we we consider when we’re trying to manage risk. And the first is we asked, can we can we avoid the risk? And if we, we recognize that that’s not an option, we look to see if there’s a way we can minimize the risk for And if that’s not an option, then we look to transfer the risk. And that’s what an insurance policy is. It’s a means of transferring the risk to an insurance company for exchange of premium and you get a contract kind of thing. Yeah, but so with that, I’ve been asking all my guests and like to ask, I’d like to ask you to, if you, you know, share with us what you consider to be the biggest risk and just to be clear, I’m not necessarily looking for an insurance related answer. Mm hmm. Because I believe risk is risk is everywhere. So, if you’re willing, I’d like to ask you Tenny Tolofari, what is the biggest risk?

Tenny Tolofari 33:20

Well, one of the biggest risks for individual investor houses is one is not getting in the game is seen on the on the on the sidelines, right? Because if at the end of the day you you’re thinking about getting ahead, and you are dependent on just one asset class to get ahead. You’re going to be disappointed from what we’re seeing right now. Right. The risk is depending on one particular asset class, like the stock market, to be huge wealth or for retirement purposes or for generational wealth, or for your family in general, because your family is dependent on You or you and your spouse are dependent on each other for the future. Right. So I think that’s one big risk. Another risk is speculation, right? Where people think that the market is going to perform at a particular rate. And people don’t not educating themselves about how if x Class A class work, you know, so I think that is one big risk I would think not gets in the game is one big risk outcome people are not taking.

Darrin Gross 34:34

No, like if you don’t, you don’t play you can’t win, right? Absolutely. You gotta get another game. Tenny, before we wrap this up, I’d like to ask you where can listeners go if they’d like to learn more or connect with you?

Tenny Tolofari 34:51

So one way to get in touch with us is you can visit those on our website. Our website is XSITECapital.com excited. capital.com excites people As X as in xylophone. S as in Samwell I as un indigo T as in Tango. E has an Edward capital.com. And we have a Facebook group, which is the Exciting World of Multifamily Investing. And we have a meetup group with the Xsite, Xsite capital Meetup group. So these are different avenues. If you’re in Maryland, Virginia, DC area, you can stop by our meetup is hosted every first Monday of the month. Fortunately for April, we’re going to be postponing that one for now, till this whole crisis settled down. But it’s a good community where a bunch of people that are interested in what I finally I relisted in general come together to have conversations. So those are some of the ways you can you can get in touch with us again, that’s except capital. They’ll come in on the exact to one of my family, Facebook, and exact excites Meetup group on meetup.

Unknown Speaker 36:12

Got it. And I’ll have all that listed in the show notes for the listeners. Tenny, I want to say thanks for taking the time to talk today. I learned a lot. And I hope we can do it again soon.

Tenny Tolofari 36:24

Absolutely there. And I really appreciate this opportunity. And thank you for this platform for you know, at least for us to share our story. Because we want to encourage people that are looking to get into game to get started. And if there’s any way we can be a resource who would love to, to be in a resource for them to at least get started and start learning about what we’re doing.

Darrin Gross 36:46

All right. For our listeners, if you like this episode, don’t forget to like, share and subscribe. Remember, the more you know, the more you grow. That’s all we’ve got this week. Until next time, thanks for listening. commercial real estate pro networks, CREPN Radio.

Announcer 37:06

You’re listening to CREPN Radio for influential commercial real estate professionals. For more information on this or any of our guests like us on Facebook CREPN Radio

Flexible Workspace with Frank Cottle – CREPN #254

Frank Cottle 0:00

Flexible workspace is the highest level. And think of that as including all providers that combined people place and technology into a single bundled service and provide it with a highly flexible service agreement as opposed to a long term lease. That would include business centers, co working centers, incubators, accelerators, culinary centers now, media centers. It’s that combination of people place and technology with a highly flexible service agreement to support it. There are about 45,000 such facilities around the world today.

Announcer 0:44

Welcome to CREPN Radio for influential commercial real estate professionals who work with investors, buyers and sellers of commercial real estate coast to coast whether you’re an investor broker, lender, property manager, attorney or accountant

Darrin Gross 1:03

Welcome to commercial real estate pro network CREPN Radio, Episode Number 254. Thanks for joining us. My name is J Darrin Gross. This is the podcast focused on commercial real estate investment and risk management strategies. Weekly, we have conversations with commercial real estate investors and professionals who provide their experience and insight to help you grow your real estate portfolio. Let’s get into the show.

Today my guest is Frank Cottle. Frank is a futurist based in Southern California. And in just a minute, we’re going to speak with frank about the future of commercial real estate. But first, a quick reminder, if you like the show, CREPN Radio, there are a couple things you can do to help us out you can like you can share and you can subscribe. And as always, we’d love to see your comments. So if you feel inclined, please leave a comment. We’d love to hear from our listeners. Also, if you’d like to see how handsome our guests are, be sure to check out our YouTube channel. And you can find this on YouTube at Commercial Real Estate Pro Network. And also please consider subscribing there as well. With that, I want to welcome my guest Frank, welcome to CREPN Radio.

Frank Cottle 2:27

Thank you Darrin really great to be here. And I don’t want to add disappointment to your program right now. But if you want to see how handsome I am, you probably ought to look at a picture of me 40 years ago

Darrin Gross 2:39

I’ve always always humored by the the guests response to that but that’s all in fun. And trust me you’re you’re setting the you’re setting the curve on the positive side there so nothing to worry about. But, Frank before we get into our talk about the future, if you could share with the listeners a little bit about your Your background.

Frank Cottle 3:01

Well, I’ve, my career has spanned five decades. I started in the late 60s, early 70s as a commercial Diver of all things, working independently and also as a contractor to one of our federal agencies doing what was termed interesting work for a few years.

From there, I started racing yachts.

I spent a decade racing, large sailing yachts all over and working to build a yacht brokerage here on the West Coast based in Newport Beach in California. As I matured in that business a little bit, and we were quite successful, we got very lucky. I made the decision that I would never be an owner so long as I was a broker. As a result of which I had to leave the bad part of my work. I started in commercial real estate 1979 at time period. I come from a ranching and farming family. So the concept of land banking was appealing to me buying dirt in the path of progress, if you will. But I didn’t want to stay farming they didn’t want to go that route. So we would buy large parcels on the edge of masterplan commercial developments sponsored by Prudential land, Chevron land, mobile land, the Trammell Crowe Boston properties, the Irvine company, really big property master plan developers. We would buy a little piece of land out there on the edge of their master plan project. A biggest piece we could buy with the most entitlement and we put a small building out there 3040 50,000 foot building, but we had three, four or 500,000 feet of entitlement REITs to go up, if you will, but the timing just wasn’t right. So I had to figure out a way to hold the land. And we came up with this concept and watching what was going on. We figured out that these funny little things called executive suites generated the most revenue per square foot of anything in commercial real estate. They were fairly unknown in the late 70s, although just starting as an industry, and so we built dedicated buildings and hosted in house shared workspace back in the late 70s and early 80s. We built that portfolio for 10 years across the southwestern us, California, Arizona and Texas, sold the portfolio in about 1990 and started building classic What are referred to as business or co working centers today, myself and two partners, we built across the entire nation 195 projects. We were the largest private operator in the industry at that Time. And that portfolio was sold in 2000. Right at the height of the.com. Boom, good time to sell things. What the reason we sold that portfolio that I wanted to sell at least, is that I didn’t like the risk exposure of the lease liabilities on the properties. With landlords understanding real estate is a cyclical industry. And I wanted to own the customer instead of owning the center’s so we built the structure of the inventory control systems and the technology to do that. And today we have clients and I don’t know how many in 54 countries about 1100 facilities, but we don’t own the facilities. We just use those facilities in much the same way that Expedia uses the hotel Straight to service our customers. And it’s been a real fun ride, taking us down a lot of interesting paths. And today we’re considered to be one of the progenitors of the flexible workspace industry. And we still try and push the limits daily.

Darrin Gross 7:21

That’s fascinating to hear you talk about that and then just thinking back about you know, executive suites and how that was such a, like a trend setting concept back in its beginning there. And now you look at least workspaces is kind of a second. I mean, people know what you mean when you, you know, coworker or a kid was one that tronic complete blank. What’s the We Work said?

Frank Cottle 7:54

I think that’s one of the ones that while We Work, this is kind of interesting. debacle, they grew overly fast, not paying attention to some core fundamentals and got themselves in quite a bit of trouble. They’re referred to as the biggest deflated unicorn in the history of market. And SoftBank, who’s their primary financial sponsor has lost multiple billions, billions so far on the company, all through just too aggressive a business plan. Now they get not paying attention to the fundamentals. And one of the reasons I’m not in that business is they own to the centers, they were exposed to the leases, they had the huge capital expenses. Every time they wanted to capture another thousand customers, they had to build another center, and that costs them anyplace from 15 to 25 $30 million in the combination of capex and leasehold liabilities. If I want to do 1000 CAD thousand customers to my model have to pay Google some pay per click and then build them. That’s it. So it’s a technology driven company in a software as a service model, servicing real estate customers as opposed to a facilities based model. We use others the facilities that are owned by others.

Darrin Gross 9:20

So are you are you leasing space, enter, you know, sorry, my driving.

Frank Cottle 9:27

We basically own the customer and we place ourselves and our customers into other flexible workspace facilities around the world. Think of Expedia. As a good example. Were around when they started, some guys are Microsoft and knew them quite well. And if you run a hotel room, from Expedia, via Hilton or Marriott, you have a business relationship with Expedia, not with Marriott. They collect your money, but they do Give us a special deal they give you the loyalty program etc. And they have a deal a wholesale transaction structure with Marriott with a variety of hotels that allows them to put you in at a discount. So you may be paying $500 for that room. Expedia is only paying 350 or $400 for that same room. And so they work on that wholesale margin where they own the customer the business relationship, we do the same thing with commercial real estate, utilizing the flexible workplace sector as our core inventory model. So it’s very much like the hospitality structure.

Darrin Gross 10:43

Got it. So you’re, you’re basically the marketing broker arm for the the properties or the landlords or the property managers. Like I said, you you create the relationship with the occupant, a tenant that

Frank Cottle 11:00

That’s correct and and it’s really a scenario where a lot of times people don’t like to go direct, they feel they can get a better value by shopping across a platform like ours, or many times, they don’t want to have relationships, larger customers in particular, don’t want to have relationships with 20 different service providers, they want to have one contract with one aggregated service provider that can deal across multiple currencies, multiple contracts, multiple time zones. So in our models, you can come in and you can open 10 offices in 10 countries in 10 currencies in 10 minutes. It’s very simple to do. You just drop into a website and open an office. And we can do that globally. We we’ve been operating globally since the early 2000s and is a very effective structure especially for large customers. Our largest individual customer right now has over 11,000 separate accounts with us to put things in perspective,

Darrin Gross 12:09

said 11,000.

Frank Cottle 12:10

Yeah, one customer. Wow.

Darrin Gross 12:15

And what’s what’s a an average client, if that’s a very large

Frank Cottle 12:22

Average client in our model has about three to five offices or virtual offices, usually in multiple cities. And that’s why they come to us again, they it’s much more convenient to work with a single inventory aggregator than it is with five companies in five cities might be independently owned and operated with different types of contracts. All different types of billing cycles, etc. legal departments from large corporations love us because they have one contract reveal Especially when they start going offshore. Right, that makes a big difference in our industry is very well suited for companies that are global or international in scope. I don’t know how much you know about human resources requirements in Singapore, as an example, or maybe in Egypt

don’t know nothing.

Usually larger companies don’t either and it’s very costly for them to get into it. So they fall into our industry in general, large providers like ourselves. Another great provider is a company called international workplace group. They own the brand called Regis excellent company also. And they larger clients in the multinationals, falsies structures like us, as well as local, a lot of local business as well.

Darrin Gross 13:56

So do you. You work with Regis then Is that one of your providers?

Frank Cottle 14:01

We like Regis? Yes, they’re fine, fine provider. We work with them through our European offices, primarily. They’re headquartered in in Europe. And we also have our own structure and offices and technology based companies based in continental Europe, a company called flex.

Darrin Gross 14:20

Got it. So from a user standpoint, if I’ve got a facility needs and multiple markets, and maybe a Regis isn’t in those markets or whatever, and I go to you, you have contacts or relations with providers in those various markets. So I still just have the one point of contact as opposed to having to go to each market and

Frank Cottle 14:41

That is correct. That is correct. And depending on whether we’re using one of our directory structures and partnerships with various brokerages or our own internal inventory, we have between 1100 and 18,000 different facilities that we can access around the world.

Darrin Gross 15:01

Gotcha. And as far as the so you contract with the facility provider as a, is it like a referral type mark, are you actually

Frank Cottle 15:16

We’re a wholesale, wholesale warehouse. We have a pre determined contract and a pre determined discount rate with every provider that’s inside of our system. And so we know exactly, you know, what our margins are, what our costs are, etc. And it’s, again run very much in an e commerce and software as a service type model. We have reservation booking systems for meeting rooms, conference rooms, we have our own call centers, to backup the offices with live receptionists around the world, etc.

Darrin Gross 15:51

Got it. So if I own a a office facility, and I’m looking to do some sort of You know, what is what’s the the broad term for this type of space? Is it shared space?

Frank Cottle 16:10

Flexible workspace is the highest level. And think of that as including all providers that combined people place and technology into a single bundled service and provide it with a highly flexible service agreement as opposed to a long term lease. That would include business centers, co working centers, incubators, accelerators, culinary centers, now, media centers, it’s that combination of people place and technology with a highly flexible service agreement to support it. And there are about 45,000 such facilities around the world today.

Darrin Gross 16:54

Got it. So if I have a facility that I have space to lease? And is there a way to contact you? Or are you one that goes out and contacts me when you have a client that has a need?

Frank Cottle 17:11

A little of both? Generally, our inventory comes to us through our industry reputation. We don’t really have a big sales team that goes out there. We’ve been around for 40 years in those industries. So people do know who we are and what we do. And our websites are very easily accessed all over the world. So it’s a we’re more of a responsive marketing team than a outreach marketing team.

Darrin Gross 17:44

Gotcha. That’s that’s a interesting model especially as you know, space needs continue to change based on you know, the ability to work mobile or or

Frank Cottle 18:00

Well, right is right now, I think think about it. today. We’ve got about 1.8 billion mobile workers in the world. And yeah, look at what’s happening with our current pandemic of the month, I guess I’ll call it, you know, the Coronavirus? How many people have started working remotely and telecommuting just in the last 60 days, globally, right, millions and millions and millions, okay, they can do that because of technology. They can do that because all companies, all corporations and government itself knows they have to have flexible workplace plant plans if they’re going to win the talent war in recruitment right now, which is critically important. People are looking at looking very much at balancing lifestyle, with their work style. And so having again, a flexible workplace plan where you can work from an office you can work from a co working center, you can work from Starbucks, you can work from your home, all of these things blend into a new sort of real estate 2.0 or 3.0 I guess now, approach and the our industry, the flexible work sector is a core component to solving that mobile work issue.

Darrin Gross 19:29

Yeah, and let me ask you about just the, the, you know, the the use of space because I mean, obviously, the technology avails itself now to where literally you can work from home you can work from the coffee shop, you can work from wherever but the, the fundamental need of a space that has certain attributes, features like an office hmm Do you ever see that like I mean, have you seen it change? And in the time you’ve been in, in engaged in this?

Frank Cottle 20:06

Oh, yeah, market? Absolutely. Um, number one, we all need a place to work. We need a place to work where we can focus. So it’s usually not the kitchen table isn’t the best place. And it’s certainly not Starbucks, good coffee, bad place to work.

Even though you see a lot of people have laptops in there.

See people with laptops and tablets everywhere. You know, it’s like an appendage these days, right? And I’m as guilty of that as anybody. But But we all need places to work and we like to work around people. We, as human beings, we are gregarious, we enjoy being around others and sharing with others, etc. So you have to find environments that combine the technical Which today bandwidth is like air to oxygen to all of us. We have to have massive amounts of bandwidth and has to be secure bandwidth. We have to have a productive workplace. It’s not too far from the house because we’re very environmentally conscious now where we want it to be near public transportation. They shouldn’t we want to have amenities around that. I forgot about our interview this morning and didn’t know was on video. So I’m dressed because I’m going to the gym right after this. So we want to have amenities around this good restaurants, health clubs, etc. And all of those things that need to be combined into that perfect location. But most importantly, we want to be around people that we like. So when I say people place in technology, I’m not just talking about the support services of clerical secretarial and administrative support that facilities provide.

When I’m talking about the community of people that are working in the facility as well. 10 years ago, people would look up an address, and they’d say, Oh, I want to be on that street at that address. And they would see pretty pictures of a nice facility and say, Oh, that looks like a great office. Today, they’ll go on to Facebook. And they’ll, they’ll, they’ll find that address. But before they really looked at that, locations, pretty pictures, they’re going to go on to Facebook and see who’s there, what’s happening there, what sort of activities are going on there. And then they’ll come back to the website. So the community that you surround yourself with is as important today as the facility within which you work. And that has to do with everything from communities that are focused on social responsibility and charitable structures. Profit structure is on up to highly technical communities where all of the most brilliant programmers from Google are going to end up doing their spare work. So, that’s a very important component now in in office selection

Darrin Gross 23:18

Yeah, it’s interesting, you know, I in one way I feel like people have essentially isolated as much or more than ever before but connected virtually like what we’re doing right now. So there is that that the virtual connection but still the the physical, you know, proximity to be in amongst people and be able to have a community of whatever that space looks like or whatever that you know, your requirements are recognized that is still being a there’s still some sort of social, although

Frank Cottle 23:56

They’re very important, very important aspect to that. Again, we’re, we’re working remotely because we can but today I’ll be in this type of a meeting, I’ll be in a workplace environment that has other people, as well. And I’ll be socializing like to say, I’m going to the gym in an hour. So that we have different patterns that we need to involve to have a balanced in our lives. And it’s not just sitting in a room with a headset and a microphone on 24 seven, that right, that’s a little lonely. And if you look at mental health, loneliness is an epidemic as a result of some of the technology isolation that we’ve we’ve used today. So having a place to go, where you have a community that you enjoy being with is elemental to that work life balance.

Darrin Gross 24:55

Wow, I definitely agree. You know, as you mentioned, With the the corona virus, and all of its, you know, just amazed just how the tentacles keep reaching and just how you like Italy currently centrally shut down and just this just trying to minimize the spread, we’re trying to minimize the movement of people and minimize the movement of the germs or whatever. Are you seeing any kind of an uptick and in space demand because I you know, like even I think like Amazon and other other companies have kind of restricted travel for their employees. has that affected your business?

Frank Cottle 25:42

We don’t know yet. From a January in February, we’re both record months. So we don’t know whether it’s affecting us on the positive side or whether there’ll be a whiplash effect on the negative side. I think in our sector Whereas a lot of people use our type of space as secondary or tertiary space a lot of large corporations do. While we’re used very strategically, when people aren’t in the office all day long every day, we like virtual officing. We like workstations, drop ins, hot desking. We like all of these factors. And that seems to be part of a solution.

Overall, if you look at large corporations and the way that their facilities are laid out with big cube farms oftentimes or big open workspaces with a multitude of people, that’s what people are trying to keep away from right now. So we again, we aren’t seeing a negative aspect but I think it’s too soon to tell whether people will just stay at their home? If so, there’ll be using our call centers. So, you know,

Darrin Gross 27:10

we’re even just kind of curious if not so much of a, you know, a negative is as a potential for, you know, positive a guy as, you know, there’s a group of people in a certain region that are used to traveling but, you know, for the short time or, you know, looking not to and they’re saying I can’t work from home, I gotta get, you know, someplace, I could see that. Some sort of a,

Frank Cottle 27:36

We are seeing a little uptick in the hot desking. The drop in type business right now. But it’s not. It’s not large enough to call it a trend reaction. But we’re seeing a small uptick in that. I think, for a short issue like the face it Coronavirus is is got a label, it’s got Name, etc. But it’s the flu. We have the flu every year. And this seems to be a little bit more virulent. And it seems to get a bit getting a lot more press. But people go through this type of a structure every year. And so the normal reaction is you go home and work for a few days. Or you work right. You know, you just stay away from all offices for a few days. But it doesn’t seem to affect the occupancy rates or the migration in occupancy for real estate in general.

Darrin Gross 28:37

Right, right. So, we’ve talked a little bit about kind of the, I guess the from where you started to where things are evolved to do you have any kind of a sense of how things will continue to progress as far as this you know, this class of real estate And how it’s used and your business?

Frank Cottle 29:02

Well, if I go back to the way it was originally used in the early 80s, we had the predominance of the clients. We refer to them as members now. We’re legal accounting financial services professionals. They were used, they were the biggest users in most stable users within the classic old style executive suite environment that migrated to small technology companies, marketing and media companies, etc, coming in, but it was primarily smaller companies. In the early 2000s, the migration started shifting to larger companies. They recognized through the.com and then dot bomb issues that went on in the late 90s through the early 2000s. That flexibility was Key, you had a lot of large companies, particularly large tech companies that built massive campuses during the.com. Boom, only to have them sitting 4050 60%, empty three or four years later. And their balance sheets reflected a tremendous amount of debt. That went on all over. So flexibility. And today, the CEOs and the CFOs that are running larger corporations, they’re looking at their employee lifecycle, which is around seven and a half years for the average employee in most large fortune 1000 companies. And they’re saying, Well, our lease cycle or our debt cycles should match the life cycles of our employment base. That only makes sense. Otherwise, you’ve always got a lot of excess and they’re trying to carve that excess off of one way they balanced their portfolios and shed a lot of lease liability which is debt on the balance sheet is by utilizing our industry and running with 1015 20% of their employment base in the flexible workspace, it has a rolling one year contract and that never hits their balance sheet. So they get two benefits. First, they win the war for talent by having a good flexible workplace program. Second, they shed debt from their balance sheet which improves all of the valuation ratios and ultimately the stock price for all of the stakeholders.

Darrin Gross 31:31

Yeah, no that that the balance sheet. I wonder if you could take a minute and just expand on that a little bit because I you know, I think is most of the audience I think just from people I’ve talked with and you know, had a chance to talk with our either investors themselves, or professionals or somebody who’s looking to get into commercial real estate and You know, one of the things that I don’t know that it’s fully understood is the value of not having that long term lease on your, on your, your balance sheet. If you’re a you’re a tenant, you know, if you have whatever your company is, can you speak a little bit to that is how they they look at that and why that’s

Frank Cottle 32:24

That that it’s a critical issue. Let’s assume that I am a large technology company with an employment base in the United States of 100,000 people. And I lease on a 10 year basis, my space to house and host those people. I so I have a 10 year lease. Well, the first year is expensable. The years two through 10 are debt lease is nothing but a debt instrument. I mean, it’s just like a loan right? Just say I have an agreement, you have an agreement to provide me a certain amount of space over a specific period of time and in a contract actually, based on my agreement to pay you and that contract creates a debt. And that debt becomes a liability on the balance sheet. Well, if you have extreme liability, extreme debt on your balance sheet, you’re not as good a credit to the banks. That means you also not a good credit to the bond markets, or your stock value has more exposure and risk. So anytime you can reduce the liabilities in your balance sheet, that’s a very good thing. And if you can do it simultaneously, while still being able to grow, that adds flexibility and agility that we talked about. What’s the big term for CEOs these days? Oh, he’s a real agile or she’s a real agile CEO. Well adding agility to your business model through a more flexible workplace program and a series of one year rolling contracts rather than 10 1520 year leases or even a debt on owned properties is a much more agile style structure and that creates a better stock value ultimately

Darrin Gross 34:24

Yeah, no I I appreciate you going into that a little bit. I think the thing that’s always kind of caught my attention is how I think some of these like Walgreens and these other I think a lot of it seems like it’s drugstores have gone out and built out a large footprint, you know, everywhere. And then after the the buildings up and they’re operating, they’re looking to sell that and, you know, the opportunity to, to buy in or, or, or buy or however that is but just you know, As somebody who looks at Real Estate as an asset that I’m wanting to own because I want the, the tenant You know, sometimes you forget the the flip side of that, how they, how they view the debt and how it affects and put, you know, kind of a drag on their performance. And you know how it doesn’t make them as attractive to like said the investors or bankers or, you know, bond market?

Frank Cottle 35:26

Sure. Well and look at Oh, it’s not real recently, but look at the large retail models, such as Sears. Yeah. Okay. What killed Sears facility. They had massive, massive investments in facilities, and they couldn’t generate enough revenue from their retail activities to support those facilities and ultimately, that brought them down. They also didn’t change to an e commerce model. It’s funny, you know, as the first catalog sales company, they should have been the first day commerce sales company as well, but they just didn’t make it. They’re kind of stuck in their own history. But that’s a simple example of, you know, that being a problem at one point in the one was, it was in about in the late 90s IBM’s real estate department, actually, because of the growth of the market in general during the first phase of the.com era. They actually put all their leases purposefully into their balance sheet, which they didn’t have to back then. But they call them an asset because they had leased space at under market values, and they were claiming the Delta as an asset in their balance sheet.

That kind of got wiped out by their auditors A few years later. But people have always played games with the balance sheet and really estate on both sides from an investor’s point of view, and I’ve owned a lot of investment properties and both residential and commercial. Obviously, you want to buy the property. Hope you have a tenant or tenant group that supports positive cash flow. So really, your debt side is your balance sheet side, it’s just a matter of what your courage is with leverage. You know, are you going to go on a 90% leverage or zero percent leverage? myself, I’m a very conservative person when it comes to debt. So, you know, I think less is better and cash flow is is good. I’m very much a cash flow investor.

Darrin Gross 37:52

Well, definitely, there’s some some people that forget those, those good lessons every now and then and and Why the cycle continues? I guess. So if you were to I guess point anybody that was either looking into it, let me ask it this way is that the world continues to get smaller from the standpoint of of technology and the ability to be anywhere and work from anywhere. Do you find that your type of the facilities that you guys are placing clients in? Are they do they still tend to be in your larger metro areas? Or do you find that they’re going into the tertiary markets or were

Frank Cottle 38:43

The original concept started the central business districts of major market cities. About in the late 90s as technology started to evolve and allow more distributed work, We started seeing secondary cities come up. And today, the smallest village in Germany or Italy will have a business or co working center. And they’re all equally successful relative to their costs. So I can build a center in Manhattan and I know that the dirt underneath the building is very, very expensive. Okay, but I know I still need to make a certain margin. I can do the same thing in Kansas City, or the same thing in Hutchison Kansas, outside of Kansas City. And it’s the my margins will be about the same, maybe even a little bit better in those secondary markets. And it’s all based on the cost of the dirt under the building. I mean, look, location has a valuation model and you just have to deal with that.

One of the reasons we like our model, which is technology based is it doesn’t require much of that thought process. We have a wholesale margin, we know what it is, doesn’t matter where it is, we don’t have risk side for marketing and customer management. So we’ve mitigated the risk through technology. And by changing our business model, even though we still serve the needs of a global real estate client base.

J Darrin Gross 40:24

No, it’s fascinating how you guys have kind of inserted yourself in that and now the market. You know, I guess I’m just trying to think of, you know, back in the day when everybody went to downtown to do work, and here we are really working. I mean, people are, people are choosing more of their place where they want to live and employers, like you said, are being more flexible about that. And, and so this demand is, is.

Frank Cottle 40:51

That’s really important, and I’ll use our own company as an example our senior executive team is is distributed globally. We have a corporate headquarters here in Newport Beach officially. But it’s a tiny little. I mean, we’re in one of our own member buildings. We practice what we preach when it comes to flexible work.

Our chief marketing officer lives in Lexington, Kentucky. He likes horses. He likes that lifestyle. That’s her his family is. Can you imagine if I had to move him or my CFO lives in Las Vegas, or my chief administrative officer who’s Monterrey? If I had to move all of them to Newport Beach, how disruptive that would be to their families, how costly it would be to the company. And I know our gentleman and Lexington. He would say sorry, I’m going to get another job. I think that I think each one of them were would they have families they’re so the old way of centralizing A workforce was very disruptive to lifestyle and families, and very, very costly. And again, we’ve been working remotely like this since the 90s. And totally paperless as a company since the early 90s. As well, I’ve always been embedded in technology and it just makes sense for the whole team and, and everybody’s lifecycle and lifestyle is exactly the way they want it.

J Darrin Gross 42:29

No, I it’s fascinating, fascinating, just to think about it and just think about the, you know, historically just the disruption and and, you know, people having to pick up and move and, and all to be in a physical place. You know, even though their work may not necessarily be local. And just the kind of the, I don’t say the cost, but Well, there’s a cost. I mean, obviously there’s there’s monetary costs, but just in the relationship costs and stuff and you know, And I guess it’s for every Ying there’s a Yang kind of thing, but, but it is, I guess the flexibility from the, the talent side of the, the equation to be able to, you know, make a make a choice to work for a particular company or provider, whoever, and still choose where they want to be located is, is, it’s just fascinating. I remember the first time I was meeting with a customer and, and all of a sudden his laptop laptop started making some noise, he opened it up and he was looking at a guy from, you know, across the world, and he said, Hold on a meeting. Let me call you back. And I’m looking at my, what was that, you know, basically the Jetsons right there and, and it was Skype and he’s, you know, Skype, like, new and, but it’s it is fascinating, just how it’s really, I mean, in in and I don’t even think that that much about it. I mean anymore. I mean, here we are on a zoom call and, and, you know, everybody’s got FaceTime or whatever it is on their phones and, and, you know,

Frank Cottle 44:10

It’s well, it’s, it’s gonna it’s gonna continue to progress. I mean right now we’re working with a couple of the larger video gaming companies. So you talk about where things go and how does that all work progression in real estate. If you look at the video companies, they’re starting to lose market share, not in terms of number of of people, but in terms of numbers of hours because the marketplace is maturing. And the kids that were on video all the time are going to college or they’re going to getting jobs, etc. If you look at that industry, they’re also the best rendering companies in the world. They can create the most virtual reality environments better than anybody else. And they’re already set for that. When you look at their distribution, at any moment in time, you can have 5060 100,000 people playing the same game at the same time. Globally, the crossing all borders.

So what we’ve been looking at is the creation of virtual reality offices where instead of going into a facility, you simply put on your headset, and now you’re inside of that facility. And you can interact directly with people on a fully rendered basis, beyond the old style avatar structures that we see. And what that means is when you talk about central business districts and major markets take Manhattan as an example. You know, across the bridge, office space in Brooklyn, it’s a lot cheaper, but it’s a lot nicer Manhattan until you put on your headset. Now, my, my office in Brooklyn is the same as if I was in the Lipstick Building overlooking Central Park. Okay, and I’ve got a 2000 foot office with my own conference room in it, etc. Well, I can create all of that with technology now and with Microsoft’s new HoloLens technology, I can actually just invite people directly into my office to meet with them physically, even though they’re not there. So, when you think of that, then you think of real estate and you think of investment.

If that comes to play, which we think about 2023 it will start will be started with at least the repurposing of commercial real estate is going to be massive. And the repurposing of that commercial real estate is going to radically change the way that cities are managed and it could have a huge impact on residential costs are going down and the way transportation moves around, etc. So it’s We look at flexible workspace. Ultimately, having that capability is the beginning of the next advancement in technology that we’ll see will have a major impact on commercial real estate. Virtual reality officing instead of physical offices.

J Darrin Gross 47:18

Do you have any sense of how that’ll affect valuations? I mean, I’m just thinking if people don’t necessarily need to be in a space,

Frank Cottle 47:28

It’s going to happen. In fact, it’s going to impact valuations primarily in the highest density markets first, because that’s where the biggest costs are and that drove the migration will be from and what you’ll also have is density compression. If I have a nice office, in a in a high quality building, it’s going to be 300 to 600 square feet.

But in this environment, I can be in a room relatively small cube with a headset and a pair of haptic gloves on. I’m done. Okay, so I don’t need to have an equal quality office now will I still want to go to an office? Sure. I want to go to lunch with my buddies. I want to workout after I want to go get a beer or something. So I’m still gonna want to be with other human beings. But when I’m slipping into my work mode, I’m gonna have a different experience. I’ll still be with people. It’s just gonna be I mean, I’m gonna be experiencing them differently.

J Darrin Gross 48:37

Yeah, no, it’s fascinating to think about how, you know how the future looks like is gonna play out and, and, you know, compared to the cartoon, the Jetsons and what we all were presented back, you know, back when and, and how much of that is actually somewhat here and, but the this virtual thing is, it’s kind of fascinating. I think so.

Frank Cottle 49:02

Well by but 2033 it’ll be normal.

J Darrin Gross 49:07

Right, right now. Yeah.

Frank Cottle 49:10

It’ll be a standard just like I had my first video conferencing set in our offices in 1981. Okay, wow. So now it’s standard, right? 80s through the mid 90s, even up to about 2004 or five. It was sort of a rarity.

J Darrin Gross 49:31

You were definitely a trend setter.

Frank Cottle 49:34

Yeah, we spent more money doing dumb things with front of everybody that I can imagine. But but but the technology works. So you have certain early adapters, that pioneer stuff and Pioneer ways to use the technologies. And then you have the market. Right? And usually there’s about a seven to 10 year lag.

J Darrin Gross 49:56

Right? Well, but those early early adaptors are ones that kind of helped shape it, you know if there’s not adoption,

Frank Cottle 50:04

you know? So my dad always told me says, you know, pioneers get stuck full arrows. Yeah. So don’t be Don’t be a pioneer. He said build railroads instead, you’ll be off a lot better off.

J Darrin Gross 50:19

Good. Hey, Frank, if we could, I’d like to shift gears here for a second, as I mentioned to you before, and I think we talked a little bit about risk, but just by day, I’m an insurance broker. And one of the things we do is try and manage risk with our clients. And there’s a couple of different strategies we consider when when doing so. The first strategy we look at is can we avoid the risk? If we can’t avoid it, then we look to see if there’s a way we can minimize the risk. And if we can’t avoid or minimize the risk and we look to transfer the risk and that’s essentially what an insurance policy is. I like to ask my guests and I would like to ask you, if you can take a second and and consider what you consider to be the biggest risk. And just for clarity sake, I’m not necessarily looking for an insurance related answer. But with that, if you’re willing, Frank Connell like to ask you, what is the BIGGEST RISK?

Frank Cottle 51:25

Well in in our business, which functionally is commercial real estate, I think it’s cyclicality getting caught on the wrong side of the cycle. And you’ve seen a lot of property investors overall and market timing is always crucial. So cyclicality is probably the biggest risk and the protection from that comes with debt management. You can be highly you can deal with it. As much more effectively if you have a debt, a debt management program. So that comes back to what we were talking about with leasehold liabilities being a part of that cyclicality, exposure, not just physical buildings that you own. And the debt cycle of flexible workspace as opposed to a fixed workspace, where you have a fixed lease versus a service agreement is the most effective way to manage the cyclicality in real estate and the cyclicality in business.

J Darrin Gross 52:40

That’s, that’s interesting. Well in it definitely, I think that the debt and the cycle thing is is something that we all should be aware of. And, and clearly, if you forgot the lessons of the last cycle, you’ll get a chance to

Frank Cottle 52:55

know the hard way in many cases in many cases. Exactly.

J Darrin Gross 53:00

So, Frank, where can listeners go if they’d like to connect or learn more?

Frank Cottle 53:05

A couple places. First, would be Alliancevirtualoffices.com. Alliancevirtualoffices.comm, that’s one of our primary sites overall. And if, if you want to just learn more about our industry, we also manage a publication called Allwork.Space. And Allwork.space is the by far the largest focused publication on flexible workplace sector. We have, you know, two and a half million people on social media reach and about 100,000 articles read a month and that sort of thing. So it’s a very active publication that we do as a service. It’s not appropriate to an unintentional nonprofit. We do publish that as a service to the industry and just in general so that people can learn more about flexible work and all the things that are involved with it.

J Darrin Gross 54:11

Got it. I will be sure to list that in the show notes for our listeners. And, Frank, I want to say thanks for taking the time to talk. I have enjoyed it. learned a lot and hope we can do it again soon.

Frank Cottle 54:25

My pleasure. I look forward to it.

J Darrin Gross 54:27

All right. For our listeners, if you liked this episode, don’t forget to like, share and subscribe. Remember, the more you know, the more you grow? That’s all we’ve got this week. Until next time, thanks for listening to Commercial Real Estate Pro Networks. CREPN Radio.

Announcer 54:46

You’re listening to CREPN Radio for influential commercial real estate professionals. For more information on this or any of our guests like us on Facebook CREPN Radio.

Lease Purchase Commercial Real Estate with Chris Prefontaine – CREPN #253

Chris Prefontaine 0:00

terms of the answer it’s buying property I don’t care if it’s commercial residential retail a boat a car doesn’t matter it buying things on terms without banks in my case lease purchase owner financing to name two and people say over and over and over I don’t know if I can do that Mary I don’t think sells it no they do because I not just I don’t feel any company here with my son and son in law. We buy homes every month, but in in properties and multis in our own office building, okay, so I know it works. But we’ve got about 80 what we call associates now around North America, mostly us that also do it.

Intro 0:37

J Darrin Gross 0:57

Welcome to commercial real estate pro network. CREPN Radio, Episode Number 253. Thanks for joining us. My name is J. Darrin Gross. This is the podcast focused on commercial real estate investment and risk management strategies. Weekly we have conversations with commercial real estate investors and professionals who provide their experience and insight to help you grow your real estate portfolio. Let’s get into the show. today. My guest is Chris Prefontaine. He’s got 25 plus years experience in real estate as a builder, developer, a realtor, real estate investor and also a best selling author. And just a minute we’re going to speak with Chris about one of his his books and just the basic topic, real estate on your terms. But first, a quick reminder, if you like the show, CREPN Radio, please let us know. You can like you can share you Subscribe. And as always, if you leave a comment, we would love to hear from you, our listeners. Also if you’d like to see how handsome our guests are, be sure to check out our YouTube channel. And you can find us at commercial real estate pro network. With that, I want to welcome my guest, Chris, welcome to CREPN Radio.

Chris Prefontaine 2:23

Thank you, Darren, pleasure to be here, my friend. I am looking forward to our talk today.

J Darrin Gross 2:30

Before we get started, if you could take just a minute and share with the listeners a little bit about your background.

Chris Prefontaine 2:36

Sure, the risk of day myself I’ve been at this in some shape form or another since 1991. Actually, so going on almost 30 years. It’s pretty scary.

I did some spot building I called it back then single family homes, way back when he really understood understand what terms meant and we never took out bank loans we would build on someone else’s land and then we would pre sell the home and then at the very end

When the buyer cashes out everybody got paid including contractors did that for a while, then bought a realty executives franchise put my broker hat on had never done that as a realtor ultimately built that and sold it to Coldwell Banker in 2000. And then from 2000 until the lovely crash, we were doing our own properties. We were coaching people throughout North America and thenlike so many people in the US anyway at least got beat up with the crash and that caused us to re engineer everything we do and we have.

J Darrin Gross 3:29

So your your experience definitely from ground up It sounds like as far as of construction and then into sales and and coaching. Maybe the good place to start. It would be the the how deals are financed, pre crash. When you were an investor, how are you negotiating or how are you structuring the dealsYou’re doing

Chris Prefontaine 4:01

Yeah I can remember specifically so so let’s take it from like after I sold my company called bank I was doing what everyone I still think to this day considers to be the conventional way either borrowing hard money you know from some sort of other investor who just has money to put to work or bank loans. And and both of those meant I was signing personally on him. And so I thought nothing of it credit was great. Morocco was great. They’re giving up money Thomas anyone wants a good credit. And so we ran with that. The problem was when things come rolling down when they come knock and whoever signed personally right they don’t care why the market came down or whatever they’re going to go into whether the personal signature is not that was the big problem.

J Darrin Gross 4:43

Right now and in that mess when when everybody was caught I will you know, you weren’t alone.how willing were the the banks to work with you on that?

Chris Prefontaine 4:56

Not to know the we we had like 22 Two or 23 properties back then and they were either going through by force, short sale, some sort of liquidation or foreclosure. We two or three of them had to go foreclosure. So it was pretty ugly. It was, it was a part time job, if not full time. I remember like it was yesterday, my son had shared an opposite. He’s like right next to me. And he learned a boatload do that for those times.

And so it’s very interesting. So they, they weren’t I mean, creditors were because you can call a creditor you can call a credit card, you can call it call a collections, you can call them and you can negotiate. banks don’t care. As long as they know you have assets especially they’re coming. Right. So that yeah, that took me a better part of probably eight or 10 years to be totally done. But but four years it was pretty busy just doing workouts.

J Darrin Gross 5:46

Gotcha. And, and in that you mentioned is kind of a full time job. We’re where the properties that were in question, were they all investments or were these some conStruction projects?

Chris Prefontaine 6:00

Good question. Let me think. I mean, I had I remember specifically I had a six unit construction project going on. I gave that back to the bank amicably. They were they were fine because it was, you know, their costs were low. I had a boatload of my cash investor cash in it. So the bank was good. Had a six unit has a good story, a six unit building, we were doing condominium conversions back then because you could buy a six unit let’s say in this case or three. And before you get the condominium, Doc’s drafted and engineered attorney, an engineer, haven’t pre sold. I mean, it was crazy. So here’s some numbers for you. We had a building six units in Rhode Island, first two, or three. So it’s like 172. I remember like it was just full price, the fourth, third or fourth, whatever the next unit was, it was like a light switch was thrown, we couldn’t get 50 grand. So that’s two thirds in this particular area dropped in Providence around and if our life depended on it, like I remember the owners, the other owners when you touch them for 50 grand and so on.

That’s okay. So what do you do? You got a construction loan you got, you know, bank loans. It was crazy. You couldn’t get out of those no way around it.

J Darrin Gross 7:08

Well, so when those were you basically just selling them out of Florida then or what were you? Did you

Chris Prefontaine 7:14

we couldn’t even sell them at the on the floor at that point. So that, that that one in particular was a hard money lender that to this day, we’re super good friends, because instead of hiding, one of my good friends said, Look, this is back when this happened. He said, Look, you didn’t take the national market down call who you can call and tell them why I’m here. I’m not going anywhere. I’ll work with you. If it takes me 10 years. And I said that to the Sky News. 2020 years, my senior we had lunch. And to this day, I may do with them. And he’s made other deals with us since then. But it was because I communicated. So you said What did they cooperate? Well, he did. But he was private.

J Darrin Gross 7:47

Right? Right. No, it’s kind of a lesson that I think, you know, hopefully we haven’t forgotten. I think sometimes I wonder if things don’t kind of inch back but I think that everybody. Every market has its own dynamics. And clearly back then the money was, you know, cheap and there was a gold put people on houses. And, you know, there was, rightly or wrongly that the lending got got a little loose. And I don’t think anybody was anticipating. You know that as bad as it could be. I mean, we have always had corrections. I mean, it’s part of the cycle. But anyway, there’s a lot of a lot of stories, a lot of lessons learned. So yeah, so all right, so prior to the crash, you’re doing the traditional thing, hard money and bank finance financing, you’re signing on the line there. And as the situation developed, the signature became worth more kind of assuming you understood more of what you were signing up for.

Chris Prefontaine 8:58

That’s a good way of saying it lightly. The identity Thank you.

J Darrin Gross 9:00

Well, I, you know, I think there’s a lot of things you know, anytime you go sign up alone, there’s How many times are you signing and the volume of paper kind of prevents anyone from Really? I mean, I shouldn’t say anyone I know some people that sit there and will read the whole thing.

Chris Prefontaine 9:14

Or their attorney super shocked, maybe, you know,

J Darrin Gross 9:16

yeah. And, and, and to their credit, at least they have some sort of essentially lease, they’re taking the opportunity whether or not they understand everything they’re signing. Whereas now, I’m still kind of just perplexed by how much like DocuSign and all that is basically, yeah, sent me a PDF and told me to sign that they one time and click the button and, you know, it’s, yep, I’ve signed for everything.

So it’s, I don’t know that the more signatures and all that stuff is improved anything. I think it’s just adding more more layers of, you know, an opportunity for somebody to, to welcome into this way whoever’s authoring the contract is, it’s protecting them. It’s not protecting you, the guy Yep, but sweet well let’s roll forward then so you you you got caught and you know as did many and lessons lessons you learned what what what are the takeaways from that and how have you changed your? Your yeah forward financing

Chris Prefontaine 10:19

So that the same answer right because everything that happened then caused us I got to the point where it’s like I even gonna like go into real estate that’s how spent I was and then it’s okay. So So what could we do if we were to go aggressively? Stay in aggressively real estate well, terms is the answer. It’s buying property. I don’t care if it’s commercial, residential, retail a boat, a car doesn’t matter. It buying things on terms without banks. In my case, lease purchase owner financing to name two. And people say over and over and over. I don’t know if I can do that. Mary I don’t think sells it. No they do. Because I would not just I don’t feel any company here with my son and son in law. We buy homes.

Every month, but in in properties and Maltese in our own office building, okay, so I know we’re spot, we’ve got about 80 of what we call associates now around North America, mostly us, that also do it. So we’ve, we represent a lot of different states now. So that was the lesson was don’t sign personally. So do it by using those vehicles I just said, and don’t use your own cash or leverage your own cash here. As recently as yesterday, my CFO said to me in a meeting with two other employees, did you know instead of doing one of those SBA loans for your company, you could you could take on Ecuador in your house be really cheap. And I said, Absolutely, absolutely knocked does not happen. It’s never gonna happen again, because I did that pre op. And so I said my debt to equity 17% Not, not the inverse, like I like I always was doing it’s next to nothing, and it’s never gonna be higher than that. So, all that to say the lesson was the personal signature, Darren and then when I say no personal I also mean no investor money. Unless we’re doing something really special when we’re taking a seller out or doing something unique. We’re not we’re not going to borrow and signing anything.

J Darrin Gross 12:10

So where I guess let’s back up here. So I get basically the simple answer is it’s not your money. You’re looking at a lease or seller financing. What are some keys that you’re that you look for some tells? Because, you know, I think that anybody is looking on the MLS or through loop net or a commercial broker. The first choice or the first thought that that goes through everybody’s mind is, you know, conventional financing that the seller is going to get cashed out. Mm hmm. So what what is it that you do? Is it just would you go to any deal and ask us or is there a specific type of deal that you’re looking for that makes sense for this kind of thing?

Chris Prefontaine 12:59

Yeah, good question. I’ll give a few answers about a third of the properties in the United States are free and clear. Different pockets, different percentages, but roughly speaking, and so that’s a great Ponte efficient, so to speak, because if they need to cash out, presumably they would have yanked it out. And they’re usually the ones that will be open not only open by inviting people to structure something on terms, and I alluded to it earlier, but this office building is exactly the case. He want is 70 years old or 71. He wanted terms. He wanted 20 year terms, we usually do like three 510. He wanted a long term. In fact, he he forgot to write it in a do on sale. He said, I don’t want to be cashed out on you make sure you’re clear on that. In other words, he doesn’t want me to refinance and never pay him off until 20 years, even though he’s 71. So that was more of an estate and tax issue, I’m sure. So they’re out there. So you got a niche and find them. I’ll give you another example. We bought a six and a four unit in the same town.

How do we buy them? We said Hmm, we’d like to add a multi or two more to our portfolio and we’d like it to be 40 to 10 units so we literally mailed 326 and it was small pieces of mail and we mailed them three times three tweak the letters little differently regular number 10 envelope we bought those two homes for that now what was the criteria four to six units free and clear both of those are free and clear both was structured owner financing no money down and here’s the key for the recession resistant principal only payments no interest no interest they got their price they’re happy to do that and I’ll pay the price for a premium as long as I get my term and principal only payments they both did that

as an example three examples coming office building two

J Darrin Gross 14:37

Principal only? Hmm So that just seems to be kind of counter I mean basically it’s this year you’re reducing every payment goes direct to principal hundred percent. And what so tell me why is it more of just like you said, l ike the tax issues I would primarily one of

Chris Prefontaine 14:56

The taxes of it, yet some of its ego Not they want their price and that’s that’s stuck in their school, their brain no matter what you do. So I gotta get my price. Okay? So if you give me four or five year term, I’ll give you a price. If you give me longer, I’ll give you more than your price. Because let’s just give you an example. One of the houses I did, it was a four year term principal payments, I’ll use round numbers weren’t 1000 bucks a month. Each year, I went to them and said, If I pay 6000, more down on the principal, I’m putting it down expensable will you extend my term? 12 months? Did it two years in a row? They said sure. So I got 12 grand and principle pay down by prepaying some principal.

And then now here’s the twist. So so you know, I’ll do i do incorporate interest if I have to. So this year, it would have been the third year there would have asked for that. I said, they said, Hey, you didn’t do that thing again. And I said, well, instead, why don’t we extend it 15 years, you’ve been getting no interest and I’ll add 4.5% interest in and we’ll amortize it over the next 15 years. And their accountant loved it. So we took a four year deal and made it into a To extension, so went to six years and then 15 went to 21 years.

J Darrin Gross 16:04

So you’re doing combinable paid down there for the first. I mean, the in the front end there. That’s, that’s huge.

Chris Prefontaine 16:10

Yeah, that’s what does it. And now he is a quasi combination. This guy this building said, I want 5.5% interest old school loans, a lot of land big investors. That’s what I want. Okay, well, I usually buy principal only. So let me structure something I think you’ll, you’ll like what I did with him, as I said, we put more cash down as our office. But I think we put like 30 something down, we broke the mold on that we usually don’t put cash down when we do like 30 something grand down. But then when we did heavy principal payments, I think was like 2000 bucks a month, all the way for almost the first full year and then we amortize it at 5.2%. He was happy and I was happy. We hammered the principal right away.

J Darrin Gross 16:46

No, that’s that’s really, I mean, that’s the secret the bank doesn’t want you to know. Right? And I look at, you know, most loans. I mean, it takes you about five years really before you start at that point, you know, at least five years. Feel free to really start, you know, hitting the principal? For sure. Yeah. And to be able to do that on the front end there. That’s, that’s beautiful to get really kind of a running start on your your pay down.

So, you know, you mentioned, like a third of the properties throughout the US are free and clear. Does it matter on the market? Do you find there’s any is it Do you find it more plentiful and in you know, bigger markets smaller markets is just

Chris Prefontaine 17:34

Terms in general lease purchase owner financing subject to existing financing, those are you have to talk to a little a few more people, extra people if the markets hot, hot, hot, right. Even as hot as the markets been with our students spread out where there are some pockets that have been flat since 2012. And it’s great. It’s great to buy in that market. It’s great to buy in a slightly downward trending, but when it’s screaming straight up, it’s a little harder. You just have to talk to more people because the people that are free and clear. They’re not desperate any shape form or fashion they want their number.

J Darrin Gross 18:04

Right, right.

Chris Prefontaine 18:06

That’s the key.

J Darrin Gross 18:07

So it’s kind of a numbers numbers game but you’ve got your parameters figured out. And and you said you market how many how many postcards Are you mailing out?

Chris Prefontaine 18:19

We didn’t do a lot we don’t do a lot of mailings when teach our students so we only mailed out one batch of 300 something and we did that three times and we got two properties out of it.

You know, it’s crazy to each one of those. We profited over 100 each, we’ve already flipped them, just improving the noi

J Darrin Gross 18:35

Got it, and you’ve demonstrated it works for single family and commercial multifamily

Chris Prefontaine 18:41

Works for all the above have done all the above. Now we teach on a broader scale, mostly single family. They can make it pre recession proof that because they can pound down principal and they’re always sellable. You know, so we do teach that and we own a lot of those. We own we carry like 50 or 60 of these at any one time in our portfolio, not counting our

Students, and we’re not on one single loan as to my earlier point. So, you know, I go to bed at night knowing I mean, we our contracts are set up properly, where the loans are never in our name on a lease purchase, for example down the loan stays in the sellers name. So I know that’s a no brainer.

J Darrin Gross 19:17

So let’s walk through a lease purchase for a second. So you’ve got you identify a seller and you say the seller has financing already in place.

Chris Prefontaine 19:29

Yeah, so I’ll give you a scenario as if there’s obviously many customer upside down some are debt free. Well, let’s do like a standard. We get all our leads on the single family side from for sale by owner for rent by owner and expired listings that relatives can’t sell, I didn’t sell. Let’s take a let’s use real not round simple numbers. Let’s take a house for 300 and they’ve got 250,000 equity, I’m sorry, 250,000, mortgage 50,000 equity, and for whatever reason that didn’t sell or didn’t sell in that timeframe.

So we come in and say, Okay, Mr. Mrs. seller, provided you don’t need that 50 today, because you didn’t get it, then sell in the market. If you can wait on that I’ll protect the entire 50 you probably weren’t gonna get 50. They agree, yeah, we’re gonna go lower, I would pay some fees, realtor, whatever. So we’re going to protect your 50,000 chunk. But we’re going to do that honor before the end of the term of the lease purchase. Usually, it’s what’s used three years for this one. And at the end of that term, we’re going to give you your 50. And we’re going to pay off the underlying debt. Now it’s 250 today, but it’s not going to be 250 then so that helps us.

So though, that if a silicon wait for that and wants to protect that number, it’s a great way for them to do it. And on our end, what are we doing the single families, we fill it with a buyer that needs more time, or we call it a ringtone, but it’s basically a strong buyer that just needs time to get financing, credit, downpayment, whatever.

J Darrin Gross 20:55

It is there a sweet spot for that kind of operation. tendency for you I mean, you know, the assuming somebody is further along in their mortgage would be more attractive than somebody who just just finance yesterday.

Chris Prefontaine 21:12

A more attractive for us Yes, but another good point efficient just because you brought that up is I have one of my students who’s having a real successful time with buys a list tiny list again a few hundred he buys a list that is little to no equity bought in the last two to five years. Who are they’re looking for debt relief, they’ve got to move out of the area and they can’t sell the thing because it’s no spread. Those people are typically giving us the long term so we can hedge against the market. And we either do a lease purchase or buy it subject to that existing loan staying in the sellers name. That’s another good list. Like there’s all these you know, sub lists, not just those categories. I said that we just listened to our we caught our wicked smart community but we we listen to our students and they we know it’s working in every market.

J Darrin Gross 21:56

So in the lease purchase basically you’ve got a couple of paydays and you get the obviously when you sell, there’s the the cash out. And I’m presuming that’s between the the amount you’ve pre negotiated with the seller plus whatever the pay down of the mortgages that that spread. That’s where you’re going to get that.

Chris Prefontaine 22:15

Plus the markup.

J Darrin Gross 22:16

Yeah. Right. And then are you? Yeah. And then you obviously sell for more than what they what you agreed to? And then are you able to make some more on like a rent spread between what your mortgage payment and ran to that?

Chris Prefontaine 22:32

Yeah. Yeah, we call that payday, too. So what you said for us, we call it payday. 352 is the difference between the outgo and the income, right? It could be the bank or the owner, whatever. But there’s a spread there. We average, we’re lower than our students. Actually, we average like 310 bucks on that one. The back end we average like 3540. And then on the front end pay day one. That’s when a buyer comes in and has to put down a non refundable down payment. And that range is like 2627 grand for us. So our deals are like 75 grand deals. cash out between 18 months and 10 years. So you get this cool spread of here’s my predictable cash flow saying a dozen deals, stop, scale it up, you know you got flexibility versus one flip or one wholesale or one rehab, you know, it’s it’s three paydays.

J Darrin Gross 23:16

Yeah. No, definitely. There’s no lack of capital. I mean, that’s that’s a very appealing, you know, benefit here strategy there. Can you talk about some we talked a little bit about the the benefits I mean, the the sellers or the tax and the the ego are kind of the two things it sounds like you’re you’re appealing to any any challenges explaining this to a seller? I mean, is there any resistance or is it more? Is there a kind of a longer cycle to getting somebody to agree to it or is it more like you, the people you’re finding they’ve been hoping somebody like you would come along?

Chris Prefontaine 23:55

Many of them. good way of saying it fireside too, but many of sells. It’s not difficult to explain it to them if you just use the proper scripts up front and the proper script up front is, hey, Darren, if you got your price I see here. Are you open to doing that on lease purchase or owner financing? Or do you need your money today? If they say, No, no, no, I got to fail me, I need my cash or I got this building. I got to do a 1031. Tomorrow, you know, if they have to do it now. Then I say okay, no worry. I’m not the buyer. if anything changes use me as a plan B. It’s that simple. If they say, Hmm, interesting. I I’m open to that great when it comes to property, I’ll give you the different options. So it’s just that initial conversation and then finding out why they’re selling because if I can fix whatever it is, I want the best price. I can’t talk them upside down. If I can fix that. There is no explaining. I’m just giving them a solution.

J Darrin Gross 24:46

What’s the largest type property you’ve done on a lease, lease purchase?

Chris Prefontaine 24:50

I’ll give you Austin. I’ll give you a student. So we have one currently. We actually did it on our financing 950,000 waterfront at Cape Cod. Massachusetts, we still have it we keep renegotiating extending the term out, which is great. Largest lease purchase for us. Probably around 1.1 million. I have a student in DC who the 800 to the one four is like the norm. So he’s done like a one eight to 2 million. It’s just, you know what the answer is it’s the sweet spot is the median price range in any market and then the higher end item, you know, look for those but don’t like bank on those because they’re slower to cash out. Sometimes they’re slower to find there’s less of them. When the market softens. I was gonna hit you know, all these reasons, don’t do a ton of them. But stick stick to median. You’re safe.

J Darrin Gross 25:43

That’s awesome. So for somebody looking to get started, what would be some some keys that you would suggest they consider how to get started?

Chris Prefontaine 25:57

Well, I would answer this Way regardless of whatever show this was like literally it could be a show about restaurants and I’m gonna answer the same way pick a pick a niche in this case in real estate that you can get excited about just you know so many of them does does Airbnb is apartment there’s all kinds of niches once you find that then find someone so your company go this is it I can get I can get behind this then find someone in that niche that’s like doing it not did it 20 years ago not wrote a book about it not as a really good marketer because just they’re still doing it. They’re in the trenches. Then once you find that, you here’s the big challenge people get like all these shiny objects, I watched it late night commercials and get rich quick. So number three is commit to it. I don’t care whatever it is commit to it for 36 months have blinders on like whatever that group person board of directors or mentor or coach says you do you be with that for 36 months and don’t look left right or backwards. And I don’t care again what business you’re in restaurants, hot dogs in real estate, you’ll have a phenomenal experience.

If you do that simple form, it’s the third piece. It’s so hard for people to manage expectations and patience. And finally, you know, sticking with someone.

J Darrin Gross 27:08

That’s that’s a, you know, I found in my own experience, the three years is really kind of a proven. I think it gives the market a chance to see that you’re still there. You know, I think

Chris Prefontaine 27:21

That’s a huge point. Actually, I don’t you said but that you’re right, because there’s some credibility there, but also not bought and also, like, they’ll do a deal as much sooner than that. But I know if mentally they’re committed three years, they’re not going to waffle on a curveball comes their way, which it will,

J Darrin Gross 27:36

Sure but even that I think even more to be ultimately successful, and it is at that traction, you build the traction along the way. But in three years, everybody’s gonna know that you are the guy that’s still there that’s doing it. Oh, yeah. And whether it be your your reps, I mean, you’re you know, you’re getting plenty of practice to where, you know, you know, the deal. You’ve done deals where it’s going to be around I would think the year

Your long term successes really you know be really strong as opposed to you get any you get the you get the one hit right away and you think is easy and then find that yeah there’s a lot of work and it’s not as easy and and.

Chris Prefontaine 28:15

Ya know well said

J Darrin Gross 28:18

I do have a question about tax so for since you’re not taking title to the property is basically the income just treated as ordinary income then or is there any Do you get any depreciation or anything like that with any of the

Chris Prefontaine 28:34

Okay gets it gets even better but but to answer that direct question, no depreciation or anything unless you’re buying it subject to existing financing and taking title you are correct, it follows title that’s what I tell people follows the deed. However, here’s what’s really cool. So let’s say I one of our students asked me this this morning from Florida. He said what do I do what I tell my accountant, he did his first what we call sandwich lease deal where he didn’t take title, it’s just in the middle is what’s neat pay day one that we got up front to pay the The non refundable down payment that’s payday one.

You when you get that you don’t have to you can the IRS would love you if you report it, but they don’t have to report that until and unless the exercise the option is exercised, they’ll default it, then you get to claim it. So I can take a deal where I get my 26 grand up front and doesn’t cash out for three years I get that 26 grand to pay tax until year three. Now, you may want to I’m not an accountant. This is what I do in my accountant we picked a formula so that we don’t get whacked if we had a whole bunch that were turned out the same year we don’t get whacked. So we picked a formula that every deal we do report a percentage of it and the other goes on our books as a deposit. So a the IRS loves us because we’re actually pre reporting income and be we’re not gonna get stuck at some point and be behind. So you just got to plan that out with your accountant. So if you said it’s essentially like an accounts receivable then is that what the mean because it hasn’t you haven’t it hasn’t been recognized until the sales completed and we actually Put on like you were a conventional sale, we put it on as a liability deposit even though it’s non refundable. That’s how he holds it on my books. You know, again, I’m not an accountant. Sure, but and then so let’s take a 20 grand, we put 10 of it as income that year. So it goes to we literally have paid a one on our on our income statement for income coming in order income, and then the other half the 10 will sit in deposit liability paid in one account.

You can spend it, but it’s going to sit on our books as that.

J Darrin Gross 30:28

Sure. And then as far as the installment, it’s just ordinary income and as far as it comes in, or

Chris Prefontaine 30:33

Yeah, because all you’re doing then you don’t have the loan. So all you’re doing is lease income in and lease expense out when you pay it online debt and that difference is you’re just sharing comm Yeah,

J Darrin Gross 30:42

gotcha. Gotcha. But it’s certainly a creative way and I don’t even see creative way because I think that what I do recognize just like you pointed out to there’s so many people out there that you know, they they’ve owned the property forever. How are they going to get out of it? This is an attractive term, it keeps them they don’t have to mess with the property more, they’ve got income coming in. So, definitely a win win for the, you know, for the person that that has this as an option. It seems like a definitely a good solution.

Chris Prefontaine 31:22

And if you’re doing but if you’re doing single film is it’s a win win win because the buyers, I mean, we’ve had some buyers Darren in tears thinking man, because of my bankruptcy because of my divorce. I thought I never could buy again, and we give them this pathway. And so it’s super healthy, in my opinion, energy wise to be win win win. That’s not easy to get, especially these days.

J Darrin Gross 31:39

No, absolutely. Absolutely. Hey, Chris, if we could, I’d like to shift gears here. By day, I’m an insurance broker. And I work with clients to assess risk and try and manage the risk. And there’s a couple of different strategies we typically use.

Unknown Speaker 31:58

The first is we looked at

Unknown Speaker 32:00

See, is there a way to avoid the risk? If we can’t do that, then we look and see if there’s a way to minimize the risk. And if neither of these are an option, then we look to see if we can transfer the risk. And that’s what an insurance policy is. And so, I like to ask my guests

Unknown Speaker 32:20

if they can identify what they consider to be the biggest risk. And just to be clear, I’m not necessarily looking for insurance related answer.

Unknown Speaker 32:32

But with that, if you’re willing, Chris Prefontaine, I’d like to ask you, what is the biggest risk?

Chris Prefontaine 32:41

I don’t want to sound like a redundant broken record, but in my world so comes right to the top of my brain when you ask that is you signing personally and exposing your personal assets to anyone or anything?

Unknown Speaker 32:55

Got to be the number one in my world.

Unknown Speaker 32:59

That’s it.

J Darrin Gross 33:00

That’s definitely is you’ve witnessed. If everything goes bad and you’ve got, well, it is a risk. I mean, that’s just point blank it is it is a risk. And if if the payments aren’t made, as agreed by or as expected by the lender, they’re coming to you, right?

Chris Prefontaine 33:21

Yeah, and I do make I make one exception just to be clear and just full disclosure, and that is a personal residence. But using my methods, my son in law and daughter bought their own house on terms but I wasn’t able to I do mine conventionally. But if you can do that, make that in extremely, extremely excuse me low loan to value. That’s all. I need to get it that way.

J Darrin Gross 33:44

Chris, where can listeners go if they’d like to learn more and connect with you?

Chris Prefontaine 33:51

Simple then go just go to the website. Smart real estate coach calm or smart real estate coach podcast is a show. But what I had said too often

Unknown Speaker 34:00

And I’ll offer everybody is we have a hardcopy, you know hardcover, in hardcopy, Amazon bestseller real estate on your terms that we sent you. And if the listeners go to this link I’ll give them and just say they want they heard us on your show. We’ll go ahead and ship one out to them physically ship it out not electronic, and it’s not one of those Hey, put your credit card in. You gotta pay 10 bucks for shipping. We will ship it out. It cost me a little over six bucks plus the book and we do that as long as they say they’re on your show. The link is free. s r EC stands for smart real estate coach. Free s r ec. Book. calm.

J Darrin Gross 34:38

Got it? s r ec book.com. no free s r e c book.com.

Unknown Speaker 34:46

Gotcha free. Got that on the front end there. Okay.

J Darrin Gross 34:51

Awesome.

Chris Prefontaine 34:52

I’ll give them a lot of what we talked about.

J Darrin Gross 34:54

Yeah, no, I appreciate that. And I’m sure you’ll get some requests for that. appreciate you doing that.

Chris Prefontaine 35:01

Yeah, no, probably my team will be maybe not so psyched with me. But away we go.

J Darrin Gross 35:06

All right. Well, Chris, I can’t say thanks enough for taking the time to talk today. I’ve enjoyed it and learned a lot. And I hope we can do it again soon. Yeah. Thanks for having down. Appreciate it. All right. For our listeners. If you liked this episode, don’t forget to like, share and subscribe. Remember, the more you know, the more you grow? That’s all we’ve got this week. Until next time, thanks for listening to commercial real estate pro networks. CREPN Radio.

Unknown Speaker 35:38

You’re listening to CREPN Radio for influential commercial real estate professionals. For more information on this or any of our guests like us on Facebook CREPN Radio

Decision Making for Real Estate Investors with Gleb Tsipursky – CREPN #252

Gleb Tispursky 0:00

But what happened was that they were letting their intuitions lead, letting the gut reactions lead and their gut reactions told them that we can’t afford to lose. We can’t afford to lose our social status in the eyes of the tribe, in the eyes of our peers, and therefore, we’ll make these bad decisions, which will prevent us from losing social status.

Intro 0:20

Welcome to C R E P N Radio for influential commercial real estate professionals who work with investors, buyers and sellers of commercial real estate coast to coast whether you’re an investor, broker, lender, property manager, attorney or accountant We are here to learn from the experts.

J Darrin Gross 0:39

Welcome to Commercial Real Estate Pro Networks CREPN Radio, Episode Number 252. Thanks for joining us. My name is J. Darrin Gross. This is the podcast focused on commercial real estate, investment and risk management strategies. Weekly we have conversations with commercial real estate investors and professionals provide their experience and insight to help you grow your real estate portfolio. Let’s get into the show. today. My guest is Gleb Tispursky. He is the CEO of Disaster Avoidance Experts. And he’s on a mission to protect leaders from dangerous judgment errors, known as cognitive biases, which devastated bottom lines and bring down high flying careers. He’s authored hundreds of articles and written multiple best selling books, including Never Go with Your Gut, The Truth Seekers Handbook and his newest book, Blind Spots Between Us. He received his PhD in History of Behavioral Science at the University of North Carolina Chapel Hill. And in just a minute we’re going to speak with Gleb about decision making for your business. But first a quick reminder. If you like the show, CREPN Radio Please let us know. You can like, share and subscribe. Also, if you’d like to leave a comment, we would love to hear from our listeners. And if you would also like to see how handsome our guests are, be sure to check out our YouTube channel. And you can find that at commercial real estate pro network on the YouTube. With that, I want to welcome my guest Gleb Welcome to CREPN Radio.

Gleb Tispursky 2:29

Thank you there. It’s a pleasure to be here.

J Darrin Gross 2:32

I’m delighted that you were able to join us today. And looking forward to our our talk this afternoon. Before we get started, if you could take just a minute and share with the listeners a little little more about your background.

Gleb Tispursky 2:48

Sure. So I’ve always been fascinated with decision making ever since I was a kid because the typical way that we are taught to do decision making. The way you’ve probably heard a lot is to go with our gut, follow into Question. That’s the most typical advice about decision making. everyone hears that. Well, my parents were very much gut oriented decision makers. So they felt something was right. Their intuition told them it was right. And they did it. Unfortunately, often their intuition opposed each other’s intuition. So for example, my mom liked to buy nice clothing, and my dad was kind of a cheapskate. So she’d go out and she’d buy a $50 sweater, and she’d come home and he’d yell at her say that, you know, sweater shouldn’t cost anything more than $20 and stuff like that. And then they’d be off and fighting and so on. And already as a kid, I said, that was kind of dumb. It wasn’t really helpful. The question wasn’t resolved, and they still kept fighting and fighting and fighting wasn’t good for their relationship. So and it impacted me as a kid, obviously, to hear my mom and dad yell at each other. But the worst time was this one time when my dad so my dad was a real estate agent, and he had a variable salary based on commissions. And there was a period of about six months where he made a lot of money, but he hid it from my mom. So he made Available money probably didn’t want her to spend on sweaters. And so she bought an apartment elsewhere and leased it out to some folks. And about a couple of years, my mom found out about it. And she was so mad. She was so pissed there was a huge big blowout fight actually end up separating for a while. And so I lived with my mom and didn’t see my dad much in that area. They eventually reconciled but you could never really trust them again. So I saw that my parents make terrible decisions about financial matters. And so that really impelled me to try to figure out why do we make such bad decisions? Why does nobody see set us down? Why did nobody sit me down? And tell me now Hey, kiddo, here’s how you make decisions that my parents didn’t do that. I wasn’t taught how to make good decisions in school, or even college. Once I got to college, nobody taught me to make good decisions. They taught me math. They taught me geography but not decision making. Even though decision making is so fundamentally important. Everything, everything, everything we do in our lives, from business, to personal lives to relationships. I mean, Let’s not even talk about relationships. I mean, there’s a reason there’s a 40% divorce rate in this country. So, I decided to study decision making, how we make decisions badly and how we can screw up our decisions and how we can fix the screwed up decision making that we tend to make. So I studied this topic and I started as I started studying this topic, people became interested in what I had to say. So I became a trainer, consultant and coach, which I’ve been doing for about 20 years and working in this field. At the same time, once I exhausted the very slim pickings that were on how to make good decisions and popular media, I went decided I need to actually study this formally. So I went in Taka Jima, and that’s where I got my PhD in history of behavioral science, looking at the cognitive neuroscience and behavioral economics of decision making. So cognitive neuroscientists and behavioral economists, they spent about 15 years in academia, including seven years, Ohio State as a professor teaching about this stuff and researching it. And so that’s where my the book never goes. Got how pioneering leaders make the best decisions and avoid business disasters came about combination of by consultant coaching experience, plus the actual cognitive neuroscience and behavioral economics of decision making. So that’s what my background is like. And of course, all my other books also touch on various things. The blind spots between us talks about professional personal relationships, and the true secrets handbook talks about decision making in personal life.

J Darrin Gross 6:26

Got it. That’s fascinating life story from a standpoint of being a something that affected you in your childhood, how it made such a big impression and kind of a drove your, your career that’s, that’s really cool because I think so many times, people, especially if there’s any kind of pain involved, but you hear about more people trying to avoid something or, or and I guess in a way, maybe that’s it, that’s what you’re trying to do is avoid the pain of your childhood by understanding it better.

Gleb Tispursky 6:57

That not so much the pain of my child output, but I really care about people. I’ve always been someone who care who has a value side of utilitarianism, meaning wanting the most good for the most number. You know, it always hurt me to see people suffer. So the fact that so many people suffer, I mean, I suffered as a kid. And you know, I learned a good decision making by myself, but it didn’t have to teach to others. The reason I got interested in teaching about it to others in popularizing it and helping leaders make better decisions was that this professionals and so make better decisions because I see all the suffering that comes from it. I mean, think about, let’s say, the fiscal, you know, I grew up during the.com, boom and bust when in 1999, I was 18. When all the tech leaders were partying like it’s 1999. And then just a couple of years later, there was the.com bust, when the people who are the heroes of the Wall Street Journal suddenly became zeroes. And so many people lost their life savings. So many people. It was a tragedy. I mean, I knew people who really suffered in that period. And so just seeing that was was terrible. For me to just to go through that, and even worse for the bad malicious decisions taken by the leaders of Enron, WorldCom and Tyco to hide their losses of these companies using fraudulent accounting methods. And so seeing the kind of bad decision making terrible decision making by these leaders really made me realize how important business leaders are to the lives of everyone around them. So that made me really passionate and fascinated with how I can make a difference by popularizing good decision making for everyone and especially for business leaders.

J Darrin Gross 8:34

Well, it’s interesting, you know, when you think about some of the examples you cited there, I’m kind of curious. Do you have any kind of an insight or a Have you have you come up with a reason for any of those that you cited like the Enron and these others that the reason for the bad decisions?

Gleb Tispursky 8:58

Yes. So with Enron Main bad decision making came from actually what drives us to make decisions. So we talk about our gut, we talk about our intuition. But what is that? Well, it’s about our emotions, our feelings. And what the research and decision making shows is that our feelings, our emotions, our intuitions, drive about 80 to 90% of our decisions, so when we just go ahead and let them drive our decisions. Now, unfortunately, our feelings our intuitions, they’re not adapted for the other environment. They’re adapted for the savanna environment, when we were living in small tribes of 15 people to 150 people when they were hunters, foragers and gatherers. And there are lots of things about the savanna environment, the tribal environment, that are not a good fit for the modern environment, but we’re still have the instincts of going forward and making the decisions as though we’re in the tribal span. So for example, for survival and thriving in the tribe, it was very important for us to climb the tribal hierarchy. We are the descendants of those who climb the tribal hierarchy and then fry them survived and spread their genes because the people at the top of the tribal hierarchy were the ones most capable of spreading their genes. There is a reason about 5% of us on the earth are descended from the great conqueror gang discount according to extend to recent research. So, there’s a reason for that. So we are very strongly pushed to try to climb the social hierarchy to stay at the top of the tribal hierarchy. And the leaders of Enron, WorldCom and Tyco, you know, the burning embers of the world and so on. What we now know about them is that what drove them to make their terrible decisions to hide their losses was fear of failure, fear of being seen as losing social status among their peers. Now, the decision to use fraudulent accounting didn’t really delay the reckoning by more than a year or two. And what they got a year more of bonuses for an exchange for what 1015 years of prison. And how much money did they lose while they were in prison compared to what they could have gained. It was terrible decision making on their part, because look at how much they lost. And it’s not like they want they actually really seriously lost for using fraudulent accounting methods. But what happened was that they were letting their intuitions lead, letting the gut reactions lead and their gut reactions told them that we can’t afford to lose, we can’t afford to lose our social status in the eyes of the tribe, in the eyes of our peers, and therefore we’ll make these bad decisions, which will prevent us from losing social status. So the fear of failure that drove them is actually when I do consulting and coaching for business leaders. I see it very often I see the fear of failure, the fear of loss, especially the fear of losing social status, you know, the top level when you have plenty of money. What really drives people a lot is not wanting to be seen as a failure or wanting to be seen as a success, and they often make really bad to say Because of that,

J Darrin Gross 12:01

So how can you guard against making decisions based on the fear of failure?

Gleb Tispursky 12:09

What you want to do is distance yourself from this social status seeking recognize that, hey, social status seeking is just an inherent part of what we do as human beings. It’s very natural, it’s very intuitive, in the same way, that it’s very intuitive for us when we come across a source of sugar, you know, to eat as much as possible because in the savanna environment, you know, think about what happened if you came across some grapes or some bananas or some apples, it was very important for you to eat as much as possible in order to survive and thrive. We are the descendants of those who are able to do that, because the other people didn’t the other answers the other people who are not ancestors because they died. So we are the descendants of those who were able to do it. Now when we come across a box of Krispy Kreme dozen donuts. We want to eat the whole dozen donuts. That’s the intuitive thing. That’s in natural thing for us to do that because we’re driven to have all that sugar. Now you hopefully have learned over time and develop the mental habit that it’s important to not eat a dozen donuts, you know, you want maybe one doughnut, you know two donuts, but you got to stop at the third donut. Don’t eat more than more than two don’ts. Not everyone learned that which is why we have the obesity epidemic in this country. But still, hopefully you understand that that’s a bad idea. Even though you might end up doing it. Sometimes we have low willpower and and not that I ever did it. So you want to make you want to understand that this is a bad mental tendency that comes around bad reactions. And you have learned to in to restrain yourself from eating all the sugar that you can. In the same way. You need to learn to recognize what are all the dangerous judgment errors called cognitive biases that our brain pushes us to make that our gut reactions, our intuitions when we just tell people to go with their gut pushes on To make, because of how our brain is wired, you need to learn about all of them. And you need to restrain yourself from falling into. And there are specific techniques for doing so. And the social status seeking is just one of those you need to learn to recognize when you are falling into that social status seeking mode, when you’re afraid of losing steps in the eyes of those around you, and when that’s driving you to make some terrible decisions that will hurt you and others going forward.

J Darrin Gross 14:32

So, you know, it’s funny, you bring up the social status seeking mode, which makes me think of all of the social media kind of stuff where you know, most of it’s like a highlight reel about everybody winning and, and, you know, I know there’s been numerous studies done about just the dopa mean that you know, when you see the reactions to your post or whatever the that gives you a certain pleasure. So, If if that is, and I don’t say that’s that that’s the the tell. But But if the from a decision maker standpoint, you know that you mentioned, you want to try and discipline yourself for not seeking that or be be wary of that fear of failure that that need for social status. So but but if you’re somebody that’s that’s looking at potentially investing with somebody, are there ways that you can identify somebody that potentially may have this kind of fear of failure? You know, that you should be wary of I mean, if you were working, working with or investing in Enron at the time, was there anything that you could have identified or were, you know, things that you could have done to prevent or so you could have gotten out ahead of the crash.

Gleb Tispursky 15:56

So what we know what we know we have some research So I’m going to speak up from what the research shows. We know that leaders, CEOs, whether you know, leaders or financial firms, or other sorts of firms, when you see them appearing often in the media, that is a strong sign that they are overconfident, and that they are displaying social status in a way that’s going beyond where they should be. So we know that, for example, we know that leaders who appear, the more often the CEO appears in the media, the more often the more they tend to overpay for a company that they buy. So if you’re thinking about like a merger and acquisition, if the leader of a company that’s about to do a merger and acquisition appears often in the media, there this is likely to be one of those many, many m&a is that fail. Now, m&a is failed rate of very high rate, they fail at a rate of about 80%. So about 80% of all mergers and acquisitions fail to create value, they destroy value, and the more A leader tends to appear in the media, the more of a failure will be, the less likely it will be to be a success and the more of a negative impact it will have. And there’s many other so leaders who tend to appear more often the media who have if you look at the sentiment analysis of the kind of language that they use, which you as a potential investor can certainly look at the language and see if the love language is fluffy if the language is excessive, if the language is hypee, if it’s hyping it up, then you’re likely to see that later, the company will be worth less than it should have been worth compared to other companies where the leaders don’t use the sort of hyped up language. So there is definitely tells that you that we know very clear tells based on the research in cognitive neuroscience that you can use to predict which companies are going to have leaders who make bad decisions, because of their excessive overconfidence, excessive over thing. So these are things that you want to really be careful about and watch out for. Now, leaders who tend to be in the background, those leaders are not don’t get nearly as much credit as they actually should. So if you look at the kind of leaders who have the company result in the highest profits, it’s very often leaders who are less grandiloquent who speak less, and who actually do more. And those are the leaders. The funny thing is those are not the companies that get the initial investment. They don’t get the not kind of the Elon Musk Tesla going through the roof, but they are the companies that get the most profit, so they get the most revenue per share. And those are the companies that value bets that you want to be confident will actually earn you the most money. So that is, those are something those are just some of the many things that I talked about in my book. Never go with your gut. How pioneering leaders make the best decisions and avoid business ancestors. If you want to make smart financial decisions.

J Darrin Gross 19:01

And I appreciate you kind of going through that the majority of the audience is either real estate investor or looking to invest in real estate. And, you know, a lot of the deals that they’re I mean, they’re constantly making decisions, whether it be on a market or a, you know, a property underwriting a property, maybe be the team that they select property manager. On and on it goes. And, you know, it’s funny because you you mentioned this and I think that there’s a natural awareness sometimes of of what’s presented or, or just the need to, you know, you have to do your homework, whether it be if you’re dealing direct with the seller, or if you’re looking to invest in a syndication or whatever, you’ve got to, you know, kind of lift the hood and and, you know, question The information and make sure you get an answer on that. Based on that, I’m just kind of curious if Is there a, like a strategy that you would recommend or, you know, suggest that people like real estate investors consider when investing?

Gleb Tispursky 20:21

Yes. So the book talks about strategies that are relevant, very relevant for investors. And for anyone else looking to make a good business decision. Of course, people who are making a decision in business about which vendor to select, and which whether they want to which clients to work with the client decide making a decision on whether to buy something, you have to make the same sort of decision as an investor. And I described two methods in the book which are fundamentally valuable in addressing a lot of cognitive biases at once. One for casual decisions, meaning casual decisions, which you don’t want to screw up but you don’t want to maximize where you want to get a satisfactory Good enough decision. And this is a method that takes only a couple of minutes. And it is something that you want to make sure you use multiple times throughout the day for any sort of moderately important decision that you don’t want to scrub. There’s also long and this is involves five questions. There’s also longer eight step method that you want to use for more major serious decisions, when you’re actually deciding on whether to take the big deal or not. Whether you’re deciding to enter into a partnership or not something that really makes a major impact on your bottom line, and where you want to get the perfect answer or as perfect as possible, rather than a good offense. So but for the good offense. Let’s talk about the five questions you want to ask about anything that you don’t want to screw up. Let’s say you’re thinking about writing an email to a potential business partner, and you want to work out a nuanced issue as part of the email. So that’s an email the serious email, you don’t want to scroll down but it’s not going to make her very pure bottom line. First question, you want to ask about five questions. What important information didn’t I get fully consider? So what evidence didn’t you take into account? Let’s say you want to influence your business partner to take a certain decision? Now, have you considered all the reasons why they may not take that decision? That’s often evidence that we don’t take into account. So we just write the email hoping they’ll ignore all the evidence, all the information that they that you would not want them to consider. However, the email would likely be much stronger if you think about their perspective. And if you take it into account and addressing in advance of their concerns, so that’s information that you haven’t considered now if you do consider it, you could revise your email to take those issues and count and be much better able to influence your business partner to make the decision that you want them to make. So that’s the first question and that’s an example of high implied second. What dangerous judgment errors Haven’t I addressed in this situation? So What cognitive biases might be playing a role that you haven’t considered? There are very many cognitive biases. My book talks about the 30 most dangerous ones for investing for deal making, for business leadership for all sorts of things. So you want to take a look at the 30 most dangerous ones, take a look at my book, never go with your gut. And if you want to look at the ones for the relationships, in particular, look at the blind spots between us but for business decision making, never go with your gut. Next one, what what a trusted objective advisor telling me to do so think about someone who’s a trusted objective advisor to you, what would they tell you to do? What would derron tell you to do? What would that little angel on your shoulder tells you to do? We got about 50% of this benefit by just asking the question taking out ourselves outside of ourselves. So what would you tell a friend to do about this email in an objective situation, and you get the other 50% of the benefit by actually asking a trusted objective advisor. So call this person or for your millennial text this person. Next, how have I addressed All the ways this decision could fail. So think about the email, let’s say your business partner happens to be in a bad mood when they read the email, and they misinterpreted and they get upset. And then whatever you want to see happen doesn’t happen. How can you address that events? Well, perhaps read it, read the email, so your business partner receives it when they’re in a bad mood, and then address all the ambiguities and uncertainties and lack of clarity in that email. And that will help you address all the sorts of the problems that would happen if the business partners about finally, what would cause you to change your mind about this decision. So what would cause you to reevaluate your choice? For example, with an email, you could say, hey, if I don’t get an answer from my business partner, within a week, I will give this person a call. And now once you make this decision, you can just send the email and you can let it go knowing you have a revision point in a week, whereas otherwise it’d be kind of thinking about it all the way. In your mind, you know what? Why is your business partner not responding? Should you send another email should you call whereas right now if you make a decision in advance that if if then if you don’t hear from that person in seven days in a week, you will give a call, you just let it go. And you got just go forward. So that those five questions are very effective for addressing a whole range of bad decisions that we tend to make on everyday level, minimizing risks. And this again, is for minimizing risks, not for maximizing rewards, for minimizing risks for anything, but you don’t want to screw up.

J Darrin Gross 25:35

So I got a question. If you apply that five step process, how many emails do you write up that you’d like not to send?

Gleb Tispursky 25:47

Yes, that will definitely happen. You’ll realize that, you know, maybe that’s not the best, the best email for you to spend. So yes, I

J Darrin Gross 25:55

I was going to say, I know I have unnecessary thought of him in those, the one through five there, but I can tell you numerous times throughout the day, I’ll start an email or a text or something. And then I realized, you know, what’s the point of this kind of thing? It’s not gonna, you know, is there going to be any benefit from this? Now, that’s I appreciate you taking us through that. And especially I think just the asking these personally, as I’ve listened that, you know, what, what would a trusted advisor tell me to do? You know, because I think that’s that right there is, is making me think outside of just the one to one. Now, if there’s any kind of emotion involved in the, in the, you know, the reaction, if it’s a reaction especially, I think there’s, there’s, there’s power in waiting, you know, as opposed to reacting like that. So I appreciate you taking us through that. I got I got a question for you. You referred to, a couple of times through, you know, the information about how This is like a historical way we’ve been been wired, I want to say, No words.

Gleb Tispursky 27:08

Our brains are wired. Yeah. But

J Darrin Gross 27:11

is that is that? Do you find that that’s at a cellular level? Or is that more of like, your grandparents did it that way your parents saw it. And it’s just kind of a transfer of behavior based on the experience,

Gleb Tispursky 27:27

isn’t it? It is at the cellular level, meaning biological meaning genetic in this case. So if you look at babies, you can see that these traits already exhibited in babies, you will can see that babies are things do things like loss aversion, they exhibit things like tribalism. So I talked a little bit about tribalism, so tribalism, one of them is status seeking one aspect of tribalism status seeking another aspect of tribalism is that it was very important for us in the Savannah environment, to be very strongly attracted to people who are like us meaningful like and trust the people who seem to be like us who have our values, who seem to like the things that we like, you know, like the same flavor is right. And to not like people who don’t seem like us who seem different from us. So that was very important that environment because if we’re going to be kicked out of our small little tribe who would die, and if our tribe fell apart, because we weren’t supportive enough of our tribe, we would also die. So we’re the descendants of those people who didn’t die, because they were very tribal. And we they opposed attacking tribal members, hostile tribes, which wanted to claim their territory. So that’s why I don’t like other people who aren’t like you. So you can see already those sorts of things, those examples. So again, babies were babies, if you show a baby, someone who likes the same thing that they do, and the baby will like that person more will be more attracted to that person. So these are not things that the babies haven’t learned about these things yet. They are ingrained in us from when we’re actually pretty, that our genetic innocence things. So they’re instinctive and that is why they’re very dangerous because they’re instinctive, but not something we learned from my parents. They’re just part of who we are. They’re part of our genes, and they are ingrained behaviors. And that’s the danger of following these ingrained behaviors that they’re not a good fit for the modern world.

J Darrin Gross 29:18

No, it’s good. Hey, I want to ask you a little bit about the you mentioned it, this fear of loss, or loss aversion. Can you speak to that and just kind of expand on that a little bit for us?

Gleb Tispursky 29:37

Sure. So here’s the really interesting study that was done by a large bank, I won’t name it looked at its best investors, people who had it’s a, it’s accounts for the best people which grew the highest and found that there were two categories of investors that were the best investors, one people who forgot about their accounts and two people who died

J Darrin Gross 30:01

Really?

Gleb Tispursky 30:02

Yes,

J Darrin Gross 30:03

You got it, you got a chance or if you’d if you die, you could be one of the best investors.

Gleb Tispursky 30:07

There you go. Exactly. So because there are so many people who on average tend to, on average, investors tend to buy high and sell low. And that comes from various dangerous judgment errors. One of the biggest cognitive biases that causes this is called loss aversion. So loss aversion is our tendency to want to avoid losses, even at the expense of getting much higher gains. So this is it’s a really fascinating phenomenon. If you there’s been studies done showing that asking someone hey, here’s a coin flip experiment. I’ll give you $40 right now, and in exchange, not exchange so you have the $40. Now, will you give me that $40 for a flip of a coin where if you get heads, you get hundred dollars or if it’s tails, you get zero. Now, if you get that experiment to people, you’ll see that about 80 to 90% of the people choose to keep the $40. They don’t want to go to the coin flip. But the coin flip, the equivalent value of the coin flip is $50. It’s 50% of 100. So think about what happens with a coin flip. If you do a coin, flip 100 times 1000 times do it 100,000 times 100,000 times, that’s a difference of 40 million versus a 4 million versus 5 million. That’s the difference between the $40 equivalent and the $50 equivalent, but we are very much so if you if I say that when I say that to people, they say well, you didn’t tell me about the repeating scenario. You told me just you know this one time scenario. If I thought about it differently, if you told me it was a repeating scenario, well, our gut reaction tends to see anything that we do as a one time thing. It doesn’t see the broader context of the story. veterans that we tend to make, it doesn’t go toward that high gain the 50% chance of $50 of the 50% chance of $100 instead of the $40, I can keep right now. So this is one of the biggest problems that we tend to go for, we tend to want the bird in the hand instead of the two in the bush, even when we have a pretty strongly guaranteed chance of getting the two in the bush. And because in the savanna environment, think about it in the savanna environment. We were in a very precarious environment where it just we didn’t have banks, it didn’t make sense for us to gather resources. It’s not like we know we, if you kill the mammoth, you can put all the food in the fridge, right? You can’t store up your resources. So in the savanna environment, it made a lot of sense for us to go for the immediate short term gains and to ignore the larger potential gains from investing these resources and to avoid losses because in the picture So in environment, if we, for if we risked our resources, the $40 for the pretty sizable chance of winning $100, then maybe there would be a drought or something like that, and we would die. So that sort of precarious environment, it makes sense to go to avoid losses to make sure to preserve as many short term resources as possible. In the modern environment, it really doesn’t. We have banks were pretty well protected from immediate short term losses. And it’s so if you make a short term loss of $40, not a big deal, you will still win out over all over a million flips, coin flips and give the $50 million equivalent. However, that’s not what our gut tells us. So we tend to when we are faced with the short term loss when we see stocks falling, we tend to immediately want to sell them, even though it might not be the right time to sell. And when we see stocks as going high. We want we experienced FOMO fear of missing out, and we tend to want to buy them, even though it may not be the best time to buy even though they might have peaked. So these are times when we are falling into that loss aversion, we want to avoid the loss of not getting into a good thing. And we want to avoid the loss of

more pain from stocks going down. And we make bad decisions. And of course, this applies to not only stocks, this applies to commercial real estate deals, this applies to all sorts of deals, this applies to our general way of thinking and being in the world. So you need to be very careful and know that, hey, this is a tendency in which we human beings fall into a need to be constantly aware of this and scanning your environment for this tendency, just like you’re scared of scanning your environment for the and making sure to not eat a dozen donuts because you know, it’s very easy for us to eat a dozen donuts if we’re not full. If we’re not paying attention to it. It’s very easy for us to you know, just come home and play down on the couch and watch Netflix, instead of going out to the gym, which, you know, ideally, you want to do about 30 minutes of exercise a day. But in the savanna environment, you want to preserve all the resources, all the calories that you could and not do exercises. So we’re not we are wired to serve at home and watch Netflix all day, you know, the equivalent of sitting in the cab and by the campfire and you know, doing that all day. So this is a problem for us. And we want to make sure to be watching out for all of these sorts of problems, cognitive biases, loss aversion, you know, and all of these status seeking and so on. And so that’s loss aversion is one of the biggest ones that investors tend to fall into that causes them a lot of pain like this big bank discovered

J Darrin Gross 35:46

No, it’s it’s interesting you know, when you think about it based on the the two best investors, the those who forgot about the account or those that died. It sounds like sometimes not making a decision is one The best decisions that you can make.

Gleb Tispursky 36:03

And that’s why I was giving the example of when stocks are going up, that may not be the best time to buy these stocks. And when stocks are going down, that may not be the best time to sell these stocks. And that’s one of the just one of many reasons why people who do that are often the ones who lose.

J Darrin Gross 36:21

Well, I think it also, especially in real estate, I know I bought at the high and at the low end. But over time, if you if you have enough time, it all works out. It’s a matter of you. I think if if maybe the first decision would be can I afford to lose this money? Or can I afford to not worry about it? or How much time do I have? That kind of thing? Because if you start from that standpoint and understand you may need a longer horizon to get to your goal, but you will make your goal maybe just not on such a short horizon and I think right Now especially where we’re at, with the cycle of the market. When, when people look at and realize just how low the market was, you know, and the crash does and how far up it’s come. There’s this natural tendency to think and I think it kind of plays on what we’ve been talking about here. Is this kind of the fear of the next crash? And then in the news, recently the Coronavirus and you know, other things that suggest you know, there’s there’s like the antenna or up looking for looking for the next shoe to drop as opposed to, like you’re saying the long run is things you know, you flip the coin enough times, or if you buy and stay in enough deals. It sounds like to me that that you know, you’re probably gonna be alright, it’s more a matter that if you’re trying to time it, kind of thing that you might not. He might know when. So,

Gleb Tispursky 37:57

Yes, so you want to make sure that’s why valid Investing is a good pretty good bet. You want to make sure if the deal makes sense over time, rather than trying to time the market and time trying to time the market, whether it’s the real estate market, or the stock market is usually not going to win out, especially because you’re competing against others who are trying to time the market. And when you’re competing against the big firms that are trying to time the market, they’re often going to be better at timing the market than you are. And so you can actually get the best chance for smaller investors, according to research on this topic is to try to do value investing, whether in the real estate or elsewhere, so focusing on the fundamentals, rather than trying to time the market.

J Darrin Gross 38:42

Got it? Gleb, if we could, I’d like to shift gears here for a second. As I mentioned to you before, we started recording by dam and insurance broker. And as such, we we try and work with our clients to manage risk and There’s a couple of different strategies we consider when when trying to manage risk. The first is we ask, can we avoid the risk? If that’s not an option, we look and ask, can we minimize the risk? And that’s not an option, then we look in and ask, can we transfer the risk? And that’s what an insurance policy is, is a risk risk Transfer Tool? and, as such, I have been asking my guests, if they can identify what they consider to be the biggest risk. And just for clarity, I’m not necessarily looking for an insurance related answer. You know, I think some people they think because I have insurance. So that’s, that’s what I’m looking for. But it’s not because I realized that risk is, you know, far reaching. In fact, everything we’ve been talking about here is kind of managing risk from the standpoint of decision making. But if you’re willing, I’d like to ask you Gleb Tispersky. What is the BIGGEST RISK?

Gleb Tispursky 0:06

So what is the biggest risk for me? You’re asking?

J Darrin Gross 0:09

Yeah, you are however you you know, you can identify you personally. Or if you see investors or how you see people making decisions or however you want to, however you want to frame the question.

Gleb Tispursky 0:21

So for me, and for me, and for many other people who are like me, the biggest risk, I would say is coal is a cognitive bias called the optimism bias. So I tend to be very optimistically biased. What does that mean? It’s one of the cognitive biases where people tend to see the future as always bright. As always great. As you know, the grass is greener on the other side of the hill, everything is going to be wonderful, tend to be risk blind and tend to be have exaggerated expectations. So I tend to systematically underestimate the risks for my future for myself, and this is a huge problem. I’ve run into many, many mistakes and many problems.

That I wouldn’t have to run into if I was not risk intuitively risk blind if I was not just focusing on the opportunities instead of the frets. So I’ve had to really work on myself and train myself and how to get some outside advisors and help to who are pessimistically oriented to run my ideas by because I just don’t see the inherent flaws in them, which are many, you know, the kind of first was 28 years before breakfast, and thinks they’re all brilliant. Now, to my bitter experience, I’ve learned they’re not, but this is something I know I have to deal with. And this is something that I’ve learned to mitigate by both calibrating myself better and knowing that I tend to be way too optimistic, and getting outside help from people who are pessimistic who I trust, who I can run ideas by, and who can tell me that hey, you know, these are 20 have baked potatoes and you know, 17 of them don’t make sense but maybe these three you could work on and you know, finish baking them into fully baked potatoes.

J Darrin Gross 1:55

That’s great. I love you explaning what you were talking about what’s just the five questions there is kind of bouncing your ideas off of somebody else there. That’s a lot of power now. So, all right, so Gleb before we wrap up, where can listeners go if they would like to learn more or connect with you?

Gleb Tispursky 2:17

Well, my books are available in bookstores everywhere. They’re published by great traditional publishers and never go there got this published by courier press, the blind spots between us as published by new Harbinger. The truth seekers handbook is published by intentional insights. So they’re available in physical bookstores everywhere. You can check them out in Barnes and Noble indie bookstores, university bookstores and whatnot. And of course, online on Amazon, Barnes and Noble and elsewhere. My information is going to be on disaster avoidance experts.com. And again, disaster avoidance experts.com. There’s going to be blogs, podcasts, video casts, guides, decision maids, manuals, services and consulting coaching and speaking and training and so on. You want to especially Make sure to go to disaster avoidance experts.com forward slash subscribe. There’s a free eight video based course on making good decisions. So that includes as the first step of the course on assessment on the 30 most dangerous judgment errors in professional decision making, whether business investing and so on. Again, it’s disaster avoidance experts.com forward slash subscribe, and I’m very active on LinkedIn. So if you have any questions about anything you’ve heard, connect with me there and ask me any questions. Doctor gloves support ski, GLEB TSIPERSKY.

J Darrin Gross 3:35

Got it. For our listeners, I’ll have that listed in the show notes. So if you’re driving and unable to right, find that there. Gleb, I want to say thanks again for taking the time to talk. I’ve enjoyed it, and learned a lot. And I hope we can do it again soon.

Gleb Tispursky 3:54

It was a pleasure. Thank you so much for inviting me.

J Darrin Gross 3:58

All right, for our listeners. If you like this episode Don’t forget to like, share and subscribe. Remember, the more you know, the more you grow. That’s all we’ve got this week. Until next time, thanks for listening to commercial real estate pro networks. CREPN Radio

Qualified Intermediary Monetized Installment Sale with Ben Mandel – CREPN #251

Ben Mandel 0:00

That 1031 transaction can be recharacterized into a Qualified Intermediary installment sale. And simultaneously the lender is notified and the money is wired to the seller into an account of their choosing. And that process generally takes between 24 and 48 hours.

Intro 0:19

Welcometo C R E P N Radio for influential commercial real estate professionals who work with investors, buyers and sellers of commercial real estate coast to coast whether you’re an investor, broker, lender, property manager, attorney or accountant We are here to learn from the experts.

J Darrin Gross 0:38

Welcome to Commercial Real Estate Pro Networks, CREPN Radio, Episode Number 251. Thanks for joining us. My name is J. Darrin Gross. This is a podcast focused on commercial real estate investment and risk management strategies. Weekly we have conversations with commercial real estate investors and banks. professionals who provide their experience and insight to help you grow your real estate portfolio. Let’s get into the show. today. My guest is Ben Mandel. Ben is a partner at Capital Appreciation Strategies. He’s also a 35 year finance and real estate professional. And in just a minute, we’re going to speak with Ben about an alternative tax deferral process to the 1031 exchange known as the Qualified Intermediary Monetized Installment Sale. But first, a quick reminder, if you like the show, CREPN Radio, please let us know. You can like, share, or subscribe. And as always, if you leave a comment, we would love to hear from you, our listener. Also if you’d like to see how handsome our guests are, be sure to check out our YouTube channel and you can find us on youtube ad commercial real estate pro network. With that I want to welcome my guest today Ben, welcome to CREPN Radio.

Ben Mandel 2:03

Hello, Darrin, thank you for having me.

J Darrin Gross 2:06

I’m so glad you’re able to join us today. I’m looking forward to our our talk today. And but before we get started if you could take just a minute and share with the listeners a little bit about your background.

Ben Mandel 2:19

Sure. I started my career in a family real estate business and spent 12 years working with the family pretty much developing and selling land parcels and also doing a little bit of homebuilding. Following the real estate business. I became a financial adviser practiced in that realm for 20 years. And for the past two and a half years I’ve been working on educating people about our process a Qualified Intermediary Monetized Installment Sale and helping to facilitate this process for those people who wish to employ when they sell their capital asset.

J Darrin Gross 3:09

Got it. Well, maybe a good place to start just for orientation a 1031 exchange, would it be helpful to at least identify what that is and when it comes into place we can orient as to what what a Qualified Intermediary Monetized Installment Sale is as different,

Ben Mandel 3:39

Certainly certainly. So the 1031 exchange is a section of the IRS code, which was amended in the last year and a half used to be able to be used for all capital assets. Now is only able to be used for real or real property real estate. capital asset in the process allows the seller to defer their tax capital gains tax on the sale of the asset. And what it requires that the seller do is replace the real estate with a lifetime property, which is a very broad definition, they can essentially replace the real estate with any other piece of real estate. They have to identify the piece of real estate that they want to replace what they’ve sold within 45 days from the closing of their sale. And then they must close on that identified piece of real estate within six months from the close of their initial sale. If they fail to do either one of those and the 1031 exchange essentially fails and the seller will have to pay the capital gains tax that was due in the year of sale. If they do identify and close then that deferral can Go on, all the way until they pass away and they can keep utilizing the process to buy and sell real estate current law up until the time they pass and when they pass, the their heirs actually inherit the property with a step up in basis.

So with a 1031 exchange, if utilized correctly, the individual who is selling their real estate will never have to pay the capital gains tax, it will become an obligation of the errors but since the IRS received a step up in basis in the value of the asset if they sell it rather quickly, and they’ll pay very little if to no capital gains tax on that asset. So that’s what a 1031 exchanges is.

What our process does is allows people who want to sell their real estate and any capital asset for that matter. We’re not confined to the real estate capital asset, but it allows those people selling real estate, to not have to reinvest in real estate again, they can reinvest in whatever they choose. There is no light kind requirement utilize our process, and it helps the real estate professional. Sorry, it helps the real estate professional or investor who doesn’t want to identify a property that they want to replace the sold property with within 45 days or close within six months. They’d rather hold on to the cash from their sale, and then reinvest in real estate on their own timeline, rather than on the timeline that the code requires in the 1031 exchange. Example being in a market where people feel that a correction is coming. They may choose that there they may not really want to reinvest, sell at the high point in the market and have to reinvest at the high point in the market. They’d rather hold their own asset and reinvest at a correction at a more favorable cost than they would have gotten if they had had to do the 1031 exchange. So it’s an alternative that allows flexibility with the reinvestment of the proceeds from the sale of the property.

J Darrin Gross 7:18

Got it? So a couple of questions come to mind. In the the 1031 process, you have to identify a Qualified Intermediary. And as you marched on that 1031 process, you’ve got identify three potential properties. Where is it that the Qualified Intermediary Monetized Installment Sale is inserted in the process.

Ben Mandel 7:47

Actually, it’s done prior. While the property is in escrow. The paperwork is set up to create the transaction, the Qualified Intermediary actually closes a transaction as a 1030 Want to exchange and then as soon as the funds reach the intermediaries title company that triggers the intermediary, notifying the independent third party lender who actually monetizes the installment sale to fund that monetization, and then the seller receives most of the money less fees in cash at at typically between 24 and 48 hours after their initial close of escrow.

J Darrin Gross 8:31

Okay, so, example here we’ve got a property we’ve held for a long time. It’s now we we sell it. If I understood you, right, the the sale still goes through the Qualified Intermediary. And then you mentioned the bank or a lender. Can you kind of walk us through that? with that?

Ben Mandel 8:57

I’ll expand on that. The way the training transaction is set up begins while the property is in escrow. The Qualified Intermediary will communicate with the seller and structure a 30 year interest only installment loan. Simultaneously, they’ll arrange for an independent third party lender to monetize that installment loan so that the seller actually receives the majority of their money immediately following closing. And I say the majority of their money there is a six and a half percent fee. For this transaction 5% goes to the Qualified Intermediary 1% goes to the lender. And then 50 basis points actually goes to a long term escrow company that we employ to administer the transaction during the entirety of 30 years. So in other words, the long term escrow company will receive the payments from the intermediary on the installment note, and then make the payments to the lender for the benefit of the seller on the monetization loan. They’re essential. essentially equal payments, both being interest only. And they don’t create a current tax, the escrow company supplies the seller with their 1099 and 1098 each year. And those, those two amounts will offset give an interest income and assuming that the money’s been invested as it should be the investment interest expense so there’s no current tax due. And then finally, at the end of 30 years, the balloon payment is made, which ends the process the balloon payment then is sent to the lender and everything is complete. And the individual or entity receives constructive receipt at which time the taxes are due in 30 years. So that the paperwork is set up wall the sellers and escrow then immediately following the close of escrow, upon receipt of the proceeds by the title company of The Qualified Intermediary, the transaction is recharacterize to a Qualified Intermediary Installment sale, which is allowed for in the 1031 code section that a 1031 transaction can be recharacterized into a Qualified Intermediary Installment Sale. And simultaneously the lender is notified and the money is wired to the seller into an account of their choosing. And that process generally takes between 24 and 48 hours to complete.

J Darrin Gross 11:31

Got it? So when the money goes to the Qualified Intermediary, and then the lender makes the loan, what kind of percentage would would a seller expect to get from the proceeds?

Ben Mandel 11:50

93 and a half percent of the proceeds Okay,

J Darrin Gross 11:53

So it’s just the six and a half percent.

Ben Mandel 11:56

That’s correct.

J Darrin Gross 11:58

All right. And then For the life of the loan for 30 years, the there is a payment due for the interest only.

Ben Mandel 12:07

Correct. And that’s administered by the long term escrow company. Remember, the long term escrow company receives the installment note payment from the intermediary, and then makes the payment to the lender for the benefit of the seller. So there’s no administration obligation for the seller. And then there’s there is an annual $300 fee to the escrow company for their service.

J Darrin Gross 12:32

All right. And the interest only so will the the seller have a an ongoing mortgage essentially or is there is that pre funded or how’s that work?

Ben Mandel 12:45

Yeah, the the, they’re going to have a note receivable and a note payable and and the interest income on the note receivable and the interest expense on the note payable actually offset each other from a tax perspective.

J Darrin Gross 12:59

Got it. Is that something that the seller has to take care of? Or is that part of the process of the Qualified Intermediary in the lender structure that the the escrow company handle?

Ben Mandel 13:15

That’s all part of the process, the seller doesn’t have to take care of any of the administration of the transaction. The only thing that seller has to do one is received the proceeds from the loan and then invest how they choose when they choose. And they’ll need to use the 1099 and 1098 for their annual tax.

J Darrin Gross 13:34

Okay. So the 1099 to 1098 cents to offset the tax liability. All right.

Ben Mandel 13:40

Correct.

J Darrin Gross 13:41

And so we get down the tracks we get to the 30 year mark, and the loan is due in full correct?

Ben Mandel 13:51

Yes. Correct. Both loans are doing okay.

J Darrin Gross 13:54

And interest as well? Or is the interest been paid all the way through? I mean, that’s, that’s been As we’ve been going, right, that’s the interest only loan. It’s just the principal we’ve got to pay back now. Correct?

Ben Mandel 14:05

Exactly, exactly.

J Darrin Gross 14:07

Gotcha. Gotcha. And the percentage of the interest is, what’s the percentage rate?

Ben Mandel 14:16

It varies from time to time, given the prevailing market rates. It’s essentially lately it’s been anywhere between five and 6%. But it’s not it doesn’t impact the seller at all because the the interest income and interest expense offset each other and they don’t, they don’t actually receive or pay the money. It’s all done by the escrow agent.

J Darrin Gross 14:41

All right, but that but at the on the front end, though, the seller is going to get the 93 and a half percent of whatever their their sale price was. reckoned take receipt of that because it’s alone. It’s not. It’s not the proceeds of the sale. And so now, they’re free to Go invest with whatever they want. But they they do have this note that comes up 30 years in the future and if they’re they’re alive to pay it, then they have to pay it. What it what happens if you pass before the 30 years around?

Ben Mandel 15:19

That actually is that is the planning risk. The there are several different methodologies that we help our sellers with, in conjunction with their financial advisors and professionals to plan for that event. Many many sellers, purchase insurance life insurance policy. Second died or survivorship policies typically, if some sellers will, will insure a spouse who is significantly younger rather than the older spouse to save money given that the older spouse would have a longer a shorter mortality. There’s a lot of ways to accomplish that. But in addition they don’t have to purchase insurance they could put a certain percentage of the money typically we will recommend the advisor utilize five to 6% of that 93 and a half percent and put it in a conservative interest bearing type account, municipal bonds treasuries whatever the case may be, that could be utilized to pay that tax when the owner if the sellers word of past there are a lot of different methodologies and there have been some

J Darrin Gross 16:56

All right. Okay, so We were talking about the the 30 years in the U turn with the 5% or take take a percentage amount and put that in a interest bearing account or something to kind of prepare for that. Okay.

Ben Mandel 17:21

And there’s also another another aspect of this process is the seller does not have to actually wait 30 years to pay the tax. If at any time for tax planning reasons, reasons, it benefits the seller to advance a portion of the principal or all of the principal, they can do that in any time during the 30 years to take advantage of whatever advantageous tax planning may occur. For instance, you know, a times some of our sellers or investors experience a large loss in a given year, well, they can advance a part of the principles To be offset by the loss, thus not paying any tax on that portion of the principal, there could be a significant tax increase in a given year that creates concern for the seller, and they would rather pay the taxes before that tax increase goes into effect, they can advance the entire amount and pay the taxes. Prior to that tax increase going into effect, we do caution our sellers don’t understand the huge advantage of this process is the opportunity regained over the 30 year period with their money to earn money, so it would have to be a large tax increase or have a short duration left on the 30 years to really make sense to advance the entire amount. They could advance a portion sure and pay the taxes on a portion of it if they were concerned about tax.

J Darrin Gross 18:52

So the the the two elements that are in play though is the taxes still do it just you’ve deferred it till this the end of this receipt of the the money, which is basically the loan and then also you’ve got the loan to to be repaid. If I’m understanding right.

Ben Mandel 19:13

correct the loan will be repaid by the proceeds from the installment note. So it’s not ever a burden to the individual seller because there’s an offsetting note that will pay.

J Darrin Gross 19:28

Gotcha, gotcha.

Ben Mandel 19:31

Limited recourse. The loan is a financial based loan, and the lender doesn’t hold the seller in any type of recourse if the loan were to default. For instance, if the Qualified Intermediary absconded or went bankrupt, the individual wouldn’t have to pay back that loan because of that reason. So they’ve got very limited, almost no recourse on that one.

J Darrin Gross 20:00

So as I’m thinking through this, I’m assuming that the the the ideal prospect is somebody that’s owned a property for a very long time that has a substantial gain, probably has substantial depreciation recapture. Is there kind of a sweet spot where you’ve seen that dollar amount make more sense where majority of your clients take advantage of this.

Ben Mandel 20:30

Typically, you’re looking at somebody having held the property for seven plus years. If it’s, if it’s sooner than seven years, unless there’s been some unbelievable appreciation. If it’s sooner than seven years, when you look at the fees of the transaction, it kind of limits the benefit from from doing

J Darrin Gross 20:49

Is there any kind of $1 amount where you see kind of a mean seven and a half years is one thing for kind of the depreciation recapture. I would think but as far as dollar amount or desert? Can you point to that or is there a threshold?

Ben Mandel 21:08

The only the only impact $1 amount has in our processes, we have a minimum transaction size of $500,000. But really the dollar amount has to if you if you analyze the sale and analyze the tax and look at the cost of the transaction, it has to make enough sense that there’s a big enough spread between the cost and the tax, that it makes sense to take the cash and reinvest and you regain the opportunity. Basically, you don’t you don’t have to pay the tax. So you get to hold it and make money on the tax rather than then just paying the tax when when you sell the property. There really isn’t it just every deal you have to analyze and take a look at and if it’s something that the seller is interested in Looking at, well, then we go through a process of analyzing Well, what happens if you pay the tax? What happens if you utilize our process? And even you know, some people aren’t convinced they don’t want to do a 1031 exchange. So we look at what happens if you do a 1031 exchange, and and we’re 100% supportive of them doing the best thing for them. I mean, I look I, we offer this process, not because we feel like it makes sense for everybody. And likewise, we also offer this process because we understand that the 1031 exchange doesn’t make sense for everybody, nor does a deferred sales trust which is another methodology to defer the tax there you know, as many different options as you can have for the investor, then then the best service that the investor invent or the best serve the investor is in terms of being able to identify what the best solution for them.

J Darrin Gross 22:54

Got it. So the real benefits from understanding this is that you have access To the the proceeds. And you can go invest as you as you wish. You You don’t know the tax today, but the tax is still it’s owed, but just you deferred it for, presumably 30 years or shorter if you choose. But it gives you basically the flexibility to to do other things. Is that my understanding that pretty much you’re

Ben Mandel 23:26

correct, it’s it’s the biggest issue with our process over the 1031 or the deferred sales trust as it gives you complete control over how you utilize the process.

J Darrin Gross 23:37

Gotcha. Ben, if we could, I’d like to shift gears here for a second. As I mentioned to you before we get started by damn an insurance broker. And as an insurance broker, I work with clients to assess risk and determine what to do with risk and we typically look at one of three different strategies when we’re trying to manage risk, and the first question we ask is, can we avoid the risk? If that’s not a, an option, and perhaps we can minimize the risk. And if we can neither avoid or minimize the risk, then we look to see if we can transfer the risk. And that’s essentially what an insurance policy is. And I’ve been asking my guests and I’d like to ask you, if you’re willing, if you can identify what what you see is the biggest risk. And just again, for clarification, I’m not necessarily looking for an insurance related answer If your answer is that. That’s great. But again, if you’re willing, Ben Mandel, what is the BIGGEST RISK?

Ben Mandel 24:55

Well, the biggest risk actually has two cards. Initially, the biggest one Risk is, as compared to the 1031 exchange, you, you will end up having to pay the tax at some point in the 1031. Exchange if you hold the property until you pass there’s no tax ever pay. So that’s that’s part A of the biggest risk. Part B of the biggest risk is, if you were to pass prior to the note being or the time period being completed on the transaction, then the heirs would have to choose whether or not they wanted to actually leave this open in the estate of the decedent or if they wanted to pay the tax early. We never suggest leaving it open in the state of Tennessee. The idea with estates usually is that you want to close them as quickly as possible. So those are the two biggest risks that last or risk we utilize, or we recommend to the sellers advisor. If they consider utilizing a survivorship insurance policy to transfer that risk of pre deceased in the 30 years, and having that benefit available to the heirs so that they could choose to just pay the tax when the individuals passed away. Otherwise, the biggest risk is if the if the individuals do not pass, there has to be some sort of plan that would allow them to pay that tax in 30 years. Theoretically, if you invest your money and you do well, you’ll have plenty of money to pay the tax. But what we suggest to the advisors in the event that they do outlive the 30 year period, that they set aside a certain percentage small percentage of the asset or the dollars that they receive into a conservative interest paying account, treasury bonds, municipal bonds, that would help to defer or or assist in paying that tax when it comes to you in 30 years.

J Darrin Gross 27:05

Got it. Got it. I just want to ask you, are your services are you able to take care of customers? Is there a limitation as to where somebody has to be located? Are you able to work nationwide?

Ben Mandel 27:22

Any any, any state in our country can utilize this process. Now, there are some states it’s more beneficial than others. For instance, California, when you look at the taxes that are paid on an appreciated asset, totals approximately 37% of the gain is paid in tax when you consider all of the state and federal taxes. And if you look at a state, such as Texas where I am or Florida, or any state that doesn’t have any state capital gains, if all you have to pay is the federal capital gain, then there’s no not as big of an impact as there is in a state that has a capital gains tax on the sale of an asset. That doesn’t mean that it’s not beneficial. And it can be very beneficial if there’s a large gain. But the tax isn’t as large obviously in states that don’t have state tax.

J Darrin Gross 28:20

Got it. Got it. Well, this has been enlightening Ben, I appreciated you taking us through this. Where can listeners go if they’d like to learn more or connect with you?

Ben Mandel 28:34

They can, they can call me at my on my cell phone number is the best way to call me and that that is area code 210-387-9728. Obviously, since that is my cell phone number. They can also text me if they have any questions, or would like to communicate with me about how the process works or how it might better To fit them. They also can email me My email address is macro350@gmail.com. Those would be the best ways to contact me. If they would like to get information on the process itself, they can go to my intermediaries website, which is initial SCROWCollateral.coms.

J Darrin Gross 29:36

Got it.

Ben Mandel 29:37

I said CR o CR, O w, I’m sorry. collateral com.

J Darrin Gross 29:42

Got it. Got it. Then, again, I can’t say thanks enough for taking the time. I’ve enjoyed it. and learned a lot. And I hope we can do it again soon.

Ben Mandel 29:54

Absolutely. I appreciate it. Thank you very much for having me.

J Darrin Gross 29:57

All right. For our listeners. If you like this This episode Don’t forget to like, share and subscribe. Remember, the more you know, the more you grow. That’s all we’ve got this week. Until next time, thanks for listening to Commercial Real Estate Pro Networks. CREPN Radio.

Intro 30:16

You’re listening to CREPN Radio for influential commercial real estate professionals. For more information on this or any of our guests like us on Facebook CREPN Radio

1
2
3
…
27
...Next Page

Recent Posts