cash flow Archives - J Darrin Gross Podcasts

Cash Flowing Businesses in Commercial Real Estate with Chris Larsen – CRE PN #417

Chris Larsen 0:00

If you look at Warren Buffett, you say, well, Warren Buffett, what type of investor is he? He’s a he’s a value add investor, right? He buys companies, and he improves these companies. And it’s all based on Benjamin Graham’s philosophy that he put together. So I read those books, I was always I always gravitated towards these lower risk endeavors. And really, I look at a multifamily property Darren, not as a not as an apartment, but I look at it like a business, because that’s how the IRS sees it. They say you’re running a business and we’re gonna give you the tax benefits like you do a business but you happen to get even better benefits because you have this real estate associated with it that has these terrific depreciation benefits. So you know, what we do in our value add model is we look to improve income revenues, we look to decrease expenses through improving our operations, which yields an increase in net operating income, and whether it’s net operating income or EBITA. A business a property is sold on a multiple of that, that number. So if you’re looking at multifamily property, and you look at a carwash it’s the exact same formula. It just takes different levers and different knobs that you have to pull.

Announcer 1:12

Welcome to CRE PN 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 1:32

Welcome to Commercial Real Estate Pro Networks, CRE PN Radio. 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 and provide their experience and insight to help you grow your real estate portfolio.

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Today, my guest is Chris Larsen. Chris is the founder and principal of Next Level Income he has been investing in and managing real estate for over 20 years. While still in college. He bought his first rental at the age of 21. And from there Chris expanded into development, private lending, buying distressed debt, as well as commercial offices and ultimately syndicating commercial properties. He began syndicating deals in 2016 and has been actively involved in over 1 billion real estate acquisitions. And Chris is passionate about helping business investors become financially independent. And in just a minute, we are going to speak with Chris about why and how he invest in cash flowing businesses like car washes, in addition to real estate.

But first, a quick reminder, if you like our show, CRE PN Radio, there are a couple things you can do to help us out. You can like, share and subscribe. And as always, we encourage you to leave a comment. We’d love to hear from our listeners. Also, if you want to see how handsome Our guests are, be sure to check out our YouTube channel. You can find us on YouTube at commercial real estate pro network. And while you’re there, please subscribe. With that, I want to welcome my guest, Chris Larsen. Welcome to CRE PN Radio.

Chris Larsen 3:48

Darrin Great to be here.

J Darrin Gross 3:50

Well, I’m so looking forward to our conversation. But before we get started, if you could take just a minute and share with the listeners a little bit about your background.

Chris Larsen 4:00

Yeah, Darrin, so great intro I really appreciate that. And we’re going to talk a lot about different types of real estate and even some businesses that kind of layer into that. But I started off in college, I wanted to race my bike. So I went to school actually for engineering with a Virginia Tech. But my passion at the time was racing bicycles, specifically rode bikes. I was I was doing that I go to class every once in a while. And in between my freshman and sophomore years, my my best friend, my roommate, my training partner, Chris passed away a race for another year after that. And I realized this is this is silly. This is not the most I could be getting out of life. And there’s a lot of stuff going on in the sport at that time. And I got to train with people like Lance Armstrong, I got to race against that whole generation. So I got I got to know people that were going to Europe and I was hearing the stories firsthand. And I also I tell people, I’m lucky that I wasn’t good enough to have to make some of those hard choices that some of my friends had to make. Because I realized that even if I was using performance enhancing drugs, I wasn’t going to be a great Pro. And I sure wasn’t gonna drug myself to be a crappy professional cyclist. And the thing is, cyclists don’t make a lot of money, even if you’re good. You know, they don’t really make a lot of money. And I always had this entrepreneurial streak. So after racing for another year, I made this decision to hang my wheels up, so to speak, and I said, Okay, I’m not going to let an opportunity pass my bot pass me by, I’m going to live life to the fullest. And the thing is the reality of the world. And if you’re listening, you know this, you need money, to be able to take advantage of opportunities, whether it’s an opportunity to invest, whether it’s an opportunity to take a trip, whether it’s an opportunity to put your child in the best school, you know, all these things cost money. So between my kind of entrepreneurship, as well as this, this desire to really live life to the fullest, I looked at all these different investment options, over 250 books, actually, more than that on investing finance, real estate, I got an MBA in Portfolio Management. And along the way, I bought my first property at age 21, and built a strategy around real estate to help me achieve financial independence, financial independence in a very predictable way. And we’ve since gone from small residential properties, single family rental properties, to multifamily syndications to self storage, carwashes, hotels, mobile home parks, we have a debt fund as well, where we do basically hard money lending, private loans. So we have whole spectrum. And we brought along a lot of investors along the way with us as well.

J Darrin Gross 6:39

Wow, that’s, that’s quite the, the history there as far as the different things you’ve done. And it sounds like you’re a very goal oriented person, I can only imagine with the the bike racing, and just the dedication it took to get to the level you are at the design discipline, I’m assuming that that paid off maybe didn’t didn’t sound like at the time with your school based on the way you describe you barely went to school. But

Chris Larsen 7:05

But yeah, well, tongue in cheek there,

J Darrin Gross 7:08

ya know, I’d say the the, the, but still, I have a lot of admiration for anybody that’s really dedicated themselves to a particular, you know, thing or a passion. And, you know, and then also had to make the decision as to whether or not they could continue, but that how those those traits, the gotcha as far as they did, can transfer and help you and other aspects of life. So So I appreciate you sharing that. And I agree. So you mentioned you, you you started with a was it a single families that we started with in

Chris Larsen 7:46

Yeah, yeah, bought a single family rental. And I think I saw you have a copy of this here as well, Darrin, and I go all in. If you really want to dive into my story, you can get a free copy of my book at next level. income.com. Yeah, I talked about how I started with one single single family rental at age 21. And I just just kept going from there. Got it?

J Darrin Gross 8:07

And since then you’ve done multifamily office. And was it self storage? Of those? The?

Chris Larsen 8:16

Yeah, so multifamily and self storage are kind of the base of our investment pyramid. Yep. Okay.

J Darrin Gross 8:24

And between those, is there a preference? Or have you found them to be equally satisfying? Or, or profitable? Or?

Chris Larsen 8:33

Yeah, I think, you know, we, we guide ourselves by demographics and the fundamentals. And, you know, if you look at kind of the framework that I built out for our, our investment thesis, it’s based upon demographics. So you know, where, where’s the tide going, you know, we’re gonna have, we’re gonna have short term movements, we’re gonna have waves. You know, on any given day, or any given year, we’ve seen a lot of kind of ups and downs in the real estate market, we’ve seen interest rates rise, but the long term fundamentals still persist in multifamily. And a lot of those same fundamentals cross over very nicely with self storage. And one of the things is self storage, actually, historically has outperformed during recessionary times. So, maybe you asked me after the next recession, which one I like better, but I’m definitely if you ask, you know, at best, I always put my money where my mouth is multifamily is the absolute bulk of our investment portfolio, both from our our investment group, but that we work with investors as well as from a personal perspective.

J Darrin Gross 9:36

Got it? And did I understand you’re also you’ve developed some of your properties, is that correct?

Chris Larsen 9:43

So I, my wife is an architect, and we’ve done my wife and I have built several spec homes. We have a residential development that we’re working on right now. As far as the car washes are concerned that, you know, imagine we may dive into in a little bit. We’re building we’re building some of our own locations on that Park. and even some of our self storage facilities have expansion opportunities. But for the for the multifamily for the Self Storage Unit for the car washes, we’re basically running with value add model, we’re buying, you know, established stabilized properties development as a minority in our portfolio.

J Darrin Gross 10:17

Okay, I just wanted to make sure I know that they at least looks a little bit on your portfolio there. And I thought, wow, that’s the slowest properties are significantly large, more than a couple 100 units, and the development of that quite the task there. So I was just curious on that. Alright, so in you mentioned, you have been syndicating how many? Since I guess 2006 16? How many deals? Have you gone? full cycle with?

Chris Larsen 10:51

Full cycle? Oh, geez, I have to go and check here. At least a half a dozen, I’d say five to 10. Private attend total fullcycle deals at this point.

J Darrin Gross 11:02

That’s impressive resume and definitely you’ve, you’ve managed to get in and get out and make your investors happy. That’s that’s all good. So let’s talk about how you transitioned from or saw the opportunity tunity to start investing in, in cash flowing businesses, in addition to real estate. So what what is the or what’s How did you how did you go from a real estate guy to now I’m, I’m investing in operating businesses? Yeah, I

Chris Larsen 11:38

think that’s a great question. And you know, one of the questions I get a lot, Darren, as people say, Well, hey, Chris, how did you make the transition to real estate because I spent 18 years in the medical device industry as well. And when I was in college, I was racing my bike. So I’ve always had kind of, I’ve always been doing typically multiple things. So my life always had kind of these these dual areas that I was operating in, you know, whether it was academics, and sports, or whether it was a career in sports, I ran a developmental cycling team, or whether it is my medical device, business and real estate, I’ve just always had a couple of different things going at one time. So it’s always been natural for me to have, you know, kind of overlapping businesses or multiple endeavors to keep me, I don’t know if maybe, maybe I get bored, easy. I’m not sure what it is. But I think the first thing is, I see myself as an investor. So I started off as an investor, I put together my my strategy, and then I needed to fuel that strategy, specifically with capital. So you know, for somebody that doesn’t come from money whose parents made, oh, geez, they didn’t make six figures combined. Why lived with my parents, and I don’t know if they ever made six figures combined. Except maybe in the very later years of their careers before my, my parents retired. But I needed, I needed a way to buy more real estate. So I said, Hey, what’s a career that I can go out, and that is going to be stable, so I can have stable income coming in, that I can put into a reliable, predictable strategy? Because I think first off society, in my opinion, does young people a disservice by saying, take risk early in your career? I think that’s backwards. I think you want to take risk away early, have a predictable path to success. And then specifically, if you’re financially independent, if you don’t need to work anymore, and you’re 3035 40 years old, well, how much risk can you now take, you can take infinite risk, as long as you don’t, don’t damage, you know, the kind of that that principle and that initial equity that you built. So that was my strategy, I reversed what society told me so I’m kind of a contrarian with respect to that. And then if you read my book, you may say, Well, Chris, this is all about multifamily real estate. But if you look at Warren Buffett, he said, Well, Warren Buffett, what type of investor is he? He’s a he’s a value add investor, right? He buys companies, and he improves these companies. And it’s all based on Benjamin Graham’s philosophy that he put together. So I read those books, I was always I always gravitated towards these lower risk endeavors. And really, I look at a multifamily property Darren, not as a not as an apartment, but I look at it like a business because that’s how the IRS sees it. They say you’re running a business and we’re gonna give you the tax benefits like you do a business but you happen to get even better benefits because you have this real estate associated with it that has these terrific depreciation benefits. So you know, what we do in our value add model is we look to improve income revenues, we look to decrease expenses through improving our operations, which yields an increase in net operating income, and whether its net operating income or EBITA. A business a property is sold on a multiple of that, that number. So if you’re looking at multifamily property and you Looking at a carwash, it’s the exact same formula. It just takes different levers and different knobs that you have to pull. So if you look at multifamily and self storage compared to, let’s say a carwash, or assisted living, or even short term rentals, which we have two short term rentals here in Nashville. To me, those are real estate plays, but they’re on what I would call operating real estate. So you have this operating component of that business on top of them. But they’re still simple businesses. You know, there’s this complex if you deal with the people, but it’s not as complex I can tell you is being an O R. And working with surgeons as I did for nearly two decades of my life. That’s a that’s a very complex, very high stakes environment. So I like simple businesses. I looked at car washes for the first time, nearly 10 years ago, with my uncle, we almost bought one, I decided that, you know, I was I still had my medical device business at the time, and we were focused on apartments. So we passed on that opportunity. But a couple years ago, talking with my partner, and the opportunity in carwashes, something had changed. And what had changed was that private equity was now interested in these businesses, because what we’ve seen here and you know, we’ve kind of alluded to it or discussed it, at the beginning or before the show, is that everybody’s searching for yield, because as interest rates have climbed and cap rates have lowered, that spread has shrunk and shrunk and shrunk where there might not be cashflow where there was cash flow before. And investors, private equity groups are saying Well, where can we now get yield. And some of these operating real estate plays are close to real estate, if not have a large component of real estate. They’re simple. They’re scalable, which I talked about in my book. And when you scale them, you increase the multiple that you can sell versus what you acquire at and we’re seeing 50 to 100% increases in the premium that we get from purchase to sale when we package those assets.

J Darrin Gross 17:02

Now, I love the kind of the path and appreciate you kind of walking us through that. So let me ask you, I get that the numbers, you know, operating income and, you know, whatever the multiple port for a particular industry would avail itself as far as value and in the desire to increase revenues and decrease expenses to increase that spread. I’m curious, have you found that there’s any expertise beyond that, that you’ve you’ve needed or you’ve had to find others to provide for you or or how hands on the actual operations of a company? Are you are you the CEO of those companies and you do all the hiring or are you more of an investor in a business?

Chris Larsen 17:54

Great question. So let’s let’s speak specifically about the carwash business. So I personally own a carwash here locally in Asheville with just one partner. So we have a it’s called an automatic inveigh. If you look at the car wash business, you have a few different kind of models. So take away like the the detail portion, right? That’s not really you know, that’s that’s kind of a separate section because you know, people aren’t washing their car, you’re having some I detail it typically every single week, which is typically going to be one to $300. So talking about like self service where you go and maybe you have a coin operated machine and you wash your car yourself. You have in Bay automatic, which it’s really like a big robot, you pull into a bay net robot washes, your car typically goes around your car, ours is touchless. And then you have what are called Express tunnels. And he’s expressed tunnels, it’s basically a large tunnel. Shaka Express tunnel, right? It’s a large tunnel with a conveyor belt and and that conveyor belt pulls your car through the tunnel, and it washes kind of dirt. With these little stations inside the tunnel, it typically only takes three to five minutes to wash your car. So when we did our research, the carwash I have here locally, it doesn’t have any employees on a day to day basis, it’s automatic, we get the robots in there that are washing cars, self service, you don’t really need a lot employees there because people are washing their own cars. But the Express tunnel model is it’s it’s pretty simple and that you don’t need a ton of employees. But you typically need about a half a dozen employees. And yes, that is the crux Darren of that, that model. So what we’ve found is if you want to go do this yourself and scale this model, there’s a couple of ways you can do it. One, you’re a large operator, and you already have a team built out and you just build new locations, to you work with an operator that franchises their model, and they kind of give you the blueprint to do that. And that’s it. That’s a quickly scalable model. But you give up a lot on the back end when you scale in that manner. Or you build your own operating team, which is the path that we chose, and there was a lot to learn. So we brought in consultants, we brought in our head of operations that used to run a medical production facility. So if you think about car washes, there’s really three components to being successful in the carwash business one having having efficiently run machines to optimizing chemicals. So you want to optimize, you know, the concentration of the chemicals, even the spray angle of the chemicals, and the speed at which you apply those chemicals, and three people. So you want to make sure that you have an individual and somebody that runs and their entire medical production facility has those types of expertise. So it’s not it’s not as complicated. But it still isn’t, is a necessity to understand all those things. However, what we found, even though getting the best advice, as we built out these teams and buying locations where we already had employees in place, now having over 100 employees on the operating side of this business, which I that’s not that’s not my primary focus is you heard me say we have somebody that runs that I know where I’m good. And I’d rather hire somebody that’s better than me at those things. I always joke that, you know, I’d work I wasn’t smart enough to be an engineer, so I had to go and so, so the components that these engineers developed and the surgeons used, but what we found is the industry, it’s simple, and a lot of the technology hasn’t caught up to where it could be so CRMs customer resource management tools are not are not optimized. If if a patient’s credit card is declined, their membership might be canceled. Simple things like figuring out if you bill on a Saturday instead of a Friday can enhance your your the retainment of memberships. Operating more like Chick fil A, where we have well dressed staffed that are paid more than the industry average that are taught how to sell and be polite to our customers or clients in the carwash can rapidly increase memberships. I was just looking at our quarter over quarter numbers. Our memberships are up 75%. And what does that from? It’s from basic sales paying our staff well. And what we do is we add one more employee per location that employee can focus on selling. This isn’t a complicated sell there. If you’re washing your car a couple times a month and paying 50 bucks and we offer you a membership for $30. Well, why would you not take that if you can wash your car twice as much and pay about half as much that’s a good deal for you and helps us out because we have this consistent revenue that private equity groups really like on the back end? Because we can we can show them that monthly recurring revenue, which is very is obviously very popular when it comes to a stable investment opportunity.

J Darrin Gross 22:42

Yeah, I was gonna ask you about the highs and lows. I am kind of curious on you know, I think of a carwash and obviously, the first get dirty need to be washed. We’re where you’re located. Is there any seasonality to it?

Chris Larsen 22:57

Yes, good question. It’s interesting. I just had an investor email me this morning and her inquiry was a Why would you buy a carwash in Florida instead of a wash somewhere like Colorado where you’re gonna have more storms and more need to wash a car. What’s interesting is, if it’s bad weather, people don’t wash their cars in bad weather. They wash you wash your car when it’s nice out after the bad weather. So there’s there’s absolutely seasonality people wash their car less in the winter. And they wash their car more specifically during like spring summer when there’s a lot of pollen out right. So there’s a lot of pollen, people might wash their car twice a week, when there’s a lot of pollen. And that, you know, you want to wash your car when when it’s nice out because you can kind of see and tell that it’s nice. So we see seasonality, but we also see geographic seasonality. So our car washes are located everywhere from Maryland, all the way down to Florida on the Eastern Seaboard. And you know, we’re looking at locations significantly further west as we underwrite opportunities for our portfolio. But that’s another thing that you can say, hey, we’re gonna hit a peak, say the first week of April, in Columbia, South Carolina. But in Baltimore, Maryland, that may that peak may come a month later than it does in Columbia, South Carolina. So you have to be able to adjust and have systems that adjust for for those those peaks and troughs. And maybe you also adjust your your selling techniques, right. Again, this isn’t complex, but maybe you maybe that’s when you add your additional staff is during those peak times and do that. And the big threat to this area is is really saturation. So it’s going to be about 15 years before this market is built out. But it’s all local. So we want to make sure that we’re focusing on you know, well placed locations or well placed acquisitions. When we purchase those with traffic flow. It’s a little less sensitive than when you’re buying say a multifamily property where you want somebody to have an average income of $80,000 somebody an area with an average income of 40 years. $80,000 can do very, very well, in this space, you just don’t want to be right across the street from another wash necessarily.

J Darrin Gross 25:09

Right, right. So you transition into the carwash and if I understood right is the the kind of the value add plan is that essentially what what is the plan with the carwash is are you looking for an exit the future exit eventually?

Chris Larsen 25:30

Yeah, so if you look at it just an individual carwash by itself, if you buy a carwash and you run it, well, the margins are about 50% Really nice margins in the carwash space, investors can see double digit cash flow, which is which is really nice if you look at that compared to multifamily or self storage properties. But here’s, here’s the one variable that can be very appealing. So we’re buying at a seven or 8x, multiple from small mom and pops. And this is this is the opportunity Darren. So if 85% of multifamily properties are owned by institutions. It’s inversely proportional to the carwash base where only about 15% of these Express tunnel carwash locations are owned by large institutions or large operators. So that means 85% are owned by operators with four locations or less. So 1234 locations, we can buy at a seven or 8x, multiple EBITA from those operators, package them into a portfolio of 50 100 200 locations, we can sell somewhere between a 12x and a 20x, multiple of EBITA. So again, you’re seeing a 50 to 100% increase in the Exit Multiple. So if we just buy these, these carwashes implement our branding, or national contracts, our sales strategy, our proprietary software systems that we’re we have done we can do very well. But if you pair that with the opportunity to exit on the backside, with those multiples, then you have some really, really exciting returns on the backside as well.

J Darrin Gross 27:09

Yeah, that sounds exciting to go from, you know, seven, eight to 15 at 20. That’s, that’s a that’s a big jump. On the the timeframe, do you have any kind of timeframe that you would expect to accomplish the the packaging of and annexes are like a seven to 10 years? Or how do you look at the the energy?

Chris Larsen 27:35

Great question. Great question. So if if you heard me before, I mentioned that there’s about a 15 year period where we’re going to basically be built out in this space. So if you look at that, and you say, alright, if we’re selling a portfolio, a savvy buyer is going to want to run that portfolio for multiple years to take advantage of it. So let’s say they want to run it for five to 10 years, okay, we want to acquire, package and sell our portfolio in the next three ish years. So three to five years. So we’ve been doing we’ve you know, so let’s say we’re, let’s say five years was our initial timeline, we have about three years left. So in the next three years, we’d like to exit a portfolio of 150 or more locations.

J Darrin Gross 28:18

That’s awesome. And as far as the the I think it’s from trying to decide on the the value of a carwash, I’m assuming is directly proportionate to the, to the volume of sales. So it’s not a matter of doors, is it? Is that based on a traffic counter, or when you’re underwriting and looking for the value of the opportunity to increase the value is traffic count kind of the the primary indicator of the opportunity?

Chris Larsen 28:51

Yes. So if you look at if you look at a multifamily property, you’re going to want to know what are the what are the in migration demographics, you’re going to want to know what is the employment in the area? What is the employment diversity in the area, you’re gonna want to know the area median income, you’re wanting to all these things for multifamily property. For a carwash, the metrics are going to be exactly what you said, Darren, you’re going to want to see the traffic count. But you’re also going to what’s interesting is you also want to see the traffic speed. So let’s say you have somewhere where 100,000 vehicles passed by every day, but you can look on like the software we use and see that the average speed is 55 miles an hour. Well, maybe that carwash is right next to an interstate, that’s probably not a great location. But let’s say the average speed is 30 miles an hour. It’s in an intersection and it gets a traffic count of 40 or 50,000 50,000 cars a day. That’s a terrific location, area median income. Let’s say it’s 40 50,000 plus that’s that’s very reasonable for somebody that’s going to pay 20 or $30 for a monthly membership. So and then you also want to look at the salary raishin. So again, as I mentioned before, you want to see are there other washes within, you know, a mile of that area five miles in that area. So most people will probably understand intuitively after I say it, the number one reason of if somebody goes to a specific wash or not is proximity to their residence or location at work. So we want to make sure that, you know, we look at that we look at that area median income, the proximity to households, the traffic counts, make sure that those all meet our metrics, and then is the location that we’re looking at is it is it already is going to be cannibalized by other locations? Yes or no. And then, you know, if it checks all those boxes, the value of that wash is going to be directly proportional to the EBITA of that property to the profitability of that property property. And that’s, it’s pretty simple math, because we can just plug in what we know, to be our system that works, you know, and it’s predictable after we take over locations. And we can determine, you know, if those numbers are going to work for us and our investors.

J Darrin Gross 31:05

With respect to like multifamily, I mean, historically, no, I mean, you could just ballpark 50% is just a starting point. You know, and hopefully you’re able to, you know, lower lower expense, increase your your revenue, and maybe get that, you know, raise the NOI and lower the expense percentage. In comparison, how would you Is there a ballpark starting point, when you’re looking at a carwash what you would expect for, you know, an expense ratio, compared to income.

Chris Larsen 31:40

That’s actually not a bad number than one you just threw out there. 50%. But really, our metrics are driven by that membership growth. So that’s where we’ve really found we can definitely make improvements on operating margins because of our national contracts. But if you take into account like why would we add a six employee per location versus the industry, you know, or as an employee versus the industry average of five or six? Well, the answer is, we’re going to realize a significant value increase by increasing those memberships. And that’s where, you know, some of these smaller operators, they say, hey, $1 saved is $1 made. Whereas, you know, we say, well, if we can spend $1, and create $10, that’s going to be a little bit more like, you know, the way a value add multifamily investor thinks, where they say, I’m going to spend $10,000, to renovate this unit, but I’m going to create $50,000 in value from the NOI increase on the back end. So, you know, even if we kept the margins similar, if we’re if we’re increasing that revenue, you know, 50 plus percent, we’re gonna have a massive increase in value.

J Darrin Gross 32:49

For your carwash, business, are you are you doing like syndication? Or do you have a fund? Are you doing this individually? Or how are you gone about erasing the capital? Or were Tell me a little bit about that, that side of the of your business?

Chris Larsen 33:07

Sure. Yeah. So we’re at two dozen locations currently. And we’re, we’re underwriting on a on a month to month basis 1020 Or 30 locations on a monthly basis. So we always have deals coming in on the carwash side significantly more than the multifamily side. And what we’ve been doing to bring investors in, we have really their funds, but their small portfolio, so typically, anywhere from, say, two to five locations. So investors get to pay and diversify, but they also get the benefit as we roll those locations up into the overall portfolio. So typically, an investor like the fund, we’re actually closing on three more locations here on Friday of this week, because we’re recording this. And that fund has four locations, and they’re spread out between Florida and Tennessee.

J Darrin Gross 33:58

And it’s a little bit of a diversification as far as the exactly the weather, you will want to go out and don’t have everybody in the same dark snowy town that you can’t get any carwash. Sounds good. So, yeah. So if you were going to give some advice to one of the listeners that’s, you know, liking what they’re hearing, what would be the first thing you or what would you encourage them to, you know, to do to get started or how would they, how would they go about? You know, how they best go about getting started in like carwash?

Chris Larsen 34:36

Yeah, so I think first off, if you’re an investor, you need to come up with your own personal strategy that makes sense for you. So as you can imagine, Darren, I have investors call me and they say, Chris, I’m looking at this multifamily deal the Self Storage journalist Carl to which one should I invest in? And that’s not that’s not my job to provide an investor with that answer. Investor. If you’re listening, you need to come up with your own personal strategy and say Hey, does this fit into what I want my portfolio to look like? If the answer is yes, and again, whether it’s any of those different opportunities that I just mentioned out there, one you to understand, does the strategy makes sense to you? Maybe you want to get into development. I know investors, they say, I want returns that are twice what you’re doing, Chris? And they say, well, we don’t have deals like that, can you send me one, and they send me a development deal. So a development deal with no cash flow for two or three years, is going to look significantly different from a deal that has like our recent Self Storage portfolio that we acquired it 52% loan to value and cash flow from day one, like that’s a different deal. So you need to decide what you’re going to invest them be, say car washes makes sense, you need to understand that a carwash investment is is more of a business than real estate. And if you if you invest in something like car washes, or senior housing, or short term rentals, make sure that you understand the operations and your operator and your operating partner that you’re investing with can explain that to you. And you understand how are they going to be better than, than what’s already out there. So we walked through a lot of that today, right? So those are really important questions to ask. Also make sure you understand the structure of the investment. So are you investing I’ve seen carwash investments out there, they’re their debt offerings, so investors are investing in a carwash, but they’re just getting paid a percentage on their money. So there’s not any upside, I think we’re fairly unique in the fact Aaron, that we allow investors to participate, like they wouldn’t a multifamily property where they get the cash flow from the deal. And they get some of that upside, which, again, if you’re looking at it, increasing your Exit Multiple, you know, 100% over what you went in at, those are exciting returns, you know, out the other side. So, you know, as an investor, if I’m investing in a business like this, you know, I’m Will I’m taking potentially a little bit more risk, there’s more variables, I want that upside. Whereas if I’m investing in a multifamily property, you know, that’s a institutional, you know, core asset that things like, you know, life insurance companies invest in pensions invest in, that’s going to look a little bit different. And that’s my last thing, if you’re an investor, don’t let the tail wag the dog. Don’t look at the returns first look at them last, you know, make sure you understand the strategy that fits into your personal portfolio, make sure you understand who you’re investing with who the operator is, and then then look at the returns. And you can get excited at that point. But if you just look at the returns and say, Oh, the carwash returns that the Chris is talking about are better than the multifamily returns, probably, but don’t, don’t let that tail wag that dog.

J Darrin Gross 37:45

That’s, that’s really good advice. Hey, Chris, if we could, I’d like to shift gears here for a second. Sure. By day, I’m an insurance broker. And as such, I work with my clients to assess risk and determine what to do with the risk. And there’s three strategies we typically consider, we first look to see if there’s a way we can avoid the risk. And when that’s not an option, we look to see if there’s a way we can minimize the risk. And if we cannot avoid or minimize the risk, and we look to see if we can transfer the risk. And that’s what an insurance policy is. It’s a risk transfer vehicle. And as such, I like to ask my guests, if they can look at their own situation. It could be your clients, your investors, the political environment, interest rates, however you would like to identify and describe what you consider to be the biggest risk that you face. And again, for clarification, while I’m an insurance broker, I’m not necessarily looking for an insurance related answer. So if you’re willing, I like to ask you, Chris Larsen, what is the Biggest Risk?

Chris Larsen 38:59

Yeah, so I think everybody’s talking right now out there, and about interest rates and cash flows. And you can mitigate those, you can lock in interest rates, you can set money, you can increase your reserves that you have out there. And those those are all good things. For sure. But I think the biggest risks that that we face, and we kind of talked about this in an indirect manner. It’s people, it’s people, you know, do you have the right people on the team? If you’re an investor? Are you investing with the right people? Are you investing with somebody who’s just a sole operator without partners? What if something happens to them? Obviously, I’m acutely aware of that I lost my father at age five, I lost my best friend in college at the age of 18. So I know that, you know that there’s, there’s things you need to put into play. So things like life insurance, estate planning, are probably more apparent to me when it comes to that. But if you’re if you’re an investor, I would ask that question. I would say, hey, you know, Chris, how Are you addressing this issue? How was the team built out? So if something happens to that fantastic operator that you have that came from the medical production facility, you know, how’s the team structure, something happens to him? You know, where’s the point of failure when it comes to that? What we do we put systems in place. So I really, I really like kind of the methodology of optimizing the solution, and then automating that solution and ultimately outsourcing that solution. So again, that’s optimized, automate, and outsource. And if you do that, that doesn’t mean you release control of it. But after I opt, optimize or iterate, you know, engineers, they iterate right, you iterate, you get better, you get better. And then you figure out how do you how do you automate that and oftentimes with automation, it’s it’s bringing on technologies that may be better than people. So we have we have certain technologies that we use, like our, our customer, our CRM system, where it automates responses, and it’s able to check logs, and then it’s able to say, Okay, did did, did we check this box for Darren yes or no, and then maybe it moves it to an individual so that, you know, a human can address that situation. And then finally, that outsource piece, if you can, if you can automate something, and then outsource it, that means that, you know, if, if something happens to me, then my partner or one of our employees can address that situation. And I think that’s, that’s really important, because it handles two situations, one, immediate downside risks there. But it also reduces your upside risk. And what I mean by that is, as you scale, quality can go down. So how can you scale a business, but increase the quality and increase the benefits that you get from scaling? And I think that is really, you know, talking about the risk, but also talking about how you can use that as a competitive advantage as well.

J Darrin Gross 41:49

Now, let’s that’s that’s awesome insight. I appreciate you sharing that. Hey, Chris, where can listeners go if they’d like to learn more connect with you?

Chris Larsen 41:58

Yeah, mentioned earlier, if you want a free copy of our book, Next Level Income, go to our website next level income.com. Not only can you find the book there and get a free copy by putting your address in, but you can also find our blog, you can find our podcast. And if you did hear what I said today, and you’re interested in learning more about of our investments, click on the InVEST link, and you can schedule a call with our team and learn more about what we have going on.

J Darrin Gross 42:20

Awesome. Chris Larson can’t say thanks enough for taking the time today. I’ve enjoyed our talk, learned a lot. And I look forward to doing it again soon.

Chris Larsen 42:31

Darrin, it’s been my pleasure. Thank you.

J Darrin Gross 42:33

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. Till next time. Thanks for listening to commercial real estate pro networks. CRE PN Radio.

Announcer 42:53

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Passive Investor Mistakes to Avoid with Stewart Heath – CRE PN #410

Stewart Heath 0:00

I think most passive investors probably don’t pay enough attention to the timing the intended timing the state and timing of the investment on the front end. And And likewise, it’s not necessarily the investments fault but they’re not paying enough attention to the their own cash needs and seeing if it’s an appropriate investment for them. So it’s not something that they should be that they should go in lightly. I’ve had investors that I’ve done now yeah, you know, you hear how I’ll send you money and it always make sure you understand what what you’re buying and like both of these guys are very, very sophisticated, but I think a lot of them don’t do a proper planning on the personal side.

Announcer 0:55

J Darrin Gross 1:14

Welcome to Commercial Real Estate Pro Networks, CRE PN Radio. 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 to provide their experience and insight to help you grow your real estate portfolio.

Today’s interview is sponsored by Building Insurance and Risk when you invest in real estate campaigns to work with the real estate of real estate investor protection specialist to protect yourself and your investment in catastrophic loss. The experts had Building Insurance and Risk focus on real estate investor protection. They provide you with multiple insurance coverage offers and a side by side coverage comparison. To learn more, go to BuildingInsuranceRisk.com.

Today, my guest is Stuart Heath. Stuart is the founder and CEO of Harvard Grace Capital, a private equity real estate investment firm that helps people build wealth faster through hands off real estate investing, generates passive income, reduces risk and maximizes tax efficiencies. And just a minute, we’re going to speak with Stuart a bout the hidden mistakes to avoid and key criteria to look for when evaluating potential passive property investing opportunities.

But first, a quick reminder, if you like our show, CRE PN Radio, there are a couple things you can do to help us out. You can like, share and subscribe. And as always, we encourage you to leave a comment, we’d love to hear from our listeners. Also, if you want to see how handsome Our guests are, be sure to check out our YouTube channel. You can find this on YouTube at Commercial Real Estate Pro Network. And while you’re there, please subscribe.

With that, I want to welcome my guest, Stewart Heath, welcome to CRE PN Radio.

Stewart Heath 3:17

Thank you so much for having me. It’s a real honor. Appreciate it.

J Darrin Gross 3:20

Well, I’m looking forward to our conversation. But before we get started, if you could take just a minute to share with the listeners a little bit about your background.

Stewart Heath 3:29

Sure. I have lived my entire life in Tennessee, Alabama area. I am a Certified Public Accountant graduated from Auburn University a long, long time ago. And I still practice as a CPA, but my main focus is on sponsoring cash flowing real estate investments and syndicating those to investors. Where that fits their portfolio needs.

J Darrin Gross 3:59

Got it? And so you’re based in Tennessee, right? I am. Yeah. And is that primarily the the area that you invest in? Or Or do you get further out or

Stewart Heath 4:10

it is primarily the area that we invest in. It actually it’s a little bit more narrow than that. Generally the area we invest in is called the Tennessee Valley. More specifically and sort of almost as a marketing gimmick, we say we invest in the 845 65 corridor, and that refers to two interstate connectors. One of them 840, a south of Nashville and 565 runs through Northern Alabama, which includes Huntsville. And so we’d like to invest in between those two interstates in in some suburb towns, even some smaller towns that are impacted, but the real heartbeat of that geographic area is not so much Nashville as you might think. A which obviously is a big regional influence but Huntsville Alabama is growing and growing and growing. And is just it’s just creating lots and lots of real estate opportunity. And I like to tell investors that it reminds me of Nashville about 30 years ago. And I don’t want to really miss the Mr. Train this time.

J Darrin Gross 5:22

Yeah, like, you know, I I’ve heard about Huntsville, I think, mostly and correct me if I’m wrong, is it not like a NASA base there is air. I mean, I

Stewart Heath 5:32

It was, you know, most people in this space NASA is is based in in Florida and in Houston. But a great deal of the research and development for NASA since its beginning, it has been in Huntsville. It’s been quiet. It’s been a it’s been a real defense contracting research hubs. So awful lot of rocket scientists living there who really can’t talk about what they do for a living and, but that all changed in 2008 when the congressional Base Realignment commission, relocated three army commands to the Redstone Arsenal, which is the army facility in the middle of Huntsville. And in that Bronx, a bunch of new generals and all the commands that come with that, there was also a new big push in defense spending. That if you’re a defense contractor, you’ve probably had facilities in Huntsville for a long time, but, but now they’re increasing their staff as they come out of California or out of other parts of the country, they increase staff there. And simultaneously with the big government push, there’s been a private industry push. Toyota, who already had a plant there, has built a brand new joint venture manufacturing facility with Mazda to build some engines. And they’ve hired they came in saying they’re gonna hire 3000 People now they’re up to 6000. So Facebook has a big data center here, which employ employs several people, but it just keeps going and going and going. There’s a lot of a lot of affordable land, a lot of good workforce available there. So we’ve seen this big manufacturing push and, and all of that creates needs for housing and other commercial real estate needs.

J Darrin Gross 7:32

Now, that’s great. And what is the size of the MSA there for them? The I guess, the Huntsville and then I guess I just ask is the Tennessee Valley? Is it all populated throughout? Or is it is it kind of like two ends? Or how I’m not looking at a map?

Stewart Heath 7:50

Yeah. So Huntsville is sort of at this dip in the Tennessee River. And it continues to flow towards the Mississippi obviously. And so you’ve got Huntsville, which is the big, influential city. It’s now the largest city in the state of Alabama. There’s a little bit of semantics. The Huntsville MSA is not larger than Birmingham’s MSA, but city limits to city limits. Huntsville is larger. But the Huntsville MSA also includes Athens and Decatur. And the MSA actually includes several southern Middle Tennessee towns as you cross the border where I live in Fayetteville, Tennessee, you know, we’re in the Huntsville MSA I’m a lot closer to Huntsville than I am Nashville. So there’s about 450,000 in that Huntsville MSA in that might just be the Northern Alabama population don’t include perhaps another 75 or 100,000 in that middle Tennessee area, where you pick up favorable Pulaski when towns like Winchester all all of whom also have some sort of a distant defense contracting employment base in these little towns to

J Darrin Gross 9:18

Yeah, well, I mean, you’ve mentioned one of the favorite employers of real estate investors as government from a standpoint of, you know, stable workforce and, and, you know, it’s not like the the government’s gonna go out of business. So that’s that’s a good thing there. We don’t think so. Anyway, yeah. Fingers crossed on that, I guess. Knock on wood. So, what, are there any specific asset classes that you focus on?

Stewart Heath 9:51

Yeah, we’re a little different, because we do focus on a geographic area that we know so well. I’ve been here my entire Life. So we’ve not really limited ourselves to one particular asset class. I think that’s an appropriate philosophy, if you’re expanding geographic area, because apartments are pretty much gonna run and operate the same and have the same similar issues, whether you’re in Kansas City or if you’re in LA. But because we focus geographically we have and we invest in all types of commercial real estate. Save one, we don’t do we’re not we haven’t really bought into the big built for rent communities, single family homes, I have a worry about that building a bubble in that particular asset class that will probably start showing up maybe five to eight years from now, as in my worry, is that the that the institutional buyers who go in and build 500 homes, they’re gonna they’re just gonna all sudden dump them on the market in about 10 years. And, and I think it could have a damaging impact on that. I might be wrong, they might not do that. But yeah, I suspect somewhere around the 10 year mark, which is where most brand new homes start to have things like water heaters and HVAC units and stuff like that. I think once the maintenance really kicks into that asset class that there will be a wholesale dumping of those assets on the market. And that might impact pricing, it might not they might be willing buyers ready to gobble them up and turn it back over for rent. But so we’ve we’ve done storage, self storage, we’ve not done industrial yet. Haven’t found industrial deal that I like. We’ve also not done a multifamily yet because we are cashflow buyers. We are not fixers and flippers. And every multifamily deal that I’ve found that has already been renovated and is stabilized, I think is way too expensive. So we have not bought it because it’s if you gotta wait a couple of years for the cash flow to to kick in. That’s that’s not a deal for us. We’ve done some office, we’re doing another. When I say office, I’m talking about suburban office, which a lot of people classify as retail. I’m sitting in one of our assets here in Spring Hill, where, you know, our tenants are doctors, dentists, mortgage companies, things, things that are consumer facing. But they can’t really be done remotely, that you can’t remote your dentist, you can’t remote your doctor, he’s not coming to see you. And in mortgage companies, by law have to have a physical office, even if people are working from home, they have to have an office. So there’s lots of uses like that in the office realm that is slightly different than glass for at retail. So and we’re we’re under contract on another one in Huntsville, very similar to that. Right in the heart act. Technically, it’s in Madison, Alabama, which is an upscale community that is surrounded by Huntsville.

J Darrin Gross 13:27

Gotcha. I was gonna ask you, i Hey, if I’m if I’m correct, I believe that Tennessee has no state income taxes. And that is correct. Yes. And how does that compare to Alabama? And does it? You know, is there an attraction to to Tennessee over Alabama, based on that, or is it not been an issue?

Stewart Heath 13:50

It’s good question. I have made some money in past opportunities at state line arbitrage. But state income tax is not one of those that you that you can do because if you live in Tennessee and work in Alabama, you’re still subject to that state income tax. There are some things where you can do some retail on the Tennessee side, if you live in Alabama, and so there’s some opportunities like that. For instance, Tennessee has a lottery. Alabama does not. And there’s a particular property owner I’m aware of at the state line on one of the major highways coming out of Huntsville. That’s the largest seller of lottery tickets in the entire state of Tennessee, because it’s 15 minutes away from a massive population of people that don’t have a lottery and it’s quite the spectacle. So Alabama is seen as very, very, very business friendly. They do have an individual and a business tax. They are not very onerous. There are lots of exemptions from them. It’s in there otherwise, we’ll tax and property taxes are generally low. So all in taxes, you know, total to total, Tennessee and Alabama might be fairly comparable. With Tennessee getting the edge with probably Texas and Florida being the leaders in sort of the State Taxation game, as they have been for a long time.

J Darrin Gross 15:30

On in I want to say that i i read or saw something here recently talking about three of the top fastest growing states mentioned Florida and Texas. But does Tennessee not like number three? I think I’d heard that.

Stewart Heath 15:47

Depending on how you look at Tennessee’s either in the top 10, or the top five. So I heard our governor at the State of the State Address claim that you know, we were I think number three or four, because I hadn’t seen us that high yet. But I mean, Tennessee has been sort of quiet and but but growing very, very, very friendly business day. And, you know, we just over my shoulder, General Motors built the Saturn plant back in 1987 or 1988. While they don’t have Saturn anymore, they still build several Chevrolet vehicles there. And that is the campus of the site where they’re building their new Evie assembly plant. And their evey battery plant, which is going to bring lots and lots of jobs here to Spring Hill, as this Spring Hill wasn’t thriving already. I mean, it’s Tennessee, it’s a good state. They don’t they don’t go crazy. Too far, one way or the other, we just I think they just put out reasonable policies. So one of the reasons we like the areas we like these suburban, rural areas.

J Darrin Gross 17:05

Yeah, I was talking with somebody else from yesterday, I think it was from Texas, and he was telling me about a slogan they have it was something about like, Welcome to Texas, please leave here. Your values, you know, where he came from? Or they’re afraid. What was good was gonna change based on the be in migration from all of the blue states or whatever they you know,

Stewart Heath 17:27

We have, you know, we have some of that going on here. We have a lot of people coming in and from the western states, in some in Yeah. Yeah. I’m glad you like it here. And you’re welcome. But there’s a reason you like it here.

J Darrin Gross 17:45

All right.

Stewart Heath 17:49

We also like to remind all the people from Texas that there wouldn’t be a Texas if there wouldn’t be Tennessee. So going back to the to the early 1800s When Tennessee Volunteers, which is why we’re the Volunteer State, they just picked up and went to Texas to fight Mexico, you know, even before they were a state.

J Darrin Gross 18:11

Yeah, and I forgot that little bit of American history there. But that’s, it does have a rich history there. I probably because Daniel Boone was he was gonna be down there and all that, but that’s great. So, talked a little bit about asset classes. And I wanted to ask you a little bit about passive versus active investing. When you work with people, you focus mostly on on helping them and in a passive way so they can invest with you or do you also work with people to do some active investing, it sounds like you are clearly actively investing. But tell me a little bit about how you work with

Stewart Heath 18:59

Well, coming from a CPA Breton background, I meet people where they are, I had a meeting with a group of investors who wanted to have me put together a you know, basically a private deal just for them on a storage deal that they their restaurant tours, and they’re very, very successful in their restaurant business, and they want to expand in storage. And, you know, I was introduced to them as somebody who’s operating storage in so that would not be a syndication deal on our part, but they’re very sophisticated business people and and want to put some money to work in storage. And so that would be me meeting them. And, and I would they would be active investors at that standpoint. And I would be a partner with them. But for the most part, I am working with investors on a passive basis Not just by good common sense, but by law, we need to get to know these investors a little bit to be able to understand their needs in our last raise last fall, you know, there were a couple of investors that we just had to say, I don’t think you’re a good fit for us. Yeah, they said they were accredited, sort of doubted it. And you and it’s possible for people to meet the definition of an accredited investor and really not know what they’re doing. And, you know, so we like for everybody to have a good understanding of the business. Nobody has to, you know, it’s totally passive. Once you’re an investor, you don’t have to make any decisions or guarantee any debt or show up and clean any toilets or anything like that. All of that is handled, but we do like for you to understand the economics of the transaction and the risks involved. So we have good conversations, most of our investors will admit, to date all of our investors have reinvested with us latter deals, and we always pick up additional investors along the way, as well. So we’ve got 100% reinvestment rate, which I’m pretty proud of. in all truth, that’s some pretty small numbers. But it’s still a good thing to say. But but we make sure we get to know what their achievements are, and that, you know, the the investment will be illiquid for a period of time, even though we will start throwing off cash flow in the very first quarter after the deal, because that the deal will cash flow from day one, because all we do is stabilize properties.

J Darrin Gross 21:51

So when you say stabilized properties, are you are you not looking for ways to improve it? Or is it more about just it’s all it’s it’s a turnkey thing and you you’re able to get it at a price where you’re able to generate cash flow?

Stewart Heath 22:07

Well, the ladder is key, we do get it at a price where we can generate cash flow. But yes, we’re always looking at ways to improve because tenants needs change it like this, this office building that I’m in right now. My dentist wants to expand, somebody else wanted to reduce. I had some storage space that was just used, it was just extra space on one piece that the previous seller had used to keep a boat in. And so you know, it’s it’s almost like the game where you got to move things around. So I got a small tenant to go up to that space, we built that up for him. And, and he’s happy as a lark in his own little space up there. And it and so that space that was never previously rented. So I have a new income generating space there, the dentist is happy because he got to expand and my other tenant is is happy because he got to reduce and actually in between the dentist and the other guy. I created a whole nother space. That’s that’s already been leased. So yes. And in the whole process, I was able to move everybody up to new longer leases at market rates. So yes, there is always room to improve because a piece of commercial real estate is is a living, living, breathing thing because tenants are living breathing people and their needs change. I mean, my dentist is 70 years old and has a 10 year plan. I just, you know, he’s an amazing Dynamo. But and you know, he’ll, he’ll sell that practice to somebody, but he wants to lock in that piece before he does that. So, yes, there are always opportunities to improve and so we’re getting a real step up and we’re we’re going to beat our pro forma on this building in the beginning later this year once all those new grants kick in and we spent some money to do that. But we were able to do that without any capital calls between reserves we had and the bank who’s very happy with us it will pay all that off over the next three four years.

J Darrin Gross 24:32

Got more cash flow. What’s uh, you mentioned that the investors you’ve got have reinvested with you. What’s an average hold time for you on your your investment.

Stewart Heath 24:45

Our average hold time is going to be about five years. But because we are cashflow investors and this is a little bit counterintuitive to a lot of professional real estate investors getting you need to understand the industry of people like myself, you know, we make money when you’re buying or selling, so you know, there’s fees involved in profits and stuff. And, and that’s great. And I think that’s correct for a lot of, but I’m also trying to build a recurring cash flow stream for myself, because I invest with the investors. But we always tell them, it’s a, it’s an average five years. But actually, I try to talk them into holding, because you can refinance the property as it goes up in value. And you can take advantage of advantageous rates, you pull the cash out, you give the money back to the investors, which might get them you know, made 100% Home Plus a preferred return, and then the and then they stay in and just keep getting the cash flow, it might be a little bit reduced cash flow, because now you got a higher note, but the property continues to grow. And then they’ve got more money to go invest in another deal with you. And so you start stacking your cash flow opportunities, and you pull that money out the first one that’s, that’s tax free, because that’s just borrowed money. And capitalism, there was no, there was no income event for that. And ultimately lent one day you’re going to sell the property. But commercial real estate has a long, long life to it. And as long as you’re taking care of it along the way, you’re going to extend that life much like having the maintenance plan on your HVAC, you haven’t come out and do the maintenance. And guess what you can get a lot longer life out of HVAC unit than you would by just waiting to fix parts when they break.

J Darrin Gross 26:47

Yeah, no, that’s definitely you’re gonna pay one way or another. And then it’s usually a lot less expensive to pay, pay as you go and maintain it. Plus, I find the newer appliances, whatever, whatever you’re buying, they’re built to go just past the warranty. So someone was working, hang on to a

Stewart Heath 27:08

I’ve got a 1974 refrigerator that’s that was left in the house that we that we live in. And that thing is still running. It’s the coldest it makes the best ice. I mean, it’s I hope it’s never going to kind of quit.

J Darrin Gross 27:24

Yeah, I don’t even like tempt fate talking about some of them. Because it’s I mean, I just, you know, like, you know, not because someone they just they, they were built to last? I mean, there was no there was no you know, they weren’t building them just to to go pass a warranty back in the day. They didn’t understand that that. What’s that? There’s a phrase for it. It’s some

Stewart Heath 27:48

Planned obsolescence.

J Darrin Gross 27:50

There you go. Yeah, I don’t think they they did not understand that in the day, that was not a not a

Stewart Heath 27:56

marketing team wasn’t running the company yet. You know, the manufacturer,

J Darrin Gross 27:59

Right, right it was all about your, your good name and how you’re a quality and how it last. But anyway. So let’s talk a little bit about some of the mistakes, some of the hidden mistakes that you see investors make, and potentially ones that you’ve made, that you didn’t recognize until they were made. Tell me and tell me a little bit about some of the mistakes you’ve seen.

Stewart Heath 28:35

I think most passive investors probably don’t pay enough attention to the timing, the intended timing, the state and timing of the investment on the front end. And And likewise, it’s not necessarily the investments fault, but they’re not paying enough attention to the their own cash needs. And seeing if it’s an appropriate investment for them. So it’s not something that they should be that they should go in lightly. I’ve had investors that I’ve done Oh, yeah, yeah. You know, you hear how I’ll send you money. And it always make sure you understand what what you’re buying and like, both of these guys are very, very sophisticated. But I think a lot of them don’t do a proper planning on the personal said, because generally on your real estate investment, your money’s going to get locked up for about five years. Whether or not it’s it’s an income generating thing we like. We like cash flows, and so we pay out income but that’s not paying back to your original $100,000 that you perhaps put in mistakes that I’ve made on underwriting early on is Failing to realize that GE when you buy the property, the local taxing authorities are going to reset the value of the property. And your new your new property taxes are not what the seller was paying, it’s going to be based on the purchase price. And so yeah, I did that in my first deal. And I still kick myself for it, because I’m a CPA, I knew better. Even in some of these districts that don’t raise property taxes very often, yeah, they aren’t going to do it when the property sells. I mean, that’s just, that’s just low hanging fruit for them, and it’s appropriate. And you got to plan on that. Likewise, your insurance, you’re not going to keep a similar insurance premium. From what your seller was paying. Sense, I’ve come across many sellers who were just being kind of dumb what they were insuring anyway. But your insurance is going to be based on the price you just paid is, you know, as a replacement value and, and things of that nature. So you’ve got to get to take those simple things into account. Whether or not you think it’s likely, like to date, every deal we’ve done has been a 100% full property. You still have to underwrite for the possibility of vacancies, that you can start that after leases expired, but you shouldn’t just assume 100% That all leases will renew. I had one just last month, who had been telling me their lease renewed February 1. They’ve been telling me for six months. Yeah, I’m going to renew I’m going to renew and I was being slow at sending them the lease. But we haggled out the price, we had all the details worked out before Thanksgiving, then they informed me on January 15, they were not going to renew. I never liked that tenant anyway. Because you know, that wasn’t the first time they hadn’t they had been untruthful with me, but so yeah, we had exactly 17 days of vacancy, because I was able to turn that unit around and rent it that quickly. And but it could have been it could have been 90 days could have been six months. Commercial doesn’t turn that fast. We’re just blessed to be in a very vibrant area. And in that it was there was a need in the first part of the year. There’s a lot of people looking for new office space. It was good timing on our part.

J Darrin Gross 32:52

Yeah, 17 days on a vacancy, I’d say sign me up. Yeah. And I’m curious on on a commercial turn. Was there any significant work he had to do?

Stewart Heath 33:08

No, no, we went in, and we had renovated that space for that tenant in 2019. They were very gentle on it. So we went in and touched up some wallpaper and gave it a nice cleaning. And that was about all there was to it. So we were fortunate in that realm was that you see that a lot in, in commercial, unless they’re just packing people into their office. And it’s not like when I was managing residential properties where even the good tenants would do so much. I mean, you were repainting the whole unit every two years and replacing flooring and stuff like that. The commercial with a lot less wear and tear.

J Darrin Gross 34:00

Yeah, no, I have come to appreciate words, it’s two sides of the same coin, I guess, you know, you have one, at least in the residential, which is mostly where I play as you know, if you keep pushing around, there is going to be turnover. And the good news if it’s, if it’s, you know, only a couple of years, they probably haven’t beat the place up too bad. If you have somebody staying as long time that’s a good thing because you’re not having turnover but usually when they do leave, it’s like an encampment and there’s usually some you know, quite a bit of stuff that was left that isn’t yours that you’ve got to you know take care of and basically helpful rehab on a you know, mostly like a single family property or something like that. So I that the commercials appealing just from you know, I’ve kind of come to learn this even about talking to some people about like these Airbnb models about how, you know, people they come and they they’re basically just, they’re they’re in there they’re kind of on their best behavior they’re not, you know, it’s not a kind of where now you’re gonna have dogs running around and kids and peanut butter and jelly and you know, whatever crayons on the walls and that kind of stuff, it’s more kind of come get to work down the professional kind of turn the lights off go home, kind of thing. So

Stewart Heath 35:20

That’s, that’s why I have gravitated to commercial. I’ve done residential, personally, I’ve done it professionally. In because at Harvard grace, we manage all of our own properties, which I’m actively involved in, we do that because it’s probably a whole nother show. But we think the model for property management, third party property is kind of broken. So we do that ourselves to ensure that we can deliver the pro forma that we sell to investors. But I don’t like dealing with with residents. They’re not business minded people. You know, it’s, it’s not personal, you know, when you go to collect rent from somebody who’s behind it, it’s at their apartment, it’s very personal. And they get emotional and and even though you can be behaved, you can, you can do it well, and you can treat people right. At the end of the day, you know, they gotta pay or get out. It’s the, to me the laws are actually more in favor of commercial landlords in the our residential landlords. And anyway, it’s just call it a lifestyle thing. I like dealing with professional people. Self Storage is sort of the same way. People don’t live that well. They’re not supposed to live there. But but, you know, the laws are such a hey, hey, are unlocking Yeah, you know, and it’s, it’s very straightforward. A dude, it ain’t personal. You know, but it’s, it’s it’s pay to stay. You know, it’s that kind of stuff. And I wish residential could be more like that. But, you know, when you’re dealing with people’s residences, you know, the laws are probably correctly in favor of the tenant. Primarily, because for 1000s of years, there have been bad landlords. So in mistreating people.

J Darrin Gross 37:28

Yeah, no, I think the most of the laws that we have came from, like you said, a need. There was some abuse somewhere that that occurred. And, and, you know, unfortunately, a lot of times, it’s it’s the rare exception that is that. But then the law basically says, Greg, don’t tolerate that anymore. And, you know, for the most, most people that were operating all along, you know, within the realm of reasonable, it’s not really a big deal for him. But still, like I said, there, there’s definitely a longer list of laws that affect residential tenants, and landlords, as opposed to the commercial leases are so Hey, Stuart, if we could, I’d like to shift gears here for a second. By day, I’m an insurance broker. And as such, I work with my clients to assess risk and determine what to do with the risk. And there’s three strategies we typically consider, we first look to see if there’s a way we can avoid the risk, when that’s not an option with a to see if there’s a way we can minimize the risk. And if we cannot avoid or minimize the risk, then we look to see if there’s way we can transfer the risk. And that’s what an insurance policy is at risk transfer vehicle. And as such, I like to ask my guests if they can look at their own situation, could be the market interest rates, political your, your tenants investors, however, you would like to frame the question and identify what you consider to be the biggest risk. And, again, for clarification, while I am an insurance broker, I am not necessarily looking for a an insurance related answer. And so if you’re willing, I’d like to ask you, Stewart Heath, what is the Biggest Risk?

Stewart Heath 39:32

I am willing, and I will dive into the pool. I think it’s a brilliant question. To me, the biggest risk is tenant selection. It’s not an insurable risk. You know, I do live in Tornado Alley. So you know, severe weather can be a risk but you can insure around that the biggest risk is essentially the income from the property. And the income from the property comes from tenants. And it is a professional, I think it’s a professional expertise that is developed to be able to underwrite a new tenant for a lease. It’s not just the first person that called and say, and is willing to pay you the deposit. And I use that example, because I’ve made that mistake before. But if you will take, you know, an hour’s worth of due diligence, either residentially or even commercially, and check into them yet third party reports, and do reasonable and customary means of verifying what what the tenant is telling you. And yet, then, then you will most of the time, select a proper tenant. If you don’t do that homework, your property will have income problems. And so what is a bad tenant? Well, number one is bad tenant that doesn’t pay. That’s one. But part and parcel with that is people who don’t pay usually bring other kinds of people to your property, whether it be multifamily, whether it be to your commercial office, your storage space, whatever, I have seen this over and over and over again, which actually begins to make other tenants feel uncomfortable. And so now your problem is a lot worse than just the one guy who’s not paying. And it was also easily headed off. By doing some basic due diligence on the front end, that’s the biggest risk I have in what we do. There are obviously other kinds of risks slip and fall risks, and we get sued by somebody whose coffee was too hot or whatnot. And, again, that’s insurable risk, we carry general liability as well as property coverage and, and on most of our properties. Like, we also get business interruption insurance, or, like, if a tornado takes out a lot of our storage buildings will, you know, we’re, we’re not only going to get repaid to have that rebuilt, but we will get income that we’re missing from those units that were that the tenants can’t use. So, but the biggest risk is the one that’s not insurable. And that, to me comes down to tenant selection.

J Darrin Gross 42:49

That is so appropriate for myself, and I’m sure all the listeners to know that, you know, selecting the tenant, and I know on commercial, it’s, it’s a lot more of a, I mean, you have the ability to to credit check and check, credit check, but just to really establish, you know, how credit worthy they are. But, in fact, if I understand, right, I mean, a lot of the commercial real estate is basically valued on the you know, the strength of your, your tenants, you know, if you’ve got, you got a bunch of people that have only been there for a little while, and they bear and they rarely pay or, you know, they don’t have a whole lot of credit, that’s probably a tougher sell than if you got, you know, name brands or established businesses with with significant credit history to do so.

Stewart Heath 43:41

Just in this building, I have a public company tenant. In your they’re always fun to negotiate leases with because they never want to pay a security deposit. And this will look at us, you know, anyway, we usually arm wrestle over that, but I’ve got everything from the public company to the single CPA, who is a great guy has been a great Senate, but there’s no backup there. So that’s essentially at least to a person in that situation. Great tenant, look glad they’re here. But, you know, it’s not exactly triple A credit. Like, you know, in some commercial properties, where you have a great big company that leases an entire building, well now that building is valued entirely on the credit in the terms of that lease. So you’re right.

J Darrin Gross 44:42

This is this is good stuff, and I appreciate you sharing with us the kind of mistakes and you know, what your experience has been and and how we can avoid historic where can the listeners go if they’d like to learn more or connect with you?

Stewart Heath 44:59

The best place to get information on me and connect with us is Harvard Grace Capital.com. You can find my Calendly link there. If you’d like to book some time with me, you can look at our resources there. We have lots of resources available for free, you can join our mailing list there and just follow what we’re doing. And I always say, I, I encourage people to use my Calendly link. I do love talking with people about real estate. Whether you have ever invest with me or not, or you just want to call me stupid. That’s okay. I still enjoy talking to you.

J Darrin Gross 45:33

That’s great. Well, Stuart, I cannot say thanks enough for taking the time to talk today. I’ve enjoyed it. Learned a lot. And I look forward to doing it again soon.

Stewart Heath 45:44

Thank you so much. I appreciate you having me.

J Darrin Gross 45:48

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. CRE PN Radio.

Announcer 46:07

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Cash Flow Investments Make Financial Freedom with Chris Miles – CRE PN #285

Chris Miles 0:00

That’s the goal is that how do we get you to actually create income streams? You know, how can we actually create passive income where you work because you want to, not because you have to. And that’s the kind of thing like that that’s where I have like countless experiences like that over and over if people were, were actually building that passive income. Now, you know, I’ve got some clients that were able to retire within the first year, because maybe they don’t have a huge overhead. Maybe they only need an extra 2 3 4 thousand a month to live. And, you know, a lot of them will do that within a few years. You know, others most of my clients use one of these 10,000 20,000 a month which, by the way, like I said, you want 10,000 a month if you’re fighting against inflation, that number keeps growing. It’s hard to hit when you’re trying to save. It’s like a Dalmatian chasing a firetruck it’s hard to catch up to it right like that’s what happens when you’re doing the mutual funds. Well, you can do in real estate or things like that, where you can create quick cash flow and create acceleration of your money. It’s amazing what you can create and accomplish.

Announcer 0:56

J Darrin Gross 1:15

Welcome to Commercial Real Estate Pro Networks, CRE PN Radio. 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.

Today, my guest is Chris Miles. Chris is the cash flow expert and anti financial advisor and is a leading authority teaching entrepreneurs and professionals how to get their money working for them today. He’s an author, podcaster podcast host of the Chris Miles Money Show. He’s been featured in US News, CNN Money, EO Fire and has a proven reputation with his company Money Ripples for getting his clients fast life altering financial results. In fact, his personal clients have increased their cash flow by over 200 million in the last 10 years. And in just a minute, we’re going to speak with Chris about how to create an Anti Financial Plan.

But first a quick reminder, if you like our show, CRE PN Radio, there are a couple things you can do to help us out. You can like share and subscribe. I dare ya. Go ahead. And also leave a comment. We’d love to hear from our listeners. And also, if you’d like to see how attractive our guests are, be sure to check out our YouTube channel. And you can find us on youtube at Commercial Real Estate Pro Network. And while you’re there, please subscribe. With that, I want to welcome my guest, Chris, welcome to CRE PN Radio.

Chris Miles 3:07

Thanks, I appreciate it. What was in total have a radio voice. So maybe they don’t want to go to the YouTube channel. Maybe this is just safer for us not to have them go there.

J Darrin Gross 3:16

I don’t know. I guess we’ll have to see if they know that they want to check it out. I have to just go and check it out. But, Chris, I appreciate you doing this. Before we get into our talk today, if you could take just a minute and share with the listeners a little bit about your background.

Chris Miles 3:35

Yeah, you know, almost 20 years ago, I started out as a traditional mainstream financial advisor, right, like the type that you’ve always seen that, you know, wears the suit and a tie. That’s way too short, or the belly sticking out and all that kind of stuff, right?

You know, I was basically the salesman in a suit. Did that financial visor for four years, I wasn’t my intention to go into financial advising. Funny enough. I actually was planning to go into business consulting. But I figured if I was going to go into business consulting, I should have real life business experience. So I actually dropped out of college, went to financial visor because that was the first business that I realized I could do. I didn’t realize it took anybody off the street as long as you could pass a license and a test, right? That would take people but I started doing it and love being an entrepreneur and actually stayed dropped out of college never went back when it but when I did that for four years, I started to see patterns, right? I’m always the kind of guy that likes to see patterns around me sometimes people don’t always see. And the pattern I started to notice was even people that had financial advice for, you know, decades, right, even for 2030 years. They still really weren’t financially free. But, you know, part of me wanted to deny that because, of course, you know, like if you’ve been trained in that industry, they always show you the numbers they show you the stock market’s average, you know, 10 or 12% since 2000 BC, right? And they try to try to convince you that mutual funds is the way to go, you know, and and so it’s basically what you know, insurance license and I was securities licensed.

But I started to see that the real numbers, I started running real actual numbers, not the averages, which is a half truth, right? But real, actual yields of returns, I started realized that like, for example, up until last week, the 30 year average of the stock market was almost exactly 8%. Like the real return, but the last 20 years was 3.88%. Right? We started put those numbers in, and then you start to realize, Oh, well, inflation is actually higher than the government tells us because they’re trying to save money for themselves, and you start to realize that they’re still taxes, and they’re likely to go up, it starts to become, we have a dismal conversation. And after about four years, I was trying to hang on with my heart at war, right? Like, the heart was saying, hey, maybe this isn’t the best thing, while the brain was saying, you know, actually, this is where how you make money, what are you gonna do, right, like, you know, do just find a middle ground or whatever. And so I was mortgage, I was mortgage license, you know, Life and Health Insurance license, as well as security license, I eventually dropped the securities license. And then there was a friend that I had trained in the business that left, he and his father would decide to partner up to do real estate investing, right? And it was that at the end of 2005, we started a conversation I thought, Okay, he’s probably gonna be broke. He’s gonna want work with me again. Well, no, it was the exact opposite. He told me, he said, Chris, like the last four months have been awesome. He only quit for four months, get this right. Four months have been awesome. My dad, who’s a professor, local university has now doubled his income with passive income from his investing. And I said, Come on. And this is the type of thing you hear people say all the time, even to me sometimes is, that’s too good to be true, right? And he’s like, No, I’m dead serious. Like, it’s amazing what we’re doing right now. And we got in this debate about what’s better stocks or real estate. And he finally stopped me and say, Chris, listen, how many of your clients are actually financially free where they don’t worry about money? I’m not saying that was a retire, but the ones that are actually free? I said, Well, none, because even the retired ones, watch CNN, and you can never be free when you watch CNN, right? This better not be a CNN syndicated show, because we think

J Darrin Gross 7:11

you’re safe.

Chris Miles 7:13

Good. And then they said, Now the second thing, question, Chris. All right, since your clients haven’t been free, how about you guys, because it’s fun as financial advisors, you should have figured out better than anyone on the planet. So of you guys how many of you are financially free, not off the Commission’s that you’re earning from selling this stuff, but actually from doing the investments you’ve been recommending? And I thought about it and thought, and I said, none I make maybe there’s just one guy my office that might be and I found out later, he wasn’t either. And so none of them were including myself, or anybody, even people have been in the business for 30 or 40 years. They weren’t financially free off their investments, either. He said, Chris, there’s your problem. I said, well give me the answer. He said, I’m not gonna give you the answer, because I don’t think you’re going to be open to it anyways. And that just made me want it more. Right. He just took it away from me. So I ended up saying all right, fine, what what is it? He’s like, Alright, if you’re really serious, go get this Robert Kiyosaki book not Rich Dad, Poor Dad, cuz you’ve read that a couple times, Chris, but read, Who Took My Money?, which basically just rips into mutual funds. So he’s like, go get who took my money. And then and then go, listen, this radio show this local am radio show was going on here in Utah. It’s like, Listen, these guys, these guys are real estate investor, you should listen to what they have to say. And so I did, and, and this was like, January, I started to do this. I went through the Kiyosaki book pretty quickly in one day. And then and I said, Listen, this radio show, and after about two months or so, they had a little, you know, live event at a hotel nearby, and, and they basically start ripping on financial advice, you know, like high risk rates, high returns, they say, Well, what is a 90% chance of losing create a 90% chance of winning, right? So if you’re in the insurance world, you already know this, you know, you you can’t, you can’t really, you know, mess up the numbers, right? You can’t take higher risk to get higher returns, it doesn’t happen. Because if that’s the case, we should all go buy lottery tickets right now, because we have the biggest chance of loss. Right?

J Darrin Gross 9:06

Right.

Chris Miles 9:07

So that doesn’t work for creating wealth. And they start talking about things like you’re, you’re in it for the long haul, well, how long is the long haul? Or you know, how about, you know, insurance is a necessary evil, they’re like, you know, that’s just insurance company trying to get you to quit your insurance if you’ve already paid them for years, right before you use it. Right? And all that kind of stuff. And, and he was going on about the stock market and what the real returns are, and average versus actual and all this stuff and blown up my entire island. And I was like, yeah, who teach this junk? And then I realized, it’s me. I’m that guy. And they even asked, they said, even at one point, they took a break. They say, Hey, sorry, like if we’re offending any financial visors, are there any financial advisors in the room? I was gonna raise my hand, but when I realized I would be the only hand in that room of 100 people, I quickly brought it down. I was like, do not point me out. And my friend, of course, laughed because he knew that that was me.

That weekend, I quit. I said, I’ll never To go back to financial advisor, again, I will just be a mortgage broker and I’ll teach ballroom dancing. Because a little known fact, I was one of the nation’s top amateur ballroom dancers. So I was going to just do that. And but the thing is, I wanted to know what they knew, I want to know how they’re creating wealth and retiring in their 20s and 30s. You know, I was 28 at the time. Well, I started learn from them. And lo and behold, within a matter of months, but that summer, I found out, I was actually out of the rat race, I was able to, essentially stop actively working. And so, so it kind of blew my mind. And I thought, well, this, this was way easier than I thought, I thought I have to save up $2 million in live on, you know, 60,000 a year if I was lucky, right? If it would not last me, you know, or I wouldn’t Outlast my money, right? But, but I was like, wait, it’s all about cash flow. Like I just started, things started to click. And that’s when in 2007, I kind of came out of retirement started teaching, you know, really about, you know, doing the opposite, essentially, how do you get out of the rat race and that kind of thing?

J Darrin Gross 10:59

Wow, so that’s quite a turn of events, on your financial career there from being the disseminator. And the know, you know, the average rate of return 8% kind of thing, as opposed to the real, the real real rate of return, and then recognizing that it’s, it’s not working for people. And I think the other thing that that your friend is asking is how many, you know, financial advisors, do you know, that that are actually able to, to retire or financially free? And that’s,

Chris Miles 11:31

that was the second question. Yeah,

J Darrin Gross 11:33

yeah, I find that to be concerning, and also revealing, you know, that, that, you know, so many of us are taught to, you know, get a good job, get a good education, get a job, you know, participate in the 401k. And over time, everything works out.

Chris Miles 11:56

Right.

J Darrin Gross 11:57

And, you know, that that’s something, I mean, because you may, it may work for you, and you may get to a point where you get to the end of your working days, no, maybe you don’t have your health, and maybe you have all the all the money or as opposed to making the money work for you. Early. So you don’t have to be tied to this illusion or fantasy or, or, you know, just the, the story we’ve been taught.

Chris Miles 12:26

Yeah. You know, essentially, you bring up the 401k, right, because that’s the one that people think is like the answer, you know, I get a lot of people say, it’s even worse if they’re business owners, and they’re setting up their own 401k. And they pay their own match, right. But for those people that are even employed, where they get the match from the company, you know, I just did a podcast, I just barely released about the 401k, how it’s impossible to retire with it. Because if you think about it, I mean, you get it, if you I did an example. So who makes 140,000 a year, they max contribute the 19,500 a year, plus, they get a 6% match from the company, which most of us don’t even do that much. But I was playing devil’s advocate against metal point, right. So there’s like almost 28,000 a year going into their 401k. But the actual when you factor in even a low rate of inflation, the actual yield after 35 years of Max funding every single year of your 401k was the equivalent after taxes about $14,000 a year after inflation. So you save up, you know, of your own money almost 20,000 a year to live on. 14,000 a year, right. And if you want to retire in 35 years, on 100,000 year lifestyle, you got to be putting away $150,000 a year into these because the returns aren’t great, the taxes aren’t wonderful either. And they really just don’t keep up. It’s really just impossible to comfortably retire and be free. just rely on a 401k

J Darrin Gross 13:50

You know, a few years ago, I guess I came to the realization that the 401k is basically a forced savings plan.

Chris Miles 13:59

Yeah.

J Darrin Gross 14:01

Because while you are many times invested in the market in some way, shape, or form, usually mutual funds, what you you’ve cited, based on the real rate of return as opposed to the average. You know, I love it when you do the math if you if you put in you know 10,000 or if you have 100,000 and the markets up 10% this year, so then you go up to 110,000. But then it goes down 10% you’re not done. You know if you go on two years or whatever, you come back 10% you’re not you’re not back where you started, you’ve you’ve essentially lost

Chris Miles 14:40

thousand dollars.

J Darrin Gross 14:42

Yeah, yeah,

Chris Miles 14:43

Exactly.

J Darrin Gross 14:44

And, you know, and how that average rate of return if you and I forget what it is if you if you’re up 16 or if you’re yeah up 16 one year down eight the next year. You know, the average, right? And I’m not thinking clearly on the numbers. But if you if you get an average, you will get that average 8%. But the reality is that that real rate is substantially lower. When you actually look at the real numbers. There’s

Chris Miles 15:14

Yeah, once you put it once you put a negative number, the average and the actual numbers are different. Right? Right. Like you’re saying, for example, and I remember first learning this in, I think it was 2004 2000. It was 2005. I remember now is 2005. So this is a year before I quit, right? A guy came to office and said, All right, everybody say you have $100,000. If you lose 50%, how much do you have? And we all said, $50,000. Right? He says, All right, so what rate of return you need to get back to 100%. And all of us said 50%, right? Because you lose 50%, get 50% your back even. He said, That’s wrong. He’s like, because if you make 50%, on 50,000, that’s only $25,000, you’re only at $75,000. He’s like, you have to double your money after losing half, you have to double it. That’s 100% rate of return. So he’s like, look at this guy’s like, take no 100% minus 50, that equals 50 divided by two years, that’s a 25% average return per year, even though you just got back to breaking even. He’s like, oh, and of course, there’s no cost to come out. So maybe you’re left with 98,000 after this cost, then you refactor that and return. So you actually have less after having it, you could actually lose money with a 25% average rate of return. And that’s, and that’s the big difference is that when a company, they don’t want to lie, they never want to miss state anything. But if you have the choice, if you’re a company selling investments, which one or which number are you going to show the average is always going to be higher, or the actual yield, that’s going to be lower every time because if there’s a negative year, they’re going to be different. And of course, that’s always the case, right? You lose 10%, you need to gain 11.1%. To get back to breaking even you lose 2025, you lose 33, you need 50%, you lose 90%, like in the Great Depression, you need 900% to break even. Which by the way, that’s why every stock chart that you see that shows averages over time, always includes just before the Great Depression, right? What better way to show the average than to include something where the market dropped 90% had to get 900 to break even. And that just made the averages go astronomical, you know, right. That’s what happened in last year with COVID, too, right? The market drops 30 about 35% in these about 50% return to get back to breaking even. So you have financial advisors out there saying, hey, you’ve made 50% return on your money 40% return on your money last six months, why would you get out of the market?

Well, why would I want to be in something so bipolar that I have no control? And that’s the real question.

J Darrin Gross 17:45

Right Right? No, I it’s it’s, it’s, it’s almost scary when you come to the realization, especially if you’ve got any time spent doing this thinking that you’ve got it all figured out? And then you come to the realization of that you how much time you’ve spent doing this. Yeah. And how much? how little time you have left to try and try and correct the situation. So let me ask you the topic. Anti Financial Plan? Yeah. I think everything we’ve been talking about thus far, would be kind of similar to what a you know,

Mainstream financial planner

would would think of a as a financial plan, you know, yeah, the education a job and you go get the 401 K. So how, what is your view? Or what’s your definition of the Anti Financial Plan?

Chris Miles 18:44

Yeah, I like this quote, you know, Jerry Seinfeld from an episode of Seinfeld, right, where he talks to Georgia stanza in an episode called opposite George, where George actually becomes a winner for the one on one episode. And, you know, he said, Well, if every instinct you have is wrong, then the opposite would have to be right. And, and that’s basically the Anti Financial Plan is, it’s like saying, What if we went away from what financial advisors offer, because if you really dumb it down, they really only just offer mutual funds, and then certain types of like annuities or insurance type based products, but that’s it. Like, it’s, it’s really just Mexican food. It’s, you know, it’s a tortilla, with beans, rice, meat, you know, veggies and things like that, right. But whether it’s a burrito or taco or tostada, they all have the same ingredients, you know, it’s just taking the same stuff and repurposing it, right.

Anti Financial Plan says, Hey, we’re gonna go do the opposite, instead of focusing on accumulation of money, which is the slow and really the guaranteed way to not create wealth that the poor middle class have been taught, let’s do the Certain Way that’s worked for the wealthy class, right, which is going for alternative investments, things like real estate, whether it be residential, commercial, whether it’s things like, you know, it could be oil and gas, potentially, right. It could be doing things where you become The bank and you’re lending money and getting better returns than then they get, you know, on different deals where you might get backed by security things that actually have real assets behind it. Especially right. You know, you invest in mortgage notes, there’s, there’s a variety of things you can invest it, right? A lot of it usually more certain stuffs going to be real estate based, you know, which is why we’re here today, right? That’s the big thing. And, and so, like, for example, I had a client where he was actually on a good track for most people. He was in his his early 30s max funding his 401k, aggressively paying off his mortgage doing everything that a good boy should do, right. And but the thing is, I said, well, let’s project out let’s extrapolate the numbers, what does it look like? And even by the time you’re 40? Well, he would actually have his house paid off, right, that would free up about 2500 a month, he would probably have built up pretty darn close between savings and his retirement plan, almost a million dollars, because the guy was just packing money away. Well, I said, as a strategy with him, I was working with him as a client, I said, here’s what I would look at instead is why don’t we instead do this one, we do a cash out refinancing your mortgage, don’t make it 15 year make it a 30 year, which creates some defense to in case there’s a bad times that come upon you like, you know, pre COVID, this was when I advised him on this. Now with COVID, he’s probably grateful for it was like let’s do a 30 year mortgage, create a smaller payment just in case something goes wrong. So we have a good defense, but we have a good offense to by taking some of this cash, we can go and invest it. And then the other savings you have as well, we can invest in by actual real estate. So he went and he bought real estate properties, turnkey real estate, so he doesn’t have to manage it or anything like that. Well, lo and behold, he went from trying to remember for about 2500 a month on his mortgage in you know, about eight years to already from the first six months, creating an extra $4,000 a month of passive income. Now, here’s the key, taking that 4000 month that 50,000 a year right? Taking that reinvesting it and buying more assets, and again, kind of create what I call an income avalanche, which just gets bigger and bigger and bigger. By the time he’s 40, he’s going to have well over a $10,000 a month passive income stream, versus just trying to save 2500 a month paying off his mortgage, and then having this money is locked of his 401k that he can’t touch for another two decades. Right? And that’s the goal is that how do we get you to actually create income streams? You know, how can we actually create passive income where you work because you want to, not because you have to. And that’s the kind of thing like that that’s where I have like countless experiences like that over and over if people were, were actually building that passive income. Now, you know, I’ve got some clients that were able to retire within the first year, because maybe they don’t have a huge overhead, maybe they only need an extra 2 3 4 thousand a month to live. And, you know, a lot of them will do that within a few years, you know, others, most of my clients, usually at least 10,000 20,000 a month, which, by the way, like I said, you want 10,000 a month, if you’re fighting against inflation, that number keeps growing, it’s hard to hit when you’re trying to save. It’s like a Dalmatian chasing a firetruck. It’s hard to catch up to it, right? Like that’s what happens when you’re doing the mutual funds. Well, you can do in real estate or things like that, where you can create quick cash flow and create acceleration of your money. It’s amazing what you can create and accomplish.

J Darrin Gross 23:18

I have come to witness at myself, I mean, just the you know, I think you mentioned it the the mindset shift of asset, you know, creating or accumulating assets versus the cash flow. Yeah. And I think that the beautiful thing about real estate is it allows you both, you know, you can get the the cash flow which you seek, but also it’s tied to a real asset that is appreciating, you know, presumably appreciating depending on you know, what you’re what you’re doing or, you know, or if you are in some sort of a commercial property, perhaps you’re even able to force the appreciation. And, you know, whether you hang on to it and collect the cash flow or you roll out roll into something different multiple streams, but just a little bit more more control for your, your clients that you work with. Do you have any kind of a a benchmark, or can you cite, kind of the average what they were experiencing as far as their rate of return with they were doing it to the traditional way as opposed to what they’ve been able to achieve? Going to alternative? assets?

Chris Miles 24:39

Oh, yeah. All the time. You know, I’ll give you one example. I had a client who he had max funded his 401k since the mid 80s. So he was one of the first early adopters of being you know, typical Middle America to use the 401k, max funded it for what would have been it would have been I mean, this is 2010, he had max funded every single year only had $400,000 in it, thanks to the recession, everything else, right? Granted, if he would have kept doing that he might have built it up to, you know, pretty close to a million dollars by today. But here’s the thing that 400,000 he was able to buy about a million dollars of real estate, that he was now certain to cashflow dramatically, right? Because remember, 4000, even if you had $400,000, in your 401k, the thing is that a good financial advisor, right one that’s more up to date, that says, hey, I recognize that the 4% rule, the speed that back in the day, 20 years ago, they’d say, hey, you can live on 4%, whatever your money is to let your money last. Well, that was true based on numbers they ran in the 1970s. Right? Completely different today, because we live longer. And the rates of return on those more stable investments, like bonds, and treasuries are much, much lower than they’ve ever been. Right. So now that number is more like 2%. So if you have $400,000, that means you’re only living on $8,000 a year, right? It’s just ridiculous. But I mean, I’ve had several clients where they have $400,000, we’ve turned it into over 4000 a month of cash flow, you know, with real estate specifically, again, passive that’s net profit, after they’ve paid a property manager after they’ve paid their mortgage payments, their taxes, insurance, possible HOA fees, or whatever else, they still come out with at least, you know, 45 to $50,000 a year from their 40,000 or 400,000. Right? very different than 8000 a year that you’re trying to pull out from the market. So I get that kind of conversation a lot. You know, someone tells me they’d said, hey, my goal is 100,000 a year passive income. If they come to me, and I know they have about a million dollars, I’ll say great, possibly this year, if not this year, we’ll probably accomplish it by next year or two. Right? Like it’s just, it’s really just math. I mean, if you can make at least 10 or 12 or more percent a year, doing various types of investments and depends on which investments they do, right? If you buy real estate, you have a much higher option there on a cash on cash return. If you’re buying, you know, if you’re more buying into like you know syndications, right, like maybe you’re doing commercial real estate, maybe you’re buying two apartment complex, you might get more, but it might be more of a growth strategy, you might get eight to 10% return cash flow, before you get the big growth on the back end, right. Everything is different. And so that’s why every person has their own recipe of how to get to that number and where that and how, you know what they want to do with that money. But it’s, it’s, it’s really not hard. Like I just tell people like, hey, if you can earn at least 10% a year, do the math like or if you if you know, you can make 10% a year, and your goal is 100,000 a year you need a million bucks, right? Just for passive investments, you’re doing more active investing, you can do it faster, but most of my people are usually coming to me asking to do passive stuff, because they’re already busy working as professionals or business owners already, they’re looking for something that they don’t have to babysit a lot, you know.

J Darrin Gross 27:57

So let me ask you. So if the people who have been doing the mainstream financial plan are coming to you, yeah. And you’re, you know, coaching, working with them to achieve cash flow right now? are what what are the steps? Are you are you going into a self directed IRA? Are you? Are you cashing out of the IRA? Are you doing these investments in, in a tax deferred vehicle? How are you? How are you achieving your, your success?

Chris Miles 28:30

It depends on Yeah, it does depend on their age, their goals, like if someone says, hey, my goal is to retire by 50 within the IRA is not a good option, right? It’s actually because that’s not the only you have a penalty to 59 and a half and you stuff to pay taxes down the road anyways. And part of the question we have now this year is after the Trump tax plan is gone next year, you know, because 2020 one’s the last year, it’s in effect, what’s going to happen? You know, are they going to reset back to what they were before where the tax rates would go back up again? You know, there’s a lot of uncertainty, right. So it always depends upon their goals, their objectives, and really their situation, right. So I’ll give you another example, I had a chiropractor in San Diego, he’s 4045 46 years old. He’d done a great job saving money he’d saved up several hundred thousand. A lot of it is in IRAs, right. Some of it in savings. He also been aggressively and this was his main goal, aggressively paying down his investment property he had there and his own house. And so his whole focus was just yeah, I’m going to save money in these plans. But I’m aggressively trying to pay off my houses, right. So I’ll be free and clear. in about six years. He’s on target for six years, that would free up about $4,000 a month for him if he did that. Instead, I said, let’s see if you can invest in property California, I can already tell you the numbers stink. You know, if you’re anywhere in the western half the United States, your real estate probably isn’t good for cash flow. And I was right. He was making $200 a month on a property that had a half a million of equity in it. And I was like, Listen, we can sell that for Get that equity out, put into other real estate to make a lot more than that, you know, again, even if it’s 10% a year, we can make easily, you know, 40 50,000 a year off that. I said, and let’s do a cash out refinance, your mortgage payment will go up about $500 to 1,000 a month, but we’ll get another 400,000 out of it for just that small cost. So net of cost after getting all invest that’s over 800,000, almost $900,000 to invest, that would generate a net of about 75,000 a year, year one right? Now keep reinvesting that same 75,000, don’t even add more to it, you know, he could add more, obviously, but not even add more to it, that would actually increase it to over 10,000 months by five years out. So the great thing is that he could be at 10,000 a month in five years versus six years paying off his mortgages to do it in that time. Now, his big question was alright, with IRA money, what do we do with it, I was like, well, that’s another source, we could self direct it. And we could invest in certain types of things, we don’t want to buy property with it there, that’s a bad use of that money, you lose the tax benefits. And it just you just never get favorable returns. But I mean, there are different syndications out there, right, there’s different ways you can lend money as easily as 10 plus percent a year, you know, so if you want to grow it, we can do that. There’s tax liens, I have somebody that does taxes, or they pretty much always do a target of about 14 to 18%, a year, great place that you can potentially put your IRA money in, let it grow and build. The thing is, though, he wants to retire before 59 and a half. So then it’s like, how do we get the money out? You know, without paying a you know, buku bucks in taxes? Well, you know, one thing to do is if we can get, you know, not just him or get his wife qualified as a real estate professional, you know, because he’s already full time in his practice, right? But his wife can be a real estate professional, we do that I forget some properties, we can get all these deductions in depreciation and cost segregation we can do even on single family homes as well as multifamily. Right. And the next thing, you know, we’re offsetting the taxes, we pull off an IRA, and there’s very little tax and penalty on that money. And so we’re able to keep more than money to invest and create more with it. Again, it’s always case by case I don’t recommend I’m not securities licensed anymore. I dropped that in 2005. But, but I definitely look at those options, say, all right, what’s your goals? Right? If you want to keep using your IRA, the thing is, that’s not going to get you there if your goals before 59 or 60 years old?

J Darrin Gross 32:27

No, no, I appreciate you diving into this, the think the realization that I’ve come to also with having older parents and a chance to become more familiar with their financial situation, and how, when you can take the money out of a 401k, as opposed to, you know, if you’re going to keep thinking it makes it bigger and bigger and bigger, and a bit more and more and more money into it. It’s, it’s, you know, it’s eye opening, when you see how you’re how the money comes out. When you I mean, because now you have the tax on it. And you have to your minimum Was it your minimum distributions I can require Yeah, rmds. The, how, you know, that accelerates and they’re looking to get the tax, they want the tax on your, on your 401k there. So as opposed to if you’re working outside of that, how you have the ability to create that asset and let it grow, and just collect the actual the cash flow, which was in my mind, that’s always what the retirement goal was, was to create a big enough nest egg that it just earned money for you kind of like a dividend kind of thing. But yeah, that doesn’t I am I’ve yet to see that work in the 401k. world.

Chris Miles 33:50

It Yeah, it’s it, they don’t really make it work well, right. You know, it’s really tough to do with IRAs and 401k’s, you know, even even if you do an alternative investments, and you’re self directing it, still, it’s not favorable, right, like, now maybe if we move it to a Roth, you can curate some tax free income. But most of my clients, usually what we end up doing is a strategy, especially for them the the growth phase, where they’re trying to build the assets to create that cash flow. You know, we thought about getting your investment money to pay you twice, right? So I use what I refer to as like this max ROI bank, right? a tax free supercharged savings account, where I use a life insurance, I use a whole life policy specifically run the money through we have very minimal cost. So we run the money through right back out to go to investing. And what happens when you use that strategy, where you put money into a savings account, you withdraw it, you’re not making any money on the interest on the money you just withdrew right other than in the investment, you know, but the money you withdraw out of your savings now the same is depleted. You’re not earning much interest. Plus, let’s be honest, if you were lucky to earn point 1% in the bank account right now, that’s pretty amazing. So you’re not making much and then you get taxed on that point. Nothing percent right. But if I use this strategy will flow it through the life insurance, I’m getting tax free money in there, at the same time while making money inside those investments. So I’m actually able to make money in two plays at the same time. So if I make 12% cash on cash return on my real estate properties, the cool thing is if I run it through my life insurance and then back out, and I take the cash flow, flowing it back into the life insurance again, I actually end up making a net about another 4%, on top of the 12% I’m already making, so I’m able to make more money faster, which allows me to have more money to invest faster to,

J Darrin Gross 35:29

okay, run them by me one more time. So you buy the buy the whole life policy, which has a cash value, and you borrow against that.

Chris Miles 35:38

Yeah, and it has to be a very specific type, right? Don’t do the traditional whole life that like people do. Not all are created equal. And most insurance agents will never do it for you, right? Because the truth is, you got to cut for an agent to do it, you got to be with the right companies, any other catchy commissions back about 75 or 80%. And make it work, right. Not a very popular idea among the insurance industry, or among insurance companies. But the cool thing is like whole life, usually it’s front loaded. Usually, if you put in for the first two years, you have almost no cash value. In those first two years, it goes all the costs, the way I design it, those first two years usually have about 85% of your money in cash ready to use, right? So you know, you put in 25,000, a year for two years as 50,000 usually have, you know, 40 to 43,000 bucks, and you can use versus nothing or 1000 bucks, right? So low costs, higher returns for overfunding, these policies to put in more cash, but we’re keeping very low on the cost side. And then what we’re doing is we’re taking that money, we go and invest it. Now when you when you use a life insurance policy like that, especially if it’s whole life, you can’t do it with universal life, because the the numbers change on you, right, they don’t let you compound money when you’re borrowing against it. But with whole life, that’s unique, because I can actually earn compound interest in that full amount of money. So say they have $100,000, I have in cash inside this whole life policy that’s built up there. Now that hundred thousand if I borrow 50,000 of it, right? Normally, if you withdraw 50,000, the same discount, you’re only earning interest on 50,000, because you just lost 50,000 out of there. But with whole life I borrowed from the insurance company directly, they gave me like this line of credit that has no minimum monthly payment, there’s no commitment, they just charge you 5% a year, right. But the cool thing is, at the same time, my money over here that full hundred thousand is earning compound tax free interest. So what I’m doing is I’m using this line of credit for an insurance company, again, this private line of credit, using that to invest that 50,000, but put as a down payment on a property. So it’s a duplex, I took the cash off and I duplex it’s 500 bucks a month, right? I take that cash flow, I’m following that to pay down that credit with the bank with the insurance company. Now as that’s paying down, of course, the interest charge gets less and less and less, right. Just like when you do any pay on a normal loan, like a mortgage or a car loan, the more you pay towards the principal balance, the less and less gets charged interest every month, which is why your payment has less and less interest. Same thing happens here. The difference though is that now the money is still over here, compounding by itself, it far out earns the interest, you’ve been charged on alone, netting you depending on your age and health, at least a three or 4% return on top of whatever you’re earning on your investments. And that’s tax free returns to. So you double dip, you basically earn money in two places at the same time. But that same dollars you would have used, you know, give the example I showed somebody just yesterday with one of my clients in Washington State. She was trying to understand the concept and I said let’s look at your number. She’s in her mid 40s. Okay, health, very, very average if if average health, so not great numbers compared what some people will get. But I ran the numbers I said, Look, if you use your savings account, earning point 1% right. Here’s the problem is that, you know, your money would build back up over these, you know, five years to 176,000 Mike but if we use your life insurance, same money, your your money builds up to 196,000 in those five years. So you make 20,000 more in five years using this versus just using your stupid savings account that, again is taxable. It earns nothing. And by ways exposed to lawsuits and creditors, that’s another cool thing of the life insurance in most states, hundred percent protected from lawsuits and creditors. Even if you have millions of dollars in there, they can’t touch it. So there’s that, as you talked about with risk and asset protection. That’s a big thing. Especially when my real estate investors, they’re saying wait a minute, well, if I borrow from the insurance company and use that as a down payment on my on my property, and I get a mortgage from the bank, does that mean it’s 100%? leveraged like, technically, yeah. So can they make claims on it? No, there’s no equity. There are very little equity they can attach to if they do win a lawsuit right? So they’re scrambling trying to find ways to put a lien against it when they can you know, it’s it’s just so cool when you start to see what’s possible.

J Darrin Gross 39:53

That’s fascinating how you can I mean the tools that are available but are not necessarily considered connected. And people kind of like that. Does that work? But I think we’ve all, you know, at least saw the news story about President Trump’s taxes and stuff. And I know my friends that are non real estate, you know, people are all frustrated, but the people that are real estate oriented go

Chris Miles 40:19

Who’s his accountant? That’s what they’re asking.

J Darrin Gross 40:21

Yeah. Well, that’s that’s kind of a that’s the Option G Yeah, opportunities that exists. That’s great. Hey, Chris, if we could, I’d like to shift gears here for a second. I mentioned you before we started that, by day, I’m an insurance broker. Yeah. And I work with my clients to assess risk and determine what to do with the risk. And there’s three strategies we typically consider. We look to see if we can avoid the risk. We can’t avoid it, we look to see if we can minimize risk. And if we can’t avoid nor minimize the risk, we look to see if we can transfer the risk. Yeah. And that’s what an insurance policy is. And I like to ask my guests, if they can look at their own situation. Consider your clients investors, your situation tenants market, etc, however you want to frame the, the answer. But if you can take a look and consider what you what you or take a look and see what you consider to be the biggest risk. And for clarification, I’m not necessarily looking for an insurance related answer. And so if you’re willing, I’d like to ask you, Chris Miles, what is the biggest risk?

Chris Miles 41:41

I think the biggest risk and this would apply to me or my clients, or anybody really, is ignorance? Right? Like, I always tell people, if you think education is expensive, try ignorance. You know, ignorance is seriously the most expensive thing in your life. I mean, that’s really this whole conversation about you mentioned Trump, right? You know, people are mad about his tax turns. That’s ignorance, you know, like, it’s, it’s what you know, and what you can do that actually creates the most money creates most protection, people can say, Hey, I don’t need that insurance, right, like that protection. But if they’re ignorant to the risk they’re already taking, it doesn’t matter what they think it doesn’t matter how positive thinking you can do. That risk is still there, you know, you stuff to manage, and figure out what to do with that risk. And so I think that really is the biggest risk is just ignorance is what what you don’t know is what hurts you. And also what you don’t know is what keeps you being hurt. It keeps you living a life of struggle and lack. And if you can find the answers, if you can find out the information you need and act upon it, not just know it, but act upon it. You now you become somebody who’s actually more unstoppable doesn’t mean you don’t have risk in your life. But it just means that if you’re always in the mindset of, Hey, I’m ignorant about something at some time all the time, right? You’ll start to realize I need to keep learning and if you keep learning, you have a much better chance of success than those that think they know it all. They think that whatever they’ve been told, that’s the truth. And that’s, to me is the biggest risk.

J Darrin Gross 43:07

That’s Well said. Definitely then a lots of truth in that. Chris, Where can the listeners go? If they would like to learn more connect with you?

Chris Miles 43:18

Yeah, I mean, you’ve already mentioned the Chris Miles Money Show, I always invite people check that out. I mean, it’s great free information you can watch on YouTube or even, you know, on iTunes or whatever, right? You can definitely check out the show there. And then you can check out my website moneyripples.com that’s m o n e y r i p p l e s dot com or I’ve got some great information there, too.

J Darrin Gross 43:38

Awesome. Chris, I want to say thanks for taking the time to talk today. I’ve enjoyed it, and learned a lot. And I hope we can do it again soon.

Chris Miles 43:49

Such a pleasure. Appreciate it, Darrin.

J Darrin Gross 43:51

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. CRE PN Radio.

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CREPN #174 Cash Flow is Key with Daniel Ameduri

Cash flow from day one is the key to building generational wealth that provides you options regardless of market conditions.

Daniel Ameduri from Future Money Trends has been investing in real estate since he was 18 years old. In a short time, he went from investing in properties that cash flowed to properties he hoped would appreciate in value.

When the market crashed, he lost those properties he was betting on for appreciation. The properties that cash flowed from day one, continued to produce and increased their output while the market was falling.

The lesson was learned. Invest for cash flow and you will be free!

Cash Flow versus Saving

An asset that produces regular recurring cash flow is the goal for any investor looking for a way out of the need for a job. A very simple plan, free from the hocus pocus of the stock market is real estate. For a modest down payment, you can purchase with leverage, a rental property. The tenant pays the rent, the rent pays the mortgage. When the mortgage is paid off, you get all the rent.

Compare this to saving cash, and earning minimal if any interest in the bank. You are way better off to invest in a tried and proven asset class like real estate.

Investing strategies for Cash Flow

Paid off real estate can be a tremendous base for your retirement future. Simple Retirement plan: purchase multiple single family rental properties. Pay them off. Cash flow for life. The key with real estate is time. So, the quicker you acquire, the sooner you will be free.

Financing. Unless you have an unlimited money supply, you will have to borrow to grow your real estate portfolio. If you have strong credit, and a good W-2 job, you can qualify for conventional financing.

However, if you have lesser credit and financial qualifications, you will have to get creative.

Seller Financing: Look for property and a seller with a problem. A property with a problem will not qualify for conventional financing. The seller’s problem is an opportunity for you to negotiate a low price, and determine what the actual cost to repair the problem will cost. A seller with a problem is more likely to agree to seller financing.

If they do not own the property out right, consider assuming their mortgage. All conventional mortgages have a due on sale clause. However, Daniel has never heard of a performing mortgage be called by the lender. So, this is your chance to take over an existing mortgage. Find out what the seller needs to allow them to move on. Most of the time, it is relatively little.

For a few thousand dollars, you can own a property that has a mortgage, and you get the equity the seller has paid down.

If you don’t want to keep the property, you can sell it. You can offer to carry a mortgage. When the original sellers mortgage is still in place, you create a “Wrap Around Mortgage”.

This is when your sell the property for more than you purchased it for. The new buyer gives you a down payment. You collect their payment, and make the payment on the original mortgage you assumed. The difference between what you collect and the cost to service the first mortgage is yours to keep.

For more go to:

https://www.futuremoneytrends.com/

Cash Flow Monsters:

https://www.futuremoneytrends.com/cash

CREPN #168 – Benefits of Real Estate Investing with Tyson Cross

Real Estate Investing has benefits that are not always recognized by investors.

Tyson Cross is a former Teacher turned Commercial Real Estate Broker and investor based in Portland, OR. His journey from educator to investor is a common progression for investors; awareness to action.

Invest in What You Know:

Do you understand the fundamentals of the stock market? You know you need to invest, but where? How? If you have a W2 job with an employer sponsored 401K, that may be all you do. In this options, the only control you have is the amount you put into your account and which investment fund you select. Your employer contribution and the market performance are out of your control.

Outside of your 401K, you can choose any traded stock on the exchange. What do you know about any of the companies on the stock exchange?

Now, think about real estate. It’s everywhere; big cities to rural towns. In every city, people need a home, and over time, what happens? Rent and the cost of housing go up. If you understand this, you understand the upward trend line for real estate market fundamentals. Your understanding of this makes the benefits of investing in real estate tangible.

Stocks vs Real Estate

Your 401K is essentially a savings account. Every payday, you buy shares, which over time adds up to a substantial sum. What’s not so well understood is that when you are ready to take your money out of your 401K, you have to sell shares. When you sell them, they’re gone! The remaining shares have to increase in value for you to stay even. This is out of your control.

Real Estate is not as liquid as stock. However if you keep your property for several years, you can borrow against the equity. The proceeds from the loan can be used to invest in additional properties, or taken as cash. Neither use is a taxable event.

Don’t forget the cash. Investment real estate valuation can include positive cash flow from day one.

Leverage & Control

The increase in value difference between a percent of a small number, your 401k or a big number, a leveraged asset, like real estate.

Example: If you have $100,000 saved in your 401K and the market goes up 8%, you made $8,000. Not bad.

If you purchased a property worth $500,000 using your $100,000 as a down payment, and the value goes up 5%, you made $25,000, which is more like 25% return against your $100,000 investment.

The difference between the $8,000 and the $25,000 is $17,000! This is the power of leverage.

The percentage increase or decrease in value is directly proportional to the amount you have saved. With leverage, you benefit from a large number increasing by gives you the benefit of a big asset increasing in value

The Benefits of Real Estate Investing

Real estate provides the opportunity to control an expensive asset with help from leverage, a loan. You collect rent from the residents and pay off the loan over time. Now let’s look at the benefits unique to Real Estate.

Equity / Principal increase: As the loan balance gets paid down, the difference between the market value of your property and your declining loan balance is your growing equity.
Cash flow; If you purchase your property right, it will income from day one. This is after your operating expenses and debt service. If you maintain it and keep rents at the market rate, you will always have cash flow that keeps up with inflation.
Appreciation; When you sell in the future, it should be for more than your purchase price. Commercial real estate value is determined by dividing the annual Net Operating Income by the market Cap Rate. You have no control over the Cap Rate, however, you have direct input regarding the NOI. If you are able to increase your NOI, you will increase the value of your property.
Depreciation; This is a gift from the IRS. It is an amortized expense tied to the life expectancy of your building. The gift is that you do not have to actually spend the money to get the benefit. When you subtract this expense from your income, it reduces your taxable income.

The Risk

There are no guarantees in life. But, for those who take action, real estate investing is a proven path for wealth accumulation If you know why you are investing, get educated, get your mindset right, focus, and take action, and you will overcome the risk and be successful.

For more go to:

www.Tysondcross.com

tysoncrossre@gmail.com

CREPN #166 – Keep Cash Flowing in Your Real Estate

Cash flow must be the goal if you intend to replace your salary, so that you can quit your W2 job.

I’ve experienced first hand and conferred with other investors multiple ways you can screw it up. The following are some ways to keep the cash coming.

Buy Right & Cash Flow on Day One

My friends Jake & Gino from Wheelbarrow Profits stress, “Buy Right”! This is the critical first step. If you don’t buy right, it can take years to recover, and keep you from reaching your goal. To make certain you are buying right, you have to know ALL of your numbers. Use something like my Deal Workbook to account for your expenses.

I remember the first couple of single family rentals I purchased. Needless to say, I left some expenses out, because I only accounted for the mortgage, taxes & insurance. What could go wrong when the a repair was needed, the tenant was late, or the unit was vacant. That’s right, if you don’t budget for these expenses you will pay. So, know your numbers and BUY RIGHT.

Operations

Operations includes the day to day operating of the property. Taking applications, rent collection, maintenance, etc. When you have a property manager in place, it’s your job as an asset manager to ask questions and follow up to make sure things are as they should be.

This includes providing regular reports; income & expenses, applications, turns, maintenance, etc. An empty unit is a lost income opportunity and a cost to you. If a property manager is not proactive and waits until after the unit is vacant to coordinate with the needed contractors, your vacancy loss will inflated.

A professional property manager will minimize the down time by communicating and actively marketing the unit as soon as it is known there will be a vacancy. It’s been said, “inspect what you expect”, otherwise you will be disappointed, and end up with less than you could of.

Capital Expenses

Capital expenses are related to replacing systems; roof, HVAC, plumbing, electrical, parking lot, kitchen & bath remodel, etc. They last for years, and should be budgeted for. If you do not budget for them, they can mess up your projected returns.

For the most success, make certain to include your capital improvements in your startup funding budget. This allows you to improve the property right away and increase the rents for the improved property. Paying for capital improvements out of cash flow will take significantly longer to reposition the property and will drain any potential investor returns. Been there!

An experienced investor will not only budget for these, but also account for them as capital expenses, outside of the operating budget for maintenance. When you include capital expenses as maintenance they will lower your NOI and your property’s value. Don’t do it!

Disaster

You don’t expect a disaster, but it is always a possibility. Your ability to collect rent could suddenly stop if your property is damaged. The risk can mostly be transferred to an insurance company, through the purchase of a policy that provides Business Income coverage. Be careful, not all policies include Business Income nor cover all perils, causes of damage.

Common Perils

Fire, Hail, and Frozen pipes, are some of the common perils typically covered by a property policy. Windstorm including tornadoes & hurricanes can be an extra charge depending on where your property is located.

Not Common

If your property is located in a Flood Zone, your lender will require Flood coverage be in place prior to closing. However, this does not mean that if your property is not located in a flood zone that it cannot suffer a Flood loss.

Earthquake and Landslide are rarely required by a lender, but regularly purchased by investors whose primary source of income comes from their real estate. if your property is located in an active fault seismic zone.

To learn more about protecting your cash flowing property from disaster, email J. Darrin Gross

darrin@jdarringross.com

CREPN #96 – First Multifamily Syndication with Jason Yarusi

It is said that the First Multifamily Deal is the hardest. For Jason & Pili Yarusi, they realized that there are efficiencies in multifamily are greater than what you can get with smaller properties.

Once they decided to move forward with multifamily, the question turned to where?

Jason & Pili are residents of New Jersey, where real estate prices are prohibitive for investing due to compressed cap rates and tenant laws do not favor landlords.

First, they set their Multifamily investing criteria:

Number of units, more than 100 and less than 200
Market Population stability or growth
Stable employment
Areas they were familiar with

The markets they found to support their criteria:

San Antonio
North Carolina
Kentucky

Then they built their multifamily team.

The first member of the team in was property management firm. The criteria for selecting a property management firm:

Not too small
Experienced
Real time software that provided access for their investors
Ability to provide onsite management and maintenance
Extensive market knowledge

How did you find the property?

Their property manager led them to a property that had been on the market previously. They believed it had some value add potential. They analyzed the deal, and made an offer. The seller countered, but quickly they realized they were too far apart.

After six months of a continued search, they circled back, and made a second offer to the seller. This time, they provided numbers to back up their offer and explained the reasons for their offer. The seller came down $600,000 and requested that the buyers pay their brokers commission.

After analyzing hundreds of deals, making multiple offers, and always being disciplined, their efforts paid off.

For more go to:

Podcast: The REI Foundation Podcast with Jason and Pili

WWW.OAKCAPPARTNERS.COM

INFO@OAKCAPPARTNERS.COM

WWW.WABUILDINGMOVERS.COM

CREPN #89 – Asset Class: Mobile Home Parks with Kevin Bupp

Real Estate is segmented into asset classes; single family, multifamily, office, retail, warehouse, etc. One overlooked asset class with big returns is Mobile Home Parks.

Kevin Bupp is an experienced real estate investor who survived the crash, and has since devoted all of his efforts into buying and operating mobile home parks with great cash flow.

Consider the following reasons and you will see why mobile home parks make sense:

Diminishing supply: municipalities do not like these, and they are not permitting new parks. Unlike multifamly or single family, there is not the risk of a newer, nicer, nearby park to woo your tenants away.
Fractured marketplace: unlike more established asset classes, mobile home parks still lack the organization and recognition of others, which provides opportunities to the educated buyer.
Aging parks and owners: while the supply is not growing, the owners are getting older, and looking for a way out. Today may not be the day, but there is a day coming when these operators will want to sell.
Demand: mobile home parks are affordable housing. There is tremendous demand for more affordable housing. The estimated national average space rent is around $300 per month.
Management: with an onsite manager, you can manage the asset from anywhere.
Expenses: ideally, the tenant owns their unit, and rent the ground from you. So, the typical maintenance expenses associated with housing fall on the tenant to maintain their home. That leaves streets, curbs, common spaces to you.
Tenant turnover: it cost around $3,000 to move a single wide mobile home. This does not include setup, utilities, tie down, and skirt at the new location. Most tenants do not have the means to pay for an expensive move, and will likely not move.

Mobile home parks are more plentiful in the rural parts of the United States. In these tertiary and rural market, people are accustomed to regularly drive thirty minutes for their work commute and shopping.

Pride of ownership can be provided to people who otherwise are unable to purchase their home.

To learn more, goto:

Links: http://www.kevinbupp.com/

Email: kevin@kevinbupp.com

Podcast: http://mobilehomeparkacademy.com/

CREPN #81 How to Make Big Money, Fast in Bare Land with the Land Geek, Mark Podolsky

The first thing a real estate investor needs to decide, is what is your strategy? Everyone hopes to buy low and sell high. Few consider the riches available by investing in bare land.

The Land Geek, Mark Podolsky, shared his journey from a workaholic investment banker to a two hour per week passive income professional investor in bare land.

Mark’s investment banker training taught him that a company with fifteen percent EBITDA was a good company. When his new work colleague showed that investing in land he could make 300 percent, he had to see for himself.

Sure enough, when he took the three thousand he had saved for car repairs and turned it into nine thousand, in less than thirty days, he was hooked. In just eighteen months of investing on the side, he was able to surpass his income as an investment banker.

So, he traded in his one hundred hour work weeks, for what is now no more that two hours per week.

How Can You Make Money in Bare Land?

CREPN #51 – How to Find Deals in a HOT Market with Rick Bean

The Multifamily property marketplace is HOT. Rick Bean with Rose City Commercial Real Estate explains what it takes to compete in a compete and how to find deals in a HOT Market.

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Return on investment is the goal for every investor. When the stock market is not providing the desired rate of return, so where do investors go? When foreign markets are not providing a positive return, so where do foreign investors go?

They go to the US Multifamily Marketplace

Since the collapse of the mortgage and housing market in 2008, demand for apartments has risen sharply. This demand is expected to continue for the next couple of years, giving investors a place to invest.

The collapse of the mortgage market forced homeowners who lost their home to foreclosure into the renters market. Many potential buyers have decided they are no longer interested in being burdened by a mortgage, or do not qualify for a bank mortgage to buy a single family home.

Combined with baby boomers leaving the suburbs for an urban apartment or condo and the millennials who chose to rent, the housing market has shifted. The housing consumer wants to rent. This demand for urban multifamily living for units that have not yet been built will bode well for developers and investors.

More demand than supply pushes the price up. Rents in urban markets like Portland, have pressed upwards double digits year over year, and has caught the attention of investors looking for return.

Real Estate Investors looking to take advantage of the market conditions, are struggling to find properties to buy. The increased rents, net operating income and demand for properties are squeezing the cap rates to record lows. The rising rents and minimal vacancies have kept many owners from selling their multifamily properties. The available supply is well below the demand.

Most buyers start looking for a property is the internet. Sites like, google, loopnet and zillow, make it easy for investors to get educated on the market. Properties listed on these sites are being actively marketed.

When demand is greater than the supply it is a Sellers Market.

How to Find Deals in a HOT Market

Buyers wanting more options to chose from are turning to working with Commercial Real Estate Brokers that look for Off Market Properties.

Buyers work with Brokers to define what exactly they are looking for. The Broker then approaches Owners of properties fitting the Buyer parameters. Agreeable Owners enter into a contract with the Buyer without ever placing the property on the open market.

Additional tactics used by aggressive Buyers in order to gain an advantage with Sellers is to make the deposit go hard right away. Unlike a refundable deposit a hard deposit goes to the seller right away. This confirms each to each party the deal is going to happen.

For more information about the Portland, OR Multifamily Real Estate Marketplace, contact Rick Bean.

PH: 503.577.1034

EM: rick@rosecitycre.com

Web: www.rosecitycre.com