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Learn Apply and Grow Rich in Real Estate with Roland Gib Stewart – CRE PN #408

Roland Gib Stewart 0:00

What happened was, of course $10,000 Even in those days wouldn’t buy you a 14 unit complex. So I picked up the phone and I called a number of friends. And all five of them loaned me money. They loaned me from anywhere from $3,500 to $5,000. My college roommate said that $7,500 to own a percentage of the building and we bought it bought the complex. Now the big the big hit came about 15 days later when they said you’re going to be late with your first payment that’s gonna hurt I don’t know where I’m gonna find that money. Buy a home mortgage for myself to the hilt.

Announcer 0:48

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 1:07

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 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, it pays to work with a real estate investor protection specialist to protect yourself and your investment from 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 Building Insurance Risk.com.

Today, my guest is Roland Gib Stewart. Roland is an investor and a recently published author. He and his ex wife started with to $285 and have built that to $30 million in real estate and is still going and in just a minute we’re going to speak with Roland Gib Steward about how you can build wealth through real estate. But first a few reminders. 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 our handsomer guest arm, be sure to check out our YouTube channel. You can find us on youtube bad commercial real estate pro network. And while you’re there, please subscribe. With that I want to welcome my guest, Roland Gib Stewart, welcome to CRE PN Radio.

Roland Gib Stewart 2:56

Thanks for having me there.

J Darrin Gross 2:58

Well, I’m looking forward to our conversation today. I’ve known you for a number of years. And I’m excited for the listeners to get a chance to know you as well. But before we get started, if you could take just a minute and share with the listeners a little bit about your background?

Roland Gib Stewart 3:16

Well, my background is pretty varied and you’re in reality but I lived in. I grew up in most of the major cities on the West Coast. My father was a medical supply salesman, who was also Army Reservist. And as born in Seattle, most of my growing up was in Portland, Oregon. Then I went to Los Altos, California for a year, and then graduated Santa Monica High School and went to Willamette University ran track. I also played a little basketball, but that was ruined by some so I got ended up in informer infirmary, then army, United States Army officers candidate school, my orders to Vietnam were canceled 24 hours before I got on the plane, which I was very thankful for. Got out of the army toured Europe for three months and then tried to find a job, which was actually very harrowing experience.

J Darrin Gross 4:27

Well, let’s talk about how you got started in real estate. And what you know what, what was the first first thing you did? Or how did you decide that real estate was a good thing to invest in?

Roland Gib Stewart 4:44

Well, we, we had built up to $10,000. And we started to decide we needed to do something. And so we got an account with Merrill Lynch and had a very good stock broker that grew That’s it probably 12 or 12, five. And then he went to manage one of the, I think it was a Berkeley, one of the U Cal Berkeley investment funds. Very nice promotion for him, but he heard us, we got a new guy on the block. And he drove our account to exactly $0.00. So the next time we built $10,000, was kind of by accident. I actually had a reasonable job by then. And Bonnie, my ex wife got a very good job. She was a tire batteries and salesperson for Chevron USA. And by the end of the year, we did a draft tax return about November, we said, oh my goodness, we’re gonna owe the government $10,000. So she turned to me and she said, What can we do about that? And so we buy real estate. And so we went out and looked at all sorts of things. We started with single family, and then we moved to duplexes and triplexes, and we finally ended up buying a 14 Plex in Southeast Portland.

J Darrin Gross 6:20

Wow. So did you did you actually buy single family properties prior to that? Or did you just look at them?

Roland Gib Stewart 6:28

We just looked at him.

J Darrin Gross 6:29

Okay. Okay. And how long between the the November

Roland Gib Stewart 6:32

We tried to mitigate our risk Darrin.

J Darrin Gross 6:34

Yeah, no, I appreciate that. I get 14. Yeah, well, with a $10,000 bill to the government, that’ll make a lot of I mean that, that’ll get your attention. Yeah, make you want to see what else you can do there. So I get it. So. So from like, November, when, when you were doing this kind of pre tax planning kind of thing to when you actually bought the 14 units? How, how much time are we talking,

Roland Gib Stewart 7:03

I’m pretty sure we got it finished by the end of the year, because I don’t remember, write the check.

J Darrin Gross 7:08

That’s awesome. So you were able to accomplish it.

Roland Gib Stewart 7:11

But what happened was, of course, $10,000, even in those days, wouldn’t buy you a 14 unit complex. So I picked up the phone. And I called a number of friends. And all five of them loaned me money. They loaned me from anywhere from $3,500 to $5,000. My college roommate said that $7,500 to own a percentage of the building. And we bought it bought the complex. Now the big. The big hit came about 15 days later, when they said you’re gonna be late with your first payment. That’s gonna hurt. I don’t know where I’m gonna find that money by the high mortgage for myself to the hilt. So I took the city bus over to their office. And I said, I said, I can’t I can’t pay this. Now what is there anything we can do it? And they said, oh, we’ll just put it on the end of the contract. So so another person loaned me $2,400. So I was really a debt.

J Darrin Gross 8:24

That’s, that’s funny, the kind of the lessons you learn. So, your, your beginning sound very similar to mine. And I’m sure many others that I’ve talked with and others that are maybe listening. And that just absolutely just stretching as far as you can to to get the deal done.

Roland Gib Stewart 8:46

To do something, right.

J Darrin Gross 8:47

Yeah, to get to get into real estate. And so once you got in, how long did it take for, you know, there to be cashflow or to recognize that there was an upside and that you’d made a good decision. And it wasn’t, you know, he wasn’t going to continue to be you know, stretched from from limb to limb.

Roland Gib Stewart 9:12

So we were probably full for 24 months. So things look pretty reasonable. Then I had my first move out. And that was a breakout, I had to take a garden rake and rake it out because there was so much litter on the floor, and then I could vacuum it. So that was an experience that I said, Okay, if I can handle this, I guess I’m probably going to be able to handle this thing. And and then our second move out was a move out in the middle of the night. And Bonnie was in a law class for her Master’s. And I ran back downtown and I said, okay, the Prophet said you can ask any question, and he won’t charge if it’s in class, ask him what I can do about this. And he said well She came back out. And she said, he said you could help her move out. Well, that was a rude awakening. So no, right. So my first two move outs. And then then the, the ad recession, of course, hit us badly. And I spent a number of weekend days out on the street waving, waving balloons and or holding on to balloons and waving to people trying to get a move in. I posted notices all over Southeast Portland, and we survived.

J Darrin Gross 10:36

So you had the 14 Plex? How long did you end up keeping that?

Roland Gib Stewart 10:43

Oh, 22 years? Maybe?

J Darrin Gross 10:45

Okay. So quite a lot. That’s a

Roland Gib Stewart 10:47

Plus or minus? Well, we let it pay itself off.

J Darrin Gross 10:49

Sure. And then did you acquire additional properties? Or how did you

Roland Gib Stewart 10:56

Partway through that. Partway through that maybe eight years, maybe 12, somewhere in there. A friend of mine who was in real estate called and said, my business partner needs to sell. And all he wants to do is cover his costs to get out of a duplex. So we bought a duplex out in Oregon City. And so now we have two properties. And then short while later, something came up. Oh, I know, I had to move to Pendleton. I, I became the state labor economist for Northeastern Oregon. And so we were kind of, I didn’t want to own long term out there, I bought a house for us. And so there wasn’t much going on there. And then I went back to the director’s office, the Human Services was a budget analyst and Salem, and then I was free again. And when things came up, people wanted to sell I was a, I was a good target of people wanted to sell I was we we kept accumulating money, which was kind of mostly the way we were brought up. Bonnie was brought up on a farm, he never knew when the crop was gonna come in. So they were always living on a budget, and I was real malleable. She taught me how to save really early on, I still do.

J Darrin Gross 12:30

No, that’s, that’s a good, good habit to have. And also, you know, it’s a good a good opportunity when somebody has to sell or wants to sell, as opposed to the people that really don’t want to sell I think a lot of times what you see in the marketplace is somebody that wants a price, but they don’t really want to sell kind of thing. And if you’re trying to underwrite a deal. It’s it’s important that you know, what, what the numbers are, what numbers you can offer, and what makes sense, as opposed to, you know, somebody that doesn’t, and not offer more than what you can offer. Right kind of thing to make it work. So, so you started off, you got the 14, you’ve added some additional properties. At what point did you venture into other asset classes? Because I I’ve, I’ve known you for a number of years now and I know that multifamily is not something that you’re right. I don’t believe you’re currently in Are you still in any multifamily?

Roland Gib Stewart 13:32

No. Mostly family? No. I think we may have one. I think we’re down to one single family. Rental.

J Darrin Gross 13:43

Okay. So so what was it that what what was the the impetus for the, the the reason you exited that and, and for the most part, I got out of that and gotten to more of the what I know you do a lot of the the medical office and also some office slash retail, but what was it?

Roland Gib Stewart 14:09

Luck, luck and luck.

J Darrin Gross 14:09

Luck, luck and luck. Okay.

Roland Gib Stewart 14:13

So, I was we we were worth a million dollars that when I was 48. So I decided I wanted to retire at 50. So I retired at 50. And then a dentist friend of mine asked said, You’ve been in real estate a long time, can you help me find a place where I can expand my dental practice? So I did that for almost a year and we never found anything. In those days, dentists offices let out a lot of not very good smells. And so most landlords wouldn’t let to him or wouldn’t rent them out. So after about a year of that, the dentist was driving home and saw a vacant lot next to a Fred Meyer. And we Bonnie and I did a 1031 exchange and bought that. And then we went out interviewing developers. And after interviewing the third one, we were on the way back to his office to drop him off. And he turned to me, he says, I want you to develop this. And I said, Who me? Like, like, I have any idea what that would be like. And he went through and he said, you’ve negotiated contracts for 10 years, you’ve done this, you’ve done that, you can do this. So we decided we would go ahead and try that. And and if I failed, we had the guy identified. In those days. I think it was all guys, all three of them. Were guys, we identified the one we would go call and say, Hey, can you bail us out of the struggle. And it ended up being a homerun. So it’s like, somebody told me once, if you hit a homerun on your first one, you hit hit button singles and doubles and triples for the rest of your life, and you’ll be in great shape. So we were very fortunate.

J Darrin Gross 16:18

So you, I didn’t realize that you’d actually developed that, that that when there by the Fred Myers. So developing, I mean, what was the what was your experience there? I mean, that’s, that’s a different, you know, different exercise than just buying and operating what was tell me a little bit about the development experience.

Roland Gib Stewart 16:39

I was, I was totally lucky. So we went out interviewing architects, we found David Welsh. We walked into his office, it was like a third or fourth office we walked into, and the guy had real modest furniture and did edit. And we said, this guy thinks the way we want him to think right. And so we hired him. And he did a phenomenal job on that building. So that was the first thing I had to learn. And then the next one was okay, now how do you get a contractor, so we had three or four contractors bid. And one of them happened to be the husband of a woman that I was on a church committee for. And he, she told him, she said, You better, you better give, Gib a good price. And he gave us what I thought was a really good price. So we hired him, and the building went up. And we already had the dentist, ready to take two thirds of a second floor and we went from there.

J Darrin Gross 17:51

That’s great. So you’ve got a foothold on the medical office building, asset class. And like I said, I know that you have several other properties. And how quickly after that first one, did you look to expand?

Roland Gib Stewart 18:10

Oh, maybe six months? The contractor, not the contractor that did the building, the contractor that did the dentist tenant improvements. Called me, we went out to lunch. He said, We should build more of these. And that’s what got me back in. I would have been retired the second time I probably would have quit. Who knows?

J Darrin Gross 18:35

Yeah, yeah. So tell me a little bit about the the financing for these. I know that you you and Bonnie were were big savers. And you You did a lot to you know, make sure you had some ability to invest. But as far as the these other properties, what was the dentist? Was he a partner in that that first building Are

Roland Gib Stewart 18:58

We stuck until the end until the when we stopped? Okay, so five guys. The contractor that talked me into doing more David Welsh, the architect Sita who’s now totally retired because I called him on an investment last week and he said, I’m old enough I’m not investing in anything anymore. Now, whether that’s true or that he didn’t want to give me $25,000. Okay, so our contractor, architect, dentist, my army roommate, when I was after we graduated from Officers Candidate School, we went to Kentucky, both of us, and so we decided to room together. It was a CPA out of Florida. And me so there were five of us. We all put in $2,500 in a pot And we started.

J Darrin Gross 20:05

That was it.

Roland Gib Stewart 20:06

That was it.

J Darrin Gross 20:08

And so is far as going forward? I know, development is fairly, well, I guess it all depends on how the bank sees the opportunity. How much did your experience and your success in the the initial property give you credit? Or did it weigh in your success with with lenders and others?

Roland Gib Stewart 20:36

Well, I found a number of banks to be open to the idea that, if the architect drew the plans, he should get credit for that. Not that he would charge us for it, but he get credit for it. And the contractor couldn’t build the building. And the contractor wanted half of his fee in cash, but the other half, because he actually put the building together, got credit for that. So that’s that, I was the developer. And I didn’t want any money at all. So I got credit for that. And then each of the tenants that came in, most of them chose to do their own tenant improvements. So in those days, we were getting 10 or $12, a square foot per tenant, what if you came off the street and you were a regular tenant? The market was saying, you wanted 10 to $15 per square foot. So the bank would write in another line item that says this $15 per square foot was, was provided by the tenants. And then we had our down payment we put the building.

J Darrin Gross 21:47

Now that’s great. So and that’s, that’s basically the way it was put together than the the the each one of the investors were participants at a level of, of effort, which was then recognized by the banks in the in the early going. So is that correct? That’s great. And did you as far as the formal structure of the group, were you? Did you just five partners, each equal partners in an entity like an LLC? Or was there different levels of, of participation?

Roland Gib Stewart 22:33

A lot of research went into how much the architect should be worth, how much the contractor should be worth, how much the developers shouldn’t be worth, etc. And we put those numbers into an LLC, and each of us got that amount of share. It’s an LLC, and it changed over time. By the time it was over. There were only two of us left.

J Darrin Gross 22:56

Gotcha, gotcha. So, in in from the first property to today, how many years have we are we talking about? Me second. I think I probably started the first one and 1998 or nine? So 25 years, I guess. Okay. And, and your strategy, have you sold any of the buildings? Or has it been? Have they all been long term hold?

Roland Gib Stewart 23:39

Long term hold? Okay. And that’s, you know, varies by building who all’s in because not all the tenants came in. And we were really fortunate because we were out of money after the first building. Is $12,500 doesn’t go that far. Okay, so. So we met a group of accountants, they had their own LLC. And I and we were fortunate enough that they decided we had a good plan, and they come with us, and they brought a chunk of money. And that allowed us to build the second building. same premise it I didn’t get paid the architect and the contractor go 50%. By then Barney was doing the books because my army partner came out, looked at the property and he said, This is too big. Somebody’s gonna get greedy and you’re gonna be in Alaska. So that’s the way that went. So we were down to four. Barney should have probably been allowed to take over the barrels share when he bailed out. We never thought that far ahead.

J Darrin Gross 25:00

Sure. So in the so that when the accountants came in, were they again, they were partners in, or members of the LLC, at the percentage based on their participation.

Roland Gib Stewart 25:15

Their participation was based on their needs mound of money, and we gave them for building 234, and five, we just spread the money out among those, and they became LLC members based on those.

J Darrin Gross 25:35

Got it. But there was never, I guess what I was curious to understand, because so much of what I hear when I talk with others is syndication or, you know, JV, or it’s rarely do I hear people talking about just kind of, you know, participating in a long term investment at a level that represents, you know, what the worth, you bring kind of thing or the, the amount of cash you’re bringing. In, you know, as far as the LLC goes, were there any, is there anyone? That’s the general partner? Or is it everybody just, it’s all the members are based on the percentage of that was determined based on the value

Roland Gib Stewart 26:19

Voting, percentage voting.

J Darrin Gross 26:21

Okay, okay.

Roland Gib Stewart 26:23

I’ve told people, anytime anyone wants to bail out, I’m more than happy to buy them out. If the LLC doesn’t. But every time it’s happened, everybody else in the LLC is distributed among the members. Right? So it’s easy, and it’s really easy to form an LLC, as you probably know. And that’s the only thing I was smart enough to do. I mean, when we, when we formed the LLC for the first building. A guy who’s become a friend and has been retired five years, he told me yesterday, drew up the papers for the LLC. And so this is my template, we go forward.

J Darrin Gross 27:12

Ya know, it’s nice to have a template as opposed to having to constantly redo or any, it seems to me a lot of the the simplicity of your structure, it could be part of the secret. Whereas I think a lot of a lot of investors that I speak with, the goal is to get in and then get out. And the attraction is, you know, more of the, if you can get in, you can increase the value, and then you can get out fast, you know, obviously, your, your, your, you know, your return looks significantly greater as a quick hit. But then you have challenges, you know, if you’re, if you’re able to do a 1031 exchange, or if you’re just gonna give most of that back to the government kind of thing. And were you with a long term strategy and the fact that all of your present like the majority of your investors have stayed in the whole time. And had some sort of a, a, you know, a long term commitment to the, to the the plan was there, you mentioned that, you know, occasionally there have been people that have wanted out, and the LLC is has bought their, their shares. Was there any, when you were putting this together, and you were getting everybody together? Was there any talk about what the long term goal was? Or was there ever anybody that was not in the same frame of mind?

Roland Gib Stewart 28:44

Well, I think of the first five people, okay, architect, contractor, dentist, my army roommate, me, I think everybody thought that that was going to be long term. Pretty sure. That positive I don’t know that we ever discussed it. We just put $12,500 in a pot and started on our way. I bought a I bought 12 and a half percent in a film company last week, okay. And I think it’s going to reach not full value. Okay. But I think I’m gonna get maybe a 200 300% return in a, like a three year time period. And I expect by five years, I’ll be 500%. And then I think it’ll probably keep on growing. I mean, the kid that’s running is 32 years old. He has 11 years experience in the film industry, and has developed books. I mean, this thing’s out of sight. So for me, it’s a long term Right, I’m going to be dead, then my kids.

J Darrin Gross 30:05

Right. But the the opportunity, I mean, you, you’re not one that’s always looking to get out, you’re looking to get in and grow something for the ongoing revenue stream. Correct. And I think that see, that’s, I think one of the things that I’ve always appreciated in our conversations over the years is, that’s my mindset has always been to get in. And it’s the long haul, it’s not always been about getting in and getting out, which I find so so many investors, they want to get into real estate, because they’ve heard about all the, the, you know, the big wins that people have had, but don’t always recognize the time that usually is associated with, with most real estate investors who stay you know, there’s a, there’s a big opportunity to win over time. You know, and there’s a lot of the value add, where there was people who were either tired or didn’t keep up with the market. And you know, to bring that up to market, you can, you can do that kind of thing. But, but really long term. You know, that’s always been my mindset. But let me ask you a question about debt with long term investment. When I first started to invest, what I first saw was that if I had a tenant in my rental, and they stayed long enough, whether it was them or them and others, that eventually that the note that I had against that property would be down to zero. And that would be I looked at as like another 401k. And that was the limit of my understanding of real estate. How do you see the use of debt? With with the portfolio, you have partners? Is it. I’m just curious, how do you how do you view the use of debt for or ongoing?

Roland Gib Stewart 31:58

Well, I think I’m coming to that reality right now. Because I basically wiped out all my checking accounts to pay my tax bill this year. That’s the first time I’ve been that low in a long time. So. So I have a feeling next year is going to be tough. So I probably will start accumulating debt. But again, ideally, I have 20 years left, I mean, I am, I have such a good life. It’s unbelievable. And I want to take every day out of it that I can, and if my health continues to be reasonable. And I get to still exercise as much as I like to in a day. And I can still make investments like I did last week. I’m excited every day I wake up. And it might mean that I have to start accumulating debt. If that’s the price, I’m here. And as long as I can stretch it out, make the payments, I’m in good shape.

J Darrin Gross 33:03

Right. And as far as like your real estate it have you had goals to pay off the debt, or have you have you you know, refinanced and done cash distributions?

Roland Gib Stewart 33:17

We’ve done cash distributions, but we have, yes, and almost all of our real estate will have second to last one paid off in three years, and the last one will be paid off in six.

J Darrin Gross 33:30

Wow.

Roland Gib Stewart 33:31

Then everything we have, in all the states is all free and clear.

J Darrin Gross 33:37

That’s, that’s impressive, and I appreciate you sharing that because that’s, that’s something that, again, I think that especially in the low interest rate environment we just came from, there’s a mindset of, of younger investors, newer investors just get leveraged up to you know, leverage as much as you can, you know, and in the short term, I think, if you if your plan is to get in and out, it makes you can make sense of that. But for somebody it’s really looking to hold something for the duration for forever. It clearly the strategy with debt is a different strategy. And, and, you know, you may not get the interest rate off, but you also don’t have the debt payment. So, you know, I appreciate you sharing that because that’s that’s not something that’s that’s something that’s been the that I’ve had, you know, other guests comment on because I think a lot a lot of them are don’t have such a long term hold view of of the situation,

Roland Gib Stewart 34:47

and I just might not be smart enough to do the right thing. I mean, well, the comfortable with that, you know, I do the best I can, as creative as I can be and The I take the risk that I find to be reasonable to me, right? The other day, I met a young man who just seem to be potential potential potential, right? And I asked him where he was going. And he told me and I said, Well, wait, why aren’t you going there? He’s because nobody has any money, which you and I know, is false. I mean, that’s just false. If somebody wants to do something, I can teach them how to get to $50,000 within a couple of days, right? So they got want to do it. Almost anybody can do it. So I said, Okay, you got $100,000 My money? Let’s go do something. So we went out, and we reviewed four different companies decided to buy one of them. And he’s driven the company from 400,000 to $3.2 million over four years. So I mean, it was a lucky, lucky bet. I mean, he could have gone bankrupt, right. But I could have been stuck with another $300,000 worth of debt, because we bought the company for 400,000.

J Darrin Gross 36:09

Wow. Well, but But again, I think the you know, you are, I don’t say you’re unique, but I think you are rare, in that, I think most people, and I say most, most people listening to this, this podcast, are entrepreneurial, or looking to invest or looking for some way to increase their lot in life so that they have more assets, more time, more more cash flow, then they’re financially free. And that’s really the goal of, of, you know, I think most everybody listening here, but by and large in the masses, that’s not, you know, that’s not the case, there’s, there’s always a way to look, look to spend more than, you know, or everything you make and more. And, you know, not understanding that you need to do something beyond, you know, your your eight hour or your 40 hours a week job, where you’re working for for someone else. And so I appreciate you kind of kind of sharing it.

Roland Gib Stewart 37:13

Well, I explained to somebody the other day, I said, hold it, if you really want to do this, and you have $500,000 worth of debt available on your credit card, get the 500 that or the $55,000. Actually, it’s 500. You take the 500, and you do it, and then you make it grow. And it’s up to you to make it grow. And then you pay off that damn credit card, because that’s drowning, you realize that 16 or 18%? And you should be having that money for yourself, pay it off, decide?

J Darrin Gross 37:51

Yeah, no, that’s, that’s, you know, the, the availability of debt is endless. There’s always, always somebody out there looking to lend you money, and recognizing the the cost of that money. And, and, but also, you know, like you just mentioned the opportunity, you know, if you have something you really want, and you believe that you can go forward and improve your situation, whether it be real estate or business opportunity, and you know, that you know, that you can do this. I think that’s more power to you. I mean, because that’s a great. I know, the more I’ve talked with people on on this podcast, and the more I’ve gotten to understand the real estate have also come to understand the opportunity for people that own their own business. And, you know, real estate, real estate is a business, it’s not just a, a rental property. I mean, when you when you’re, you know, especially when you’re buying commercial properties. And, but But there really is an opportunity to grow and improve your, your, your end result for your own personal finances. So I appreciate you sharing that.

Roland Gib Stewart 39:06

I don’t know if it’s true or not Darrin, but to me, there’s a shortage of really motivated people. I don’t know if that’s true, but I surely I keep looking for people to invest in right. And my goal at the beginning of the year was my New Year’s resolution was to start associating with younger people. And so far, I started to be successful in that. I think that’s important to get, get get there and talk to them and learn from them.

J Darrin Gross 39:44

Ya know, definitely. That’s what’s coming in as opposed to what’s already been probably a good good strategy if you’re looking for the future and investing in the future. I believe in Yeah, well, good, cuz we need, we need to, we need to have something positive look forward to. So that’s good. Hey, Roland, if we could like to shift gears here for a second, my day, you know, I’m an insurance broker. 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 first look to see if there’s a way we can avoid the risk. And if that’s not an option, we look to see if there’s a way we can minimize the risk. And if we can’t avoid nor minimize the risk, then we look to see what could transfer the risk. And that’s what an insurance policy is. And as such, I like to ask all my guests, if they can look at their own situation, could be clients, tenants, investors, political. However, however, you would like to identify what you consider to be the biggest risk. And for clarification, again, while I’m an insurance broker, I’m not necessarily looking for an insurance related answer. And so if you’re willing, I’d like to ask you, Roland Gib Stewart, what is the biggest risk?

Roland Gib Stewart 41:19

I think right now, the biggest risk is the availability of money. Okay, so we got a lot of money available today, right? So in July, when we, the country hits its debt limit, what’s going to happen? Are we going to all collapse? Is this whole thing going to just the glass is going to break? And we’re going to all be wondering, Can Can, can I really get the money out of my credit card? I want to eat this week. I’m having fun. How do I continue this? So my biggest concern right now is that somebody’s gonna push us over the edge, which I think will damage the entire world’s economy, and our country will never be covered. And I don’t want that for my kids or my grandkids.

J Darrin Gross 42:13

Yeah, no, that’s, that’s a kind of a depressing thought to think about. But there’s a lot of a lot of pressure. And I think the thing that always gets me going kind of frustrated is that how many people have the ability to push it beyond for their own benefit? While I’m not necessarily concerned about the consequences kind of thing, which that’s kind of a personal perception sometimes. But I get it. Roland, we didn’t yet mention you mentioned you’re an author. But tell us a little bit about the book you’ve written.

Roland Gib Stewart 42:57

I brought it over, Learn, Apply and Grow Rich.

J Darrin Gross 43:04

Okay. That’s a that’s a good 123 there like that.

Roland Gib Stewart 43:11

I’ve never considered myself really smart. But when I first got into real estate, I had one heck of a lot to learn. Shortly after I got I got to be pretty friendly with the chief lieutenant for the contractor that sold us the building. And a few months down the road, he says, you just need to know that your two worst nightmares, as long as you stay in this business are going to be keys. And the second one is parking. Yay. Two of my things that haunt me are keys and barking Luckily, I’ve pushed that off on someone else. But let me tell you, those are those are the two things you got to worry about.

J Darrin Gross 43:55

That’s That’s funny. The keys and parking definitely, definitely something to be concerned about. Roland where can the listeners go if they’d like to learn more or connect with you?

Roland Gib Stewart 44:10

My email address is continueforward@live.com And it’s just all spelled out. Continueforward@live.com.

J Darrin Gross 44:23

Got it. Roland Gib Stewart. I can’t say thanks enough for taking the time to talk today. I’ve enjoyed it. I always enjoy when I talk with you learned a lot and I look forward to doing it again soon.

Roland Gib Stewart 44:37

Thank you, Darrin. Appreciate it. Take care. All right.

J Darrin Gross 44:40

For our listeners. If you liked this episode, don’t forget to like share and subscribe. Remember, the more you know 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 44:59

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

Real Estate Note Investing with Fred Moskowitz – CRE PN #402

Fred Moskowitz 0:00

But we’re buying notes on the secondary market notes that were already originated by someone else. And what happens is they’re sold at a discount. So we buy notes that exist already either they were originated by a traditional lender or a bank or an institution and then they’re sold on the secondary market. Now back to your back to your which is different than being the originator of the loan originator of commercial, a commercial loan commercial projects.

Announcer 0:36

J Darrin Gross 0:56

Today’s program is sponsored by Building Insurance and Risk. When you invest in real estate. It pays to work with a real estate investor protection specialists to protect yourself and your investment from catastrophic loss. The experts at 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 Fred Moscowitz. Fred is an educator and best selling author who has trained countless investors from all walks of life on how to create passive income streams on their own. As a fund manager Fred manages a mortgage note Investment Fund, and is considered an industry veteran within the note investing arena. But it teaches the concept that individual investors are able to step into the shoes of the lender through note investing, and effectively be the bank. And in just a minute, we’re going to speak with Fred about mortgage note investing.

But first, if you like our show, there’s 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, Fred Moscowitz. Welcome to CRE PN Radio.

Fred Moskowitz 2:56

Thank you, Darrin, it’s great to be here. I’m so excited for our conversation today.

J Darrin Gross 3:01

I’m looking forward to it myself. But before we get started, if you could take just a minute and share with listeners a little bit about your background?

Fred Moskowitz 3:10

Yeah, absolutely a little bit about my background, I come from having a very long and successful career. Working as a computer engineer, I spent a lot of time working at technology startup companies. And it was wonderful, it was amazing. So many amazing opportunities that I was part of what happened was that I watched my entire industry get turned completely upside down. We lived through the bursting of the.com bubble. And then that was immediately followed by the September 11 terrorist attacks. And there was all this turmoil in the world all across the world. And our industry was in shambles it was in shambles. And what happened was I realized that I was way too dependent on the income from my job on that paycheck. That was my only income source. And so I came to this realization that even though I love my job, it was a job full of all of the circumstances out of my control. And it didn’t matter how talented an engineer I was, or how valuable of an employee I was. If things were not going well in the industry or in the company that I would lose my job through no fault of my own. And so with that, I turn to investing to find other sources of income. And I’ve wanted to generate passive income so I would not be relying on my job as my only source of income.

J Darrin Gross 5:04

Got it. So as you were looking for something different, were there any other things that you, you tried before you settled on? Investing the way you are now?

Fred Moskowitz 5:19

Well, I started out, I started out investing in real estate, I wanted to one thing I learned was that there that I couldn’t invest in tangible assets, in fact, and turning to the alternative investments area, could invest in in tangible assets, that would generate income for me while I own them. And that was very important. That was I was focused on cash flow. And so I started with investing in real estate, I built up a rental portfolio here in Philadelphia, where I’m based out of, and I did really well with that that was was going well, after a number of years, what happened was through my education, I was pursuing education, the whole time learning learning skills, learning new strategies and techniques, I learned about note investing, where you could invest in instead of buying and owning the property, you can instead buy and own the debt on the property and earn cash flow from that. And that was very intriguing to me, because I saw that it was something that you could really scale and turn into something big, you could build a very large portfolio, and it was, was not difficult to scale it. And so that became very appealing to me. And I got involved with that, and eventually has grown to where it’s the main focus of my business activity now. And real estate is a great asset. But there’s so many ways to invest in real estate. So many note investing is one of them. But what’s interesting about it, is that you you own the debt, however, you don’t own the property, so you don’t have the the management headaches of owning the property or the risk and liability of owning the property. So it does put you in a in a unique situation.

J Darrin Gross 7:29

Yeah, no, I hear you. So let’s talk about the mortgage note investing. I think probably the the first thought that comes to mind is, you know, how much money do you need to be a lender? You know, if you’re going to borrow hundreds of 1000s of dollars from the bank to buy a property as a private mortgage note investor, how much? How much does a person need in order to get started as a lender?

Fred Moskowitz 8:00

Yeah, that’s a great question. Taryn. Let me start out by saying that my focus what I do and what I teach about, it’s about not creating the lending. But we’re buying notes on the secondary market notes that were already originated by someone else. And what happens is, they’re sold at a discount. So we buy notes that exist already, either they were originated by a traditional lender or a bank or an institution, and then they’re sold on the secondary market. Now back to your back to your which is different than being the originator of the loan originator of commercial, a commercial loan commercial project. How much do you need? There? There’s no, no limit. It is a capital intensive business for sure. So you do need to have capital, there are notes, small notes that may have a five or $10,000 balance, and you can get up from there go all the way into jumbo loans which are approaching a million dollars and everywhere in between. And so there is no set amount on that. In that goes for buying individual notes. And if you invest in a note fund, where you’re investing in a fund that’s professionally managed, they will have minimums and maximums. But some of them are on the smaller end maybe $25,000 or $50,000 or $100,000. Each one is different. There’s no right or wrong. It’s it’s just however, The business model is. So really, it’s something that you can look at to see what fits best for you individually as an investor.

J Darrin Gross 10:10

Got it. So with respects to the different opportunities, whether it be invest, investing, or buying a single node or investing in a fund. Can you describe kind of the, the range of return? One might expect?

Fred Moskowitz 10:30

Yeah, absolutely. I’ll give you some, some rough examples. Think of it this way, it comes down to risk tolerance. Right? For you guys in the insurance world, you know all about this. So for someone that’s willing to take on very low risk, you’re gonna get a lower lower rate of return in exchange for the high security. Now, if you’re comfortable with a greater risk than the rate of return goes up and not. And so this is give you an idea on ranges if you’re investing in super safe notes that are in first position. And they’re there’s equity above and beyond all of the liens on the property. And it’s in a good area, and the borrower has excellent credit, excellent track record, checks all the boxes, right, you might be looking at five or 6% rate of return. Now, at the other end of the spectrum, you could get into things that have higher risk, for instance, notes that do not have a perfect payment history and perfect track record, or a borrower that is a little more challenged with their credit history credit record, or the property might not have a good equity coverage on it. Or the loan might be in second or third lien position, where it could be any of these things, or maybe it’s a loan, that’s a hard, hard money loan, where the lender, the lender is originating a loan to an investor that’s doing flip, fix and flip projects. And that’s a short term loan, but the RE returns is very high, it’s not uncommon to see 1012 14% interest rates on those. And that’s why, and so it really runs the full spectrum there. And what I found in this industry is as you get more experienced, you get more comfortable with managing risk and taking on different challenges. Maybe you’re comfortable with solving different kinds of issues. And so you pursue those higher, higher risk higher return opportunities, which is a natural progression. In note investing. It’s present in real estate investing as well. People as they become more experienced more savvy investors, they will go and acquire a property that has some problems that can be fixed has some challenges, whether it’s a management issue or or property conditions issue, but all of these things can be corrected and addressed. If you put in the work and the resources to do that, and time. And so when when you do that you become more successful as an investor, because you’re able to create value, you’re able to realize a higher rate of return and greater profitability that way because you’re pursuing opportunities that others may decline to pursue.

J Darrin Gross 14:02

Yeah, no, that makes complete sense. I want to ask you getting back to the you know, where you are selecting a loan to buy or investing in a fund. If, if I were to underwrite an individual or a, you know, for for a specific property and I’m assuming it’s, it would be very similar to like, if I was going to borrow money myself they want to see financials want to know about the property, you know, that you and your likelihood repay. When you go to buy something from, you know, an existing loan that’s already in force. How do you get the information you discussed? With respect to the likelihood of the loan being paid and how safe it is?

Fred Moskowitz 14:53

Yeah, for it for for your due diligence, right. Very important, very important prior to buying, buying To note, or investing in a note fund you have, that’s the time to do your due diligence, right. And I talk a lot about this. In my book about noon investing, I’m an entire chapter dedicated to how to perform due diligence and the various areas to look at. Now, when buying existing loan, like you said, you have, you look at the property and the property value and the borrower and their track record, all of that information is provided to you by the prior note holder, they will, they will provide that to you as part of the transaction, you have every right to, to review that information, you have the right to pull credit on the borrower, because you’re buying that loan, that mortgage. And so this is very important, you have access to this to this information. And it’s up to you to obtain it to know what you’re looking at and do an analysis. Now another area that is very important is loans are typically managed by a note serves a loan servicer. And so the servicing company is going to be able to provide reports and data on the payment history and the track record. And so you can review all of that. And that’s that’s very important. And let me just add an additional point here. loan servicers are an integral part of our business and very important vendors. Think of loan servicers as the same way that a property manager manages a rental property on behalf of the owner. The loan servicer manages the note on behalf of the lender. And they take care of keeping track of the accounting of the amortization schedule, they collect the payments from the borrower, the take phone calls, they send out the IRS tax forms at the end of the year that need to get get sent for the interest that’s been paid, they handle when a loan is going to be paid off and generating all those documents that’s needed. And also all the compliance paperwork and requirements that are that are needed. So they take care of all of this. And it really is a valuable service. And I would say that, at least in our business, we we place every single loan with a loan servicer, that’s that’s very important, because they handle so much so much of the day to day details, and it makes our lives easier. And it keeps us compliant as well.

J Darrin Gross 17:49

Ya know, they definitely don’t want to get upside down or sideways or chasing money.

Fred Moskowitz 17:55

Because we have to focus on on our business as investors, right. That’s, that’s what we do. And so a lot of things, it’s better to to delegate we’re hand off to experts, that that’s what they’re good at.

J Darrin Gross 18:13

Sure, that makes sense. So let me ask you this. You’re buying an existing loan? Why is the the existing lender selling the loan? Hmm, great, great

Fred Moskowitz 18:26

question. A lot of there’s a lot of different reasons. So the main reason that I see it revolves around liquidity. The seller of a note usually needs their capital back whether it is because they’re paying investors back. Or they’re maybe they’re recapitalizing because they have a new a new purchase transaction they need to fund it could be that there is a note fund or a mortgage backed security on Wall Street that exists for a specific timeframe. And after X number of years has elapsed, they call they collapse that investment and sell off all the assets. And so these are some of the reasons why but when we buy from we buy a lot from individual investors and other note funds and hedge funds. It’s usually due to liquidity that they need, they need the capital for something else. And so they’ll sell off notes to close out close out fund, close out an investment where raise capital for the next purchase they’re doing.

J Darrin Gross 19:45

So you mentioned you can buy these at a discount. If you have an original loan and let’s just use a like a residential mortgage for example of a 30 year fixed rate have, you know, I’m trying to think, currently think where you can get rates on five. But you know, they recently they were as low as you know, in the three years or below. You’d mentioned these five to six and 10 to 14. Are you? Are these notes not like an individual mortgage? Are they are they typically more of like a commercial nature?

Fred Moskowitz 20:26

No, they’re they’re often residential mortgages. Absolutely. There’s both types for sure. But some of the things that impact pricing may be that the loan, the loan might be in second position, for instance, we buy a lot of, of junior liens, there’s a lot of nuances to that space, it’s its niche area. And so that’s perceived as a higher risk. And with that, there’s going to be agreed or discount. Another another thing, you’ll see a lot or noon notes that they’re being paid on. But they have a less than perfect track record, maybe there’s been some lapses in in payment history, or the borrower is one month behind, however, they’re still paying every month, when when you have these scenarios, that’s going to change changed the greeting and the risk and those who will trade for a greater discount. Or if there is equity, whether it’s not full equity coverage, or maybe the properties underwater, we saw a lot of that about a decade ago where notes were bought and sold, and there was not enough equity to cover cover the lien, however, it’s still a valid lien, the borrower is still paying on the note, right? People want to stay staying in their house and live there, they’re not going to get up and move because the property value had dropped. And so you would see a lot of these different scenarios. And, and when you when that happens, that changes the valuation of the note.

J Darrin Gross 22:24

Got it? And with like a second, or a third position, again, the further you get away from being the first the rate goes up, risk goes up. Is there a a sweet spot you find for the from the length of of the loan, meaning, you know, in year one, it’s worth more than, than it is when you’re five? Or are they get? Is there a grade on the value of the loan based on length of time from origination?

Fred Moskowitz 23:01

Yeah, not so much. Not so much. Really. What’s interesting is that something that’s less important to look at. And here’s why this is really interesting phenomenon. Most common we see or third year fixed rate mortgages right here in the US. However, the average t know what the average life of a residential mortgage note is in the United States. Historically, it’s five to seven years, it’s five to seven years before the borrower will refinance and pay off that loan, or they’ll sell the property because they’re moving to a larger house, or moving because of employment, or downsizing to a smaller house, all of these life changes that happen to everyone is part of life. And so that creates an element of randomness in our industry where yes, you may have bought a 20 or 30 year note, however, you never know when the borrower is going to pay that off. And they have the right to pay off at any time. And so it creates an element of randomness because you never know when that may happen. And what when you start to manage a larger portfolio, there will always be notes being paid off. And so capital is going out because you’re buying new notes. Capital is coming back in because notes are being paid off. And so it’s a it’s a dance to keep as much of your capital deployed and at work at any given time. When you’re managing a fund managing a new portfolio, larger portfolio. This is some of the larger, higher level dynamic MX that happened. And if you think about this, if you’re sitting on capital on deployed, it’s going to create a drag on your overall rate of return, because that money is earning zero for you. So it’s only when you put it out in the form of acquiring notes or lending, that it’s generating a return for you. And so that’s always something to be looking at, and to balance in a portfolio. But it’s really interesting, as I said, that element of randomness, you never know, you never know, I’ve thought notes that one or two months after buying them, they got paid off. And if you negotiated a good discount on it, the payoff comes for the full amount of the debt. So that discount that’s becomes profit, which, which is nice, but then there’s other notes that you can earn for 510 15 years, and they’re paying and you’re making money on on your yield, and that’s fine, too. And so having a mix, having diversity in the portfolio, it helps to round that out.

J Darrin Gross 26:12

Yeah, definitely, I get the, you know, kind of the diversity thing there to, to try and mix it up. And, and it sounds like you know, similar to real estate, a lot of the the value you can create is in the upfront and the price you pay for the loan. So if you can get a significant discount. And then if the borrower pays it off, right away, I mean, homerun, that you make make all your money in a hurry. So, let me ask you, so the the opportunity for private lending? Is it a constant? Does it does it, you know, go up and down, as does the, you know, the published Fed rate? Does it go up and down with the economy as it is? It’s just always there.

Fred Moskowitz 27:04

And you’re talking about originating private lending,

J Darrin Gross 27:07

but just the opportunity to be whether to be, you know, buying secondary notes or, you know, existing or or, I mean, I guess both ways. Yeah. originators or is there a constant demand for this?

Fred Moskowitz 27:21

Yes, absolutely. There’s, there’s constant demand. People are always buying property, no matter what the real estate market looks like. And most of those transactions are financed with purchase money financing. And so and so that’s something that that all the time, it doesn’t change, what what changes is usually, with the real estate market is demand is risk profiles, property values change. And so there’s always adjustments being made. However, all all the time, there’s a demand for lending, because here in the US, there’s not a lot of real estate transactions that are funded as an all cash purchase. And if they are, you hear about them, you see, see a lot of that with investors particular, they’ll buy a property, all cash, but then after the property gets stabilized, then they’ll go in and put a loan, take out a loan on it put financing, permanent financing in place. And so really, it’s, it’s at the heart of most transactions. And so there’s always a demand for that for sure.

J Darrin Gross 28:51

So going back to the first question I was asking about, you know, how much do you need? Where do where I guess, let me ask it this way. Do most people just invest, you know, some liquid cash they have? Or do they look to the retirement funds to put to work? Yeah, that’s investing or how do people capitalize for doing this?

Fred Moskowitz 29:12

That’s a great question, Darrin. And the answer is both both of those, you You hit the nail right on the head, it’s either liquid, liquid cash, we see a lot of interest in buying and investing in notes or investing in a note fun from someone that may be just sold a property or they just exited from another investment and they have liquidity. But in addition to that, is using retirement funds, retirement account funds. And when in our business, I talked to investors all the time. And this is something that the majority of investors actually leverage the strategy using self directed retirement accounts, whether it’s 401 k or IRA funds, those funds can be used to invest in mortgage notes. or invest in real estate, it’s a great strategy. I always feel like not enough people talk about this or actually use it. But you can absolutely, if you have an old 401 K plan from a prior employer, or you have an IRA, you can put that capital to work in note investing. And what I love about that is that you’re investing in an investment that has tangible value, right? It’s backed, it’s an asset backed by buy real estate has tangible value, and so that that’s a really good security for your capital. And so, I find that that very appealing, but those, those are the ways that that people can can invest in in notes. And that goes for investing in individual notes. If you want to build a portfolio, or investing in in a note fund that’s professionally managed, you can absolutely use your retirement account money to do that. And it’s a very powerful strategy. And what I really love with that is the preferential tax treatment, especially if you have a Roth, like a Roth IRA, and then you own notes, are you You invest in a note fund all of your, your returns all of your profits? It’s tax free, as a Roth, right? And so that’s powerful. That’s very powerful. The growth in that account over the long term is phenomenal.

J Darrin Gross 31:51

Yeah, no, I love the Roth. That’s a great option. Let me ask you, in your experience, what is the the rate of failure? Portfolio wise? You know, what are you seeing? If you have, you know, 100 loans or 1000 loans over the life expectancy of those? What’s the what’s the industry? Or what’s your experience for failures?

Fred Moskowitz 32:23

Yeah, that’s a great question. It’s, it’s very low, actually, very low in in particular, with the way the real estate market has been. Even though we’ve just went through a pandemic, and there was a lot of turmoil. We did see some, some notes where borrowers were impacted by the pandemic, either they’re they stopped work, or they got sick, different things. And so there was some people that got behind. But eventually, what happens is people people get with enough time to get these problems worked out. And really didn’t see much with serious, serious problems all throughout the pandemic, which was, was really, really good. Something to think about with this is that there’s always some some rate of default, in a loan portfolio. It can be kept low through good due diligence and good management of of your notes. But it’s not perfect, right? And never, it’s never perfect, there’s no guarantee. But But most times, what I find is that with enough time, and having the right people and resources working on it, just about every problem can be resolved, come to a resolution and come out, it’s a win win scenario for everyone moving forward.

J Darrin Gross 34:06

And I would assume that the fund model would give you a little bit of insulation, where you wouldn’t necessarily be the single sole participant owner of a note, the more like a percentage of a note for that would be owned by the fund kind of thing as opposed to if you were holding the note that failed. Yeah.

Fred Moskowitz 34:27

Yeah, that’s that’s a great point. Aaron, what happens is that if you were investing, let’s say you were investing $100,000, right? You could go and buy one or two or three notes with that maybe, and all your capital is spread out into those few notes. But if you invest in a note fund, your investment now gets spread out over hundreds of notes, maybe 1000s of notes. And so there’s so much diversity there and it Just really adds an element of stability into your portfolio and into your cash flow stream. And that’s one of the nice advantages of that. It’s that diversification within the portfolio. And if I want one additional point, because you’re an insurance guy, I know this is going to resonate with you. But how do insurance companies manage their risk? Right? It’s by not me writing a policy on one person or one building or one property, they insure a pool spread out diversified. And so that the strength of the pool is what carries the whole insurance company keeps it liquid, keeps it moving well as a good entity, because yeah, there may be some claims here and there, but not likely that all of the insurance, all the policies are going to have a claim all at the same time. Highly unlikely. And so it’s the same thing. And so it’s, I like to say we take a page out of the playbook from insurance companies, in the note business by doing that same thing, have a portfolio, and now your your risk is spread out into that diversification among many notes, and that’s wonderful.

J Darrin Gross 36:24

Yeah, no, that makes a lot of sense. Do you guys use any kind of algorithm or any kind of, you know, computer modeling, to determine kind of level of risk? Or is it more of kind of like, one loan, you know, one, one, review? Kind of a scenario? I mean, is it is it deep? Are you doing all the underwriting individually, personally? Or is there more of a model that you guys look for? If you’re buying like a pool of loans from a, from a lender?

Fred Moskowitz 37:01

Yeah, it’s, it’s a combination of the two, we absolutely look at each loan individually, when when we’re buying. But in the beginning, when we’re looking through many, many loans, we’ll definitely use some modeling to to kick out loans or exclude loans that maybe don’t meet the criteria we’re setting. And so that’s very important to to do that. But there’s a lot of great tools and modeling that that can be done to help you with that, if you’re looking at a larger portfolio.

J Darrin Gross 37:38

Got it. Hey Fred, 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, we’ll see if there’s a way we can minimize the risk. And when we cannot avoid nor minimize the risk, then we look to see if we can transfer the risk. And that’s what an insurance policy is. And as such, I like to ask my guests, if they can look at their own situation. It could be clients, investors, political, the Fed, weather, you know, whatever it is you you consider to be the biggest risk, but identify what what that is. And, you know, let us know what you consider to be the biggest risk. And, again, for clarification, while I am an insurance broker, I’m not necessarily looking for an insurance related answer. And so if you’re willing, I’d like to ask you Fred Moscowitz. What is the Biggest Risk?

Fred Moskowitz 38:53

Wow, this is a great question. There’s, there’s many, many risks. That’s a big part of what we do is known investors is get good at understanding what they are. As I said earlier, diversification is is a great way to manage risk and the note portfolio, but some other other areas, it’s really getting good at doing your due diligence before purchase. As I said, I dedicate a large portion of my book to this topic because it’s so important. It’s prior to buying, running your due diligence and surrounding yourself with the right individuals to help you whether it’s vendors its data providers, to give you the resources and information. It can be an another area super important. Is counterparty risk when you’re buying a note, who are you buying from? This is a big one. You want to make sure you’re comfortable with who and this goes for any any business transaction. Are you comfortable with who you’re you’re entering into a business transaction with with them as a person with their company, their reputation and track record industry, I feel like this is something that often gets overlooked, or doesn’t get enough attention to it. Because deals can go bad transactions can have problems, they can go bad. And so what’s very important is how is the other person going to respond and cooperate and work with you to solve a problem that comes up? Because we live in a far from perfect world? And so you want to know, how is the other person going to show up and resolve this issue. And that matters so much, so much, so that you’re comfortable, that you can work through an issue, you can still be friends at the end and walk away knowing that everyone got a fair transaction. And you’re looking forward to doing the next deal again, in the future. There’s nothing worse than walking away from a transaction saying never again, am I going to deal with this individual or this company, or this client, it’s so all these headaches, it’s the worst feeling in the world. And so that’s something you can avoid upfront. Something you can easily avoid upfront. And that that’s, I would say, a huge risk that a lot of people neglect to think about or talk about.

J Darrin Gross 41:42

Yeah, no, definitely want to know who you’re dealing with. And, you know, otherwise, you might find out the hard way, once it’s yours, and that can be expensive. So that’s good to know. Hey, Fred, where can listeners go if they would like to learn more or connect with you?

Fred Moskowitz 42:01

Thank you, thank you appreciate that. Best way to connect with me is to visit my website, which is FredMoscowitz.com. Or if you prefer, I have an easier spelling for you. You can go to gift from fred.com. It’ll take you right to my website. And once you’re there, you can learn more about me, you can connect with me and request a copy of a special report on Node investing, be happy to send that out. And my book is available on Amazon, which provides a great overview of the industry and node investing as an asset class and how to get started how to get involved. It’s called The Little Green Book of note investing, and it’s available on Amazon. Oh one more thing. If you prefer to use your mobile device, you can connect with me by texting, text, the word money to 215-461-4433 and then follow the prompts. I look forward to connecting with you and interacting with you. I always love speaking with investors and learning about what they do.

J Darrin Gross 43:16

Awesome. Fread Moscowitz thanks for taking the time to talk today. I’ve enjoyed it. Learned a lot, and I look forward to doing it again soon.

Fred Moskowitz 43:26

Thank you Darrin was my pleasure. Thank you for having me on the show.

J Darrin Gross 43:31

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 43:51

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Physician Real Estate Investors with Pranay Parikh – Cre PN #396

PRANAY PARIKH 0:00

When I, when I was in med school, you know, I didn’t expect to be some real estate tycoon. But I just wanted to make sure that the hard work I was doing at in medicine paid off, you know, and paid off relatively soon because I was, you know, I’ve been in school for 20 years, right? So, I’ve had enough of that delayed gratification. So, you know, I wanted to see some of the fruits of my labors. And I saw real estate as a good path, you know, and initially, like, it was just a way to make a little money to on the side. And then eventually, I realized that there were so many people that wanted to do the same, but didn’t have the opportunity or the desire to do it. You know, I feel like any doctor could, if they spent the time and effort and went out made the connections, they could do this, you know, they’re all very intelligent, resourceful. But, you know, most people don’t and, you know, that’s kind of the thing in the world. A lot of people want to follow but don’t necessarily want to be the one to start, you know, someone has to do it. You know, honestly, if someone else said it, I would have, you know, I would have just invested in them, but no one else was I had to kind of step up.

Announcer 1:10

J Darrin Gross 1:29

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’s interview is sponsored by Building Insurance and Risk when you invest in real estate. It pays to work with a real estate investor protection specialist to protect yourself and your investment from catastrophic loss. The experts have 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 building insurance risk.com.

Today, my guest is Dr. Pranay Parikh. He’s a medical doctor serial entrepreneur and a podcast host. His unconventional journey to medicine helped him learn the skills to excel in entrepreneurship and real estate. Over the past 16 months, he’s bought over 200 million in real estate and helped hundreds of others invest in real estate without being a landlord. And in just a minute we’re going to speak with Pranay about time management, real estate and entrepreneurship.

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, Pranay Parikh, Welcome to CRE PN Radio.

PRANAY PARIKH 3:24

Hey, thanks for the opportunity. Super excited to chat.

J Darrin Gross 3:28

I’m 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.

PRANAY PARIKH 3:36

So I’m a medical doctor still practicing in the US. And you know, when I graduated residency, so became a full fledged doctor, I knew that it was not as important how much I made, but what I did with my money, you know, and I didn’t want to wait, you know, 2030 years put all my money in retirement account to kind of enjoy the fruits of my labor. You know, as doctors have been doing delayed gratification for long enough. So I looked around and saw real estate. So bought my first property four units a year out of residency, and thought I’d just buy one a year, you know, and retire in 10 years. But I the market here in California, Los Angeles, pretty tough. And it took me a while to find my second property. And so I decided, you know, there has to be something better. And that’s when I found passive real estate syndications. And no one was really teaching much at the time. Now there’s some books, the hands off investor, a couple other books, but at the time, there wasn’t that many resources. So we created a course had 1000s of people take it than we thought we were done. You know, we taught everyone how to invest and they can go out and find great deals. But people realize that they still didn’t have the time to do it or maybe they were so too busy at work. And so they said hey, Pranay, you you guys are investing in you You guys are finding, vetting and investing in deals, why don’t you just let us come together? And maybe we’ll get better terms, we’ll find better deals. And that’s how we created a cent equity group. You know, first, we just did a small piece of a very large deal. But over time, we got enough people. And now we can take down hold deals by ourselves.

J Darrin Gross 5:19

Wow. So on that progression? Are you now the GP? Or are you coming in with just larger capital to where you’re able to more partner with a GP.

PRANAY PARIKH 5:30

So we’re in a pretty unique position. So what we do is JV equity. So that means we’ll bring in about 90% of the capital. But because we’re bringing pretty much all of that other than the skin in the game of the sponsored operator, we get major decision, right? So you know, we get decide when we buy, sell the property, even stuff like the name or what color stuff is. But it’s, it’s powerful to have that, because it’s really showing alignment of interests. And so what our, what our company has evolved to do is we do capital raising, we raised the money on one side, but we have actually a full Asset Management Operations team. So we go in and we help the sponsors. And that’s why, because we do both of those, and we don’t just disappear after bringing the money. Sponsors bring us deals that we think are great, like we closed in August of this year, a deal that had a fixed interest of 2.9% for nine years. Yeah, yeah. When everything else takes and now,

J Darrin Gross 6:33

Today, a 2.9%. That’s some

PRANAY PARIKH 6:35

Yeah, well, we’ll talk about risk mitigation, but a lot of risk mitigated right there.

J Darrin Gross 6:40

Wow. Well, that’s, that’s amazing. So I want to back up one second, you, you mentioned something, talking about your path. And you said a 108? I don’t know, I’m not familiar with the use of your physician. And then I thought I heard you say one away. And I didn’t know if there was a code word for that, or

PRANAY PARIKH 6:59

No. So when. So I’m a physician, I still practice. And when I graduated, I really took some time to figure out what to do with my money. Don’t

J Darrin Gross 7:13

the maybe saving went away? Maybe you went away? Maybe did you go away? Maybe that’s what I heard, because oh,

PRANAY PARIKH 7:19

Oh, I went away from active real estate. I said, you know, because the goal was just to buy one property a year, right? And retire in 10 years, right, and start paying them off and then just have, and, you know, 10 properties pretty manageable for a single person. But it wasn’t, it wasn’t, you know, and two, there’s just acquisitions is its own beast, you know, finding properties, working the sellers. That’s its own business. And, you know, we can kind of break down what I do. So commercial real estate, I think it’s really three businesses, its acquisitions, so finding the property, negotiating all that stuff, to asset management, making sure the property is doing what the business plan is, and three capital raising. And it’s really hard to find a company that does all three of them. Well, I find that most want to do to either acquisitions and asset management or just capital raising, and then we do you know, we’re kind of the unicorns that do Asset Management and capital raising.

J Darrin Gross 8:23

Yeah, no, that’s, that’s, that is unique. I’d say that the acquisition capital raising are probably the two that I’m most familiar with people do. Exactly. Just kind of because they, they do go hand in hand. Asset Management, I think is it’s, a lot of times it’s understood in that, but it’s not necessarily I mean, asset management is truly its separate thing. I think a lot of times people, you know, blurred the lines between just operations and property management, but to really manage the property and achieve the goals that you’ve set. Or to meet the investor goals that you’ve, you’ve essentially don’t say promised, but you’ve projected, paying attention, the asset management and how to get there is really kind of where all that happens. And it’s really, really critical that you have that, you know, no

PRANAY PARIKH 9:13

one’s gonna care about the property as much as you, you know, and investors. So, you know, for example, we’re on the phone with property management every week, right? And a lot of times, they’ll be like, oh, yeah, you know, there’ll be super happy that they hit pro forma, right, the rents that they wanted to hit, and we’re like, Okay, so let’s go above pro forma. They don’t necessarily want to do that. Because you’re making the life harder for them, right? If they hit their numbers, they get their bonus and all that stuff. But we’re talking about more like, Okay, let’s see how far we can push this because every small increase in noi ends up being a ton of value on the back end when we sell the property.

J Darrin Gross 9:51

Yeah, and even now, I mean, more. So. The importance of that is going to bear out tenfold based on just the capital markets and interest rates and all that autobackup here second, so you’re a physician. It’s not an easy path, lots of school lots of time. How did you go from, you know, the goal of being a physician to real estate. So, it,

PRANAY PARIKH 10:25

you know, it didn’t. When I, when I was in med school, you know, I didn’t expect to be some real estate tycoon. But I just wanted to make sure that the hard work I was doing at in medicine, paid off, you know, and paid off relatively soon, because I was, you know, I’ve been in school for 20 years, right. So, I’ve had enough of that delayed gratification. So, you know, I wanted to see some of the fruits of my labors. And I saw real estate as a good path, you know, and, initially, like, it was just a way to make a little money to on the side, and then eventually, I realized that there were so many people that wanted to do the same, but didn’t have the opportunity or the desire to do it, you know, I feel like any doctor could, if they spent the time and effort and went out made the connections, they could do this, you know, they’re all very intelligent, resourceful. But, you know, most people don’t, and, you know, that’s kind of the thing in the world, a lot of people want to follow, but don’t necessarily want to be the one to start, you know, someone has to do it, you know, honestly, if someone else said it, I would have, you know, I would have just invested in them, but no one else was, so I had to kind of step up.

J Darrin Gross 11:39

Now I get it, I get it, I, you know, interesting to me, I know, you know, just the the amount of time you put into become a physician through awards, or, you know, most most people look at his, uh, his, the, the income, from the position has kind of the reward. I mean, you know, being a piano specialist, being a doctor, clearly, you know, as revered in the, in the society and community and, and, you know, well paid. I think one of the things that’s been kind of opening for eye opening for me, is recognizing some of the debt, that a lot of a lot of physicians end up, you know, accruing. While they’re, you know, going to school and paying for that. I know, I was talking with one who basically recognized as, like another house payment, in order to pay off his debt. For me, it was just kind of built into his, his, you know, his plan, you know, work, make money, pay off, pay off the debt. And, you know, you mentioned that, you know, if somebody else had had been willing to go forward and do this, I’m kind of curious in, in the physician community, do you find there a lot of people that are asking you about what you’re doing? Or are they kind of, you know, more interested in wrestling with insurance companies to get paid more?

PRANAY PARIKH 13:18

Yeah, well, you know, every day, people are saying, hey, you know, how do I be a general partner? Or how do I raise money for you guys? You know, I think a lot of people see the opportunity, you know, and one take one step back, you know, really the reward in medicine is being able to take care of people, you know, and I think when you can detach that, from the money, right, where you can take care of people for free. That’s, I mean, that’s my goal, like, have, you mentioned, talking to insurance companies, you know, and I know you deal with that. But if I, if I could take care of people not worry about insurance companies, and be able to provide for my family, that would be that would be ideal, you know, and that’s kind of where I want a lot of people to be and help them where, you know, if someone comes in, they can’t pay, you’re like, oh, shoot, that’s fine. You know, I’m still going to take care of you. So and that’s actually how I trained so I trained at a county hospital. We didn’t didn’t care about anyone’s insurance, right? Coming door, we’re going to take care of you, you know, and that, that’s medicine, you know, that’s what I enjoy. That’s, that’s how I think we should take care of people. But you know, the real world is not like that. So we can provide for these physician families. And you’re right, this debt burden is ridiculous. I mean, think about coming out of school and having 345 $100,000. Right. And it’s not, it’s not at a 2% interest rate. It’s at a 7% interest rate, right. So you know, that’s a 35,000 you’re paying and just interest payments per year. Right. So, you know, that’s one of the issues. That’s why you hear that there’s an issue of Problem with finding primary care doctors because primary care doctors make, you know, 150 200,000, which is a lot of money. But if you come out with your debt of 500,000, how long are you going to take to pay off that right? So a lot of these people reasonably go to these high pain specialties cardiology, orthopedics, even though they love primary care, and they love taking care of people, seeing people watching them grow up, it’s just not financially viable. So, you know, our goal is to if we can provide some passive income, income that will help them you know, support themselves in their family, then they can perform medicine for the love, you know, and that’s, you know, I tell people like, do you want to be taken care of the person who’s working three days a week? Who loves their job has time to read stay up to date? Or do you want the person that’s just barely surviving working six days a week, 12 hours a day, you know?

J Darrin Gross 16:01

Yeah. Sad, sad reality of things. I think it is perplexing, and, and you know, just how it’s become such a money thing. I think that’s really the the, you know, boggles the mind on how one can incur so much debt, to get the education. And then, you know, the Forever pay back program to, you know, what, what’s, you know, like you said, Really, the ultimate goal is to be able to care for people. But I think that, you know, what gets blurred a lot of times is the money. And I still question how insurance companies have made health care better, and I don’t know, that’s the case. But but other topics, another conversation,

PRANAY PARIKH 16:47

you get a lot, a lot of money. And I can tell you, it’s not us, you know, when we do it, we’re not, you know, there’s very few doctors out there and Ferraris, and, you know, Rolls Royces. And even like the high end Mercedes, you know, I drive a Honda. So,

J Darrin Gross 17:03

well, I’m just always amused by you get the statement from the, you know, physicians talking about, hey, this is the bill and it’s, you know, 1000s of dollars and says we’ve applied to your insurance company for or kind of payment. And then you get the statement from the insurance company, and they say, this is not a bill, you were billed, you know, $3,000, or whatever it was, and we settled it for $89. And you’re nothing. So, anyway, how did you do that? And I think a lot of people in myself, I’m like, well, shoot, it was only $89, you know, whatever, that I could have paid that. Insurance to, you just helped inflate the cost and, and, you know, you work the physician down to a, you know, a prize winner. But anyway, that’s always been an equation, I have not understood how, how it’s gotten to be what it is, but, but we’re getting off track here. But so, you, you know, you’re trained as a physician, you look, you find real estate as an opportunity, you know, essentially financial freedom. So what I’m hearing you say is, you know, not being, you know, obligated to, you know, charge or like we said, Russell with insurance companies to determine the level of care you can provide for somebody. But you also, you know, sound like you have an entrepreneurial spirit in you. Are there other things, you’re doing entrepreneurial? Or is it you related to real estate? Or?

PRANAY PARIKH 18:38

Yeah, so, you know, we have the real estate company, we have a podcast, from MD to entrepreneur kind of Chronicles, my journey. And my partner, created a company called passive income MD, which is kind of an education media company. So you know, I help him with that. And, you know, just try to see, you know, a lot of times, and this is what I’ve realized, you know, the people, the serial entrepreneurs, Mark Cuban, all these other people, you know, a lot of times we’ll walk by, and we’ll be like, Oh, hey, here’s a problem. And then you think someone should do something about it, you know, but it’s the other people the entrepreneurs are like, Hmm, is this a viable business? Can I make money doing this? Right? Is there enough demand and you go and start it and you know, 90% chance of it failing but you only need one to really blow up and it’ll change your life forever?

J Darrin Gross 19:33

Yeah. Well, in just you know, being aware of that and and looking for those opportunities as opposed to just having to have your head down to the grindstone, you know, kind of thing I think that’s, that’s really a level of freedom that I don’t think most people are able to achieve. Just based on need, you know, there’s like a, if you’re working for the man, and you only get paid when Your work, you know, you gotta go to work. And the job is a job as a job, whether you’re, you know, going to Starbucks or or selling insurance or, you know, taking care of other people as a visit physician, if you’re not able to have a path that the that provides for you outside of that, that job that you’re so dependent on for your existence. It can be a, it can be very limiting mentors, you know, where do you find the time to look outside of that? So, let me ask you, I mean, based on all of your you know, all of the activities, you’re involved in health care, real estate. Sounds like you do some consulting, you get your podcast. What is it? I mean, time management is a piece of that. Do you are you? Do you have a routine? Do you? Do you selectively? I mean, do you say no more than you say? Yes. How was it? You manage that? And do you work with others on on that type of? Problem? Or

PRANAY PARIKH 21:25

it depends on where you are in your career. You know, so five years ago, when I was just starting to say yes to everything, everything, you know, and I think that’s the right way to go. You know, and over time, you can start saying no to stuff. You know, I still say no, still say, Yes, we’re gonna watch anyone’s podcast, I’ll jump on 20 episodes, you know, 30 episodes? Yeah, you know, I’m happy to help. Because I was offered help in the beginning. Right. But I think there’s a couple of things and you know, you hear about these often. And you’re like, yeah, yeah, yeah. Try them out. Right. So time blocking, this is something that I am starting to do. I don’t do that much. But I was doing and I was doing podcasts every day, you know, it’s, we spend so much time switching between tasks, and then I just record on one day, you know, and people will ask me to be on my podcast, and I’ll be like, Yeah, sure. I think it’s going in March. But that’s what happens, because I only record one day, you know, and then you can have other days. So you know, you have a full schedule. And remember to schedule time for family, you know, I put it on the calendar. It sounds kind of lame, but you know, if it’s on your calendar, it’s going to happen. Right? And so there’s, there’s time blocking. And you know, Derek Severs says, when you’re looking at something, it has to be either hell yes. Or hell no, you know, or no. So, look at, especially when you’re kind of mid to late career and entrepreneurship, like, do you really want to do this? Because it’s easy to say, yes, you know, and we all have that thing. We’re like, ah, still have to be on this podcast. Or, for me, it’s more travel, you know, I have a young son and another on the way it’s like having to leave them for a couple of days. sounds horrible. You know, traveling, I get sick. And so it’s easy to say yes. Now, but think about in the future like so, you know, an easy way to think about that. If this was tomorrow, would I say yes, if I was free? And they said, Hey, this is tomorrow, would you go? You know, and that takes some of that recency bias or future bias away? So time blocking Hell, yes or no. And then I just tried to really take some time and look at what your priorities are. Right? And not just money, but family time, right. And we do this for business, but I don’t think we necessarily do this for ourselves. And so what do you really want, you know, and a lot of times and you know, it’s a little woowoo with like, the manifestation stuff, but, you know, the quick story on that I had cooked some chicken last night at like, 9pm. And I heard the beep and I completely forgot about it. Woke up in the middle of night for 4am. I was like, oh, shoot, I gotta go put the chicken away. You know. And I think our subconscious mind works on that. Like, we have stuff that our brain is processing, and things that we want our subconscious is trying to figure out how to happen. I don’t know why it took six hours for my subconscious to remind me about the chicken. But it did you know, and a lot of times you get that epiphany, right where you’re like, Oh, this is how I solve this problem. So sit down, think about what you want and let your subconscious do his thing. You know, you have all the skills, and you’ll be surprised. And then a corollary to that is one You forgot what you want, start telling people, you know, we, we were looking for a very specific hire. And I told my partner, I was like, Hey, you start talking to people, literally in the next half an hour, he talked to someone, and that person was like, I have the perfect person for you. And we ended up hiring her. And it’s just, you know, figure out what you want, let your subconscious work and tell other people because they want to help you, they want to see you succeed.

J Darrin Gross 25:26

No, I hear that. And I know that, and I think the the challenge sometimes is, is doing it on regular basis. So that you do, you know, achieve the things you’re you’re you’re trying to achieve, I think it’s one thing to get all excited about something, you know, this is great, I’m gonna do it. And, you know, you start off and it’s like, the New Year’s resolution, I’m gonna go to the gym every day, you know. And, you know, about week two, it’s also high, I get it, you know, it’s easy to say no, to the thing that you want, you know, that you’ve identified and next thing, you know, you’re, you’re back to where you started. And, and you’re not getting the results you wanted? You know, it’s no secret as to why you’re not doing the work. Right.

PRANAY PARIKH 26:15

You know, one, one trick I’ve found against that, and I’ve been using this recently, you know, so a lot of people have heard the Seinfeld, you know, closed chain, kind of where you have a calendar and you X off and you, you know, you don’t want to break the chain of axis. That is that works great for some people, but I found it to be too, too strict for me. So I, I heard this rule about to you, You never let two days go without doing what you said you were gonna do. So for let’s take working out, for example, you know, I’m super tired, not going to work out today. Okay, not a big deal. I’m not going to beat myself up about it. But tomorrow, the rule is I just can’t go two days, you know, and that gives yourself a break, right? One day. And you’re like, and make it a rule. So you know, I don’t eat. I don’t eat past 7pm. You know, and that’s a rule because there’s nothing healthy, you can eat past 7pm. You know, it’s like, you go to dessert, and people bring fast food. And it’s just a rule. And once you have a rule, and it’s a rule, it’s not, oh, I’m trying to lose weight, it’s no, I have this rule. And I always do this, you know, I heard this other rule, like, I’ll need dessert, if it’s like super fancy. So it has to be from like a, you know, Michelin star restaurant, otherwise, he doesn’t eat dessert. And it’s not because he’s Gucci. But it’s because he’s trying to avoid 95% of the, you know, the bad stuff. And that rule just works. So, try to come up with a rule that fits you, you know, and most of the rules are very draconian, that’s why I like the two day rule. Because it gives yourself a break, you know, like, you’re exhausted, you deserve a day off, right? That’s fine. Don’t take two days off, and that I find works really well for me.

J Darrin Gross 28:09

No, that’s, that’s awesome. I appreciate that. Because it’s, I think the, I’m a routine person, if it’s something that I get in the routine, and it’s a good routine, it’s just my MO I’m like, uh, you know, time of the day and clock on or the calendar, you know, that’s, that’s his time in that routine, could be on a monthly basis, weekly basis, daily basis, however, but it’s just something that kind of, it’s helpful to have a routine and, and, you know, I know that some days are better than others. You know, sometimes as you’re going through the motions kind of thing could be, you’re just not feeling well, or whatever, but, but, you know, I think having that routine, because I think one of the things I’ve come to realize is that, in order to really get somewhere, you’ve got to be consistent, you know about it. And if, if on one day, I you know, do it all and like said, if you’re, you know, letting multiple days go by, and then I’m gonna do it all. And you don’t have any consistency there. So any kind of gains you may have, that you may have created on day one are lost by the time you get back to it again. Whereas if you go to steady, there’s just this incremental improvement, you know, and, and, you know, I think that’s, that’s one of things, it’s really hard to see that on the front end, the importance of that. I know, like, I had an injury in back in college and, and, you know, knew what I was supposed to do, but rarely did I do it until finally I got older and it became an issue. And then I started doing the exercise that I was prescribed back, you know, when the injury occurred. And when I do that every day, and it’s not a big time. You know, Ragu doesn’t work. Quite a lot of time doesn’t require a lot of space, I don’t have to go anywhere to do it, I can do it right where I am. But if I do that every day, the outcome is that all of the the negatives that I was facing for not doing that are gone. And, you know, it’s just, it’s amazing to me how simple something like that is, but but, you know, again, it’s, it’s the benefits of doing the work. Even though it’s it’s a little bit of work, but it pays off big dividends. And so, I like that, that the two day rule thing that that makes a lot of sense to me. Because you know, you do have the days when you’re traveling or, or, you know, you’ve got family commitments or something that can take you out of your, your deal there.

PRANAY PARIKH 30:46

Something for something like that, you know, that’s stretching or whatever. One, one trick that I have seen is attach it to something you’re already doing. You know, for me, it was putting on sunscreen, I’d always forget, you know, brown. So sunscreen wouldn’t be the first thing that came to mind. But it’s important, you know, and people of all colors still get skin cancer, right, and aging and all that stuff. So you know, find something that you’re already doing and attach it. So for me, it was brushing my teeth, right, I always brush my teeth, in the morning and at nighttime. So in the morning, put the sunscreen right there. So as soon as I brush my teeth, I put the sunscreen and you know, after a couple of weeks of doing that, I think most say about 21 days, then it becomes a ritual in itself. So, you know, a lot of people will do stretching in the morning. So you know, brush your teeth stretch, you know, or everyone goes to the bathroom first thing in the morning, so you know, attach it to something like that. Or taking medications, right? A lot of people forget to take medication, so attach it to, you know, going to the bathroom in the morning or brushing your teeth.

J Darrin Gross 31:55

Now, no, I definitely haven’t. I mean the Makita needs I guess kind of the you know, the sociation errs are already doing this, you know to answer that, that’s really easy. Hey, I want to talk to you a little bit more about the real estate and the syndications and stuff. So you mentioned the three things acquisition, asset management, and capital cabarets. And yeah. So in what you’re doing is you’re basically you’re raising the capital, and then your your JV and with with the general partner on these. Tell me about some of the properties and because you mentioned that, you know, you’re being approached as a source of capital, it sounds like because you’ve identified a big become recognized as a, as a potential partner and these things, tell me a little bit more about some of the properties that you guys are in and and some of the, you know, the the people that are investing, are these physicians that are investing with you, or where are you guys raising capital? Tell me a little bit more about that.

PRANAY PARIKH 33:08

So we have a pretty narrow lane, we do value add multifamily. So we’ve we identify properties where we know we can go in and we can renovate, we can increase rents, and you know, sell for a premium. So that’s kind of our lane, we buy properties in low tax to know tax states don’t Florida, we’ve done Texas, Arizona, Oklahoma, and our investors are all accredited investors. So you know, they have to make more than $200,000 per year for two years, or 300 as a couple, or have a net worth over a million dollars or less. See, there’s a couple of tests, you can pass the series seven series 65 A good portion of them are doctors, because that’s our kind of our audience, but we have a lot of dentists, lawyers, pharmacists, and you know, engineers, people of all types, but our story kind of resonates with doctors. So, you know, they, they like to get into our deals.

J Darrin Gross 34:08

Got it? Is there any kind of a minimum investment that you you seeking? Are you doing a fund or is it your is it

PRANAY PARIKH 34:19

individual deals, individual individual deals, and we try to try to keep our minimum very reasonable. So it’s somewhere between 35 to 50,000 per deal, because, you know, there’s people of all different types, and we want it to be pretty accessible.

J Darrin Gross 34:34

Got it. And you mentioned the various states there that the tax friendly. How many deals have you gotten fullcycle on?

PRANAY PARIKH 34:45

So we’re two years old. So we haven’t had any full cycles yet. We’ve done eight deals. We bought over a quarter billion in real estate. We’re hoping to get a couple of early ones, but the economy change so We will probably have our first exit either next year or 2024.

J Darrin Gross 35:05

And as far as the returns, are you hitting the projections that were were presented in the beginning?

PRANAY PARIKH 35:17

We are. So we are hitting all our pro forma, right. So the types of brands, you know, we plan on going in renovating, increasing rents and all that stuff. The interest rates have gone up, as you’ve heard. So the real estate markets a lot different than what we expect. So, you know, fortunately, we have, you know, the loan and all that stuff is long enough that we expect to hit what we projected and maybe even better, but it’s going to take a year or two, with interest rates.

J Darrin Gross 35:51

Yeah, no, that much time or somebody else just about the hope that the rents increase enough to, you know, outpace the interest rate and flexion and stuff. And, and, you know, I think that what’s interesting is how interest rates affect the market so dramatically. In that, and I don’t know, it’s kind of more of a, a reset, as we’re going from one point to the other point. Is that in between area that’s hard to figure out, I mean, our interest rates, is this where they’re going to be or they’re going to go higher, you know, is this Have we reached the the top is, uh, you know, because I think what that does is it, it throws off any development, any additional supply, which, you know, if you’re an investor and you’re holding something, having no more development, in the pipe, maybe is a good thing, because it doesn’t dilute your investment, because it hopefully the demand is still there and is growing. So, and then I suppose, as things kind of level out once that, that new equilibrium is understood, and the market can say, Okay, here’s, we can go forward from here, and build again, and, and, you know, great, more supply, but the demand hopefully, you know, stays, stays strong behind that. So it is an interesting time, and just kind of the, as we go from where we were to where we’re going, just kind of the, you know, are we there yet, kind of thing is, is the challenge we’re all facing. So we’ve got the the entrepreneurship, we’ve got the time management, we’ve got the real estate, what do you have any new deals in the pipeline that you’re looking at, or, you know, talked about not,

PRANAY PARIKH 37:54

we were looking at a couple, they’re pretty early to talk about, but what is happening is a lot of REITs Real Estate Investment Trusts, or other institutional people are having to rebalance their portfolio. And you know, they’re worth billions, so they’re willing to take a haircut of 10 20%. So there’s going to be a lot of assets that we’re going to be able to get at a, you know, big discount. So there’s two of them, that we’re looking at fairly large discounts, and we’re pretty excited about that.

J Darrin Gross 38:31

Now, that’s a that’s an interesting point. You know, I think a lot of times people forget, you know, the requirements of the law, not necessarily requirements, but just the business model, and kind of, it could be their their loans are coming due, and they’re gonna have to refinance if they, you know, keep the loan or, or, you know, maybe their original investment plan was to exit on a certain timeline for their and, and capitals, II or whatever. I mean, there’s still an exit that they need to they need to act on. And I would think being situated like you are with the capital stack and being able to go into syndications provide you an opportunity to take advantage of some of these deals where others have to exit. And that’s good. Are you seeing Is it is it based on just the the the sellers need to exit the property? Or is it or is there a kind of what what is it because I just, you know, as we’ve talked about the interest rates and stuff and the uncertainty in the market, it seems like either there would be fewer sellers because it’s like, they don’t want to sell at a reduced price. You know, if you just if you didn’t have to sell right.

PRANAY PARIKH 39:54

Yeah, so it’s distressed. So it’s people that have to sell so maybe this is the They have a fund. And they are, you know, they’ve been killing it for the past couple years, and maybe they own one or two more assets, and they’re willing to take a haircut or a loss on those to close off their fund. Because remember, as a real estate person, you get paid at the end, you know, you get paid when you have a successful closing. Or, say you’re a big Goldman Sachs or you’re a big company, and you, your investors, your paperwork, your legal structure requires you to have a certain asset portfolio, right, you’re a hedge fund. And because the stock markets down 25%, you’re over allocated, and it’s a real estate, you know, so and your bond market, so your stocks and bonds are down 25% over. So it looks like this, right? You have way more real estate, so then you have to get out of your real estate to, to balance that out. And that’s your charter, that you know, that’s a legal requirement for you to have to do. So now people are trying to figure out how do I get out of this? This real estate because they have too, right? They they’re not allowed to have that portfolio that’s out of balance for too long.

J Darrin Gross 41:14

To that you mentioned the one you got here a little while back with the 2.9% interest for for nine years going forward? Are you finding opportunities to take over the the debt obligation? Or are you

PRANAY PARIKH 41:27

so we are and you’re exactly correct. It was a loan assumption. So how do you get a loan in 2.9%? For nine years, it was created three years ago, right? So you assume the loan, you go in and you pick it up? And we are seeing that? And that is a premium right now? Were you able to take the loan that was originated or started a couple years ago, or even six months ago? That’s ideal right before interest rates or 567 percent. So that is something we’re looking at, we actually did two of them already this year, to loan assumptions. And we’re hoping to do a couple more.

J Darrin Gross 42:07

No, that’s great. I am thinking is that kind of more of your what you guys see is the opportunity as opposed to originating in a new loan?

PRANAY PARIKH 42:15

Yeah, definitely, definitely. Because people are, our rates right now are, you know, you can potentially get a fixed loan for high fives if not low sixes, a few can even get something in the fours are probably it’s it’d be hard to get a three but in a high, low fours that that would be, you know, killer.

J Darrin Gross 42:38

And when you when you’re able to get a property with the existing financing in place, is the the asset sale price, then is that prevented from being discounted substantially, or you heard me know who that is?

PRANAY PARIKH 42:54

It’s actually the opposite. So because the reason that loan assumptions actually normally aren’t very attractive, because there’s a prepayment penalty. So the seller wants to sell, but they’d have to pay a couple million dollars to get out of this loan. Because if you think about if you’re giving out a loan, right, if I give you $10, you underwrote me, you spend all this effort all this time you looked at the property, and tomorrow, I’ll give you $11 You’re gonna be like, What the heck, I was expecting, you know, $1 a year for the next 10 years. Right? Give me those $11 of interest that you want it right. And over time that prepayment penalty gets goes down. So they because what are they going to have to do take that money and put it out again, and that includes that involves a lot of risk, right for the same amount of money they already go to gotten. So as long as you’re able to qualify for the loan assumption, it’s a win for the seller, and a lot of times you will actually get a discount. So we got a $5 million discount on a loan assumption we did earlier this year, because we would have had to pay a prepayment penalty of $5 million.

J Darrin Gross 44:06

Wow. When when for the good guys, right?

PRANAY PARIKH 44:09

So that’s good. Now now that’s looking great. Because if interest rates go up, that prepayment penalty goes down, because, you know, the bank wants to take that money and give it out to someone else at a much higher interest rate.

J Darrin Gross 44:23

Yeah, now the bank’s calling you Hey, really? Yeah, exactly. Exactly. Yeah, well, you know, those counter loan No, no penalty. Yeah. Yeah, it’s funny how that works. That is interesting. And really thought through the both sides of that, but definitely I could see now the next call is coming from the bank. offer no point where your your penalty. So the the play then is basically the the existing loan. I mean, at least that’s that’s really where the the opportunity is. In a lot of these these opportunities. That’s, that’s, that’s really cool. I mean, kind of the creative, creative financing there. Calm.

Hey, Pranay, if we could, I’d like to shift gears for a second. My dad, I’m an insurance broker. And I work with my clients to assess risk and determine what to do with the risk. There’s three strategies we typically look at, we first look to see if there’s a way we can avoid the risk. When that’s not an option, we look to see if there’s a way we can minimize the risk. And when we cannot avoid or minimize the risk, we look to see if there’s a way 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 could be their clients, investors, the market, political interest rates, whatever you see as the biggest risk, but identify it. And, you know, let us know what you think is the biggest risk and what you’re gonna do about it. And again, for for clarification, while I’m I’m an insurance broker, I’m not necessarily looking for an insurance related answer. But yeah, if you’re willing, I’d like to ask you, Pranay Parikh, what is the biggest risk?

PRANAY PARIKH 46:20

So for commercial real estate, it’s always debt, right? I mean, if you think about it, that’s your biggest obligation every month, right? Every month doesn’t matter. If there’s a fire, there’s a tornado, you have to pay the lender, right? Otherwise, they take the property back. So you can get that risk to zero by paying all cash. And that’s possible, but you’re gonna get a couple percent return. So you got to figure out where in the risk spectrum Am I comfortable, you know, and we, our last deal was about 60%. So we put a downpayment of about 40%, which you know, you and I would put down about 20% for our house, so this is much higher, but what that does is it decreases your loan payments, so your obligation is a lot less, right, you can get fixed debt, or adjustable debt, you know, within adjustable debt, you can get up by a rate cap means you pay money upfront, almost like points, so that the interest rate won’t go above a certain amount. And you could do that for two years, you can do that three years. So you could make that very tight. So you know, that you have an interest rate of three, and it can only go up to four, or you can get looser, where you get have started off at three and it could go up to six. So there’s a lot of ways to try to, to, one, get rid of it pay cash, pay as much cash as you can to, to mitigate it right? Doing a fixed interest rate. So the rate, the risk of interest rates going up is on someone else. Or you can transfer it to someone else by buying a rate cap where if it goes above a certain amount, someone else is going to pay that interest. So I think debt is super important. In 2008 multifamily commercial real estate actually did okay. But the people that did have problems were the ones that had bad debt, or they had debt that was coming due, and they couldn’t refinance or get out of it. I think we’ve learned a lot of lessons. And I don’t think that’s going to happen again. The debt markets are a lot better. 2008 was just we, we didn’t know what to expect, you know, and it was an issue with the debt because the debt was the biggest issue. No one else was giving out debt. Now we have supply chain war, all this other stuff, but it’s not the debt markets that are having issues. So if you’re looking at your own properties, if you’re looking for an investment, really dial in focus on the debt and ask them about it like what what about this, do you think is going to minimize our risk of the bank taking the property back?

J Darrin Gross 48:56

No, very, very true, especially in today’s changing interest rate environment. That’s, that’s great. Hey, Pranay, where can listeners go if they’d like to learn more or connect with you?

PRANAY PARIKH 49:12

So the our website you can sign up for our newsletter where we send out new deals is AscentEquityGroup.com. My podcast is From MD to Entrepreneur Podcast. It’s on Apple, Spotify, Google podcasts, I talk all about entrepreneurship and interview guests that are experts in their fields.

J Darrin Gross 49:38

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

PRANAY PARIKH 49:48

Awesome. Thank you so much. All right.

J Darrin Gross 49:51

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 tweak until next time, thanks for listening to Commercial Real Estate Pro Networks CRE PN Radio.

Announcer 50:09

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

Investment Real Estate Investor Loan with Brad Hansen – CRE PN #390

Brad Hansen 0:00

The typically unless it’s a portfolio loan in the bank or investors keeping it, but your typical Fannie Freddie, Ginnie Mae loans, these are packaged and sold as mortgage backed securities on the secondary market. And then that’s what determines the rate. So those rates will go up or down based on inflation based on demand. And so, you know, during the 2120 2021 time, what the Fed was doing, not only did they take their Fed rate down to basically zero, but they also were buying mortgage backed securities and just like anything else, it’s kind of a supply and demand right? So they’re buying up all these mortgage backed securities that’s driving the price down, right so that’s part of the reason why we saw rates you know, 30 year traditional conventional loan rates were in the upper upper twos low threes, you’ve got good credit and you know, now they’re they’ve more than doubled.

Announcer 1:00

J Darrin Gross 1:19

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’s interview is sponsored by building insurance and risk. When you invest in real estate, you need to protect yourself and your investment from catastrophic loss. The experts had building insurance and risk provide you with multiple offers and a side by side coverage comparison. To learn more, go to building insurance risk.com.

Today, my guest is Brad Hansen. Brad has been in the mortgage business for 18 years helping clients meet with home financing goals. He also is a real estate investor and loves to educate others on how to build wealth through real estate. And in just a minute, we’re going to speak with Brad about great products and strategies for becoming a real estate investor.

But first couple reminders. If you’d like her if you if you can, we’d love to have you. Let me say this again, if you like our show, like I’m nervous. 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 lawyer there. Please subscribe without a warm welcome my guest, Brad Hansen, welcome to CRE PN Radio.

Brad Hansen 3:11

Thanks. Great to be here with you, Darren.

J Darrin Gross 3:13

Well, I’m 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.

Brad Hansen 3:22

Yeah, you bet. Like you said earlier, I’ve been in the mortgage business for about 18 years. I’m a branch manager. And so I’m also an originator. So I have worked with clients 1000s of clients over the last 18 years and like you said, I really love helping people achieve their goals. And we do everything from really primary residents, second homes, investment properties, construction. But it’s all very residential focused, right? So rigid residential investment, typically includes one to four units, although we have some options to go pay units. So yeah, I really love what I do. I think it’s homeownership, I believe really strongly in homeownership and investment as you know, investment properties as a way of investing as well.

J Darrin Gross 4:13

Now, I love it. So if you could, Brad, what’s the difference between an investor versus a an owner occupied as far as lending requirements or it gets kind of you could differentiate between the two?

Brad Hansen 4:31

Sure. Yeah, I mean, it’s a good question. I mean, really, when it comes down to it the the lender, and we use a number of different lenders that help provide the funds right. So we’re the originator, little bit about Academy mortgage, we originate the loan which basically means take the application, we work with the client directly. We will we will underwrite the loan will fund the loan, but then the loan will sometimes go to different investors. So it might be Fannie Mae, Freddie Mac, FHA, VA, USDA, but then we also have private investors, right, they portfolio these loans, we see that a lot with Jumbo. And all of these investors, they will categorize their loan risk based on is it a primary residence, are they going to live in that home for 12 months, up to 12 months, because normally when you when you get a loan, you say, this is going to be my primary residence, you’ll say, Hey, I’m gonna live in this for the next 12 months. Now, things can change. And sometimes there are exceptions to that. And then, of course, a second home is a home that you don’t live in primarily. But it typically will be in a place where people vacation, you know, here in Oregon, it’s at the coast, it’s in the mountains, it’s out in Bend Sun river, you can’t have a second home, that’s next door to you, right, that doesn’t qualify. And then of course, an investment property is one that you’re not going to be living in. And those can be really anywhere. It could be the house next door to you if you want. The other thing that’s really interesting about the last few years is we’re beginning to see what I’ll call you know, I think the term house hacking is kind of the term for this, but people will see their primary residence and say, Hey, how do I leverage my primary residence to also make money with it? They might use Airbnb move out for the weekend, they might get an adu. So the thing that’s exciting about real estate right now is we have more products and tools and options than ever before, to help people finance. But also there’s more options for investors, right. It’s not just a long, you know, long term rental, you can do short term, you can do all kinds of different things with it. So that’s, I think one of the exciting things about being in real estate, and even if you’re a primary, even if it’s your primary property, it’s still an investment to I mean, you get to live there and enjoy all the benefits. But I’ve personally made more money from the homes iPhone than I might have from the stock market in terms of return on investment.

J Darrin Gross 7:10

Yeah, now, it’s a good case to make for the positive market with real estate there. So I’m curious. So between the two are the multiple different options, you know, whether it be a primary or a vacation, or a rental? How, how is it that the lenders view if you could kind of is it like, percentage down payment required? Is it the I mean, when it comes to, you know, your ability to qualify for a loan? Yeah. What are some of the factors they look at in those different scenarios?

Brad Hansen 7:45

Yeah, you bet. So, with a primary residence, you have typically much more options when it comes to your downpayment, right? So we have primary residence, if you’re a first time homebuyer, we have zero down loans, multiple different zero down loans, or downpayment assistance programs. Typically for those, you have to be a first time homebuyer. But even with that you we have 3% down, we have 5% down some low down payment programs, right? Those are what available for a primary residence, but you’re gonna live in that home. When it comes to investment properties. The minimum down, we have a loan that you can put as little as 10%, down, but 10 15% down, depending on the the investor that we talked about, those are kind of the options that we have. We have a great portfolio loan that I’ve used myself, that’s a 10% down no mortgage insurance. And it’s a portfolio investor product. So still pretty good. But most of the time when you’re getting into higher units, so 344, plexes, they’re wanting to see 25% down and typically, the larger the downpayment that you have on an investment property, the better your your interest rate, and your fees are on these. So any again, well, I’m not necessarily going to quote interest rates, because everyone’s situation is different. We’re seeing right now, interest rates are a lot higher than they have been in the last couple of years we’ve been, you know, in these COVID lows we had the Fed and their actions created, the lowest rates we’ve seen in history, I think, during 2020 and 2021. And as we came into 2022, really, toward the beginning, we started to see rates climb, because of inflation. And again, that has caused a lot of people to slow down, take a pause. But anytime the crowd is going one direction, there’s going to be opportunity for others, right so I’ve talked to a lot of investors and they they feel like now’s a great time to buy because number one they’re not competing with 456 other people, right? So they can go in, they can typically get concessions from, from a seller to help cover some of their costs. And they feel like even though rates are higher, maybe their cash flow is not going to be quite as good during this time, they can actually take advantage of get get some more more opportunities to buy properties during this time.

J Darrin Gross 10:21

Yeah, I was gonna ask you just about the kind of the current situation. Like you mentioned, fed rates are increasing and kind of the mortgage rates, I think everybody assumes that they’re always coupled to the rate. But are you seeing that? Is that the case today? Or is there is or where we’re in relation just to the spread, I guess, or is? Right.

Brad Hansen 10:47

Right. Good question. So there’s a lot of confusion, people sometimes think when the Fed takes their Fed rate up, right, that’s the money that banks lend to one another, it’s kind of the overnight rate, they, they think that is how mortgage rates are determined. And actually, it’s sometimes what we’ll do is we’ll see the Fed take the rate up, and interest rates will actually drop. And the reason is, because the Fed is taking their rate up to fight inflation, right? Inflation is the enemy really, of bonds. And mortgages are bonds. So you hear about mortgage backed securities, those are bonds, those are sold on the market, they’re the you know, the when we, when we do a loan, the typically unless it’s a portfolio loan in the bank, or investors keeping it, but your typical Fannie Freddie, Ginnie Mae loans, these are packaged and sold as mortgage backed securities on the secondary market. And then that’s what determines the rate. So those rates will go up or down based on inflation, based on demand. And so, you know, during the 2120 2021 time, what the Fed was doing, not only did they take their Fed rate down to basically zero, but they also were buying mortgage backed securities. And just like anything else, it’s kind of a supply and demand, right? So they’re buying up all these mortgage backed securities that’s driving the price down. Right. So that’s part of the reason why we saw rates, you know, 30 year, traditional conventional loan rates were in the upper upper twos, low threes, you’ve got good credit. And you know, now they’re, they’ve more than doubled, right? And then typically, an investor rate is about anywhere from a half to a point higher than a regular conventional loan. But it’s interesting, because right now, we’re actually seeing the conventional rates, the Fannie, Freddie, you know, driven rates are actually higher than jumbo right? So we’re seeing some jumbo rates that are lower. And it’s really a little bit interesting right now, because you’re not a lot of the rates are not following their traditional rules. Typically, a jumbo rate is slightly higher than conventional rate. Right now, they’re lower, right? We’re seeing them anywhere from a half to point lower, because a lot of those are driven by the banks, right, some of these big banks, they’re, they they’re in maybe the sixes, and if the conventional rates and the sevens there, they’re thinking, hey, I’m make we’re making enough money on this, we don’t want when rates start to drop, we don’t want those rates to run off, right. We don’t want them to be refinanced right away, because the banks or the servicers, they make their money and investor, they make their money on holding those loans in those notes for a while. And they’re making the interest on him. Right. So it’s really changed the dynamic. We have the we have, I think, the highest rates in 21 years I just read recently. And that scares a lot of people. But again, anytime you have a lot of people that get scared to say, hey, I don’t want to, I’m going to wait on the sidelines to buy that home. What that means is it means opportunity that’s out there in some markets are worse than others. Right? I’ve heard Arizona right now that home prices have dropped significantly, inventory is gone, you know, triple double or quadruple what it’s been since the beginning of the year, here in Oregon. While we’ve seen inventory go up. We haven’t seen it go up significantly. I think the last number I saw it went from 1.8 months, up to like 2.2 months. So again, supply and demand has a lot to do back in the Great Recession. You know back in, oh 809 We saw inventory up to 1112 months, right there was too much supply. And now we don’t have that problem. And it’s really different a different time than we were back in Oh 809 When we had the those market that market volatility right now. Back then, I had my my loan options went from you know, 15 pages of Luna options to one, right I had a, I had a 30 year and a 20 year loan, and nobody wanted to do the risk was way low. Now, we still have a ton of opportunities and products for homebuyers, whether it’s for primary and investment property, things like that, we’re starting to see, you know, more credit. And part of that, the thing that has helped, is they’ve tightened up a lot of the guidelines, right. So they’re not giving the old no income, no asset loans or stated loans. They’re really solid loans. It does help that that, you know, unemployment slow that jobs are strong things like that. So, you know, the economy does impact our you know, what we have what we can offer as well.

J Darrin Gross 15:48

And it it is kind of a, you know, weird how, you know, when we go through these cycles, especially like the oh eight cycle where everybody, I mean, just the lending environment was basically anybody could get a loan and, and multiple, multiple properties. And, you know, probably I don’t know what the percentages were, but enough people had them that it created this, this false market that basically couldn’t support itself. And so then, and I forget what were the measures they put in place there? Because it was like, weren’t me I know, they tighten up the the inspection with the appraisals and, and some of the the loan requirements and that but I mean, basically some of the the they narrowed the opportunity for this problem to reoccur. And now we have I mean, the last couple years, like we’re talking about how rates have been so low? Is there any kind of number industry wide or like a percentage of people that actually refinance to a lower rate, as opposed to still have a writer?

Brad Hansen 16:58

Right? Yeah, that’s a good question. I’ll answer your first question first. So you asked about what were some of the main things that changed. On the appraisal side, they instituted a home value code of conduct, which was really good. And what that did is that created a separate function. So you couldn’t just have your own appraisers go out and give you values. And you know, I think, you know, that was really good, I think having some accountability with appraisals and banks and lenders, so you weren’t just getting false values, right? So bringing more guidelines into that and more rules, I think was really good. Now, maybe they’ve gone a little too far. And we’ve actually had appraiser shortages, but then they’ve instituted things in recently, like appraisal waivers. So if they’re doing a lot more electronic appraisals, that’s your primary residence. And so that’s that actually has helped. Then the other thing they did is they’ve instituted and I won’t go into all the details, but basically they instituted an ability to repay rule, right. So we’ve as a lender, we have got to make sure when we underwrite that loan, we can show that this borrower has the ability to repay, right, are we verifying their income or re verifying their assets, their credit, their debts, all those things, and then we have very specific guidelines. Typically 50% debt to income ratio, when you look at their your housing costs, as well as your all of your other debt is pretty much the maximum there are some exceptions with FHA and VA. But that’s kind of about the max when it comes to an investor loan. Typically 45% debt to income ratio is about the max. And when it comes to a jumbo loan, most of those loans have been limited to 43%. Now, again, we have other loan programs, the old subprime is gone, but there’s a new category they call non qualified mortgages. And non qualified mortgages are an opportunity to for self employed borrowers to use bank statements or assets for income, they’re still have, they still have this ability to repay rule as part of it, but they’re just using they’re using bank statements or maybe it’s a 1099 employee or some things like that they don’t fit into the box, we’ve got options for some of the people and then typically those rates will reflect the risks that are associated with that type of product. So I really feel like there’s been a lot of really good things that have happened over the last you know, what is that now 14 years or so? Since that happened you know, just the basic rules and and they brought some more sanity to the I started in oh four. And I still remember when I came in and someone was telling me about the no income, no asset, no employment loan night and, and the rate wasn’t even that much different. I was a little bit surprised by that and really didn’t do most of those kinds of things. A lot of those people that focused on subprime, many of those people got out of the business or switched out of subprime. And the, you know, obviously, you don’t need to go into the disaster that happened in Oh, 809. But took a while to get through that.

J Darrin Gross 20:22

But I think, you know, kind of where I was going with this is that, you know, the fundamentals in the market in a weight are entirely different than the fundamentals right now. Absolutely. I think that there’s a sense that history is gonna repeat itself. Now, we’re gonna have this big wash of closures, and and there’s going to be all the supply on the on the market. In fact, there’s, I mean, what I read and see is that there’s a housing shortage. It’s right, but most markets, there’s still demand. I think the challenge we have in any, any market or any situation where there’s change, it’s there’s, there’s a sense, or there’s a time for people to kind of read get their, you know, get their footing to understand what is the market, as opposed to feel like, you know, it’s too risky, or it’s not what it was, or it’s not what I think it’s going to be Yeah. And so I don’t know if if you have any kind of thoughts on that, or if there’s any kind of, you know, what you’re seeing Yeah, I’m guessing the activity level has changed for you in the last couple of months.

Brad Hansen 21:25

Absolutely. You asked a question about, you know, how many people refinanced right? What percentage, and I don’t know that I’ve seen a percentage, but it was a lot. I mean, it was it was, if I remember correctly, the the number of mortgages that were done, was last year in 2021, was like 4 trillion or something like that. I mean, it was a giant number. And this year, I think it’s expected to be closer to like 1.5 trillion or something. And again, my numbers are probably off. But the the percentages are similar in the sense that, I know it’s funny, because every once awhile, I’ll talk to a client whom that didn’t refinance. And I’m actually really surprised that they didn’t refinance during that time, but you don’t know what they were going through. Right. So there, they might have been unemployed during the time or they might have had a foreclosure or bankruptcy or other things that happened, that are going on. And the one thing that we’re seeing this year is we’re still seeing people that want to upsize or downsize. There’s a big demand from millennials, that, you know, they were competing with 456 10 other people last year, and they couldn’t get into it, now’s the time for them. And like I said, even as an investor, now’s the time that you don’t have to necessarily overpay for a home. Right, you might actually get it for less than asking, get some concessions. And I know we’ll talk about some products here. But we do have a we have a lot more. That’s the other big difference, like I was was saying, I went down from the 15 page rate sheet down to one page. And now I’m with the change that we’ve had with rates going up, I still have even more loan options than ever before.

J Darrin Gross 23:09

Well, let’s talk about some of the products. Yeah, that you have.

Brad Hansen 23:12

Yeah, you bet. So, as I mentioned, you got your kind of traditional agency loans and you’ve got portfolio and private so I’ll just kind of walk through a few different ones. But I’m gonna start with actually one that I think is kind of one of my favorites. It’s a new one. Fannie Mae just came out with a new, they call the Fannie Mae adu product loan. So I could, if I have a home, I could actually, you know, get a line of credit, build an adu on my property. And then this loan allows you to basically pay that off and consolidate the loan. Or you can even purchase a home that has an adu and you can use the rental income from that adu from the auxilary dwelling unit to to qualify, and, you know, that’s something let’s say you have a someone who’s buying a home, and they’re buying a duplex, right. So you could buy a duplex live in one side and rent out the other side. And we can actually use the rental income from the other unit to help you qualify for a home. So what’s really interesting is, a lot of times it’s easier to qualify when you’re buying an investment property or some sort of property that will whether it’s a Plex something that’s got an adu. You know what let’s say I own a home and I want to buy an investment property, I can actually get a rent schedule from the appraiser and I can use those rents to help me qualify. If I’m buying an investment if I’m buying a vacation property, I can’t use the rental income from it. So it’s a little hard to qualify but investment properties you can use those now not not all banks allow that I know. You know for us with the way we do business, Fannie Mae does So a lot of our investors do. Typically when you’re buying a jumbo, which in our market, jumbo is any loan amount that’s above $647,200. And most investors want to see, or I’m sorry, jumbo loans, they want to see that you’ve got a history of investing. So you know, one of the things I always talk to people about is walk before you run when it comes to investing, right? years ago, back in Oh, eight, I had heard about people who were buying 4567 properties at a time, right? Well, they fell hard, right, because they didn’t just buy one, they just bought multiple, because they could buy him on 100% loans. And other things are at each one is if you remember the old 8020. And he they had those even for investors. So especially if you’re a new a new investor, I would say, you know, definitely take it slow, do one at a time, or do one of these house hacks that we’re talking about where you buy a duplex, live in one side rent out the other. We’ve seen a lot of people to where they’ll buy their home. And then a year later, they’ll turn that into a rental. And then they’ll buy another home, right. So we’ve seen people build a rental portfolio by by buying them living in them, maybe fixing them up, turning it into a rental and then go in and buying another new investment or another new primary. The when you’re like I said, when you’re buying a home, you’re basically saying if it’s your primary, I’m going to be living in this for the next 12 months. So you don’t have to keep that home as a primary residence for you know, the rest of the time you own the home, it’s just for one year that you’re committed to. So we’ll see people they do it that way, do it slowly, maybe every couple of years, they’re buying a new primary, converting their old one into an investment property from there. So that’s, that’s one of my new, it’s pretty new, it’s a new favorite that you can actually use the adu because most of the time when you’re buying a primary, you can’t use room rents or border income, or things like that. So you’ve got your traditional Fannie Freddie loans. And for most of those, your minimum downpayment is 15%, down for kind of your traditional conventional Fannie Freddie loans. You can and then if you go to a

J Darrin Gross 27:25

brand new site 15% Is that is that for investors,

Brad Hansen 27:29

single family, single family investor, so let’s say I was buying a, an investment property, single family home, I need to bring at least 15% down that’s for like Fannie Mae, Freddie Mac. Now, like I mentioned, I do have a investor portfolio program that you can go 10% Down rates a little bit higher than the Fannie Freddie one right now. But it doesn’t have mortgage insurance. And anytime you’re not putting 20% down, you’re gonna have mortgage insurance that you need to bring in. So with the Fannie Freddie loan, you would have mortgage insurance, if you’re not putting at least 20% down. Now, if you go to a Plex to let’s say, it’s a two plaque duplex two or three Plex and you’re going to live, you’re going to live in one of them, then that will that will help as well, right, because you can buy it as a primary residence, we can, we can use that and that one. Typically, I think that’s 15% down on that one. You also have for people who are more low to moderate income, you can only be 80% of the area median income, we’ve got home ready and home possible, which are both that’s a Fannie and Freddie loans that they require the income limits, they have home education requirements, and with those, you can get into like a Plex for 15% down, or, again, four to three to four unit would require 25% down, right, so

J Darrin Gross 29:13

80% That’s the maximum amount of income that they can have.

Brad Hansen 29:17

80% Yeah, it’s 80% of the area median income, right. So those are for people that have lower now. Honestly, those are really challenging, right, because it’s gotten so expensive, it is difficult, but you know, on some of those, you can you can count the rental income on some of those as well. But, you know, it just gets a little bit more complicated when you do those things. I mean, for for most people, when they’re buying an investment property, they’re not normally living in those. But there are options to live in. You know, maybe buy two Plex or you know, a three Plex, four Plex and you live in one of them rent out the other So you can count that FHA is another one, you can go three and a half percent down as long as you’re going to live in the home, because FHA is only for primary residence, but you can buy a Plex, with those. The one thing you have to be careful with FHA loans, though is if it’s a three or four unit complex, then you have it has to, it has something called a self sufficiency test, which means it has to be able to qualify, just with the rents that are there. So that again, can be a little bit difficult with the price of flexes these days, a lot of investors love, you know, plexes, because you have multiple borrower or multiple renters in the in the homes. So yeah, we’ve got your traditional Fannie, Freddie, you’ve got FHA, we’ve got the investor product. And then we also are seeing more recently, in the last few years, jumbo loans are starting to come in, and with the jumbo loans, typically 20%, down for a single unit, and then 25 to 30%, for a four, three to two to three, sorry, two to four unit property. Those jumbo loans, the what some of the ones we have, they can go up to one point 1,250,000. So you got some bigger loan amounts, but you’ve got a lot more requirements on those, you’ve got the debt to income ratios, 30 43% or lower, you gotta have typically reserves anywhere from six to 24 months, just a lot harder when you’re going into those, those type of products. But we even have products that and as I mentioned that non QM, there are investor properties or investment products with the non QM, which means we can use bank statement loans, we can use asset. And then we even have something called the DSCR, which is the debt service coverage ratio. So it’s, you’ve got to have the debt to income ratio on that. One is I think it’s 20%, you gotta have at least 20% down, but it’s got the rental income on that property has to be able to support the payment, right. And then they have an option for short term rental as well, people are starting to recognize that folks will will have some properties that will be used for Airbnb, VRBO, those kinds of things. And typically, if you’re going to use short term rental for income, they want a much higher downpayment. Typically, that’s like a 35% down. So the thing that’s nice about the different options we have is everybody’s situation is a little different. Some people are self employed, and some people are using income from rental properties. And we can really customize there. You know, we’ve got a lot of different product options, depending on the different borrowers situations. But again, my I always come back down walk before you run, right, don’t try to overdo it when you’re getting into being an investor.

J Darrin Gross 33:13

And Brad, what about a, buying a property that needs some work? So you can get it for just for round numbers to say it. You can buy it for 100. You’ve got 30 down, but it needs it needs 30 or 40. Right? Is there any product that you have that will help provide funds for the renovations or repairs that are in need? Yeah.

Brad Hansen 33:39

Yeah, actually, that’s just property. Yeah, for an investment. So we just did this actually, for one of our borrowers. It was a property at the coast. And 100,000 is probably not a realistic number.

J Darrin Gross 33:49

I’m just saying for easy numbers. Yeah, I’ll give you this this exact

Brad Hansen 33:53

example. So the property was not financial. It had just a number of things wrong with it that didn’t make it financeable in a traditional sense, the borrower had 20%, down, they bought it for 300,000. And they were they ended up putting in about $75,000 in improvements in the home ultimately appraised for 450,000. In that situation, we actually used a private money lender, sometimes people call them hard money lenders, right? So the borrower was able to get the funds within within a week, they were able to, you know, get the hard money loan, they closed on the purchase. They brought their downpayment, and then we did the we did the refinance once the home was done. We did the appraisal, and we basically were able to pay off that hard money loan and to get hard money loans are meant to be short term, right. They’re meant to be able to help you get into something that maybe isn’t fun. financeable and you don’t have 100% Cash, right? In this case, in this particular case, you know, it was like three points, two for the fees and 12% for the interest. But it’s short term, you’re only they only needed it for a couple months, and then we were able to refinance them out of that into a permanent loan. And like I said that because it was not financial, they will to get a really good deal at it, you know, for 300,000 on this home. And when we appraised it, it was priced at 404 150,000. So they made money, they had a property that they’re now going to be using for probably short term rentals and then enjoying it themselves at the coast as well. And that same concept can be used in other situations where you have, you will need to close quickly, you need to be able to not have them worry about if it’s you know, got all the plumbing or it’s missing siding or whatever, right, there might be issues. We do have. So Fannie Mae actually does have a product called home ready. And that’s for something that let’s say it needs a new roof, or you want to put new appliances. So that actually is another property product that we have. It’s a traditional loan, it’s basically the rehab, Fannie Mae’s rehab loan. And we can do the same thing. That one is a little bit more complicated, takes a lot more time, because you’ve got to get bids. And this is a lot longer. So the other one went really fast. And it was more appealing to the seller, because they didn’t have this big, you know, 60 day 75 day process waiting for contractors and everybody else to come in. It’s a much tighter process, but it’s a good, that’s a good product as well. And then sort of one all in one loan. Right. So it’s the purchase when you buy when you buy it. And you could do it as a reef rehab refinance as well. Basically, you’re getting that money set aside. And as the work is completed, that money is drawn and pay you pay off the construction or the rehab part of it to the contractor. So

J Darrin Gross 37:12

yeah, I was gonna say the the speed at which you can get your funds, I think that’s probably pointing worth reiterating. Because yeah, it’s one thing that they have an advertised rate of, you know, below or super low or whatever. But you know, how much ground glass you have to crawl over to get to it kind of thing, as opposed to something you can get it, like I said, relatively easily and actually close on the deal. And, you know, have an advantage with the seller, as opposed to I think I’ve heard about this done before. And I know it’s available in my my broker says I can, yeah, and, you know, be more of an you have to

Brad Hansen 37:48

be careful, you got to have the right people. I mean, we have, we have, you know, a few different relationships. But you know, the people that we’ve seen have high integrity there, they finance these things, they set the money aside, I mean, you have to be careful with that, right. And having a history of know who can help you in the right situations, is really important. The other thing that I think is really important as people get into investments is number one, they want to make sure that they’re not looking at this as a short term, quick fix, right? I mean, we’re not talking about fix and flip kind of thing, right? We’re gonna buy it, fix it, sell it up, we don’t we don’t do that kind of thing. The hard money people do. That’s not something we do. You know, but you know, typically, when you’re looking at buying an investment property, the idea is you want to hold that for seven to 10 years, right? And over that seven to 10 years. Number one, you’re gonna have the your renter, paying the principal down for you, right, not only are they paying the interest on the loan, but they’re also paying principal. So you’ve got to, you’ve got all of this principle, buy now that you’re gaining, gaining that someone else is buying this for it, and then you have your appreciation on the home, right. So what I’ll do for investors, we have a investor analysis that we do for borrowers and we look at it over 10 710 years, we look at what are some appreciation expectations, we look at not just what’s your principal, interest, taxes, insurance, HOA fees, we also look at what’s your expected maintenance fees, right? And you want to build all that in and then you can look and see, hey, is this is this right? For me? Is this an investment and typically in the first couple of years, when you’re putting money into the home, whether it’s the cost for the closing costs, and the taxes, insurance and everything, typically, the first couple of years, you’re really not making money on those. In some cases, you can if it’s a long term investment, but most of the time, it’s more really over time, right? Because your payment stays the same over time, you can start raising your rates or your rents and soon you know you’re making more money on this through. You know, like I said appreciate One principal reduction, and then of course, cash flow over time as well. So we will do a full cash flow and investment analysis for the clients as they’re looking at those. So make sure you know, whatever they’re doing, make sure they’re partnering with people that can add value, you know, use a accountant or CPA or, you know, financial planners can help you with this kind of thing too. So that it’s important to have the right team, you know, someone like yourself, who provides insurance making sure that that the home is properly insured. And that the renters have insurance as well. Things like that are really important when you’re doing this.

J Darrin Gross 40:42

I appreciate you reiterating that I think it’s in real estate is always in vogue, when rates are low, and, you know, people have bought for low and they, they’re flipping in and out of it. And it’s almost seemed like as a stock, you know, because people are able to get in, make a big, big money or, or you hear about the big cash flow deals or whatever. But truly, it’s an over time kind of thing. And the real test of it is that it’s not easy to sell a property, you know, when you get in, you better have a plan to stay in for a while, because, you know, you know, just the transaction costs, you know, you’ve got commissions and, and all that stuff. So I think that for myself, it’s, it’s been kind of a, you know, it’s been rewarding, in that I haven’t really, I mean, I do have kind of like my little sheet that I kind of like look at occasionally just to see how things are based on whatever the, the values are, you know, presumed to be, as opposed to how much is owed and, and kind of that just as kind of a reference point, but it’s not, it’s not like money I can go spend the whole day for for an investor is to create a nest egg that is large enough that then it it’s you know, purposes that it throws off capital, as opposed to something you’re working down to zero kind of thing, which is the went to the stock market model really is is is, you know, good enough to where they can get you to the end. And, you know, get a, you know, settled up there, but definitely a different mindset. One of the questions that you have touched on a little bit about the products you have in the Ingo is pretty much one to four doors is kind of the the real sweet spot for the

Brad Hansen 42:33

Yeah, Bester. It really is for what we do, we do have a we have one product that can go five to eight units. But again, it’s a larger downpayment. Once you get over four units you into that five plus units, it is a pure commercial. And it pretty much is always based on the property’s ability to service the debt. Right. So I mentioned that we have this debt service coverage ratio product, they call it DSCR. That’s kind of how and again, I’m not an expert on the commercial side. But but really, once you get over five units and higher, that’s when they’re really commercial and hey, does this thing pay for itself? Right? They’re not. They’re not looking at the borrower’s qualifications. Whereas when we do a loan, we’re looking at it in relation to not only the property, but also all the other debts, right? Do they qualify with everything else they have? And so we’re they’re personally liable for those. And again, I think they’re on commercial too. But it’s a little different how they look at those.

J Darrin Gross 43:46

Right. And so what I wanted to ask beyond that is what are the number of loans an individual can have? I mean, at one point, there was a, there was a limit, I think it was four. And I don’t know what the what’s the current market or? Yeah, there’s a number right now that you’re limited, right?

Brad Hansen 44:08

So your traditional agency loans, so Fannie Mae, Freddie Mac, they have a limit of 10 financed properties, right? So you could have up to 10. So if I’m doing a financing for someone, and this is their 10th, finance property, and you’re gonna count your primary and every other home, that’s finance, that’s the last one I can do with Fannie Mae or Freddie Mac right. Now, there are other investors who don’t have limits. So I did, I had a customer that I helped a couple years ago, and this particular investor had over 100 properties. And, you know, 50 of them were in their own name. 50 of them were in an LLC were in a kind of an LLC and the LLC hold held them, but they had too many from vehicle to do Do that. And we were able to refinance them with one of my portfolio lenders, where they didn’t have a limit on that, save them a lot, you know, got the rates down, even consolidated some of some of the debts, once you start getting into over 10. Really, there’s, there’s other ways to look at that, too. Sometimes banks will package five, or six properties in one, if you have that in a LLC, for example, and give you one loan. And so it can really vary. We even have, you know, again, we have a jumbo option, for those who have more than 10. Finance probably doesn’t mean how many properties you have, but it’s how many you have financed, right, so you might have 20 properties. But this is only if this is going to be your 10th Finance one, then that’s the maximum we can do with Fannie Freddie loans. Now, if you’re doing that’s for purchase, if you’re doing a lower rate term refinance, if you’re doing cash out, there are some other limitations when it comes to cash out refinances. The debt to income ratios come a lot coming in a lot lower too, when you have more than four. So important to be talking to, to a professional.

J Darrin Gross 46:09

Yeah, and I just I remember, you know, just kind of the nuance of it. And at the time, I don’t remember how many I had, but I know that if he put my loan in a different category, right. And I think when the only thing blew up, and there was all these lower refinancing options available for whatever reason, I had one that it wasn’t it didn’t qualify as like a, I think it was a Freddie Mac as opposed to a Fannie Mae, there was like a differentiation between the Yeah, an agency made it available. The others didn’t. Yeah, I

Brad Hansen 46:46

think they did for a while have and I’m not remembering off the top of my head. But I think for a while one of them had a limit of six and the other had a limit of 10. And they will have different requirements, which I think is great. Honestly, it’s nice having a couple of different agencies that you know, give us different ways to help help our clients. Yeah.

J Darrin Gross 47:06

I just said, I remember thinking like, Why didn’t decide which one? You know, how did I How did I end up hearing? I think

Brad Hansen 47:13

that’s a good point. I mean, I think when you are doing, you’re looking at this, it’s important to do some planning, right? It’s, you know, not only do do the investment analysis, but you’ll also look at like, how long do I want to hold it? How many do I want to have, and just work with someone that can help you do some, you know, we call it mortgage planning, right? Do a little bit of planning around that mortgage, and maybe even I’ve had situations where I’ve been with the client, and we’ve had their CPA with us, we’ve had their financial planner with us, and we’re all there in the same room, talking about how real estate fits into their overall investment plan. Right? Those are, those are great, because I don’t have, you know, the expertise as a CPA or as an investment advisor, I’ve got the mortgage expertise, and they don’t necessarily know all the rules around. So bringing your your your team together, right, having a team that might maybe even in an insurance person. Because there’s different requirements around all those things, you want to definitely make sure that you’re protecting yourself when it comes to you know, all the all your different needs and different you look at it in light of your whole whole package really, and not just in isolation, I think is really important.

J Darrin Gross 48:31

No, well, well said and indefinitely having some some sort of a plan, and then the strategy that you can act on it, it definitely will make it a smoother go forward, as opposed to a new plan. And, and, you know, no ability to execute kind of things.

Brad Hansen 48:47

Yeah. Yeah, I mean, one other thing I will throw out there, that’s kind of interesting. We used to see this a whole lot more, but it’s seller financed. You know, in sometimes, especially in a market where things aren’t selling as quickly, you might even have sellers who are willing to provide the seller carry financing. Like I said, we used to see that a lot more and they would even do second liens or other things. But you know, something to think about when you’re in this market. There’s a there’s still different ways to do that doesn’t have to be a traditional mortgage, like we’re talking about or you know, you know, don’t trust deed, it could be a seller that carries the note for you. Maybe they don’t want they want to sell but they don’t want to take all of that money right now. They’d rather have that money working for him and maybe an investor can get even better rate working directly with the seller. But again, it’s important to have maybe an attorney real estate attorney help draft agreements and the notes and trust deeds and those kinds of things too. So like I said, Be Be sure to work with professionals because As you want to make sure that you have somebody looking out for you, and it’s not just the seller who’s writing it up, or you’re getting it off onto getting it online and writing it up yourself something like that. So

J Darrin Gross 50:12

I love I love you, the fact he brought that up, because one of the things, I think that, you know, investors that are just getting started if they’ve bought a primary home, and they went through a realtor and ended up with a mortgage broker, and you know, there’s a, there’s a marketplace, and that’s fairly routine, I mean, there’s the MLS, where you can find the homes, you know, a three bed, two bath, you know, that fits your budget and the neighborhood, the school district, whatever it is you’re looking for. And when you go into the investor world, it really is kind of like the wild west from a standpoint of flexibility. If your imagination allows you to think outside the box, and you’ve got a seller, that’s, you know, agreeable, you know, whatever you you agree to, is, is available to you. It’s not like, it is like with a primary home. And and and so I mean, the fact that you brought that up, I really appreciate that, because that’s, that’s, that’s really where the the, you know, kind of the, the, the Genesis or the ability to really become an investor might might be for somebody listening right now. So I appreciate that. Yeah, you bet. So, Hey, Brad, 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. When that’s not an option, then we look to see if there’s a way we can minimize the risk. And when cannot avoid or minimize the risk, we look to transfer the risk. And that’s what an insurance policy is. And as such, I like to ask my guests, if they can look at their own situation, could be clients, investors, tenants, the market interest rates, politics, however you choose to have to identify what you consider to be the biggest risk. And for clarification, again, while I’m an insurance broker, I’m not necessarily looking for an insurance related answer. Yeah. So I’d like to ask you, Brad Hansen, what is the biggest risk?

Brad Hansen 52:27

Yeah, that’s a good question. You know, I think, you know, there’s a couple of them. Number one, I mentioned a few of these number one, I think you have to be really careful. Trying to do too much too quickly, right? It’s like anything, the more experience you get, the better you’ll be at IT knowledge. So I always say, they walk before you run, right? And make sure that you’re not, you know, if you’re gonna buy an investment property, do it in an area that you know, do it, do it in such a way that you’re going to minimize the risks, right? You know, that you have professionals help you, right? You know, the value of the home, you’re not overpaying. It’s going to cash flow, those kinds of things. So, you know, one of the risks is that you have a home that has a negative cash flow, right, let’s say you overpay and rates are high right now, right? So your rates, your payments going to be relatively high, but let’s say you have a payment, that’s 3500. But you can only rent it for 3000. Well, now all sudden, you’ve got a $500 a month negative cash flow. So, you know, again, knowing what you’re getting into and not just, you know, it can be as you said, it could be a little bit kind of glamorized a little bit, right. That’s a lot of hard work. You know, are you going to are going to hire a property management company? Are you going to manage yourself? Are you going to hire a handyman to help take care of repairs, you know, those kinds of things? Because stuff goes out, right? Are you going to set aside money for maintenance? So there’s a lot that goes into it, I would say, you know, that’s a risk. But it can be mitigated by educating yourself, surrounding yourself with with professional so walk before you run is another one. The other risk potentially is home values might go down. Right. Now, while we don’t necessarily think the environment similar to what happened in oh eight, where we saw 25 to 30% declines, because of the oversupply and the the lot of other things that were happening with the home financing wasn’t great. We don’t think that’s the same environment we have, if you overpay, you could see values go down, but that I think that can be mitigated to a degree by what we talked about earlier. If you’re going to buy it, don’t expect it. It’s going to give you the return on investment that you want to just the first year or two might take multiple years for that. So like anything, it is a risk. It’s money that can be lost. But I think I mean, I honestly think the big Guess risk is that negative cash flow, maybe buying a property again, I always recommend that you get a really thorough inspection, you found a property that had that you didn’t do an inspection. And you ended up having to put a new roof in or you had other issues, right. So like you, you know, again, I’m not insurance you there are things that insurance can protect you from, but insurance can’t necessarily protect you from buying a home that is in disrepair and needs a lot of work. Right. So those are probably the biggest risks that I see. And there’s ways to mitigate those and be prepared for them. But yeah, those are those are probably two of the biggest ones I’ve seen.

J Darrin Gross 55:45

Now well well put there definitely insurance company doesn’t want to rehab your home therefore i That’s no good way to get yourself canceled, but it’s like you Hey, Brad, where can listeners go? If they’d like to learn more connect with you?

Brad Hansen 56:00

Yeah, number one, they can go to my website. Again, I’m with Academy mortgage and they can go to my Portland mortgage.com. If you go to my Portland mortgage.com You’ll see my website, all my contact information is on there. I’m also at Brad.Hansen@Academymortgage.com Is my email. People can reach out to me my phone number is 503-544-8504 I love helping people. You know, really just, you know, with my experience, love helping be an advisor for people to help them with that mortgage plan, helping bring other people together to help them be successful in real estate.

J Darrin Gross 56:43

Awesome, Brad, I can’t say thanks enough for taking the time to talk. Yeah, thank you. I’ve enjoyed it and learned a lot. And I look forward to doing it again soon.

Brad Hansen 56:54

Yeah, thanks. Thanks so much. Always fun talking about what we love. All right. All

J Darrin Gross 56:59

right. All right. Take care. 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 57:20

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Wall Street vs Real Estate with Craig Berger – CRE PN #382

Craig Berger 0:00

Since 90% of hedge fund managers do not outperform the s&p 500 on a net of fee basis, it probably just makes sense to own s&p 500 index fund and other other index funds for your equity exposure unless you’re really good at picking hedge fund and investment managers that outperform. So, stocks I don’t view as being particularly controllable, you’re just sort of riding the market. And that’s fine. On the real estate side, I think it’s totally different real estate sponsors have the ability to make their money going in buying value. A lot of the process of owning a multifamily apartment investment is controllable expenses are more or less known. You know, debt is forecast suitable within a range there’s really only a few things we don’t know as multifamily operators and that’s, you know, sort of what is top line growth really look like and what sort of multiple can we achieve on the property when we sell it? What kind of cap rate or selling price can we achieve down the road?

Announcer 1:19

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 are an investor, broker, lender, property manager, attorney or accountant we are here to learn from the experts.

J Darrin Gross 1:39

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’s sponsor is Building Insurance and Risk when you invest in real estate. Work with the experts at building insurance and risk you will receive multiple coverage offers with a side by side coverage comparison. To learn more go to building insurance risk.com.

Today, my guest is Craig Berger. Craig founded Avid Realty Partners in 2015. After spending more than a decade on Wall Street as a multi award winning equity research analyst. The firm’s portfolio has grown meaningfully in recent years, and includes acquisitions and operations of over 14 150 units in secondary and tertiary markets throughout the United States.

And in just a minute, we’re going to speak with Craig about Wall Street versus 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, Craig Berger. Welcome to CRE PN Radio.

Craig Berger 3:30

Darrin, thanks so much for having me. Really excited to be here.

J Darrin Gross 3:34

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

Craig Berger 3:44

Sure, yeah, I studied I studied accounting in school went into went into corporate finance and Intel Corp out of school did a few years working at Intel Corp, sort of learning how to run a large business learning a lot about semiconductors. I had always been interested in Wall Street. So I went to go work for Citigroup, Smith Barney to go right equity research for their semiconductor analyst. And that sort of launched me on a 12 year career in, in research on Wall Street. That was a good run, but my portion of Wall Street was shrinking. And I really wanted to roll up my sleeves and do something entrepreneurial. And so at the age of 37, I walked away from my desk job and said about to build something meaningful and found my way to multifamily and commercial real estate is a way where I could deliver investor returns and hopefully do good things for our residents and the community at large and be a more active entrepreneur than I was able to be working working for large investment bank brokerage firms. And so that was sort of my my My journey.

J Darrin Gross 5:02

Got it as a research analyst where you, you, I guess I want to things I think, excuse me on on Wall Street I usually think a lot, a lot of excitement, you know, big, big trades and stress and all that kind of thing. As an analyst. Can you describe kind of what what your role is in that or whatever what it was?

Craig Berger 5:26

Sure. So, we, we sell side equity analysts typically cover one sector and have expertise in one sector I covered semiconductors, we formally cover 10 to 20. Companies in that sector rate those stocks a buy, hold or sell, published formal research with earnings estimates that all gets sent to Thomson Reuters and get aggregated among all of the analysts that cover Nvidia, for example, so the street expects 78 cents of earnings this quarter. Well, I was one of the analysts that helped to comprise the street. But essentially, we would perform analysis, make stock picks provide recommendations and advice to our hedge fund and mutual fund clients, as well as to our banks, internal traders, and our clients, our hedge funds and mutual fund clients would typically pay the firm for the research by executing trades. I believe that executing trades for research is no longer allowed. But that’s basically the role back in the 80s and 90s, there was no regulation, fair disclosure, the information flowed more freely between the C level executives of the companies and the research analysts. But now information is supposed to be disseminated all at the same time. The the, the hedge funds can’t pay for research and trades. And so frankly, the role of the research analyst has sort of continued to shrink, there’s always a place for it for deep analysis and expertise. But it’s not as large of a role as I think existed in the 80s. And 90s. I myself was not making trades, there was definitely an opportunity to move over to hedge funds, or mutual fund companies for employment and to work on that side. That’s the buy side, they’re buying the research ideas that the trading execution, the sell side is selling the research ideas and the trading execution. And so that’s sort of the background on sell side versus buy side by side is definitely more of a world of, of actual practice and implementing real trades. And a real real risk management sell side is a little bit more of a world of theory. Hopefully, that background is is helpful.

J Darrin Gross 8:00

I appreciate you sharing that, because like I said, the the analyst. I don’t know of any movies really show that the analysts, you know, hard work kind of reading and talking with, you know, people and trying to come up with a conclusion is usually the buy, buy, sell, sell kind of a reference point when I think of you know, Wall Street or the floor, the trading floor kind of thing. But I’m curious, given that that was your your position. As an analyst, it sounds a lot like an underwriting position. You know, that would be a good fit for real estate when you’re looking at assets, either to buy and or to liquidate. Do you find that that? That training, transferred, the skill set transfer? And did it help you with when you got into real estate?

Craig Berger 8:53

Great question, a lot of the skills do transfer and then I’ve had to build and learn a whole new arsenal of additional skills. But certainly being on the sell side coming coming from that Wall Street world gave me the good fortune of underwriting companies and their financial futures on a very regular basis tracking actual results versus plan or budget or forecast, living and breathing the stock market, the ups and downs sort of riding the economic cycles, which is particularly relevant today. And and where we are, with a don’t fight the Fed and type of type of mentality. We’ve learned, you know, risk management, I got to spend time with C level executives that were doing, they were executing at a very high level or perhaps folks that were executing at a lesser level and so that was a great training ground. Obviously, it is a very theoretical kind of thing. And so when I cut over to Real Estate and really started over started from scratch, you know it It didn’t require learning a whole bunch of operational, entrepreneurial, and sort of in the weeds, skills that are that are particular to real estate. But I brought all those other read, you know, research related skills with me and importantly, developing an institutional mindset as we approach our assets and growing our business.

J Darrin Gross 10:26

I would think that’s, that’s a, again, an interesting transition. And like said, there’s more to learn. But just kind of background, as you mentioned, you know, having had that, that I guess, the publication side as an analyst, where you are publishing your, your expectations, and then I’m assuming you’re in you tell me Does that, does that help you when when attracting capital are presenting the prospectus? Or preparedness prospectus for investors? Or I mean, seems like they’d be somewhat similar in the structure and what you’re trying to convey or just that that speak is that, is there any transfer there?

Craig Berger 11:13

Our investor pitch decks are very thorough, and I think they they look good. I’ve been told that there’s as much good information and our pitch decks as folks have seen, a lot of times I’m putting that information together for myself and my own analytic curiosity. So yeah, I think it helps, right, we also, of course, write quarterly investor updates, that tend to be pretty thorough, other original content at a certain point, and running and founding this business, I can’t write every investor update myself. I can’t write every every bit of sort of engagement content myself anymore. So it does help and also, you know, doesn’t scale perfectly.

J Darrin Gross 12:05

Yeah, I get it. So real estate a, you mentioned, you’re ready to leave Wall Street, what was the attraction to wall to real estate.

Craig Berger 12:19

So my Wall Street career was great. But I really wanted to set out on a path of independence, I wanted to set out on a path of self control, and self determination, where I could take control of my life, my career, my future, and not be dependent on other others and and I wanted to build a business that had the corporate culture that I want. That treats people the way that I think they should be treated. And where we can build meaningful wealth for ourselves, our employee, team members, our partners, and be in a position to do great things for our customers in need, or the community at large. It’s a long journey, it’s not something that happens quickly, there is no such thing as get rich, quick. Real estate is if you work hard, and are smart, you hopefully can get rich slowly. But you know, there’s no shortcut around time persistence, smart decision making, value identification, or really, I set about on this journey, this long, long journey to build something meaningful and have control over my own destiny.

J Darrin Gross 13:44

No, I like it. When you first started it, did you start with the creating the firm, or did you start investing on your own? Or how did that look?

Craig Berger 13:59

Well, I didn’t know what I wanted to be when I grew up. It’s still a period of, of self discovery, and, and I creating an identity. I know a lot more now than I did back in early 2015. So we had to throw spaghetti at the wall, try a bunch of different things and see what worked what didn’t work, what we like what’s good for me what, what I’m good for, with projects and so on. So it’s, it’s been a journey of self discovery and growth and learning. I did buy my first deal in 2015. It was a total of $375,000 of equity for a 95 unit apartment building. You know, in a demographically, ciao challenge to location. You can imagine that we didn’t fully Um, capitalize the project as much as it probably needs 95 units 375,000 of equity. But we we did well and and, you know, we did a value add program at that property we focused on improving safety and security then we started upgrading units and common areas and, and writing the journey. I bought and sold a couple hotel properties one sort of value add exterior corridor property was particularly challenging, but that was a similar value add type of deal are total project on 110 doors you know, I bought one and that leased property. So I’ve I’ve dabbled in various food groups and, and explored and discovered and, you know, really multifamily is our main business, our only business today. But there is this period of self discovery I think, you know, had I gone back and done it differently. Maybe I would have gone to work for an Angelo Gordon or a Blackstone or, you know, a real estate investment firm and learn the business and gotten some credentials. Maybe that would have been easier, maybe that would have been smarter or more risk managed. But that’s not my journey. That’s that’s not what I did. That’s not who I am. And so I’ve sort of done this my way. And, you know, I’m not sure if I have regrets or don’t have regrets, but it is, it just is what it is. This is my path. And I’m not going to pretend to have been on any other journey than what I was actually on.

J Darrin Gross 16:47

No, I’m still curious to learn more about the 95 units for 375,000 in equity, that sounds like a pretty I’m guessing there’s a lot more to that story there.

Craig Berger 17:00

Well, we bought it on an auction site, we got a great basis, we didn’t find any of the any of the capital improvements, we took that all from cash flow, you know, when my property manager by the one that I that I inherited when I bought the deal when when she quit on the first of the month, you know, I flew into town to go be the property manager myself for six weeks, it was my only asset. And failure was not an option. So, you know, I learned a lot about property management and asset management and dealing with with residents dealing with issues that come up and learn sort of empathy for what property managers face on a day in and day out basis. And so now when I now when I go and see my property managers, I have unlimited gratitude and appreciation, love, respect, admiration for all that they bring to the table, you know, sort of a formative experience. And, you know, I’m thankful that I didn’t, didn’t, didn’t avoid.

J Darrin Gross 18:07

Yeah, now it sounds like a rich learning environment there to, you know, jump in feet first like that. And and it sounds like there was some opportunity to improve the property there. So, just out of curiosity, it sounds like it’s a value add opportunity. How long did you keep it before you guys exited that?

Craig Berger 18:33

So we’ve, we’ve about seven years. Okay.

J Darrin Gross 18:40

So just just recently, then you

Craig Berger 18:42

I actually, just to be clear, I still own that asset. One other asset, and they are being marketed right now for sale. And I’m sort of attached emotionally attached to that asset, which is never a good thing. But you know, it’s, it’s my first deal. It sort of holds a special place in my heart. And the staff that have been there with me for seven years are like family and, and, you know, we’ve, we’ve done well, so we refinanced the deal back in 2018. And we sort of had a 3x of our capital on a refi. So we’re sort of already playing with house chips on that asset and, you know, the environments a little more challenging right now to sell any asset. I think it’s a I think it’s a home run basis for the next owner. And we’re sort of working through the details of that and one of our other legacy assets, it’s about a mile away. It’s sort of a two pack 240 units, and I still think a great basis for that for that Tupac got it. And we’ve we’ve owned it for seven years and and I’m considering parting ways.

J Darrin Gross 20:01

Gotcha. Well, that sounds like a, again, a great starting point sounds like it’s done well and and wish well with the your exit on that. If he if he ended up selling it sounds like that’s that’s always a possibility might not. So you got the first property was that? Did you do that as a syndication? Did you have partners? How did you go about snow because

Craig Berger 20:32

it was a very small amount of equity I put in about half of the capital personally and then I had two partners put in the other half of the capital.

J Darrin Gross 20:41

Gotcha. And

Craig Berger 20:44

I had no experience or track record to go out and syndicate. And then second deal, I was able to convince a few friends and family to support me on the value add hotel deal. We did that that was successful. You know, obviously, these play out over a period of years. And then I bought a few other, you know, smaller deals about my first institutional asset in early 2018. So it did take about sort of three years to work into what I’d call my first institutional asset. And, you know, thankful for the, for the institution that invested in a roughly roughly $5 million of equity into that deal for us to buy that and you know, have a great relationship with those folks and gratitude for, for them giving me an opportunity. And I think ultimately we we delivered for them on that asset counted.

J Darrin Gross 21:46

You mentioned the hotels, and I know that currently you guys are focused on multifamily. Were you actually operating the hotels then as well? Or were you was just just a property acquisition you lease on? Or how did that work?

Craig Berger 22:01

So we so I had a partner on the deals sort of a junior equity partner on the deal who had hotel experience hotel operations experience, we did self manage, I’ve sort of been through this self managed versus third party manage debate in my head on a number of assets over and over. But we did self manage, and again, sort of another rich learning and learning experience and, you know, a sort of a night and day change from, you know, working, working, working for investment bank firms. And then and then moving over to this in the weeds, you know, series of experiences. But, you know, adversity makes people strong and doing a variety of different things sort of has given me perspective. So we did, we did self manage, and that was challenging, and I did have a partner that helped me on that front.

J Darrin Gross 23:02

Gotcha. So, you moved from Wall Street, you’re into a real estate. If you were to compare the two as far as, like an investment opportunity, how do you how do you position or how would you compare, like a stock as opposed to real estate? What are what are the things that you you see, or that your investors are, are appealing to your investors?

Craig Berger 23:36

Well, it’s a fantastic question. I think there’s a place for equities and a balanced and diversified investment portfolio. I think there’s a place for real estate and hard assets in a balanced and diversified investment portfolio, as well as depending on your age bonds, other alternative investments, private equity, and potentially some modest exposure to crypto. But you know, here’s how I think about stocks. You’re kind of writing the market. And if the market goes up, your portfolio’s up, the market goes down, your portfolio is down. You know, back in the day, hedge funds were actually hedged. They would be, you know, long Google short Facebook. And if the market went up or down, it didn’t matter. And if Google outperformed, it did matter. And they were protected against market moves and hedged. Very few hedge funds or investment managers on the equity side are really hedged today, and so you’re really just writing the market wave. And so, you know, since 90% of hedge fund managers do not outperform the s&p 500 on a net At a fee basis, it probably just makes sense to own s&p 500 index fund and other other index funds for your equity exposure. Unless you’re really good at picking hedge fund and investment managers that outperform. So, stocks, I don’t view as being particularly controllable, you’re just sort of riding the market. And that’s fine. On the real estate side, I think it’s it’s totally different real estate sponsors have the ability to make their money going in buying value. A lot of the process of owning a multifamily apartment investment is controllable. Expenses are more or less known. You know, debt is forecast to fall within a range, there’s really only a few things we don’t know, as multifamily operators, and that’s, you know, sort of what is top line growth really look like? And what sort of multiple can we achieve on the property when we sell it? What kind of cap rate or selling price can we achieve down the road? So a lot of it is known. And controllable. I don’t want to say it’s formulaic at all, because it’s not, but I feel like I have more control over multifamily investment than I do over my my stock portfolio. So that’s sort of how I think about it. You know, there’s obviously some well known and well discussed benefits to real estate investing, you’ve got ongoing cashflow. Yes, you have appreciations. You’ve got tax favored and tax advantaged status, you get cash flow distributions that are typically not cash not not not treated as income because of the depreciation protection. Your income or gains down the road are treated as capital gains later, instead of income tax rates in today, dollars. And importantly, real estate, while slow, can be non correlated, or less correlated with the global moves in the equity markets and whatnot. And so it’s a good balance, and I think it’s controllable. Obviously, you have to pick great sponsors, or participate in some other way. So that’s sort of how I how I think about stocks versus versus real estate.

J Darrin Gross 27:38

I appreciate you doing the comparison there. As far as a real estate investment philosophy, can you provide kind of some what your guys’s how you operate? or particular markets you look for size? Or? Or sounds like value add is kind of a strategy, but just a little bit of what you’re looking for and properties that you’re acquiring?

Craig Berger 28:09

Sure, yeah. So in terms of markets, we like markets that are growing, we like in migration, growth markets, most of the most of the units that we’ve bought have been in Texas, I think Texas is a great market, sort of a business friendly environment, you got a lot of fortune 502,000 companies that are moving there. Obviously, we want to invest where people want to live. And where, where it’s easy to operate. I’m in New York, I live in New York, I’ve never done an investment in New York, because there’s so many rules and laws and regulations and complications. And I just, you know, I don’t know what I can or can’t do here. And I don’t really feel comfortable putting my own or other people’s money to work in an environment where I don’t know what I can or can’t do and what’s legal or not legal, and it’s just too complicated. And I’d rather be simple. You know, to me simple is places like Texas, Florida, the Carolinas. You know, Nashville is a good market. I do like some of the markets in the Midwest where you get a little more value for your money. Maybe you get less appreciation, less job growth, less rent growth, but a friendlier entry cap rate and purchase price places like Columbus, you know, Cincinnati. Indianapolis has been pretty good and Kansas City has been pretty good. You know, so it’d be sort of a complement to some of the faster growing markets in Texas and Florida. When I do like Vegas a lot and Phoenix a lot. Those are two markets that I’ve never been able to make the cashflow work I’ve never been able to make the numbers work so I’ve never bought anything there. But I’ve lost because those markets have gone up. Among the most of any, you know, it’s a tough pitch to buy it a three, two cap and improve it to a four cap and sell it again, for three, three cap. It’s, you know, I haven’t been able to get on board with that, but but again, my loss. So we like to buy in growth markets, we’re building a diversified footprint across markets. In terms of asset class, we, we, you know, we buy A’s, B’s and C’s, I’ve obviously come up in the seas, but I think it’s, I think it’s helpful to have a diversified footprint of newer assets at higher prices and older assets at lower prices, and a mix of demographic exposures. So, you know, we’re not getting negatively impacted by any one trend at any one point in time. That’s sort of a longer term vision, I don’t necessarily have enough scale today, we bought roughly 2000 units total over our history. So I wouldn’t say have enough scale to have fully executed that plan. But that’s sort of a longer term vision. Does that answer your question?

J Darrin Gross 31:20

Yeah. No, I appreciate that. Do you guys operate in a syndication model now? Or do you have a fund? Or how are you?

Craig Berger 31:28

So we’re in the final stages of forming our first fund, one of the reasons that we’re forming a fund is that we can take investor dollars 24/7, at any point in time, rather than sort of racing the clock and saying, Hey, we have 40 days to fund this deal, here’s the deal, do you want to see the deal? Are you ready to invest and get your checkbook out rapidly and come out really into the, I’m not really into the whole pressure sell thing. So I’m trying to get out of the Purgatory of racing a 40 day or 60 day clock to, you know, as fast as possible, raise money and get the deal done, and, and so on. But, you know, I have lived in that zone, that’s still where I’m living, and we hope to hire and scale and grow, we’re hiring a lot right now. And we’re, we’ve sold some deals early this year, late last year, and we’re taking those resources and, and, and redeploying into into people processes and systems right now to build out every facet of the of the company and building out means hiring folks to handle our capital markets and and capital raising efforts and handling people to source more and better products and handling, you know, corporate type of folks to handle the back office infrastructure and, and management of the investors and the product. And so we have been in the syndication model, sometimes will, will work with an institutional investor who comes in for 6070 80% of the deal, and then we syndicate out the rest of the deal. So it’s sort of a mix. And, you know, we’re deal by deal today, but but looking to, to move more towards, you know, a dry powder, you know, on balance sheet capital type of model in the future.

J Darrin Gross 33:29

I think that’s kind of the progression I hear, you know, firms, as you get experienced and have a track record of with investors and stuff that the fund model gives you on more flexibility. So I appreciate that. As far as managing your your assets, do you guys, do you have a in house management? Or do you do sub up to management, and all your other services.

Craig Berger 34:01

So on our two legacy assets in St. Louis, that I talked about earlier, we do self manage, and that’s because they require will require a great amount of care. There’s not really that much scale. And you have to be really committed to managing those locations. So we do it ourselves. And I have a full time partner on the ground in St. Louis, who, who takes a leadership role and allowing us to self manage those assets. And it’s been again a great learning experience. On the institutional assets. We do utilize third party, we’ve typically used Roscoe properties, RPM living in in Texas for our Texas based properties they they’ve executed at a high level for us. There’s other great management providers out there as well. But we take a very hands on role with the asset management work that we do. We have a bunch of sort of key performance indicators and spreadsheet trackers that we’re we’re tracking our properties on on a weekly basis, to make sure we’re getting maximum performance out of the properties, and maximum engagement with the third party property management providers, and getting the most work and effort and results out of out of any third party provider. You know, it’s, it’s usually a positive attitude, we’re one team one dream, we all want the same thing, we want to make the asset perform of peak levels. But we do, you know, take a very sort of focused approach on, on ensuring that these assets perform, and we’re very hands on at every facet of owning these assets. So it’s not really a casual process. It’s a very engaged and focused process. And, you know, I have so much gratitude for the hard work that the third party folks put into these properties. It’s not an easy business, it’s a very hard business, you’re dealing with people’s lives, people’s homes, it can occasionally get messy. And, you know, I try to keep that in mind. And every time that I’m dealing with folks from from, you know, maintenance, maintenance people on up through regional DPS are the owners of these third party management companies.

J Darrin Gross 36:30

Well said, as far as you know, the multifamily marketplace right now, you’ve you’ve been doing this long enough to see kind of the the trend for the last five or six years. And now we’re entering into kind of a, a new phase or a different phase with interest rates. Do you have any kind of expectations or, you know, a sense as the former analysts do any kind of future view to what you’re expecting? The market to do? Or do you have any kind of thoughts based on what you’re seeing in the market right now?

Craig Berger 37:12

Wonderful question. Everybody has views, thoughts and opinions, mine isn’t any more important than anyone, anyone elses. But look, half the country rents. And, and, you know, there’s always going to be demand for apartments so that that’s good. That’s good from an ownership perspective. Prices have definitely come down quite a bit and multi over the last six months. It’s still hard to make these deals work, there’s still properties most properties selling at a four cap. And we’re now out borrowing at five and a half fixed and six and a half or 7%. Bridge. So it’s still hard to make these deals work. rents have obviously gone up a lot, I think there’s still some ketchup to be had for a lot of properties. But this inflationary period is mostly behind us at this point. And I think that’s true for the broader economy. I think we’re past the worst of the inflation. I know. The market has sold off on the August inflation numbers a lot yesterday. But you know, July, inflation was more or less flat month on month, I think August was up point one or point 2% month over month. If you carry that forward for the next year, if we get 10 more months like that will be on a inflation that’s up, you know, one or 2% year over year, which is great. So I mean, I saw a lot of inflation in early and mid 2001. And on all the way through 21 and early into 22. But I feel like prices have more or less stopped going up, at least based on what I can see. You know, prices have come down so it should be easier to buy multifamily. But the reality is a lot of the capital on the sidelines, has evaporated stock markets down 25% Kryptos down. The Fed is sucking liquidity out of every market, the bond markets and so on. There’s they’re shrinking their balance sheet, you know. So, it’s a lot harder to get people to part with their cash right now in this environment. It’s true of institutional investors. And it’s true of of individual investors. If you’re a large institution that has a lot of on balance sheet dry powder, it’s an amazing opportunity to go out and scoop up assets on the cheap and I think Two or three years from now, those folks will have done very, very well. If you don’t have on balance sheet capital, and you’d have to go convince people to give you capital, it’s a very scary, risky time to go out and take risk and try to convince people of such, which is why a lot of operators and investors are on the sidelines right now. But I do think it’s a great buying opportunity prices have come down, this business is not going away. And one thing that we’ve learned from being in the apartment business or from watching this business, is that it’s very rare for rents to go down. In periods of weakness, they flatten out, you get concessions, maybe you get more vacancy or non collection. But rate really doesn’t contract or doesn’t contract for any meaningful period of time. And so if you can buy cheap now and write out the near term, choppiness, I think in three, four years, you’re gonna, you’re going to be thankful for taking the risk and doing the work, which is why we’re still out in the marketplace, buying deals and trying to negotiate the very best entry points that we can on any assets so we can deliver outsized returns, for our investors, while continuing to grow the platform.

J Darrin Gross 41:21

I think the legs of the marketplace and demand while the housing demand is strong, the the uncertainty, keeping some of the investors on the sideline, but sounds like you know, is we kind of sorted out there are going to be some opportunities and and for those with capital should do well. So that’s good. If we could Craig, 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 we can avoid the risk. When that’s not an option, we look to see if there’s a way we can minimize the risk. And when we cannot avoid nor minimize the risk, then we look to see if we can transfer the risk. And that’s what an insurance policy is. And as such, I like to ask my guests, if they can look at their own situation. Could be your clients, investors, tenants market political landscape, however you would like to frame the question with regards to the biggest risk is for you to to determine. But for clarification, while I am an insurance broker, I’m not necessarily looking for an insurance related answer. And so if you’re willing, I’d like to ask you, Craig Berger, what is the biggest risk?

Craig Berger 42:57

Darrin, you’re really good interviewer, you’re asked some great questions, and you’re really smart. Our biggest risk, my biggest risk is taking a finite amount of personal resources and growing a business. I’m hiring I’m buying deals and having the investor of last resort or the backstop in any of my deals if if a deal needs more money, I really don’t do capital calls. I’ve I’ve always invested out of my own pocket and the very few limited cases where one of our deals or properties is needed more money. So I’ve got a number of demands on my personal resources, most of which revolve around growing a business. So that’s my biggest risk. How do I hire top flight and top quality, talented sea level executives, investor management, personnel, acquisition personnel, back office personnel, with my resources, how do I go out and buy quality deals when when I have to raise the money in a finite period of time. And so those are those are some of the biggest risks on our assets, we’ve really paid mostly prices that I feel really good about. So I don’t feel like any of our projects are a risk. You know, again, that’s one of the great things about multifamily. We’re buying below replacement cost we’re buying into a business that is fairly stable overall so I like the the multifamily and commercial real estate business. And we’ve never lost money on any deal yet knock on wood. And hopefully, hopefully we won’t. So you know, my risks are more around corporate level. risks and how to scale a business with, you know, limited limited personal resources. We have exited, you know, a number of properties over the last year. So my resources are a lot less limited than they were a year or two ago. But they’re still limited in terms of growing the business and hiring talented people that need and deserve to make, make a make a living.

J Darrin Gross 45:30

No, I appreciate all the hats you wear. That’s, you know, it’s one thing to to invest but it’s an entire different thing or a whole nother level is to be you know, operating as the leader of a company and, and trying to balance and, you know, compensate those that are helping you grow. You and your your investors portfolio there. So I applaud you for that. Hey, Craig, where can listeners go? If they would like to learn more connect with you?

Craig Berger 46:06

Sure. You can email me Craig at Avid Realty partners.com. You can go to our website, Avid Realty partners.com, you can find me on LinkedIn. All my contact information is there. And this has been fantastic. I really appreciate the opportunity to be on your podcast and have this conversation with you.

J Darrin Gross 46:30

Likewise, Craig, I appreciate that. And, Craig, I do want to say thanks for taking the time today to talk it’s it’s been a good one. And I’ve learned a lot and enjoyed it. And I look forward to doing it again soon.

Craig Berger 46:45

Awesome. Thank you so much.

J Darrin Gross 46:48

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 47:07

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Real Estate Investing Offense vs Defense in Changing Market with Spencer Hilligoss – CRE PN # 379

Spencer Hilligoss 0:00

If you just read the headlines, people are sitting there thinking, oh man, good time invest or bad time invest. And that is such a dangerous headspace to stop that, like, you don’t want to stop at that level of curiosity and I certainly did at that time I’ve maxed out my 401k not a bad idea. Coming into this 20 Year 2022 I believe in the following things I believe that people should always be investing. I believe that we will always be investing I also believe is the number two principle that you know what, there’s no such thing as a time when there’s no deals. There’s just fewer of them and they’re harder to find. brilliant person recently said as a kind of a third principle that I’ve integrated into our lives. It’s like, well, there’s no such thing as bad assets. There’s just bad prices.

Announcer 0:50

J Darrin Gross 1:10

Welcome the 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’s episode is sponsored by Building Insurance and Risk. When you invest in real estate, work with the experts at Building Insurance and Risk. You will receive multiple coverage offers with a side by side coverage comparison. To learn more, go to Building Insurance Risk.com.

Today, my guest is Spencer Hilligoss. Spencer is the CEO and co founder of Madison Investing a real estate investment firm specializing in real estate syndications. As a passive investor and active syndicator. He understands the unique challenges that busy professionals face when starting out in their real estate investing journey. Spencer’s mission is to arm investors with a know how they need to make confident investment decisions tailored to their individual life goals. Prior to pivoting to real estate, Spencer held several executive roles in the financial technology industry, including positions at Intuit and gusto. forging a 13 year track record of building high performing teams across five companies, three of which are valued at over a billion dollars. Throughout his career, one thing has remained consistent his ability to keenly focus on professional development, helping teams and individuals reach their full potential. Spencer is a member of the 2021 Forbes real estate Council and has been featured in publications such as Business Insider, when he’s not shifting the way people think about investing, you can find him listening to metal, adding to his tattoo collection and jogging through the Bay Area with his wife and two sons. Ask him about the time he played on stage in San Francisco at the Vans Warped Tour.

And then just a minute, we’re going to speak with Spencer about playing financial offense versus defense. 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 on a welcome I guess. Spencer Hill gace Welcome to CRE PN Radio.

Spencer Hilligoss 1:55

Darrin, thank you so much. This is a wonderful way to start the day with you. So really great to connect.

J Darrin Gross 4:15

Well, I’m glad you’re here. And I’m looking forward to our talk. Before we get started, if you could take just a minute to share with listeners a little bit about your background.

Spencer Hilligoss 4:25

Yeah, happy to. So as you mentioned, I’m out here in little island city called Alameda, and it’s in Silicon Valley. It’s actually right across from San Francisco and kind of tucked next to Oakland for those that don’t know that name drop. I wake up every day feeling kind of blessed and pinch myself right now because I get to serve the passive investors in our passive investing groups we have at Madison investing.com And that’s something I mean 2530 years ago, you know if I could go back in time Darren and say to myself, Hey, you’re eventually going to be running A an investing group in a private equity firm that helps people invest passively in de risks at forum a bit, I’d probably look at look at myself, thinking I’m crazy. Because I grew up in a real estate business working for my dad, he was a residential real estate broker for 30 years, I used to be embarrassed to say that because and, you know, friends are working at tech companies, as they kind of got into high school and beyond and telling them I worked in my dad’s real estate business was not exactly the cool thing to be doing, let alone working at open houses, you know, instead of going and hanging out with friends, you know, clearing out fridges, for properties that had to get prepared for sale, not very glamorous. So I did that. And it really scared me in technology. So I ended up getting into the tech companies. And I was there, as you mentioned, in that really thoughtful intro. I was in that for 13 years, and I cherished it, you know, I really did, I think a lot of folks in the real estate investing community, you know, bless their hearts, they tend to dig in and critique the corporate world and the WTO world. And that just wasn’t my experience. I mean, I frankly, had a very positive experience, there was times of immense challenge. Of course, you know, specifically when you’re leading and managing large groups of people, but all that to say, I ended up realizing and having some really key moments of decision along with site, my, my wife, and he’s also my co Oh, Jennifer, we had gotten to that point with great incomes, you know, working, you know, dual income household, and investing in maxing out our 401k is at the time, couple of young kids. And there was some key moments where light bulbs went off for me, after I joined a real estate tech company eventually. And I saw how well, some of these investors on the other sides of these deals, we were lending money to a lender, I saw how well they’re doing. And it really lit the spark for me, and I realized, Oh, we can invest for this thing called cash flow, and not just park our money in something that, you know, we are not going to be able to touch for 30 years without a penalty. So what happens when we do a bunch of these investments over time. And that’s really, you know, the kind of the tip of the iceberg for what led us to actually doing this full time. And helping hundreds of people that now invest with us, basically get in and get the memo earlier than I did if I could go back in time and kind of figuratively shake myself by the shoulders and say, Hey, dude, you can go there and do this differently, there’s a better way to go and invest because you can change your life. And you know, about five years ago, we set a goal for 15 years, we wanted to be financially independent. We chopped that goal in half. And then we had to whittle it down again, because we had achieved it. And now we’re just very grateful to wake up and help other people walk that same path today.

J Darrin Gross 7:51

Well, I love the story, that’s quite a fascinating journey, you know, from the tech and kind of resenting your hair, your dad kind of thing, or at least, you know, not being really excited about the real estate, the way you were, you know, had experienced it, but then seeing the AHA, when you were looking or working with investors, and kind of, you know, catching the bug kind of thing. So tell me something that you mentioned. So five years ago, when did you start investing? We indeed you start passively. And then you said was it five years ago, I guess, give me a little bit more definition on the timeline as to when you first invested as opposed to when you started?

Spencer Hilligoss 8:32

Well, we might good, he’s sorry. And it means good job. Now,

J Darrin Gross 8:35

I just wanted to just for clarity on when you started be doing your own syndications.

Spencer Hilligoss 8:40

Yeah, you know, I appreciate you taking it there. I think there’s three phases to it. You know, I, of course, I packaged it in three phases with Jennifer now because in hindsight, everything in life tends to be quite a bit clearer. Right. And Hindsight is 2020. As they say, at the time, it felt like navigating a maze. And, you know, trying to figure tively, grab a machete and just hack through every challenge and learning and the steak. And that’s just how learning tough new things goes. So we started off in 2016. I mean, we’d already you know, bought a home, of course, but we’re, you know, so many folks, we call that an investment. But that started all the way back in 2013. Buying a home in the Bay Area is not something that is easy to do. As you know, Darren, it’s like a pretty scary, massive price tag and event around 2016. I was working for this, this tech company that actually was also working with real estate investors. And that’s where I got that bug. Exactly. I think you said it. Well. I caught the bug. And I read like no joke. I read 24 books on finance and investing in real estate in 18 months, I listened to 400 podcasts that provided a wonderful foundation of knowledge, just like yours. And I think that the I don’t need to do that much education. I think some of the became procrastination before we finally went out and bought a duplex, you know, we still own this duplex now is our first real investment property, it costs us $430,000. And you know, that’s barrier pricing. Thankfully, it’s appreciated quite a bit. But it was producing $200 a month in cash flow. And that’s already a miracle in California, from what we know No. But that said that property took over $100,000 in cash, because of course, you get a loan on it. And that’s just as much depth as I’m going to give people. But that’s an important learning because that’s what scares most people. And they stop. And it almost scared us because we realized, we can’t keep doing this, we had some capital we’d built up from our jobs, but we couldn’t necessarily go out and do that over and over, we need our dollars to go further for us. And so phase one was just buying that going through those learnings, using a whole summer just to find that one property with our infant son in the car, it was not easy. Phase two, found the courage to look outside of California outside our local market. By long distance long distance rental ownership. We got up to five single family homes in Kansas City, Missouri. And different economics, that’s for sure makes people on the West Coast. Look at these with confusion and excitement. Now, people parts of both price tags purchase price, 60k $60,000 per property, and roughly $250 a month in cash flow. And your listeners probably know this. But just to make it clear, that means after everything else, that means after, you know taxes, mortgage insurance, all the rest. And so all of that 250 bucks a month sounded great. But phase two, as we call it, in that rent long distance rental ownership phase was really about learning Well, rentals or semi passive invest, even with a property manager. And I strongly believe in property managers and hiring them for that 10% Or, you know, more or depending on how many you have, most people are going to be paying at least that. But you still have to manage the darn manager. And if you own rentals far away, oftentimes you’re buying them in neighborhoods, you know, we would probably call those C class neighborhoods. So you’ve got higher turnover. So what happens when one of those properties goes from 100% occupied to 0%? occupied, because it’s a single family home overnight. And all the costs associated with that wiped out that 250 bucks a month for the whole year from one of them, right. So that phase really was about learning. And thankfully, we got out at a profit. And we went into phase three, because we had to find something that was more passive and two young kids full careers at that time still, but that’s when we you know, we were still like in parallel owning those properties. But we had already started putting money into syndications you know, and so price tag on those, you know, your your but the minimum of 25,000 bucks or maybe 50,000 bucks. And so our first one was 25. And that’s LP investing or limited partner investing the aka being a passive investor in syndications, you know, and so that’s when our my colleagues and my co workers in my day job, they started asking, like, what are you putting your money in, I thought you guys were just building this big rental portfolio. And I shared my enthusiasm for what we had landed on, because I’m an operations guy by trade, Darren, so like building teams and forecasting, I like predictability. And I just couldn’t get away from those economics of, well, single family home that we owned, occupancy goes from 100% to zero overnight, and person has to leave 400 unit apartment building? Well, we certainly can’t buy that ourselves. But there’s these other structures that people can do, where you can own a piece of it. And as long as you get over the ego hit of that, which a lot of people get stuck on because they want to be quote unquote, the mind, right. But we got over that and realized if we just didn’t invest that, we have to do diligence on the front to trust this other team, these other humans, and that’s the biggest risk on these, of course, getting the right teams. And that’s why we built a business around because we felt like we built such a clear, strong five part framework to do that for our own money. People were asking for us to help them go and figure this out for themselves so they could start that journey. And lo and behold, here we are in 2022. And now we’ve done 37 of those deals since Madison investing so it’s in 13 full cycle exits of properties going all the way to completion and sale at the other end. So it’s really been quite a journey, but that’s probably more than you want to

J Darrin Gross 14:52

No, actually I appreciate the kind of the the detail because you know, I was definitely curious about how you got started and kind of the three phases. but more of the syndication and how I think the thing that I appreciate the most is how you, you, you, you mentioned in reference the kind of the ego thing, and that the when you’re going alone, it’s all yours. But if it goes to zero, it’s all yours too, right? That’s right. Whereas if you, you get a teammate or you become a part of a team, you can, you know, smooth out those ups and downs and be more passive, if you if you’d like to be, and the returns are more predictable. And, you know, I’m kind of curious, as you you said, 37 syndications, you know, 37, that you’ve invested in? Or have you? Have you been the the GP on any of those, or where are you at on

Spencer Hilligoss 15:51

The 37 was actually not some of those We also invest in, because we do invest as part of our vetting framework that we commit to 100% of our investors 100% of the time. So we always put money in with the asset management teams that I ended up joining in the GP with on our active deals. And so those 37 are purely our active deals, which the majority of which our apartments syndications self storage, we also do self storage, those are my two areas of expertise that I try to stay in my swim lane on because I feel like that’s always just a guiding helpful principle in general for right investing and just life, which is stick to the stuff that you know, when the stakes are high stick to what you know. But we also occasionally work on niche stuff, that’s non real estate, but that’s really once in a blue moon. And so other than that, we will do fund models. So sometimes you’ve got we’re like, we’re just wrapping up a fund, which is really just the same economics, honestly, for the investors and anyone participating. But there’s seven apartment buildings throughout the southeast between Georgia and Florida compared to one syndication apartment, and in the same kind of market.

J Darrin Gross 17:01

And that’s going to add another level of opportunity. But going to the syndication. So if I understand, right, so are you a GP on on any of the properties? Or have you created more of like an investment vehicle to where you’re raising money to invest in other investor led properties? Are you the principal and many of those?

Spencer Hilligoss 17:27

So by design, there was this moment many years ago, when we formed medicine investing Darren, where, you know, a mentor of mine was like, into, you know, we’re trying to carve out the strategy, like, what role do we want to play because this is where honestly, I think 99.9% of aspiring active people in real estate, unfortunately, make a major misstep. And they tried to fly through this, this this key moment. And we sat there looked at our experiences, asked, what are we really great at? Where can we add value? And did we want to go out and become, you know, the next big apartment owner and compete with people in the single most competitive landscape? of commercial real estate and real estate history in general? Well, no, also, I can’t swing a hammer, I’m really good at like, what am I good, I’m going to partnerships. I’m good at team building good at economics and betting on the processes of a business, repeatable business, etc. So I bring all this up, because we decided, let’s go to join instead of trying to compete with them. Let’s go join these teams, and complement them. Because, you know, real estate professionals are great at what they do. And that’s often acquisition and asset management. And I live in the Bay Area, and I wasn’t planning on moving back out of California. We had a beautiful decade in Colorado, of course, but I think beyond that, we have roots here. Our kids are happy here and school, etc. So let’s go join these teams in the markets we love and the markets we love are far away from where we’re based. These places are in, we started heavily in Dallas Fort Worth, Texas, all the way across the Sunbelt east, you know, so majority of our portfolio is in Texas, all the way over to North Carolina, South Carolina, Georgia, you know, and once once in a while, more recently, we found great opportunities closer to our neck of the woods, you know, so we’ve done stuff in Boise, Idaho, Colorado Springs, Colorado, and Phoenix, Arizona, just to give some examples of we just want high growth markets that provide cash flow for the investors and you can’t really find that as much in my neck of the woods. And so I said well, we don’t live in a money. We don’t live in a deal state we live in a money state and and then it’s not intended to offend any of the California real estate investors. It’s just a different play. And so our investors are looking for cashflow number one and then growth and then tax efficiency and tax benefits and you know the in that order typically so It is a join and don’t try to go beat him. So we picked that strategy and it served us incredibly well. So I what I will do is just join GP teams, and they exist in their own, they can’t go buy most of these buildings at their stage, you know, without help from others, both on the equity capital, the investor capital, as well, as I know, you know, things like marketing infrastructure, you know, business sec, you know, any number of layers about business building and stuff. So, we help out on those fronts. But primarily, our core competency is bringing in investors that people actually want to work with, in but we don’t do that with a fund. I just joined them in their GP team. I’m also registered with FINRA. And that’s going to make zero sense to sue a lot of people. But for the the capital nerds, the investing nerds out there, my brother, and they’ll appreciate the fact that we did that in 2020 by registered with FINRA. And that’s just a fancy way of saying, voluntarily putting ourselves in a higher level of accountability and visibility, just like a person working at a bank would? Well, I have to disclose everything, it means that I can legally raise capital on a fund without having a fund of our own all that stuff. So I’ll bore people that otherwise they’re gonna be asleep before I mentioned anything else about securities laws?

J Darrin Gross 21:16

No, I appreciate that. Because there is a level of scrutiny by registering with FINRA that, you know, probably most people aren’t aware of. It certainly will differentiate yourself, especially for anybody that is aware of or concerned about that because I think there is a fair amount of, I don’t say, a fly by the seat of your pants, but there’s a there is. Guys that are more focused on just kind of the deal, as opposed to, you know, following all the rules and stuff may not be as, as familiar with and or, you know, compliant. California, not trying to, you know, put anybody down or up or anything, but I’ve seen that there is there’s the deal. And then there’s also the the regulations and stuff that come by it. And I appreciate you, you know, going that extra mile and doing that, and I’m sure your investors do too.

Spencer Hilligoss 22:15

Yeah, you know, and I really appreciate you saying it there. I mean, frankly, I think that you nailed it, I think fly by the seat of your pants is the nicest way that very tactical way to say that, they’ll take it a step further and just say it’s wild west out there, you know, it’s right. So it’s very wild west out there. And I think that that tends to be the case into a very, very heavy growth part of the cycle. And so we as I’m a black and white guy, I’ve always been, I strive to operate on integrity, and I strive to be very forthright, because in the end, whether you’re hiring an employee, you’re bringing on a new investor, you’re receiving capital, ranging from 25k, up to a potential million dollar check for us from a single investor for a single deal. I don’t think they feel comfortable with that unless there was literally everything spelled out and I wouldn’t sleep well at night, unless they were feeling comfortable going in on that, too. And so I think there’s a lot of folks comfortable taking those amounts of money for an investment, who are not doing things as rigorously and I don’t know how they’re able to relax?

J Darrin Gross 23:21

Well, I think probably the the justification, if you will, is that by definition, you’re dealing with either sophisticated or accredited investors. Right. There’s, there’s a level of, of scrutiny that’s put more on the investor, as opposed to, you know, at a federal level, which is more of like a retail designation or level of scrutiny. Kind of thing. Yeah. And so, you know, the benefit of you taking it that seriously, and doing that, you know, that that level of, of certification or, or whatever the registration is, is that the investor? Or are you You were kind of bound by by more rigorous disclosure, all right things as opposed to somebody that’s just saying, Hey, if you can pass the test, if you if you have this much in assets or net worth, and it’s up to you, then you’re sophisticated, and you know, how this work, so that’s right. And so that’s that’s kind of differentiation. But I think it’s important that I think it’s to your benefit, and I’m certain that anybody that that is looking at something you’re presenting is probably able to differentiate the level that you’re providing as opposed to one that’s not whether or not they care that’s, that’s on them. But I would guess that anybody, you know, that is really kind of trying to tiptoe into this and try and figure out what they’re used to seeing and what they’re seeing there. Maybe a, you know, a gap, versus what you’re presenting might more reflect what you’re used to seeing.

Spencer Hilligoss 25:07

Yeah, I think you’ve nailed it. And I appreciate you taking it there, because two comments that you made there, I think are worth just replying to specifically because there’s so spot on and you just don’t hear it very often, Darren, certainly in the private placement investing world was just kind of is the official term to summarize this whole category, right. And I would just say that disclosure, you know, disclosure is everything in this in this category, it’s everything. Because when you’re putting in like, like this is all speak personally from our own personal LP investing, limited partner investing or with our own money. We’ve done at least half a dozen, I think, I think actually with the count was getting closer to a, maybe nine that we’ve made personally this year. And in this passive investments that we made, and we just made the biggest one we’ve ever made. And when that stuff happens, you’re sending out a wire to invest in these funds. They’re predominantly illiquid, you know, and so people are not going to be able to pull this out just because they started feeling like the markets giving them the heebie jeebies. It’s, I look at that as a boon like that. That’s a good thing to me. And I understand that, could my money go away completely? Absolutely. That’s why it has to be plastered on, at least like I don’t know, 12 to 15 times in writing for any one of our investors before they join is like, Could your money go away? Yes. How many of our 37 deals as they happen? Zero. So you know it, that’s why the returns can be what they are, is that it’s not an FDIC insured savings account that has very low risk, hence, a low return associated with it. But they’re illiquid. And I think that that’s part of a learning journey for any new investor, or even an experienced investor is deciding in that moment. What is their risk tolerance for the for the more sweet and rewards and disclosures huge, making sure that you understand how experienced are these people that you met on the internet, potentially. And that’s why we have this five part framework that we use at Madison investing that we just built for our own purposes, for our own money, you know, its track record, approach, the team communications that you use in their values. And that’s just one of three big buckets of the who, the where, and the business plan like this kind of a, I don’t want to go too much too fast for folks. But that’s really the framework that we use, I didn’t come up with the highest version of that, you know, brilliant people far came along before me, said, You gotta go look at these deals and assess, you know, the operator, the market and the deal. And it’s those three buckets, I just, like layman’s terms to demystify the stuff for people and myself, it’s like, it’s really the who, you know, who’s managing the deal? Who’s working the deal? Who’s executing the deal, which is the single biggest risk for this category full stop execution risk. Number two, is the market, you know, are people going there and are their jobs? That’s kind of the big question mark. And number three is, what’s the story for that deal? Like, what’s the business plan? And then the number one thing I’ll say there, if they’re going to win long winded here is it’s about repeatability, you know, repeatable business process. And so just folks going in, if they’re evaluating this, if they’ve never done it before, education is key, you don’t have to do what I did with 24 books and 80. And, you know, 400 podcasts, that’s not reasonable for any human being, I was a bit obsessed when I first got into the category. But I strongly encourage folks to just take their time and educate and and start learning, because disclosure should be there, if they’re getting into these deals, and you should make sure you’re comfortable putting that money away for a while, because it’s not going to be something you can access at once there’s hardship, and that’s got to be able to do them in hardship. So sorry for the diatribe. I just wanted to arm some folks with the content.

J Darrin Gross 28:57

No, I appreciate that. And, you know, I think I hit all kind of helps round out the story there. So it’s, you know, make sense her. So, we’ve talked a little bit about kind of your model. You’re raising money you’re investing with others. I’m curious in you kind of alluded to the WHO and and the where and the story what are some some key things that you found when you’re when you’re or that you look for when you’re trying to determine whether or not a particular syndicator is someone that you’re going to invest with?

Spencer Hilligoss 29:45

Yeah, you know, I think I have the benefit of looking at so many deals and syndicators aka the sponsor, aka, you know, the the operator, the terminology in the space is always confusing to me and others. So I tried to demystify that by saying that’s all the same thing. You hear me say syndicator, operator, asset manager. And I know you know this, Darren, but maybe some of the listeners are hearing those distinctions for the first time. So if you were to put I like assigning numbers to things, because in business, it’s just helpful, you know, so this is not a scientific number, I’m gonna quote here, this is my rough estimate. If I am going in assessing how much of the right decision making a good decision, whether it’s Yes, let’s go or a hell yes, let’s go invest because it shouldn’t be a hell yes, it shouldn’t be just a yes or no. And at least 80, probably 90% of the relative importance of that decision comes down to the who. And oftentimes the big mistake that you see so many first timers on this just on these investments, and I get it man, I was the same way. They go to what they know. And what they know is numbers. You know, I’ll give a specific example of a very common type of investor we work with brilliant, you know, successful Senior Software Engineers, dual income making $400,000 each in a household, you know, and they come in and they zero in on the numbers, then they zero in on, I want to review, what’s the proposed rental increase in years 123. And we’re talking about a 20 tabs spreadsheet that has a probably 600 sales for the numbers. So they’re picking one. Why is that a miss? Well, because in the end of spreadsheets, there’s a love that quote, you see floating out in memes out there on the internet of more stories I’ve been told in Excel and PowerPoint throughout history. And that’s absolutely possible within real estate. And so what I’m saying here is that people can make a story, your numbers look very rosy, they’re missing the point. The point is, focus on the who. And the way that we do that is number one, their track record, have they done this before. And the business model is generally going to be find a high growth market, like we like places like Phoenix, Arizona, closer to us, or you look at Atlanta, Georgia, Raleigh, North Carolina, these are places where jobs, there’s job diversification, there’s people moving there, population growth is forecasted to go up and cetera. So you look at all that stuff, assuming that that’s okay. Has this team? Is there at least two to three of them, not one person? So there’s a redundant redundancy that’s managing this team? Have they done it enough so that they have a process around it? Have they bought a building, let’s say, pull the two levers to have to do value add, because we primarily do value added deals. And that’s renovations. New property management? So have they done that? Or the economics and that business showing profitability? are they producing those beautiful cashflow deposits that come into direct deposit every month, and now we have dozens of these things ourselves that we’ve invested in worked really hard to get through over time, and investors that have invested with us 10 or more times now over years, seven figures and up, and they’re getting these checks every month. So by the time that all happens, and at the very end, they have to sell this property, the operators have to sell this property, I bring all that detail up to give people some meat behind that answer so that they can understand they need to have done all that. At least, the team needs to have done all that, at least one time we’d much prefer and typically do expect more than that. But you know, I would say as a starting point, we do like working with newer teams. And why. Because they’re hungry, they often find deals that aren’t that big, big, well established three cycle operators out there. I know that some folks only investment folks who have gone through one to two, multiple real estate cycles. And I respect that fact of the matter is people looked at with a $2 billion portfolio of real estate who have been through that many battles don’t need your money. So they won’t ask and you won’t get access even if you do it. So the fact of the matter is, there’s great deals right in between that are life changing. And so we really try to find and partner with those types of teams. Because it’s a win win for all parties for the investors that want to participate on a risk adjusted basis, as well as really the team that is looking to bring on great investors that might want to come back and work with them again. So that’s a lot to process. Darren, I mean that and that’s literally why I think our business exists is it’s just we help with that entire process by just curating and vetting down to the team’s first or their own money and vetting those guys and then coming back down to look at the deal by deal basis. So that means one more thing I was going to share briefly was just saying that, you know, I think if you look at

one of the interesting learnings I did not expect is that there’s this notion of failure response. It’s a term that I just started using years ago in my corporate career when hiring for frontline folks So all the way up to directors VPs and above, and that was, is this team I have a blast this team that will ask us a team’s now when we’re vetting them is like, have they been through on pundit tell me walk me through a really challenging experience like challenging to the Corps, ideally in a real estate deal that didn’t go well. And when they got to figuratively kicked in the teeth, not to be too violent there, I’ll just say that, what did they learn from it? And like, how did they employ? How did they put those learnings into the actual business processes and the mandate of their business? Because if they haven’t been through pain, and all they’ve known is comfort and winning? I certainly don’t want my capital invested with that team, because I have no idea how much Britt they have, I don’t know how they are able to make decisions when they’re holding five to six, five to six digits of my invested capital, and they’re at the steering wheel are they’re gonna have rash decision making, because they can’t take the heat. So I appreciate you indulging me on that answer. I just, I wanted to get some teeth behind a couple of insights.

J Darrin Gross 36:06

No, I think that that, you know, given your position, and anybody that’s looking to invest with you would want to know, you know, how, you know, some of the criteria you look for, and I, you know, I concur, though, it’s really easy to make the numbers look real sexy, and, and all that, but, you know, Upon execution and over time, or, you know, what’s the likelihood of that happening? And then, I think the who probably answers that more directly than, than just the pro forma kind of thing. So I appreciate that. So let me kind of go back to the, you know, the topic that I introduced here, and just kind of make sure we’re hitting on this. You know, I introduced it as, like playing financial offense versus defense. Yeah. And we know, we’re recording this in September of 22. It’s probably not gonna air until like, November. But the the point that I think is worth mentioning and worth asking and getting your your input on is just, you know, the the economic conditions are in flux. Interest rates have risen, and the Fed is committed to pushing those even higher in an effort to break inflation. At the same time, there’s a demand for housing. Investors are looking for real estate as a as an alternative to what they’re finding elsewhere. And so there’s, you know, the market is in flux. And my my question to you, and I’m sure the listeners would would appreciate, is kind of hearing your take on, you know, offense versus defense, with real estate as we go forward.

Spencer Hilligoss 38:03

I mean, it’s, it’s clearly a fun topic legitimately. To me, Darren, I think it’s, there’s no right answer to what is going to happen because no one knows nothing, you know, as much as I devoured you and you read like, pot, not just listen to podcasts, but read reports, look at financials look at look at forecasts from the brilliant minds, way smarter than me out there, trying to predict to understand what’s occurring. But I stick to what I know and how I interpret things and read whatever I can. And I see 8.52% inflation as of the end of July. I don’t think I was not cool enough to know the August numbers. But I think you look at that. And to get context, I think most people when are right now, in 2022, as of this recording, looking at volatility and reading the headlines and kind of filled with a sense of dread, the same way that I was in, you know, more like the 2009 2008 time period, right. I was earlier in my career, but I had, you know, a job, I had a career that was burgeoning and all that stuff. So I was paying attention as much as the average person probably. And that’s while I was working at a financial tech company. That’s one of the oldest ones that does a third of the country’s tax filings every year. I’m talking about Intuit, and they make QuickBooks and TurboTax, etc. So you think I was really getting it and I was dumping money into 401k. And so I I bring that up because if you just read the headlines, people are sitting there thinking oh, man, good time invest or bad time invest. And that is such a dangerous headspace to stop that. Like, you don’t want to stop at that level of curiosity. I certainly did. At that time. I’ve maxed out my 401k not a bad idea. Coming into this 20 Year 2022 I believe in the following things I believe that people should always be investing. I believe that we will always be investing I also believe is the number two principle You know what, there’s no such thing as a time when there’s no deals. There’s just fewer of them and they’re harder to find.

brilliant person recently said, as a kind of a third principle that I’ve integrated into our lives is like, well, there’s no such thing as bad assets. There’s just bad prices. So, you know, the, these are guiding principles that I bring up. But to make it more tactical and useful for people, I’ll just say 8.52% inflation, what does that mean? That means that our dollars I my $1 that I might have in my possession, and it’s not invested in something, it’s dying. You know, I think that, you know, if I were to use the language from Gary Keller’s, book, millionaire, really real estate investor, which is not the newest one, but I really appreciate the amount of clarity it brings in this topic. He uses this this notion of like, dead money, Safe Money, wealthy and healthy money. And the return rates associated with those things go up over time. And right now, not only is my dollar dying to inflation, if I don’t do anything with it, it is rapidly losing value in the real world to buy things that such as food, such as gasoline, I know everyone already knows that, unfortunately, all these things. And so what changed? Well, the Feds raising those rates, not the same rate as a mortgage rate. I used to think that in 2008, as well, before I went down this learning curve, of course, but mortgage rates are going up. And I encourage folks to go take a look at financial offense in this context, what it really means errand to me and our family before we apply it over to businesses and you know, deals are, are we sitting there adding income streams to our household, there’s multiple ways to do that. I’m not dogmatic about it. And someone could invest in a real estate syndication as we do with our capital and help investors do, they can also go do that in a fun, they can do it in a number of ways. But does someone have a clear second goal on investing for income streams to financial offense. So some of our investors want more swagger walking into their corporate job, because they want to make a really cool new cutting edge proposal. And they know that boss isn’t gonna like it. So another 5000 bucks in passive income coming in monthly or on time, absolutely helps with that swagger. A lot of other folks just want to pivot out of their career, start a side hustle was part of the great resignation, that’s definitely accelerated. Other folks. Maybe at the other end, you mean, they’re basically going out at the end of a 30 year business, they built themselves, trying to get out passively moving their real estate portfolio or their business into something that will support them through their retirement, golden years all the way through, you know, and so that’s the financial offense is just going out there and saying, I’m not going to sit around and wait for our money just to somehow magically take care of our lives. And we want to build passive income, and we want to do stuff that will grow and exceed the inflation rate it has to otherwise money is dying. On the defense. That’s a comment on two things. It’s really a matter of number one, can’t really escape the notion of frugality. I don’t believe in you know, in giving up coffee, I’m just not that guy. I love my coffee. I’m not giving it up. I do believe in driving used cars, we’ve had used cars for years I we lived in our first home for nine years. And well outgrew it years before that, we just don’t need to keep up with the Joneses as a principle that we don’t care about that. We’d like experiences want to be great parents want to help those around us and help and lead our business effectively. The real comment for financial defense would just be massive lightbulb learning for folks out there. And for myself, certainly in our own journey. I was making great w two income, and roughly half of that was going to the federal federal estate tax. And that’s something that I thought was fixed in life. And that is not the case. You know, I realized over time, I can go add these income streams. And we can keep more of what we actually make, as long as we’re doing it, adding income streams that are more tax efficient. And, you know, I don’t look back fondly on the number of checks that I saw where I was like, oh, there’s that fixed amount of money going over to taxes again, and again and again, every paycheck and then every tax season. We don’t celebrate rich tax refunds in this household anymore. Because it’s if that’s mind blowing for some folks, you’ll probably in the same place I was the beginning of the journey. Your tax dollars could otherwise be in the meantime, before you pay that bill invested in something that’s growing and outpacing inflation right now. And so that’s the type of stuff financial offense and financial defense that we are very focused on and trying to encourage and helping others navigate that path because it’s scary. It is scary. You know, I get it, but don’t let that stop you. I think folks will benefit from a very loving well intended to kick in the butt to go take action on that front.

J Darrin Gross 44:51

No, I appreciate that. I think, you know, the offense in the defense. Definitely keep learning and and you an offense kind of that financial security can I mean, that’s the goal was to have some sort of, you know, cash flow that makes everything else, you know, less important, as far as like critical to your to your ability to live in a way that you’d like. am curious, the investors that you’re working with, is there an ideal or kind of like, a sweet spot that you found? For somebody that, that you work with? That and I’m talking about people that are investing in your, in your deals? Or in your fund? Can you kind of, you know, identify what would that that investor or that person look like?

Spencer Hilligoss 45:48

Yeah, I think, you know, it runs the gamut. Now, where folks are truly all over the country, you know, away from East Coast, West Coast. But it started out in my own network as attended to so we have a very strong representation of technology professionals, you know, on the business side, whether it’s, you know, your business leaders, like executives, maybe. And then on the tech side, you’ve got more product managers, software engineers, all the rest, I would say that that’s kind of the, if you were to call it a profile of our ideal customer profile ICP. Number one is people that are working full time, but making very strong income, and they don’t need to invest to live a great life financially, take care of those alone. So those folks are generally investing for cash flow first. The other profile we did out a second one a couple years ago, because now we have quite a few investors. And this is accelerating even just this week, we brought a new one just yesterday. We have really entrepreneurs, like multi decade, multi Generation Entrepreneurs. And so these folks have done incredibly well. I mean, whether it’s a wholesale business owner of 19 years that I got to know yesterday, we have a very seasoned repeat investor of ours is more in the metal recycling business. Third generation, you know, like, that is interesting, because the purpose is for this in every every person in between that you can imagine whether we have, we have multiple military folks, you know, a pilot technic, a jet technician who’s just smarter than I can even fathom, he fixes jets and flies and to make sure they work. So that kind of a hero in my book that said that, that other profile, they don’t need cash flow to live. They have one, you know, they they pulled it off, they fought their battles, they built an incredible business, they’re selling that thing, or they’re offloading the real estate portfolio they built over decades, they just want to have killer tax benefits and have some diversification away from their other holdings typically, because they also usually have a really sizable equities or stock portfolio. And so those are kind of the two, that we do our best to go out of our way to serve with educational content to supplement the deals that they invest in with us and those deals that we present. They’re ones that typically aligned to those, those goals.

J Darrin Gross 48:10

And I appreciate you sharing that. And I’m curious, if you the when you meet a prospective investor? Are most of them already warmed up to the idea of real estate? Or is there a learning curve? And kind of a resistance? Or? Or is there a time to become educated that, that it doesn’t take a while for them to become educated and willing and wanting to invest with you?

Spencer Hilligoss 48:41

Gosh, I mean, that’s a really good question. I would say that many folks in our shoes in comparable businesses, you know, because I mean, I would say that they try to create content that starts with someone all the way from basic zero, right? From No, no awareness of real estate. And, I mean, the fact of the matter is, I don’t think in 2022, it’s wise for any person, as a prospective investor, or even a consumer of a product. You know, if you’re gonna go by, like, I just caved in and finally bought a new guitar that I wondered, for a long time recently as a hobby. I researched the heck out of that thing, because the internet’s a wonderful place in that regard. It’s weird and some others, but it provides you all the information you need. So I didn’t have to talk to a human before I paid more for a guitar than I’d ever have to ever think I’d be able to or want to invest. And on an investment like this, there’s just some work people got to do. I mean, I don’t want them to jump in not understanding. Not only is that irresponsible on my part, no one’s gonna sleep well at night, if they jump in dropping $50,000 into an investment they don’t understand. So we do provide educational content that’s robust. However, it’s up to the investor if they want to actually read any of it or watch a video or throw me questions and I will feel those questions any day of the week. I mean, I have actually a backlog of emails from from last night in this morning just from folks that have been reading our newsletters. And now Now they’ve kind of got I mean, I’m using this is not their words, their mind, they said, Hey, I’d really like to kind of just ask you some more specific questions. I’ve been watching the videos and reading your newsletters and understanding stuff for a while now. But are there any additional resources, I’m just going to send the guy a quick recording and ask him if he wants to set up a call, he certainly can. That’s the level of insight that I think most folks really cherish, that they cannot find easily is sound boring with another passive investor who’s actually done a lot of these themselves. And that’s really the value that we try to provide, because you can, because anyone out there can now go Google and just say, you know, what is this indication, you know, what is a fun? What’s passive income, and there’s going to be 1000 different resources, and so that that area is well covered. But we are launching for the first time ever, in two weeks, actually. So perhaps, you know that this is in September, so by late September, we’re launching a very cool new resource, I am so fired up about it, and long awaited, and it’s a blueprint for passive investing, it’s free. People didn’t come to our website at Madison investing.com. And basically come in and just and download that and said, so that’ll be out in just a couple of weeks.

J Darrin Gross 51:17

Awesome. Hey, Spencer, if we could, I’d like to shift gears here for a second. Yeah, as I’ve mentioned, and we’ve talked a little bit by day, I’m an insurance broker. And I work with my clients to assess risk, and determine what to do with the risk. And there’s three strategies that we typically consider the first look, see if there’s a way we can avoid the risk. When that’s not an option, then we look to see if there’s a way we can minimize the risk. And when we cannot avoid nor minimize the risk, then 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, could be clients, investors, tenants, the market interest rates, politics, how are we you would like to frame the question, and identify what you consider to be the biggest risk. And again, while I am an insurance broker, I’m not necessarily looking for an insurance related answer. And so if you’re willing, I’d like to ask you, Spencer Hill, what is the biggest risk?

Spencer Hilligoss 52:29

Oh, my goodness. I love that question. And I say my goodness, because it is such a intelligent question. And I wish that someone could really couldn’t go back in time yet again, and tell myself that every decision in life is a risk decision. Without exaggeration, and you and you already know this far, far better than I do because of your experiences, which is amazing. And I respect so much Darren, walk out the front door, you’re making a risky decision, you know, drive your car and make an arrest decision. What is the biggest risk? I think the biggest risk as ethereal as this sounds. And I’m happy to drill down and make it less ethereal and make it more pragmatic or useful for people if they’d like, but this is genuinely what I believe. I think that the biggest risk posed to most people in life right now is a lack of curiosity. And what I mean by that is a lack of curiosity about their sources, like we’re talking financially, of course, I would say they’re not curious about how they make money and have what what is their money do like what they work for it. They know that they know what their income is, they know that they aren’t really curious about well, do I need to does this have to be the way that I do this? What I’m curious, can I am I a human as a professional, capable of doing a different thing? Can I go do a side hustle? If I don’t have any money? Could I be capable of generating a capital engine, fancy way of saying simply a way to build more investable capital outside my day job, which is more which is where most wealth is built. It’s not in people’s salaries. People don’t build their net worth. In their day job. They build their net worth, by going out and building a business by going out and investing by going out and doing something on nights and weekends by It runs the gamut. And there’s so many wonderful ways to go do that, that are free to start with and educate on now, like college courses. Sure. I’m talking pragmatic stuff. And so I encourage people to find a curiosity and that includes, I thought taxes were boring. I don’t think they’re always fun, but I certainly think they’re pretty fun now compared to many years ago, and most people would hear that statement and think I’m absolutely crazy. And that’s fine. But get sure is about your money and get curious about what you’re capable of, if you are not happy with your circumstances, or if you don’t have a plan B, C, D, E, F, to insulate yourself against the other many risks in the world. And so maybe I don’t know if that’s necessarily barking up the completely wrong tree in the wrong forest altogether. Darrin, but that’s, that’s what I chalk up if I had to give a single answer to what’s the biggest risk is a lack of curiosity and people just sitting there to do the same thing over and over working hard, truly, is not working smart.

J Darrin Gross 55:32

No, I think there’s a lot a lot to that what you said, lack of curiosity. And, and, you know, I certainly fall victim to that. On occasion, it’s easy to do what you did, because you know how to do it. I kind of thing, but you also know what the results are, you’re gonna get and you know, if that’s all you want, maybe that’s, you know, maybe there’s, maybe you’re, you’re fulfilled, but I think that it’s part of the human condition to be curious. And, you know, to have a rich life, there’s gotta be some curiosity, and some effort put to learning something new, trying something new doing something different. And who knows, you might find something you you hate. But you might find something you really, really like, more than, than what you already know. So I applaud that. But he Spencer, before we wrap up here, where can listeners go? If they’d like to learn more connect with you?

Spencer Hilligoss 56:31

Yeah, this has been a pleasure. Thank you, Darrin. really thoughtful questions too, right. So our website, best place to find us, MadisonInvesting.com. And that’s Madison investing with an ing.com at the end. On there folks can go and we got some content that’s just educational, available, blogs and cetera. But also, folks can sign up for our monthly newsletter. It ain’t fluff. It’s useful. You know, I do write those along with Jennifer and we put a lot of work into them. But we’re are launching this new resource of passive investing blueprint. That’s from our own journey, you know, and after speaking with hundreds and hundreds of very successful and new and experienced passive investors, so that’s the best way to reach out if folks are on LinkedIn. I’m also on LinkedIn. But yeah, thank you so much, parents. This has been a blast.

J Darrin Gross 57:25

No, I’ve I’ve thoroughly enjoyed myself. And I learned a lot here and I look forward to doing it again.

Spencer Hilligoss 57:34

Likewise, thank you.

J Darrin Gross 57:35

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 57:56

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Mindset for Real Estate Success with Joseph Moffet – CRE PN #374

Joseph Moffett 0:00

And I started changing the story I told myself in that moment. And actually what I, the biggest shift was that I learned was the questions you ask yourself and answer, make a massive difference in the quality of your life. And so every time I would go to the mall from that point, and I’d say I’d look at these great, you know, clothes that I thought I loved. And they said, Is this going to help me get to financial freedom or further what? And when I answered that, I put the clothes back. And I started implementing strategies of paying myself first and paying off the debt and I had to sacrifice in that time. You know, I had friends they would go snowboarding and I’d have to say, can’t make it or hey, do you want to go out to dinner Friday night, when it towards my debt can’t make it. And I spent a lot of Friday Saturday nights in my room by myself because I didn’t want to go out and spend money. But I didn’t just sit there I actually started digesting more personal development. So I kind of got a two for one there and started transforming the way I thought about life and the way I thought about myself and my financial future.

Announcer 1:02

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 are an investor, broker, lender, property manager, attorney or accountant we are here to learn from the experts.

J Darrin Gross 1:21

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’s program is sponsored by Building Insurance and Risk. Don’t put your real estate investment at risk work with building insurance than risk and receive multiple coverage offers with a side by side coverage comparison. To learn more, go to building insurance risk.com.

Today, my guest is Joseph Moffett. Joe is a he received his master’s in performance psychology. He is an entrepreneur, a real estate investor, a co best selling author. And he’s worked with Tony Robbins for almost a decade. He is also the CEO of Master Life by Design. And he’s done over 22,000 Peak Performance calls. And today we’re going to speak with Joe about business mindset coaching in life and real estate.

But first, a quick reminder, if you like our show, CRE PN Radio, there are a couple of 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, Joe Moffatt Welcome to CRE PN Radio.

Joseph Moffett 3:09

Thanks for having me pretty excited to be here.

J Darrin Gross 3:12

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

Joseph Moffett 3:22

Absolutely. So I grew up in on the East Coast in a small town in New Jersey right outside of the Philadelphia area. I was one of those guys that didn’t know what I wanted to be when I grew up. So I joined the United States Marine Corps, spent five years in the Corps traveling all over the world, lived in Japan for a couple years deployed to Iraq after I got to San Diego. And when I got back from playing in the sand, I was at this defining moment, do I stay in with the career to pension? Or do I try my chances on the outside. So I ultimately made the decision to try my chances on the outside. So be young single 23 in Southern California, I thought that was a really good deal. And I actually got involved in network marketing. And that birthed me into personal development, which absolutely changed my life. And I was in 30 to 40,000 $1,000 in credit card debt three times. So I like to think I’m an overachiever. I don’t do it once or twice, I got to do it three times. But I started taking some of the personal development content, specifically Tony Robbins and really changing the patterns in the way I thought about things and operated and then transformed my life. And so I knew this stuff work. And I just enjoyed helping people and ultimately I was able to become a coach on the Tony Robbins team. And that led me to starting my own business and now helping businesses with mindset coaching as a value add to their existing product or service. And so we love doing that we also invest in real estate are selling so I just find it it’s a perfect combination for what we’re doing and the lifestyle we’re creating.

J Darrin Gross 4:54

No, that’s awesome. I appreciate you sharing that. So let’s talk a little bit About your real estate, and then how you tie that with the coaching. What are you currently invested in? Or how long have you been investing in real estate?

Joseph Moffett 5:13

Well, I started real estate, I started my real estate journey, probably about five years ago. However, one of the biggest things for me was, and I didn’t buy a deal. Five years ago, I started in the process, I let fear hold me back thinking that the market was at its peak, and that I was going to be buying at the top and I was going to kind of, you know, lose money on the deal. And it’s kind of ironic because I here I am as a mindset coach who work with people that work through those challenges, and I was living that challenge right myself. But right now, we’re focused mainly on Airbnb, Airbnb arbitrage. And we’re shifting gears into multifamily five units to 60 units, and even triple net leases in the Florida area for commercial. So that’s our primary focus moving forward.

J Darrin Gross 6:09

Got it? That’s interesting, you know, a motivation. Coach having fear. And I’m curious, what did you do? And how did you work through or overcome your fear to move forward?

Joseph Moffett 6:23

Well, you can see your own blind spots, right. So as much as you know, something, you can teach something you can coach jumping, I needed to have someone that had an outside perspective helped me, I needed to work with a coach. And so I did, I worked with my coach to kind of break through my fears. And at some point, you just have to do it, right. Like you have to take the step, you have to take the action. You never know if you’re going to be a good parent until you have the trial, right. So you have to take the action and, and that’s what we did. We just started jumping in the game. And I knew that the ultimate resource is resourcefulness and no matter what came my way, I would figure it out. I would make I have the connections. There’s a ton of resources, a ton of information out there that will be able to help us overcome any challenge that we face. And so ultimately made the plunge found a good deal. And we just started executing right now. I think for me, that’s the greatest lesson. That’s the greatest teachers action.

J Darrin Gross 7:23

No, no doubt. I think that, at least personal experience. I know I’ve I’ve always had a little bit of trepidation, even though I’ve, I keep thinking like, there’s one more thing that I should have checked? Or, you know, why didn’t I check this kind of thing? And, and, but I’m kind of curious on your end, having jumped in, I’m assuming whatever your fear was, it’s you recognize that, you know, they, once you work through it, and you move forward, it’s work because you continue to invest in real estate. Was there any anything that you know, in any new things that came up that created additional unknown fears that you know, the you didn’t see on the on the front end? Or? Or is it all been kind of smooth sailing oriented?

Joseph Moffett 8:09

No, there’s there’s some difficulties, but let’s be honest, there’s, you’re the best thing you can do is mitigate risk, you can eliminate it. And so the things that I like to do is I like to set up safety checks. And so I know what I know, until something goes wrong. And then I have learning experience through it. And then I can make corrections moving forward. So what I like to do is I like to get people around me that I have in my network that I can say, Hey, can you double check this? Am I missing something? And I allow their second set of eyes to help me see what I don’t see. And if I don’t, if there’s nothing, I’m like, great. I’m learning I’m growing, I’m getting even better at understanding this multi headed monster called Real Estate. And so I always like to have other people double check some of the things for me that’s been fanning out.

J Darrin Gross 8:57

Well, got it. So the other people, are there specific people that you have, or specific skill sets that you you look for when you’re relying on others with your real estate investing?

Joseph Moffett 9:12

Two things one, is I always make the short, I like to decide who I’m going to work with based on values and character, right? Like if we’re aligning values and character, I love it. I like doing business with them. I need to be able to trust them because they can tell me whatever they want. And maybe true, maybe it’s not, but I got to be able to trust them. And I do that through seeing are we aligned in our values? Do they have great character? The second thing is I look at their skill set, like where are they a master at? And I vet them before you know and have conversations and build a relationship with them. And so some people are really good at finding off market deals and if I need to want an off market deal, I would go with them. I pay them or partner with them. But are they really good at underwriting and if they’re a lot better at underwriting If that’s not my strong suit, I’m gonna go to them. And I want to make sure they are mastering their skill set. So I looked for that specifically.

J Darrin Gross 10:08

Now those are two, two, definitely a good good points are definitely that alignment thing. I think, you know, I think more people have challenges when you find out only after the fact after you thought you knew somebody, you trusted somebody, because of the way you are assuming that everybody else works the same way, only to find out once you’ve paid the money, that’s, you know, that’s not the case can be problematic there. So that’s good. So let’s talk a little bit about the coaching. He said, You You were with Tony Robbins for about 10 years. And even before that, so like you were doing some network marketing was was some of the Tony Robbins training. Were you? Were you getting that while you’re doing that and unmasking the debt you talked about or it sounds like there was something that clicked that that caused you to kind of really dig in and, and make it work for you and are really kind of focused on that. I’m kind of curious more about, what what was that? That that you you found that that really made that change?

Joseph Moffett 11:21

Yeah, great question. I saw when I got involved in network marketing, I thought it is a way to create financial freedom. And I went all in on that, and coupling that with personal development. That’s where I discovered Tony in his work. And on my journey of network marketing, I found out what it really was, was a glorified babysitting position, right. And so, over some time, I after about four or five years, I kind of got tired of it. And I was actually in business with Tony Robbins son Jeric. And I met a friend of his who said, you know, hey, I’m a coach at Tony Robbins, I said, I didn’t even know that existed, I want to do that. I love helping people, because I found myself in network marketing, staying up till two, three in the morning, pouring into people because I knew if I help them succeed, that would help me succeed, right. And I just got tired of babysitting people, people quitting after a while, because they didn’t have the stamina or the fortitude to keep going and persevering through difficulties. And so eventually, I did what I had to do to become part of the team. And it was really the psychology shift for me, that helped me be able to come out of that 30 $40,000 credit card debt. That’s strategies that helped me with that. Also, even in my relationships, I had patterns that weren’t serving me there. And then that shifted that. So for me a lot of the things that I was doing, and I found myself always telling myself a story to justify the things that I was doing that I knew weren’t serving me or my financial future. For example, I used to buy, I used to go to the mall and spend $100,000, you know, clothes. All right. And what I would tell myself is, oh, I’ll just pay for it later. Right? How often do we hear that in today’s society with children or young teens that are getting credit cards early, and going into consumer debt right now. And that’s a, that’s a pandemic in itself. And so I would always tell myself the story to justify and then when I realized that we justify the stories in our head, they allow us to have these behaviors that don’t serve us. That’s when it clicked for me. And I started changing the story I told myself in that moment, and actually, what I the biggest shift was that I learned was the questions you ask yourself, and answer, make a massive difference in the quality of your life. And so every time I would go to the mall from that point, and I’d say I’d look at these great, you know, clothes that I thought I love. And they said, Is this going to help me get to financial freedom or further what? And when I answered that, I put the clothes back. And I started implementing strategies of paying myself first and paying off the debt. And I had to sacrifice in that time. You know, I had friends, they would go snowboarding and I’d have to say, can’t make it or hey, do you want to go out to dinner Friday night, I went towards my debt can’t make it. And I spent a lot of Friday, Saturday nights in my room by myself, because I didn’t want to go out and spend money. But I’ve interested there I actually started digesting more personal development. So I kind of got a two for one there and started transforming the way I thought about life and the way I thought about myself and my financial future.

J Darrin Gross 14:36

Interesting. So you, you had the personal situation. You had the aha you started changing your behavior. Rather than continuing tell yourself the story and asking yourself these questions and it sounds like the focus was the financial independence was really kind of the goal. And obviously that’s what you said you started the network marketing for How long between when you you had the aha and started working to to reach your goal, meaning what you know, with some earnest and some sounds like some self honesty kind of thing did it take for you to really see a change? You know, that was getting you closer to your goal.

Joseph Moffett 15:24

I would say for me, it took me about two years. And the reason I say that is because at that time, I was going to school to get my master’s, I was living in Southern California, off of maybe $2,000 a month. And so the pay rent, the pay for car, gas, food, insurance, all that good stuff, the life, you know, your expenses, your basic expenses, I didn’t have a lot to throw at it. I was actually at a point that was so low where I was, I was eating cheese, ketchup sandwiches survive, and I was giving donating plasma to get money. And it wasn’t because I was, you know, in this, it’s because I made poor decisions, right? And so once I started shifting the way I thought and using different strategies, I had to look at the reality of my situation and say, Okay, how can I? How can I realistically get out of debt? How can I get ahead in life. And so it took me about two years, because I was living off of that. But I was also looking at how do I increase my income. And I was looking at other ways to do that. And coaching kind of fell in my lap, and I was excited about it. And as I started to master my craft, I was able to be able to charge more, and be able to get out of the financial situation I was in. So it’s about a two year swing from me. And some people, they can’t wait that long. Some people they’re like, that’s, you know, that’s, that’s nothing needed took them a decade. And so it really depends on the individual for in their circumstances, I think,

J Darrin Gross 16:56

No, but how cool, I would think that your your clients, your coaching clients, to get your insight as you’re actually going through it yourself, and have that kind of that, you know, become more like a three point, you know, somebody can see that you’re doing the work and it’s making changes, I would think that’d be motivation for somebody who’s truly wanting to change and it’s working with you as a, as a coach. They the transformation of what you’re going through, and how they would see that and receive that would be motivation all by itself. On top of the message, I don’t know if that makes sense, or, you know, the clients. So yeah, they’re

Joseph Moffett 17:45

I will say, when I, when I start with, when I would work with a new client, I would share my journey because I wanted to build that rapport. And let them understand that I too, have been through the trials and tribulations that maybe they’re going through, or they may be going through in the future or something similar. Because the one thing that I do not like right now on social media is everyone’s a guru who has a perfect life. And what we do is we give people a false illusion of something that can never be obtained. And so I like to let them know, I always tell my wife, what we share this, what we say when we post on social media, yeah, we post some great things that we’re doing in our life. But we also post some of the challenges, we don’t post our highlight reel only, we’d like to keep it real. And so because we want people to see that we’re normal. We’ve gone through that we’ve gone through challenges, we have speed bumps in our relationships, we have challenges raising our children, right. And these are the solutions and the tech tools and strategies that we use to overcome that. And so I think that all builds credibility, trust and rapport with people. And ultimately, it doesn’t matter what my success is, and matters, can I help that person through our framework to be able to get them the results that they’re looking for? So going from five figures, or excuse me, a large five figure debt to having a seven figure plus net worth now, it was a huge swing, and it just breeds belief in the people. So it plays a multi purpose.

J Darrin Gross 19:17

Now, so when when you’re working with someone, I’m assuming there are people that that get it and, you know, commit to it and and do the work and have the success. And then there are probably those that that don’t, for one reason or another. I’m curious if you can identify, is there one trait is there one thing that you can identify when you’re working with someone new that will determine the likelihood of their success as to we’re versus not having success? Is there one thing is one common trait A term or a situation or a, you know, something within them that you find that that really, you can, you can see that this person is going to get it and they’re going to make it.

Joseph Moffett 20:12

That’s a great question. And if I had to give a word to it, I would say willingness, or coachability. And the reason why is, and I call it out right up front, is that there’s two types of people who show up to coaching, there’s people who show up and treat it as a massage, hey, I pay my money, I’m here, do something to me. And I tend to find that those people usually are not successful with coaching, right? Then there’s other people who come in and you treat it like a personal training session, hey, I paid my money, you’re here to guide me and show me or you know, helped me, you know, through this process, but I have to do the heavy lifting, I have to do to her. She no one hires a personal trainer in SM to do to bench press or to squat, because the trainer is going to get the benefit. So the clients that are coming in and are willing to do the hard work during the call. And even after the call, I say the magic doesn’t happen on our coaching session happens in between our calls, because of what they apply from our session on a consistent basis. So Coach ability or willingness is that one of the biggest keys that I see or even I guess you could say, even ownership, are they willing to take ownership of the results that they’re going to experience through the coaching?

J Darrin Gross 21:28

No, that’s, that’s, that’s insightful. So when somebody is working with you? And now, let’s say they we recognize they’ve got the willingness? What are some things that you you see that are common, that are holding people back from obtaining the success they’re looking for?

Joseph Moffett 21:54

I’ll give you two answers here, from a generic standpoint is I have the hits kind of sounds silly, but their mindset, but I coach, about 85% of the clients I coach outside of athletes are real estate investors. And from a real estate perspective, the biggest challenge that all real estate investors get hung up on is the ability to outsource certain leverage. That is by far the most challenging to them. Because most people, they don’t start on a seven or an eight figure size deal. They start with a single family home, maybe if they’re, you know, rolling the dice a duplex, right. And so those they’re starting out, I’ll say rather small, and it’s still they have the mindset of I’ll do this myself, I can manage your property here, I can have the plumber come out, or I can, you know, rehab the place. And they have a challenge because with leveraging because they feel like they have to be in control, and the ability to be in control. If they’re not in control, then how’s it all going to get done. And they operate with this belief system that the success that they create is based on them, and how they control things. And that eliminates the ability to scale at a large level. I have I get it, everyone’s different that I have a friend who likes to buy one deal a year, and then 20 years off 20 houses and the most of them will be paid off and we’ll have a great retirement. But then there’s people who are like I have a client of mine that I worked with his name’s Matt Onofrio. Do you know who he is by any chance.

J Darrin Gross 23:34

The name sounds familiar vaguely, but I don’t know exactly. I don’t know that I know.

Joseph Moffett 23:40

He was a 28 year old anesthesiologist, and he started learning about triple net leasing. And he had about an $80,000 net worth when he started. And two years later, through triple net leasing, he had $150 million net worth with a $5 million passive income coming in two years. So now is one of those kids that are an anomaly. He he started to accelerate rather quickly because he and I told my wife this all the time. It’s all about the vehicle you choose. If you choose a vehicle of being a Walmart greeter, and you’re trying to create financial independence, you’re going to have a long way to go. Not that it’s wrong to be a Walmart greeter. They’re very people. But if you choose to use like commercial real estate or residential multifamily real estate, you’re going to accelerate your financial freedom rather quickly. So the ability to leverage and scale a team is one of the biggest holdups that I see with people in real estate right now.

J Darrin Gross 24:41

Yeah, no, that’s that’s the in order to go big. I mean, I think like you said, you know, you’ve got to recognize it takes a team and there’s no nobody. I mean, I even I would say that the big names in real estate that are that are big. They’re big. because they have other people’s money, they have teams and that nobody is just going to do it all themselves. And and, you know, definitely that’s that’s a common common through point as far as the success of the the larger operators net. So if that is the hold back or the, you know, the thing that keeps people from achieving that, how do you work through that in order to get somebody to, you know, higher level of success?

Joseph Moffett 25:36

Great question. There’s a lot of different tools and approaches one can use to that. Sometimes. And often, it might sound obvious, but clients don’t understand that there’s another way of thinking. It was, I think it was last two months ago, I was out here in Boise, we’re at an event I was speaking on stage with Brandon Turner. And he drew his famous pyramid. And at the bottom is the DIY mindset, which most people start out and then they evolve to the visionary. Most people don’t know that it’s even possible to step into a visionary identity and a visionary role. And so just by even sharing that possibility with them starts to, it starts to loosen the grip that they have on the problem, because they hold on to this control thing, do it yourself so much, it starts to loosen the grip where you can be able to work with it, you might even get be able to get them to put that thought of D to being a DI wire down and start looking at the possibility. We get caught up in this identity of who we think we are. And at some stage of life, we create this identity and this is who I am, I’m someone who does it all myself. And I asked him, when did you decide that that’s who you are? Is there a possibility that exists? Where you’re someone else? Is there a possibility that exists? Where you’re someone else that’s more profitable and more successful with even more time? What would that look like? What would have to happen to get there? So transforming identity, and my left is huge on identity. But I will say identity is a big component and helping people shift from not leveraging to leveraging. And if you look at anyone who’s successful than you, they’re and I know, you know this, but for the audience, if you look at anyone who’s successful, they are not running day to day operations. They’re not even the CEO. They are the visionary, and or the investor of the company. Grant Cardone talks about it all the time. He’s like, I don’t want to be the CEO, the CEO of Warren Buffett’s company, I think he made like $15 million. But Warren, the investor made, or I’m sorry, the CEO of Coca Cola made $50 million. Warren Buffett invested in Coca Cola, and he made $500 million. Right? So shifting the identities a big one in the role that you’re playing, moving forward.

J Darrin Gross 28:12

Now, very true. And, you know, just that ability to look beyond your current set of circumstances and, you know, set that vision. I’m curious to see, you know, in that in order to help somebody reframe their, their realm of possibilities. How long does that take? You know, when you’re working with somebody, if they’ve, they’re willing, you know, we’ve established you’ve got somebody that’s willing or unhappy with their current set of circumstances? How many people that you work with know actually what they want?

Joseph Moffett 28:53

That’s a good question. So I say most of them have a great general idea, right? And they globalize it they go from a kind of a macro point of view, I want financial freedom, right. And the challenge, when you speak kind of globally like that is it’s so ambiguous, you’ll never obtain it. So one of the biggest things I like them to do is get really specific and really, there’s a great book called vivid vision and getting really detailed on what do you want, because when you say I want financial freedom, that’s like looking through binoculars that are, you know, twisted to the far left, everything’s going to be blurry. But the more detail we get, the more that we turn it and we get a crystal clear once it’s crystal clear, you see your end destination. And, and if you’ve ever had blurry vision, you are very, very hesitant to even take one step forward, even if you know where you are. You can be in the middle of field but you still not going to take a step forward because you can’t see. But when your vision is 2020 or closer up, if you can see it, you’ll go faster towards that and so by helping people get clear on a their personal vision, their professional vision, that is a huge, that’s a huge indicator.

J Darrin Gross 30:09

No, that’s, that’s definitely, I think that if you, if you have the target in mind, and you can see it and you know you’ve got it, you know, the details are there, I would think the wand would also, you know, the drive and the want to reach it would be that much more clear to as opposed to just kind of I, you know, I want to be going to be financially independent, you know, kind of more of a vague description. So that’s, that’s insightful. Appreciate that. Hey, Joe, if we could like 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 are three strategies we typically consider, we first looked to see if there’s a way we can avoid the risk. And that’s not an option, we’ll look to see if there’s a way we can minimize the risk. And when we cannot avoid nor minimize the risk, we look to see if there’s a way 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. And you can frame this however you like, could be your clients, the market, you know, interest rates, political, whatever, you see that, that you considered to be the biggest risk? And, again, for clarification, while I am an insurance broker, I’m not necessarily looking for an insurance related answer. So if you’re willing, I’d like to ask you, Joe Moffett, what is the biggest risk?

Joseph Moffett 31:51

Well, I’m going to answer it from the perspective of a mindset. And because I think it applies in insurance, real estate, the economy, politics, whatever it might be. And the biggest risk I see as individuals not being flexible. And what I mean by that is having the flexibility to see things in different ways than they would traditionally look at it from, it takes courage to look at both sides, or all sides of a story, a situation and investment, a product to really have your due diligence on what’s the best way to go. So people that I find that say, it’s one way, it’s this way, let’s go it’s my way, or the highway type people like they are in so much danger, they are at such higher risk of failure, and even under the illusion that they’re going to be successful because of it. And they may be but at what expense, but they are at a higher risk. And someone who is more flexible, they’re open to seeing both sides, or all sides are open this, you know, change direction or going down a path. I know. For me, I remember I had a term policy, and I realized, you know what whole life was a great insurance policy, that product for me, and then I actually unknowingly because I didn’t know all the details, I actually went through my whole life policy, when I didn’t know that the product was designed to be able to take out a loan against my principal that was compounding annual. So anyway, you live and you learn. But I wasn’t I wasn’t flexible enough to see all sides and understand it. So I would say the biggest word I can say is are you flexible? And if you’re not, how can you be even more flexible? Because in today’s times, you know, the strategy in real estate last year in the last two years, that strategy isn’t working now. And if you think it’s good enough, you’re not flexible and adapting with the market, you’re not going to have the success you’re looking for. In fact, you could actually harm yourself and or cause yourself to go in the opposite direction. So flexibility is my answer.

J Darrin Gross 33:59

Oh, well said. Definitely. If you’re only seeing things through, you know, one way and the whole world’s changing chances are your opportunity is going to change as well. And you got to be prepared to move with and so appreciate that. Hey, Joe, where can listeners go if they’d like to learn more connect with you?

Joseph Moffett 34:21

Yeah, there’s, you can find me on youtube under Master Life by Design. You can go to our website Master Life by Design.com or you can find me on Instagram at the Joe Moffett on Instagram.

J Darrin Gross 34:39

Joe, I can’t 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.

Joseph Moffett 34:48

Thank you. I appreciate it. Thanks for having me.

J Darrin Gross 34:51

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.

Announcer 35:10

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Trade Real Estate on Blockchain with Trevor Bacon – CRE PN #373

Trevor Bacon 0:00

In a traditional market, that a bank sits in the middle and makes market on makes a market on a stock, let’s say Apple, you know, they have one, one fund that wants to sell it, one wants to buy it, maybe no one wants to buy it, they want to sell it. So they’ll hold it on their balance sheet. And typically, it’ll take us a spread or get a cut for that, right. So in a decentralized fashion, there is no middleman. So what happens is that people will create will take assets and put them in a pool called the liquidity pool, and allow people to trade them. When you allow them to trade them. There’s a trading fee, just like the fee that I mentioned, for the centralized exchange, and the people who allow them to trade to get their portion of those fees to trade on top. So basically, I’d say I am willing to just make market so anyone can make the market. I put Portland token into a pool called the Portland pool. And now anyone can come and trade on the Portland pool. And if they do I get a fee. Now that can be any single person that provides liquidity versus in a traditional model, just the bank would take that the be the facilitator. And that’s, that’s it. It’s just a different model for the same thing which is a decentralized way to make markets.

Announcer 1:18

J Darrin Gross 1:37

Today our program is sponsored by Building Insurance and Risk. Don’t put your real estate investment at risk, work with building insurance and risk and receive multiple coverage offers with a side by side coverage comparison. To learn more, go to building insurance risk.com.

Today, my guest is Trevor Bacon. Trevor is the CEO of Parcl a blockchain based platform that allows users to invest in digital squarefoot physical real estate and neighborhoods around the world. And in just a minute, we’re going to talk with Trevor about utilizing digital real estate as a hedge against inflation.

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, Trevor Bacon. Welcome to CRE PN Radio.

Trevor Bacon 3:15

Hey, Darrin, thank you for having me. Really excited to be here and appreciate you having a song.

J Darrin Gross 3:21

Well, I’m I appreciate you being here. And I’m looking forward to our conversation here. Before we get started. If you could take just a minute and share with listeners a little bit about your background.

Trevor Bacon 3:33

Yeah. Cool. So prior to so it Parcl was founded in May of 2021. With a group of co founders. And prior to that I was an investor in technology companies in at several hedge funds. So I was a portfolio manager to hedge funds at an analyst at one for about five years. And before that I was at several banks Lazard and Barclays, always within the technology sector. So, internet software payments was where I specialized and that’s where, you know, I got the deep understanding of both software which we we do a lot of and blockchain as well.

J Darrin Gross 4:20

Got it. So, Blockchain, can you give kind of a brief description of what it is and and how it works with real estate?

Trevor Bacon 4:35

Yeah, so, a blockchain is effectively just a decentralized ledger to that has transactions listed once occurred in a public database. So it’s just a public database, not centralized. It’s permissionless, which sounds scary, but it’s just anyone can use it effectively. There aren’t any rules to who can use the blockchain for Remote like it’s in the traditional system, there’s a lot of restrictions. How we use it is probably more relevant. So how we operate, we are creating, we’ve effectively created two systems. One is is a data platform that derives the price per square foot in any given neighborhood, region, state city, have residential real estate. And what happens with you get that price per square foot, for example, if if we’re Darrin you’re in or Portland, right, so if we have a Portland price per square foot that gets piped onto the blockchain, and then we use the blockchain to collateralize, that square foot basically as a financial instrument, and then trade that square foot of Portland on an exchange called the decentralized exchange. But a decentralized exchange is very much it’s just a decentralized version of what any exchange in the world is, which is a centralized exchange. So meaning Morgan Stanley, Goldman Sachs, FTX, and crypto or Coinbase, and crypto that’s centralized, a decentralized exchanges where Darrin can make markets, or provide liquidity without being a institutional market maker. So that’s how our system works, which is effectively it’s a decentralized exchange to trade real estate prices

J Darrin Gross 6:30

Got it. So basically Parcl is in like a, like, the Dow, not the Dow Jones, like the New York Stock Exchange, or it’s an exchange, where right people can go on or they can find different opportunities and trade, you know, buy and sell is that, or

Trevor Bacon 6:50

Yeah, so, so right now, the way that the initial the initial implementation is, it is not real real, it’s not physical real estate. So the price points are backed by collateral by someone in the system that says, I think Portland is either going to stay flat or go down, I’m okay, putting my Portland shares into a pool to allow people to trade that. If it goes up, I’m on the hook for the for the the loss, if it goes down, I’m in the money. So it effectively creates a two way market of the price exposure in Oregon, or any other place in the country. And then in the future, internationally. So think of it much like a derivative index, right, like you can trade but it’s not very vibrant. The Case Shiller Index on the CME or like the Mercantile Exchange. The reason why one theory as to why it’s not so vibrant, is that it updates every month, but on a two month lag. So like, financial markets are very efficient. You know, they’re pricing in real time data every every minute. And you know, a month is a very long time in market. So there is a similar instrument, it’s just not as robust because of the time lags.

J Darrin Gross 8:14

Got it. So back up here once one step here, so I have a property, and I own it, and it’s, it’s in Portland, can I then list it on? On the Parcl? That’s the name of the listing? Right. Okay. So can I get a Parcl and list that on the on the exchange?

Trevor Bacon 8:36

No. So in the future, there are various products that would have where we would be touching the potentially touching the single family. But you know, there’s a lot of current, the current infrastructure is not ready to do that, right? You need like the title, you need the loans, you need the appraisal. So, again, we’re focused more on providing price exposure or providing hedging opportunities with the price movements of the underlying versus actually taking a physical house and putting it onto the blockchain. And that’s what’s been. There have been instances in which people have tried to give fractionalized ownership or tokenized ownership very another very similar concept that it does not scale because you actually need to own the house or building and then fractionalized the you basically fractionalized, who owns it that you cut up the pieces of the equity. You know, on the other hand, to make a vibrant market in the instance that you’re just referenced. You’d have to get a real big buy in of people listing their homes on the platform to get a good two way market. So we’re starting with this index approach in in the future we will likely have or aim to have more I call it individualized products. But again, I think that’s like some time out because of the financial infrastructure that’s needed to make that a reality.

J Darrin Gross 10:10

Kinda so the it’s more of the index model, like you said, as opposed to the actual the physical assets. Yes. Okay.

Trevor Bacon 10:17

That’s how we’re starting.

J Darrin Gross 10:19

Okay. So back up here a second. So, the how does the blockchain I get the concept of the, the ledger, and people being able to you get a token and you can log in. And if you want to, you know, sell a part of what you have, if you have one and you want to sell half or you know, if you have 10, you want to sell five or whatever, whatever that is, you have control of of that, I am assuming that that holds true. So, but so help me understand then go back to the index. So if I, if I see that, that Portland real estate is trading for x, and I think that it’s going to go up? So I buy in Who who is it that holds that? The other side of that investment is that you guys are here investors that that do that? Or how did you guys establish the the

Trevor Bacon 11:13

Two way? Yeah, so if so there’s it’s basically two sides of the market. One side, like you mentioned, you would just by Oregon, that would sit in your wallet, that you have, you’re the only person who has access to so we don’t have custody of your tokens, the way that it works in, in blockchain in a decentralized fashion, it’s called a decentralized exchange. So in a traditional market, that a bank sits in the middle and makes market on makes a market on a stock, let’s say Apple, you know, they have one, one fund that wants to sell it, one that wants to buy it, maybe no one wants to buy it, they want to sell it, so they’ll hold it on their balance sheet. And typically, it’ll take us a spread or get a cut for that, right. So in a decentralized fashion, there is no middleman. So what happens is that people will create will take assets and put them in a pool called a liquidity pool, and allow people to trade them. When you allow them to trade them, there’s a trading fee, just like the fee that I mentioned, for the centralized exchange, and the people who allow them to trade to get their portion of those fees to trade on top. So basically, I’d say, I am willing to just make market so anyone can make the market. I put Portland token into a pool called the Portland pool. And now anyone can come and trade on the Portland pool. And if they do I get a fee. Now that can be any single person that provides the liquidity versus in a traditional model, just the bank would take that the be the facilitator. And that’s, that’s it, it’s just a different model for the same thing, which is a decentralized way to make markets.

J Darrin Gross 12:57

Right. So but I guess what I’m understanding as if you decide to make the market, what is that? What does that entail is or capital that you have to put up?

Trevor Bacon 13:09

Yep. So basically, if we say Portland is, let’s just use $100. It’s more than that. But like, let’s just say $100. For simplicity sake, you put $100 into the Portland smart contracts. So this is the crux of it. Right? So what what is backing that $100? It’s it is actually collateral? So it’s it’s it’s it’s crypto, but it’s not it’s crypto and not real estate, basically. So it is backed by something. And if that goes up, you’re you are you lose that collateral. Does that make sense? Right? Darrin owns it and it’s going up, you’re losing this collateral. And on the way down, Darrin loses the the loss to to make that person have more money in that contract. So it’s it’s a simple contract, a smart contract, they call it where two people are locked into an agreement. If it goes up, one person knows if it goes down it the other person knows.

J Darrin Gross 14:08

So okay, so you explain how to make a market? How many markets do you have to date?

Trevor Bacon 14:17

So we started off, we just entered our alpha stage with with our community, which is a closed test. It’s the markets that we currently have our Miami, Los Angeles, Manhattan, Brooklyn, Phoenix and San Francisco. And we’ll probably be adding three to five more in the coming months and then we are also looking to expand internationally. International data structures are obviously not as they’re more fractured and there’s language hurdles to we need to overcome and In various data cataloging is there’s different rules in different countries. So luckily, the US is a pretty large country with one kind of set of data that we can use. But we’re very excited about our international rollout.

J Darrin Gross 15:17

This is fascinating. So somebody investors, I assume, in what’s, what’s an average market? To to establish a market? What kind of capital or equivalent Are you? Are you it doesn’t take to create a market? Like to start Dallas?

Trevor Bacon 15:40

Yeah, yeah. So we have. So there’s ways to incentivize to begin that, you know, kind of the cold start pool of liquidity in Dallas, for example, we have committed capital that are going into the various polls, it’s scaling up. And we will, as we enter new markets, follow similar protocol to get capital into the system, you can do that in various ways you can get it, you can start slow, you can incentivize people that come in. And then we’ll also do our best to release markets that are attractive to to users, like try and facilitate demand, both organically and then also from us in the community, so trying to take feedback of where people want to get exposure to if it’s Dallas, Austin, Chicago, Paris, we want to know that and then cater to where people want to have their exposure, real estate exposure. So basically,

J Darrin Gross 16:47

is it a function of whatever you feel like the demand is going to be as how you capitalize it? Or how do you?

Trevor Bacon 16:55

At the very beginning, you’re saying, right, yeah, so at the very beginning, we’ll try and seed markets with some liquidity. So if just the way it works, if you’re making a market, for example, and there’s a lot of trading volumes, that’s a very high return, because you’re getting fees. So if there’s a very high return more people, like economically speaking, more people will come in and provide liquidity drive that return down. So it is the the earlier you are to a liquidity pool, the higher your return will likely be and that just economically speaking, that gets diminished over time, into a more stable rate. And so yeah, so I would say like, at scale, like we’re kind of when we’re open to the broader public, we’re looking to have call it like one to 2 million at the start and each pool.

J Darrin Gross 17:50

Gotcha. Gotcha. And pricing the market. The data that you’re using, you mentioned about the lag. And but I would assume like I know just a little bit about I mean, this almost like IPO kind of stuff from the standpoint of when you start a market. Yeah. I and excitement to get into it. So I’m kind of curious on the pricing, is, is most of the initial trading, just speculative? I mean, because like you said, as as the market matures, you get more of a stable thing is it I mentioned fascinated me to think about starting to market trying to get interest in recognizing the majority of the return that investors are getting is based on the transactions. Is that correct? Or, I mean?

Trevor Bacon 18:44

Well, there’s again, there’s kind of two sides, but you’re, you’re you’re you’re nailing the point. So there’s two sides. So the person just providing liquidity just cares about the transactions, the trainer or the or like the investor is cares about that price Return of the asset. Does that make sense? So like Zacks, or Morgan Stanley, they don’t really have a view on what Apple is going to do. They just want to make they want more trades, or there’s market maker who just sits there puts capital there, it’s passive income, and they’re getting fees. The person trading has a view on the underlying which they want it to either go up or down. And so there’s kind of those two dynamics. But to your point, it is interesting how in each market is very much like you’re running the gamut of like equity issuance, right? Like when an IPO comes public, there’s only buyers because there’s no stock to short, the employees can’t sell it for six months. You can’t locate shorts, so it probably is at the very beginning a very much akin to that. So putting it out, you’re going to have a little bit of a off pigness to like the underlying price and we We are facilitating or we’re working on different ways to have short like natural shorting, which would basically be and you’d borrow or created just like a regular stock market where you borrow stock, sell it, you get the capital, and then you have some margin under it to cover your potential losses plus the returned stock. So we’re working oops froze her markets, or that

J Darrin Gross 20:37

you froze just for a second, you said you were working on it you

Trevor Bacon 20:41

We’re working on ways in which to create capital efficient shorting mechanisms so much like I think I think you got me on the stock part. But basically, you borrow the Parcl sell it, it sits in a contract with the cash and collateral, and then you you have to return that whatever the gains are, for four, to close out your position.

J Darrin Gross 21:12

And so is there anything that the market maker, the people that are basically set to, you know, incur, or I guess, charge the fees? Based on the on the trades? And that, is there anything that prevents them from participating in the market? I mean, one of the things I’ve kind of come to recognize is that the big money on Wall Street, they make money buying and selling because they recognize the position. They’re big enough to create a position up or down or whatever. Is there anything because there’s a blockchain? Or just Parcl? Is there any of guardrails or whatever? Or is there as transparent as far as who’s doing what or is it? Because I’m just kind of think like, in an initial market, everything’s a buy? Yeah. And you get to a point where somebody’s trying to sell and if you’re the guy that put up the capital, and you’re basically losing as it goes up? I’m assuming you’re waiting for it to go down to make back some of your money based on the, the the ying and the yang of that, is that. Does that make sense?

Trevor Bacon 22:22

Yeah, so there are no restrictions with respect to if who can use so the protocol is, is permissionless. We are, you know, being conservative with regulatory regions, like where we’re rolling out, just given some lack of transparency in many, many countries. But broadly speaking, it’s permissionless. So if you provided the liquidity, you could also trade if you wanted to. And eventually, what we’re aiming to do, hopefully, in the next several months, is you could also create, like, much like a stock market, if you have shares and someone borrows them to short you can earn a return on that too. So it’s kind of like your cost to borrow in a regular short market. So we want to be able to create an infrastructure where if you own the Portland Parcl, you stake it in a pool, such that someone can borrow it and short it. And that’s another way to get return on in the system in charge fees.

J Darrin Gross 23:36

It’s fascinating in just the the positioning I think that you know, if you’re a traditional real estate investor, you’re thinking about all of the particulars to a particular property. Obviously, it’s tied to whatever the market value is or what the market sees and how you believe that you can change the value or increase the value and kind of an exit whereas this is kind of fascinating from just a it’s a standpoint of you want to participate in a market but you’re not necessarily you know, finding a particular property it’s more about a an overall market the appeal to the mass market meaning that you get in and there’s a lot of interest in you get in you can you can make you know make an upside and I’m assuming just based on the blockchain there’s an easy entry exit from that particular market so if you got into say a Dallas when it first started and you wrote it up, you could get out and find another market and get in and

Trevor Bacon 24:43

Yeah, exactly. Yeah. The goal it’s like a liquid exposure obviously in hard assets right like a lot of the opportunity is buying it at the right price. You know, fix it or however you you can, you can ride the neighborhood demographic as it changes, and if you think that’s good, from an economic standpoint, you could also do work and then flip it to get return, right? Obviously, those are great ways to invest in earn, earn return in this in this specific type of instantiation of real estate, it’s more like, you can trade these same kind of economic shifts in the areas, eventually, we want to have leverage. So it’s not so dissimilar from actually, maybe, you know, it’s not as much of a binary like, I think real estate is great, because you can take leverage and those returns are levered, you could do that here as well and then have immediate liquidity when you want to sell and, you know, kind of rotate into a different region, if you think it’s petered out, you’d also be able to short so you’d have a relative value. I like Portland, and I don’t like San Francisco, and you could play that trade. So it’s, you can see kind of traditional Wall Street structures being formed around the real estate price action.

J Darrin Gross 26:10

So how directly correlated or coupled is the physical asset that market to Parcl in in the digital market. If if, I mean, obviously, when you when you price it to begin with, you know, you’re I would assume you’re trying to mirror what the the actual market is. But if you have, you know, speculation, just because of Parcl being something new, and people can get in and get out, and they run the price up, but yet the actual physical assets, not necessarily in the same, you know, the ability to run something up or down, it’s not as instant. Is there any kind of correlating factors, it is basically just buyers and sellers in the marketplace?

Trevor Bacon 26:58

Yeah, so there is a, there’s something that we call the peg, so the peg is the price at which, if we’re gonna go back to the stocks, but it’s kind of like the issuance. So you collateralize it at the peg, the peg is a representative price of on the ground Real Estate. Today, it updates every day. So imagine a more robust index that is taking into account various, you know, obviously publicly available data, but to get you to a representative price per square foot. And that’s like the partial price. So you can always mint a create assets at that price. There’s various ways in which to drive the price down, you can mint and sell. You could mint and provide liquidity and add liquidity around certain price points. And then yeah, so we do anticipate that initially, as these markets do get off the ground, you’ll have some floating away from that that price. But you know, I think that’s, that’s similar to most markets, right? Again, if we started with just one stock, for example, you’re issuing it, you’re it’ll be it’ll deviate from like the intrinsic value, just simply because of the imbalance of buyers and sellers. We are working on different ways in which to create more fluid systems to have that natural balance. And then over time, it becomes hopefully an efficient market. So this is the price right? We have our reference price, you can you can issue at that price. But if if we creat can create a creative market with enough liquidity and enough selling and buying, we that becomes the price and then it can be off peg because it’s a smart market. And that over time can actually inform on the ground decisions with respect to pricing transactions and other types of real estate data outlets.

J Darrin Gross 29:01

Got it. So if I understood right, right now you’re basically in a beta mode. Are you is this active for

Trevor Bacon 29:08

Yeah, it’s active and live a lot of blockchain. We are in a yeah, basically, we call it an alpha. But it you know, for all intensive purposes, it’s a closed beta, where we have like a sort of small subset of users trading real dollars. We’re super thrilled with the initial momentum. And we’ll be opening it up over the coming weeks, to just a broader set of of users.

J Darrin Gross 29:37

I think it’s fascinating, just the, you know, what are the things I love about the digital age, it’s just, you know, all of the opportunities and people like yourselves that are creating, you know, opportunities that previously had not been that it’s just it’s incredible. So, as far as like investing in a physical asset, you have the opportunity to Like I said, if there’s leverage, you’ve got some interest, right off and, you know, depreciation some tax advantage kind of things. I’m assuming that’s not necessarily the case. With this, am I missing that? Or is there? Is there any correlation or opportunity?

Trevor Bacon 30:18

You know that right now, I do think there’s ways to there’s various ways in which you could tax loss harvest on, if you were to be really savvy with respect to the viewer, okay. Being short or taking a loss in this vein as to tax loss, harvest your view on the market, right? Like, you can’t, you can’t, your house can’t do that for you. So there are different various, there’s, there’s savvy ways to do it. But there, you know, for the kind of the, you know, natural flow there today, there’s not in the future, you know, the regulation pretty is pretty. No, the framework for digital assets, has yet to be truly developed. So we hope that we can help influence that. And I think, hopefully, we can figure out a way in which to have that as part of the future. You know, I do think generally speaking, institutions are buying more houses, making it harder for the younger generation to actually participate. So just because they can’t participate, that kind of weeds them out, right, they’re excluded. Today, actually, Blackstone, I’m pretty sure it was Blackstone announced that they were raising a fund to buy 1 million houses a year, there’s a shortage of houses in the country. So now all of a sudden, you know, you’re pretty much either stuck renting from Blackstone and institutions, which means you’re short real estate, right? Because when prices go up, you pay more rent. So it’s, it’s falling on the consumer, especially the younger consumers. So, you know, I think for equity or inclusion, having ways in which other people can participate in real estate such as this, but also get those structural benefits that traditional real estate offers, which is tax write offs, depreciation, etc. should be considered by policymakers, I think.

J Darrin Gross 32:24

Agreed. So what was the first market you guys opened in?

Trevor Bacon 32:29

So we launched at six total, Miami, Brooklyn, Manhattan, San Francisco, Phoenix, and Los Angeles.

J Darrin Gross 32:39

And how long have you been live? One week? Oh, really? Seriously? Lap. Right. Okay.

Trevor Bacon 32:45

Well, live. So we’ve been developing this for over a year. So it’s taken a lot for us to get Sure. So yeah, we’ve done we’ve done three test nets with like, what the like fake dollars. Now we’re live with real transactions and data that unveils a new set of opportunities, and, you know, things to deal with, but we’re very pleased with how it’s evolving.

J Darrin Gross 33:11

So I’m curious, the test dollars, where it’s not real money, as opposed to the now you’re live, and it’s real money? Do the two scenarios do they track? Or are you finding that behavior slightly different with real money?

Trevor Bacon 33:31

So we didn’t get the meaning gate means like, we didn’t close the test. Net two is a subset of people. So really, we’re dealing with like, 100 to 200 people, which is where you know, and that’s like, our community that we’ve been building over the last, you know, six or so months. So those are like our patient users, they can tell you when something’s not working, they can put the you know, they can, you know, call you out if it’s on Twitter, if something is broken. So, you know, I think some of the behaviors that we’re finding are Brooklyn, like some of the smaller demographic areas, like Brooklyn is a hit, Miami, Phoenix, like these areas are pretty high in demand. Again, it’s a small sample size, so we need to understand exactly what’s driving that, but we’ll do we’ll do more testing to figure out like, what exactly is behind some of the demand drivers and then keep catering to those specific products?

J Darrin Gross 34:32

Yeah, it’s, it’s fascinating, again, just the concept and the application and just, I didn’t even thought about how social media, Twitter, you know, Vav being attacked on Twitter or not even PAC but I’m just there’s, there’s, you know, there’s a lot of talk on social media that would attract and, and provide movement or opportunity for movement in Ademar Get. I mean, to me that’s that’s fascinating kind of magic in my my son, gamer, he was all excited about GameStop. Back when I was like, exactly. Look at the fundamentals everybody that’s yeah. But fascinating. Hey, Trevor, if we could, I’d like to shift gears here for a second by day, I’m an insurance broker. 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 first look to see if there’s a way we can avoid the risk, when that’s not an option, we’ll see if there’s a way we can minimize the risk. And when neither avoid nor minimize our options. And we look to see if there’s a way we can transfer the risk. And that’s what an insurance policy is. And as such, I like to ask my guests, if they can look at their own situation, could be their clients, investors, the market political, social media, whatever you consider to be the biggest risk, and just again, identify it, and then explain why you consider it to be the biggest risk. And again, for clarification, while I’m an insurance broker, I’m not necessarily looking for an insurance related answer. And so if you’re willing, I’d like to ask you, Trevor Bacon, what is the biggest risk?

Trevor Bacon 36:27

Great question. Yeah, aside from the table stakes, which is just execution that we’re focused on every day, I think there’s their security is the security and transparency is something that we take very seriously. And we obviously identify that as, as a risk point, both for the actual product, but also for our community and reputation. So we take security on both the data side and the blockchain side. Very, very seriously. We’ve had multiple, multiple audits, we have audit firms on retainer, to make sure that every line of code is audited before we put it on the blockchain. And expose it. So that is something that we view as a risk, we do our best to manage it. And as you say, mitigate it through checks, protocols, just time spent in development. And then that’s something that we’ll continue to make more robust as we expand.

J Darrin Gross 37:35

It’s fascinating. And again, just the, the risk you face and you know, what you have to do to control?

Trevor Bacon 37:42

This is an industry, you know, that question is, it’s very, it’s very applicable to crypto, generally speaking and blockchain. So you know, we’re basically you’d have a field day here.

J Darrin Gross 37:59

Oh, no, I’m sure just, you know, cyber and just between what you’re, you know, the product you’re creating, which is, you know, essentially the code so that the users can, can interact. And just to be aware of all of the, the things you got going there a lot of balls in the air there. So that’s Yeah, that’s great. Yeah. So hey, Trevor, where can listeners go if they’d like to learn more connect with you?

Trevor Bacon 38:24

Yes, we’d love to connect. Twitter is our main medium. It’s Parcel pa at Parcl pa RCL. To verified account, so there may be others. But that’s the one. You can find us it. Parcl PRC. l.co. Our app is app.Parcl.co. And we’re also on Discord. Just search for Parcl in in the discord app. So yeah, we’d love to hear from you and get your feedback.

J Darrin Gross 39:02

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

Trevor Bacon 39:15

Darrin, thanks a lot for having us. We really appreciate it. And thanks for all the Conquerer insightful questions.

J Darrin Gross 39:21

My pleasure. 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 39:41

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Raise Capital for Real Estate with Dave Dubeau – CRE PN #371

Dave Dubeau 0:00

Say, I lost that deal, I was not able to raise the money for it because I bought into that find a good deal, the money will find you. Since then, I’ve completely changed my philosophy. And I think, hey, here’s the goal. Get your investor ducks in a row first. And then go looking for the deals or at the very minimum, do both at the same time. But don’t wait until you got a hot deal on the go. And then desperately start looking for the capital. Try and get that set up ahead of time get those investor ducks in a row. So the whole goal and nowadays we work with clients and we help them do all of this stuff, is we want to get you a bunch of investors waiting in the wings anxiously you know, biting their fingernails waiting to jump in on your next opportunities.

Announcer 0:46

J Darrin Gross 1:06

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 program is sponsored by Building Insurance and Risk. Don’t put your real estate investment at risk, work with building insurance and risk and receive multiple coverage offers with a side by side coverage comparison. To learn more, go to building insurance risk.com.

Today, my guest is Dave Dubeau. Dave Dubeau is a real estate entrepreneur, best selling author, speaker and investor, attraction expert. And in just a minute, we’re gonna speak with Dave about raising capital. 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, please go to our YouTube channel. You can find us on YouTube at Commercial Real Estate Pro Network. And while you’re there, please subscribe. With that own welcome my guest, Dave Dubeau, welcome back to CRE PN Radio.

Dave Dubeau 2:38

Darrin, thanks so much for having me.

J Darrin Gross 2:41

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

Dave Dubeau 2:50

Sure. Well, thanks very much. I am originally from northern British Columbia, Canada. Born and raised living there now however, I took a little hiatus and I lived overseas for almost 14 years. Traveling around Mexico and Latin America, settled down and lived in San Jose, Costa Rica for a decade, from about 93 to 2003. Ran a language training company down there, got married, had kids, all kinds of good stuff. And then in 2003 I uprooted my Costa Rican family and moved us all back to the frozen hinterlands of British Columbia, Canada. And a lot of people, especially Canadians, go what are you crazy? Maybe Maybe Costa Rica is wonderful is beautiful. However, being the pasty faced white guy that I am. Whether you have money or not people assume that you do in Latin America. And there’s a distinct risk of being kidnapped, held for ransom, that sort of thing. So in the small town we live in, in British Columbia, Canada, that hardly ever happens. So that was a matter of our kids were getting towards school age, we decided, hey, you know what, Costa Rica is great, but I think it would be better for the kids to grow up in North America. So that’s why we moved back.

So at that point, Darrin was like, Okay, now what do I do? I mean, I’d been out of the country for so long. I didn’t have a bad credit rating. I had zero credit rating, just nothing. I had been self employed for quite a while. So I was pretty much unemployable hadn’t been able to sell my business in Costa Rica so didn’t have a lot of money to get started with. And it was a question What am I going to do? So I don’t know if you remember those you remember those late night infomercials? Darren, you too can get rich in real estate with little or no money down. I need you to do it. You’ve got the radio voice, but you know what I’m talking about, right? Oh, yeah. But I saw one of those. I saw one of those commercials I said perfect. That’s what he got little or no money. So I send away for this program. A guy named Ron Legrand all about creative real estate real estate type deals. had to kind of Canadian eyes it it’s basically all the same stuff, Darren, I mean, we have slightly different language for things up here. But real estate works. The same as it doesn’t doesn’t state. So first of all kicking the can was I did 18 deals in 18 months, these creative low money, no money down type deals, which may or may not sound impressive. It sounds kind of impressive. However, you got to see some of those deals, some of those were pretty, pretty sketchy at best, talking about rundown mobile homes and mobile home parks and things like that. So, but I got very good at doing creative deals and attracting motivated sellers. So that’s, that’s how I got started in the real estate space.

J Darrin Gross 5:40

Well, 18 deals in 18 months. I mean, you’re getting reps, and you’re having success, regardless of you know, how pretty they were, how big they were. I would think that just, you know, it’s like anything, you know, whether you’re doing math or trying to learn how to hit a golf ball or whatever the revenue,

Dave Dubeau 6:00

Neither which, neither one of those things, I’m particularly good at Darrin. So

J Darrin Gross 6:06

The point is that repetition is really the that’s the key, exactly are the those that are have some natural talent. But even that if they there’s room for improvement, and, you know, repetition, how you get there. So that’s great. So you you started, I know, down here, it seems like the guy was Carlton Sheets, but it was all the same kind of thing. It was a late night. You knew us it was time to go to bed when when the ads started coming on, because everything sounded too good.

Dave Dubeau 6:37

Yeah, but I think I was I was stressed out, I had insomnia. So I was late, up late, thinking, what the heck am I going to do to put the put the food on the table? That kind of thing.

J Darrin Gross 6:46

So yeah, no, I know, I’ve got several insurance clients that I think, you know, that’s kind of how they get started, because I remember some of the deals that they were, they were bringing me when I first started, right, you know, insurance were like, and, you know, just, they just, they were nothing like anything I had ever seen before, you know, trees growing through the chimney are kind of thing and, but they were making money and making it happen. And, you know, again, it was kind of more of a, an assumption and finding those that were there was some opportunity, and kind of learning the ins and outs and becoming more proficient. And, you know, to this day, they’re there they’ve done very well and, and have multiple properties very secure, you know, base of, of equity and and, you know, options for for exits and and all that fun stuff. So

Dave Dubeau 7:41

I wish I had been smart enough to hold on to a bunch of those properties. But those were all kind of quick turn transactional type deals. So so it made it made a quick POP of cash with them, but that didn’t get any of the long term growth. So that was gonna jump.

J Darrin Gross 7:57

Well, but during your your experience, so you mentioned that you attracted investors and stuff.

Dave Dubeau 8:03

Well, yeah, so that’s how I got started in real estate, took a few years off, and then when I got back into it, then I started doing a little bit more traditional type stuff, starting with single family homes, buying and holding them for a while. That’s when I started bringing on joint venture partners investors, that sort of thing, then transit transitioned into multifamily buildings later on. And these days I’m personally I’m more of a kind of a passive investor myself, because, quite frankly, Darrin, I realized a while ago, I kind of suck at dealing with tenants and toilets. So I’d rather let the guys and gals that are good at that take care of that stuff.

J Darrin Gross 8:39

Ya know, that’s an important realization to have. Yeah, property management versus asset management, two entirely different roles and the big deal there. But so let me ask so you, you know, you came, came back into you got into larger properties and raising money. Did you find the property first? Or did you find the money first when you were doing these larger deals?

Dave Dubeau 9:09

Oh, yeah, that’s a good question. So at first, when I first started realizing I needed to access other people’s money to grow my portfolio. I bought into the guru talk of just find a good deal and the money will magically find you. And personally, Darren, I like to find whoever came up with that expression first and smack them right upside the head. Because I think they’ve done the vast majority of real estate investors a great disservice for that because it’s baloney. At least in my experience, so so that’s what I tried at first, I remember it vividly. I just little deal on the go, just a single family home, but I needed to raise $85,000 And I only had less than two weeks to do that. And I didn’t have anything lined up. So I was starting from scratch. So I had heard that expression, find a good deal. The money is going to find you but I knew that. You know it wasn’t just like the secret that the universe is going to do. plunk a bag full of money down on my patio. So I’d have to do something. So I’d also heard these gurus say, Well, hey, you know what if you need to raise some capital quickly pick up the phone and do what all of us love doing, which is cold calling, right Darren, I don’t know if back in the day, when you were first starting in the insurance business, you were encouraged to cold call people and try to pitch them on on your stuff. But that’s kind of a common thing for, for people in those kinds of industries to be told. So I thought, hey, well, I’ll give that a try. And I failed miserably at that.

Desperation.

Yeah, I didn’t really know what I was doing. Plus, quite frankly, I just think it’s really a really bad idea. Unless you’ve got an amazing sales background. You’re very good at that. But if you’re trying to raise at that time was trying to raise $885,000, if you’re trying to get somebody invest 85 grand with you, calling them calling them up cold over the phone, probably isn’t the best way to do it. So I did a bunch of those calls. That didn’t work for me. So then I thought about I got to try something else. And I’d also heard Hey, go out and network up a storm turn every conversation into real estate conversation. Nothing wrong with networking, Darrin, the challenge is when you’re on a really tight timeline. So by this time, I’m down to like seven days that I’ve got to come up with 85 grand. So when you’re in a tight timeline, and you’re networking and schmoozing to raise capital, the desperation kind of oozes out of every pore in your body. Right. Right, people can pick up on that. So it doesn’t really matter how good the deal is, if you’re coming across as desperate needy, that’s going to creep people out, it’s just going to kind of repel them. So that’s what happened there. And then I was getting really desperate a few days before I needed to close on this deal. I came up with a what I thought was a great, brilliant idea said hey, this is such a good deal. It’ll sell itself if enough people see it I’ve ever heard anybody say something like that was me. So I put together the one PD one page PDF outline of the deal, put together a list of a couple of 100 people that I knew. And I spammed I mean, I emailed them all this, this PDF, and I remember it was like a Wednesday night. I think I’d removed subjects on Friday. So it was a Wednesday night I sent this out. Thursday morning, I got up I was so excited Darrin because I had some responses in my inbox. And then I started reading the responses. And they pretty much all said something along the lines of hey, Dave, dude, haven’t heard from me in forever. One guy hadn’t heard from me in eight teen years there. And this was the first thing that showed up in his inbox from me. Hey, it’s Dave, I got the deal. Have you got the dope thing, right? They all basically said, Hey, do Bo take a long walk off a short deck, take a hike, get out of here. Bottom line, Darrin, that’s a very long winded way to say I lost that deal, I was not able to raise the money for it, because I bought into that find a good deal, the money will find you. Since then, I’ve completely changed my philosophy. And I think hey, here’s the goal. Get your investor ducks in a row first. And then go looking for the deals or at the very minimum, do both at the same time. But don’t wait until you got a hot deal on the go. And then desperately start looking for the cattle. Try and get that set up ahead of time to get those investor ducks in a row. So the whole goal and nowadays we work with clients and we help them do all of this stuff, is we want to get you a bunch of investors waiting in the wings anxiously. You know, biting their fingernails waiting to jump in on your next opportunity. So that’s, that’s the goal these days.

J Darrin Gross 13:47

So you you know, you still raise money for your own deals? Or do you primarily work with others to help them raise money?

Dave Dubeau 13:54

Primarily these days, I’m working with others, we have kind of, for lack of a better term, a a boutique marketing agency, and we work with what I call Mom and Pop real estate investors, help them get started on their path to raising capital doing it the right way. And help them get their first, you know, anywhere between 500,000 to 1.5, maybe $2 million worth of industrials and capital lined up.

J Darrin Gross 14:17

That’s, that’s impressive. So in that role, what are some of the mistakes you see that you know, in or people that are trying to raise money make?

Dave Dubeau 14:30

Yeah, well, you know, everything that I just mentioned, all those mistakes I’ve made, I see other people making those as well. So waiting until you’ve got to deal until you start trying to raise capital and then just floundering around and and, you know, running around like a mad person. That’s a big mistake. Another big mistake is you know, especially for newer capital raisers is they think that everybody and anybody with a pulse and a checkbook could be a good investor. So I’m going to cover my butt here, Darrin, I’m gonna say the caveat is I’m not a lawyer, nor a security specialist. I’m a real estate guy up here in Canada. However, you know, you guys in the states have the Securities and Exchange Commission, we’ve got our own version of that up here, they’re just as nasty. It’s all basically the same role. So, same idea. So, a lot of people, I see it, I’m sure you’ve seen this as well, they start pitching their deals on social media, like they put it up on Facebook, or LinkedIn, or whatever their flavor of social media is, and say, Hey, I’m looking for investors for this deal. I’m offering x, where she had guaranteed and all this kind of stuff, right? And they’re trying to promote, they’re trying to solicit investors in a public forum. And my understanding is that that is illegal, right? Unless you’re licensed to do so. Like, if you’re a stockbroker, if you’re a financial planner, certain cases, maybe a mortgage brokers, certain financial specialists, they, they can do that they’re there, they’re able to do that the big banks, etc. Or, if you’re set up with a specific exemption, in the case of our American friends, right, you’re, you’ve got exemptions, or you’re set up with corporate structures and, and offering memorandums and all these kinds of things, which tend to be very, very expensive and cumbersome to set up, which doesn’t really make a lot of sense if you’re doing a little single family home or a duplex or a small deal. Right. So where does that leave us? Well, I think the best place for people to start is to focus on their existing network of contacts. So instead of going out to everybody, and anybody, I mean, we got to be logical about this as well there. So I mean, think about it, if you’re trying to get somebody to invest 5075 $100,000 or more with you in a deal, chances are, they’re going to need to know you, they’re gonna need to like you, they’re gonna need to trust you with their money. If you’re going out to the great, unwashed masses, you’re going out to the general public, you’re going out to strangers, strangers, don’t know you, they don’t like you. And they certainly do not trust you with their undergrads. So that’s a long shot at best. So why not focus on where we can kind of shoot fish in a barrel. And that’s with people that you already have in your existing network, friends, family members, co workers, business associates, people who know you, and who you know, because when we focus on those folks, number one, we’ve taken care of the know like, and to a certain extent, the trust factor, they know you they like you, they may trust you to babysit the dog for the weekend, maybe not with 100 grand yet. But you know, we’re getting closer, we got two out of the three, which meatloaf saying is all about that, that ain’t that that’s it, that’s a good place to start. So that’s that’s what we recommend, is when you’re getting started with raising capital, focus on your existing network. Laser laser focus on that is going to be the fastest capital, it’s going to be the easiest capital is going to be the safest capital for you to get started with.

J Darrin Gross 18:08

That’s good. With raising money, I guess that you mentioned like when to start, you recommend kind of either before or at least at the same time when you when you find a deal?

Dave Dubeau 18:21

Well, yeah, I recommend before. So that’s a really good question, Darrin, because a lot of people are hung up about this, especially when they’re first starting with raise capital, When should I start trying to bring on joint venture partners, investors, etc. And my personal opinion is, as soon as you’ve got one successful deal under your belt, then you are ready to start using other people’s money. Because the statistic I’ve heard thrown around for years, is that 95% of the general population has never purchased an investment property before their own house does not count as an investment property. So if you’ve got even one successful deal under your belt, chances are you’re ahead of the vast majority of the non real estate people that are in your network. So And my philosophy is, you know, a good real estate deal is the absolute best way for everyday folks like your listeners, myself, our investors to get an above average return on their money backed by a solid, tangible asset, a real piece of property, because I don’t know any other investment class out there that we can exercise as much control over right. So when you think about it a piece of property, we can draw what market we want to focus on, what kind of properties we want to focus on, who’s selling them on market off market type deals, to a certain degree, how much we pay for them and there’s a little bit of negotiation available there, how we get them financed to a certain degree, right? We can control what we do with those properties. Once we Get them, how we make improvements on them, who we put in those properties as our tenants, we’re holding them long term, how we exit those properties. So we have so much more control over this asset class, then buying gold stocks, bonds, mutual funds, crypto, all these kinds of things. We really don’t have much control over. Right.

J Darrin Gross 20:22

Right. Right. So as far as the asset goes, do you typically work with people that are looking for like, multifamily value add? Or do you work with other asset classes or other strategies for for, you know, buy and hold or what’s kinda the sweet spot?

Dave Dubeau 20:40

Pretty, pretty much you know, as far as the people that we work with as our clients. Yeah. Pretty much runs the gamut there, Darrin. So again, we tend to be working with smaller Mom and Pop real estate investors. We’re not working with the big time syndicators. So we’ve got clients who are doing single family homes, burrs, self storage facilities, by fixing sell flips, small multifamily properties. We’ve got people that are doing land deals, we’ve got people that are doing carwash, we got all you know, pretty much commercial, you name it, if it’s if it’s got real estate involved with it. The process works the same way. Tax liens, tax deeds too. Yeah.

J Darrin Gross 21:23

Got it. So how do you set realistic or attainable expectations? When you’re when you’re meeting with somebody? Is that based on the size of the network that they have? Or was it their experience? Or how do you kind of, if I, if I came to you and said, Dave, I want to raise, you know, $10 million?

Dave Dubeau 21:45

Well, I would say, that’s great, Darrin, how much have you raised to date, if you see a big fat zero, right? Then we’ll say nothing wrong with wanting to raise 10 million, we can probably help you get up to your first one, maybe to 2 million, by really leveraging your existing network. Because that’s what we found over the last six years, we’ve been doing this as we can typically squeeze the juice out of your existing network, get that one to 2 million out of there. Once you’ve got that, then you’ve got to quickly work on expanding your network and probably start working with accredited investors who have larger amounts to invest there. But that’s that’s kind of why that’s our sweet spot is we help people get started in the process, get them up to that, you know, over time up to that one to 2 million.

J Darrin Gross 22:32

Got it. And even in that just heard me like, I’m assuming that there’s kind of a reality check. Sometimes based on what people you know, want to do versus what, what seems reasonable or what’s easily easily attainable. You’re saying the find that that kind of the eyes are bigger than the play kind of thing, or we’re

Dave Dubeau 22:53

Not necessarily there’s there’s a, there’s a bit of a range there, but quite often daring. Again, like I say, we’re working with the mom and pops that have been doing some deals for a while that typically they sell finance their first 234 properties, something like that, now they’ve hit the raw, they’ve run out of cash, they’ve run out of credit, they tend to be very insecure about how to go about raising capital. So if anything, a lot of them tend to be quite conservative, right? So we, we actually are able to show them that, hey, we can probably get you even better results than then you’re hoping for. But again, yeah, it’s it’s important that we have those realistic expectations. So typically, what we say is, hey, it’s fairly straightforward to raise your first six figures, in a matter of, you know, less than two months kind of thing. And then we can be working towards the seven figures, the million dollar mark over the course of a year. So it’s not a immediate type thing. So it’s, it’s like anything, I mean, Darrin, you’ve been in the insurance business for for many years now. So you understand that, you know, when you first reach out to that target group, that market, you’re gonna have some low hanging fruit, you’re gonna have some people that are ready, willing and able to do business with you right away. But then you’re gonna have a much, much larger group of people, they’re going to take a little bit of time, to warm up to the idea, they’re going to take a little bit of time to be convinced that you’re the real deal. They’re gonna it’s gonna take a little bit of time for them to be ready, willing and able, especially in our case, if we’re trying to get them to invest 50 7500 grand or or more, they’re gonna have to feel very, very comfortable. So we’re gonna have to work on their timeframe, not just our timeframe. Does that make sense Darrin?

J Darrin Gross 24:41

Yeah, totally you mentioned kind of the lack of confidence or or I don’t remember exactly how you said it, but something about the investor not really I took it to me like they really believe in, in what in the value of their experience kinda thing.

Dave Dubeau 24:59

Yeah, That’s uh, so a lot of our work is just getting people in the right headspace to show them that yeah, they are worthy because here’s the thing, right? A lot of people that are listening to smart guys like you with podcasts that are interviewing super successful real estate investors who’ve got dozens or hundreds or 1000s of deals under their belt, they’re watching guys, like CARDONE on YouTube with, you know, raising gazillions of dollars and all this kind of stuff. That’s what they think is normal. But that isn’t what’s normal, right? Normal is Mom and Pop real estate investors that that, that makes up over 80% of the population of real estate investors. And the reality is, the vast majority of the people in your network could really benefit from partnering with you on a deal. I mean, we talked about, we talked about real estate as an asset. And if you look at the kind of returns and I know you’re in the financial business, Darrin, so you see this every day, right? The kind of returns, the average person is getting on their investments, whether that’s stocks or bonds, or, or mutual funds, or whatever it is, is pitiful, it’s not even coming close to keeping up with inflation, especially these days. They’re getting whacked with fees left, right and center by their financial planners. And they really aren’t coming ahead yet getting ahead. By doing it the way we’re told to do it, right. So when we bring people the opportunity, when we educate people about what we’re up to, with real estate investing, I say educate. That’s a very purposeful expression there. I’m not saying pressure, I’m not saying manipulate, I’m not saying convince people to invest with you, when we show them what we’re doing. We show them what’s in it for them, we show them the big benefits of real estate, not only as an investment class, but also all the multiple ways that they can profit from even one real estate deal. So Darrin, I know you will work with a lot of guys and gals in the commercial space. So if we’re talking about for example, a an apartment building, I’m aware of up to eight different profit centers, from one multifamily deal. Now compare and contrast that to almost any other investment out there. Who that might have usually just have one way to make money, maybe two, but definitely not eight. So again, when we’re able to show people, Hey, here’s why real estate rocks, and why it’s so much more is so much superior to pretty much everything else out there. And we allow them, we show them the pros, we also show them the pitfalls, we show them the risks as well. And we allow them to make an educated decision.

J Darrin Gross 27:45

Got it. So when you have somebody and you said, kind of work with them on their own mental frame of mind, you know, to to kind of get them to know that they do have valuable experience and others would like to probably work with them. What are is it? Kind of from that point? Is it stories that they kind of, you know, learn to tell others about, you know, their own experience? Is it? Is there a a medium that you find works best? Is it written letters? Is it emails? Is it phone calls? Is it what what’s kind of the the method and then the frequency that you find that somebody who’s getting started and trying to raise money? And let’s say they they’ve they’ve been investing for years, but but also low? Also? Yeah, that’s yeah, it’s very common. Now there’s another looking to try and raise some capital.

Dave Dubeau 28:42

Yeah, that’s a really good question. Darrin. So what I talk about are the three C’s of capital marketing. And the three C’s are constant, consistent, edutating, communication. Sorry, I have to throw entertaining in there. I’ll explain that positive, consistent communication, communications, the marketing, it’s what we’re saying. Constant means the frequency. So our recommended frequency is like once a week. That’s that’s pretty ideal. And once a week isn’t overwhelming, I’m sure you’re on a bunch of different people’s email lists, and you get gazillions of emails from certain people way more than once a week. So once a week isn’t overwhelming, and we recommend that people mix it up a little bit. So the simplest things to do and the things that are most effective these days are electronic newsletters. So for example, once a month when we’re working with clients the first week, first week of the month, we send out an electronic newsletter on their behalf and we try to make it edutainment. What does entertain me means a little bit educational, a little bit educational, and hopefully a little bit entertaining, without necessarily being goofy, right? So here’s what we need to remember there. And this is true of any business, right? You’re in the insurance business. And what you probably learned a long time ago is that you are very enthusiastic and keen about insurance, yet very few other people. No offense,

J Darrin Gross 30:21

Very true. Very, very true.

Dave Dubeau 30:22

Same thing with us as real estate investors, we’re very, we’re nerding out on this stuff. I mean, for crying out loud, you got people listening to us jabber on about real estate investing and raising capital, you got to be a little bit different than the average person if this is something of interest to right, and that’s a good thing. But what we got to remember is, our target group of potential investors are not us, right? They don’t really give a darn, they want to know that we know our stuff. And they just kind of want to get the gist. So a big mistake I see a lot of people making is they try to over educate their prospective investors by doing a data dump of everything in their brain, and try to transpose it onto other people’s brain. Big mistake. So we want to keep it super simple. Educate them a little bit. Hopefully entertain them a little bit and keep it super simple. I call it Reader’s Digest love. You remember the good old Reader’s Digest? Yeah, yes. My grandma used to get that I used to read that when I was a kid at her place. It was great. So as a magazine written for grownups, however, was written at a 13 year old reading comprehension level. So any, we want to keep our I’m not saying our investors are dumb. We just want to keep it super simple for them. So it’s easy for them to consume and understand and have a clear call to action. So to answer your question is a long winded answer for sure. What are we recommending electronic newsletters, then we’ll follow up the next week, it might be a blog posts or short little article something about why why real estate rocks compared to everything else, or why per specific strategy you’re focusing on or the market you’re on, you know, pretty light, not too heavy. With a clear call to action. Hey, if you’d like to find out more, click here, book a call, let’s have a conversation, see how this could work for you. The next week, it might be something different, perhaps is a short video, a video log of log. And that would be like a three to five minute little video, where you’re talking about something, maybe sharing a story during a case study, doing a walk through doing and showing before and after picture, something like that. So again, keeping it fairly high level, hopefully a little bit entertaining. And then with that clear call to action. So every single week, drip, drip, drip, something to get top of mind and stay top of mind with your prospective investors. The low hanging fruit, they’re going to be keen, they’re going to be responding right away. The other folks that take a while, hey, they’ll respond when time and circumstances are right for them. Right. So it might be three months down the road, five months, six months, 12 months, 18 months down the road, really doesn’t matter. Right? Because if you’re doing this constantly and consistently, it’s going to be creating a regular flow of investor meetings for you. And that’s the whole goal.

J Darrin Gross 33:15

No, that’s, that’s really good. The kind of the frequency and the method and, and, you know, again, I think myself and I struggle with it kind of the I feel like it’s kind of horn tooting. You know, it’s always like look at me kinda thing.

Dave Dubeau 33:31

Yeah, there’s there’s your that’s a good point, right? So you sound like you’re kind of a conservative kind of guy. And most most of our people are as well, they don’t want to come across like a Grant Cardone nothing, nothing against grant, but he’s over the top.

J Darrin Gross 33:44

Nobody. I mean, it’s just, it’s a level of comfort and confidence in what you’re doing. And the people, you know, I mean, there’s the number of messages and you know, we’re all bombarded by information. And I think one of the challenges that that’s tough to keep in mind is that, yeah, we are bombarded by stuff, but there are people that let know and like you already would love to, to, you know, hear more from you about whatever you’re doing, especially if it’s if it’s something positive and it’s your, your genuine, I think the authentic piece is really critical to that I’ve I’ve had, you know, numerous instances where, you know, people have come across, way over the top, you know, way over their skis kind of thing. It’s like turns you off, right. Yeah, just it’s, it’s, it’s not genuine or if it is genuine, that’s not the gym. That’s the person I want to you know, that’s not the one I want to get to know more but

Dave Dubeau 34:41

Exactly. That’s why we call this if we go about it this way. It’s kind of it’s not exactly like shooting fish in a barrel, but it’s the closest thing we can get to it because again, you’ve already got a connection with these people. They already know you they already like you that’s why you can be genuine. And to get to your point about how to do this without Being all Hey, look at me Look at me. What we do with our clients is we really try to keep it focused around, communicate what’s in it for the other person, right? We’ve all heard the Wi FM, right? So let’s focus on when you’re telling a story, especially if you’ve worked with a joint venture partner on a deal or something like that. Then talk about it from the aspect of what, how they benefited. Here’s what our investors loved about this. Here’s, here’s, here’s how our investors ourselves benefited from this. So when you’re using that language is not about all about, hey, here’s how smart I am. Here’s how clever I am. It’s here’s how we did this together, and we benefited together?

J Darrin Gross 35:43

No, no, it’s it’s definitely a powerful message and an opportunity for anybody that, you know, especially anybody that has invested and is looking to grow to the next level. And, you know, looking for ways to raise capital, because I think it is, you know, there’s mindsets, and I know, I kind of share a little bit of that it’s like, Well, I do it myself that I don’t have to, like worry about engaging others kind of thing. But the real reality of that is, is that you, you know, when you think that way you cap your ability to grow, you know, your, your asset base and your wealth, and also to share with others. I mean, they, you know, there’s nothing like you’re saying to me, you know, when you’re excited about something it’s contagious. You know, there’s, there’s even when you share that people go like, wow, you know, that sounds pretty good. And tell me more? How do I get in kind of thing? That’s kind of a common thing? Well, how do you know, how can I get in? Yeah, and definitely, with the market being what it is, there’s people looking for, you know, ways to improve their returns, and, and definitely, they, they likely don’t know all the ins and outs, or the benefits of real estate. And, you know, here’s your chance to educate them and, and attract some of their money and, or attract them to it and, you know, grow and grow for you and for them. So I think it’s a great idea.

Dave Dubeau 37:07

It’s kind of like, in a certain way, it’s kind of like the insurance business there. And and correct me if I’m wrong, because I’m not in the insurance business. So I’m making some assumptions here. But I feel like we owe it to people, to show them what we’re up to, and allow them to make up their own minds as to whether or not they’d like to get involved. So like with insurance, I’m sure you feel this way that, that you would be doing people a disservice, if you didn’t at least allow them to be aware of what it’s all about, and what the big benefits and how it can protect them. Well, the same idea with a real estate deal. You know, when we’re, we’re not trying to push our stuff on people, we’re just trying to educate them about what we’re up to, and how how we can compare and contrast that to their other options. So same kind of idea when you’re doing insurance, right? Having insurance versus not having insurance or having a certain kind versus another kind, you understand the intricacies. Now it’s up to you to be able to explain that at a level that people can really understand it, and get what’s in it for them.

J Darrin Gross 38:13

And to that, I think that if you if you don’t share that information with others, and they hear it from somebody else, and they act with that other person, because you didn’t introduce it to them when you were doing it. I think that’s that’s the thing that’s kind of driving motivation. You know, that that’s a bit of a punch in the guts, isn’t it? Yeah, I mean, because, you know, you, you know, you know, multiple times, I think we all kind of qualify somebody without ever introducing the topic or whatever, we’re gauging kind of where they’re at. And we just assumed that he had a there, they’re probably not there. And you know, it’s a great disservice to the other party, it’s a great disservice to yourself. And the reality is if you you know, if they know that you’re in this and say they do hear about it from somebody else, but they know you chances are they they would come back to you first at least, you know, find out more and see if that’s something that fits with what they’re doing and and what they want to do.

Dave Dubeau 39:21

That’s why what you do is so important is right as well because I’m sure for your for your business, your while you’re doing the podcast, you’re doing a great job of staying top of mind and having that constant consistent, entertaining communication. You’re doing that every time you do a podcast episode. So same idea for us when we’re raising capital. We got to make people aware of what we’re up to so get top of mind and then do our best to stay there. So when time and circumstances are right for them. We’re the ones are going to think of.

J Darrin Gross 39:53

No, that’s that’s the plan. That’s the strategy. So hopefully it all stays on course.

Dave Dubeau 39:59

I’m sure well,

J Darrin Gross 40:01

Hey, Dave, if we could, I’d like to shift gears here for a second.

Dave Dubeau 40:05

Okay,

J Darrin Gross 40:06

As we’ve discussed by day, I’m an insurance broker. And I work with my clients to assess the risk they have and determine what to do with it. And there’s three strategies that we typically consider, we first look to see if we can avoid the risk. When we cannot avoid it, we look to see if there’s a way we can minimize the risk. And when we cannot avoid nor minimize the risk, we look to see if there’s a way we can transfer the risk. And that’s what an insurance policy is, is a risk risk transfer vehicle. And as such, I like to ask my guests, if they can look at their own situation, could be their clients, investors, tenants, the market interest rates, political, climate, geopolitical climate. But take a look at it your situation and identify what you consider to be the biggest risk. And again, for clarification, while I am an insurance broker, I’m not necessarily looking for an insurance related answer.

Dave Dubeau 41:10

Good, cause I’m not gonna give you one,

J Darrin Gross 41:13

Good, good, good. So Dave Dubeau, what is the biggest risk?

Dave Dubeau 41:21

The biggest risk in my mind, for real estate investors is relying solely on their own financial wherewithal to create their portfolio. So this might sound self serving, because I’m in the business of helping people to raise capital. And maybe it is, but you know, that’s what I focus on. So just like you focus on insurance, so I see so many people get stuck and stay stuck with a real estate portfolio that just doesn’t really do much for them. Because they don’t know how or they’re not willing to grow using other people’s money. So they stay stuck with one or two or three properties in their portfolio, which is better than nothing, for sure. But it’s not, it’s not going to allow them to create that real estate dream they had in the first place, which is usually to create enough passive income to be able to quit the jlb. Right, or be able to retire early, or whatever it is. So that that is the biggest risk is just staying stuck. Because you’re not willing to expand by partnering up with other people.

J Darrin Gross 42:31

Now you got a stretch, gotta get out there and stretch and make. Make it work for you and others. That’s good.

Dave Dubeau 42:37

Exactly.

J Darrin Gross 42:38

Dave, I cannot say thanks enough for taking the time to talk today. Before we wrap up, where can listeners go if they would like to learn more connect with you?

Dave Dubeau 42:50

Oh, thanks so much, Darrin, I appreciate being on the show as well. So I’m really excited. Because we’re just launching a brand new podcast all about this stuff all about helping mom and pops get started on their path to raising capital. It’s called the How to Raise Capital 101 Show for Real Estate Investors. So you can find that wherever you enjoy listening to podcasts, the how to raise capital one on one show, or you can check it out on our website, Raise Capital 101 Show.com. And again, there and the whole goal there is to well, actually, the first nine episodes are going to be a little mini course on what I call my money partner formula. And it’s it’s all about how to raise your first six figures in a matter of weeks, and seven figures in a matter of months, even if you’re starting from scratch and you’ve never raised capital before. So again, that’s the how to raise capital one on one show.

J Darrin Gross 43:48

Awesome. Well, Dave, again, I can’t say thanks enough for taking the time to talk. I’ve enjoyed it. Learned a lot. And I look forward to doing it again soon.

Dave Dubeau 43:59

I appreciate it so much. Keep doing what you’re doing there.

J Darrin Gross 44:02

All right, Dave. Thanks 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 44:23

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Blockchain Applied to Real Estate with Neal Bawa – CRE PN #361

Neal Bawa 0:00

And what blockchain does is from the very beginning, it’s designed to be both extremely secure and extremely visible at the same time, and no one can manipulate it. It’s not a walled garden. It’s actually an underworld garden. It’s designed to never be walled. So now you have the capability of a property, basically, that has been sold. Once it’s sold, its title is on the blockchain. And because it’s on the blockchain, if you and I are disagreeing about who owns this property, our lawyers can spend 15 minutes in a room, go look it up on the blockchain and say sorry, Darren, it steals property. It’s very clear. That’s that’s what’s on there. That’s just a very tiny example of how blockchain can be used. But there are hundreds of discrete advantages that a future world where real estate is hosted on the blockchain compared to today’s world. And one of the biggest pieces the quickest pieces is tokenization.

Announcer 0:57

J Darrin Gross 1:16

Today, my guest is Neal Bawa, Neal is a technologist who is universally known as in real estate circles as the mad scientist of multifamily. Besides one of the most in demand speakers in commercial real estate, Neal is also a data guru process freak and announced an outsourcing expert. Neal treats his $1 billion multifamily portfolio as an ongoing experiment in efficiency and optimization. And in just a minute, we’re gonna speak with Neal about real estate, disruptive trends tokenization and property or prop tech.

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 with add on welcome, I guest. Neal Bawa Welcome back to CRE PN Radio.

Neal Bawa 2:47

Thanks, Darrin good to be back on the show.

J Darrin Gross 2:49

So glad that we’re able to make this happen. Before we get started, if you could take just a minute and share with the listeners a little bit about your background.

Neal Bawa 2:59

Sure, I’m a tech geek that is obsessed with the idea of disrupting real estate, using big data using analytics, using systems and processes that the industry typically doesn’t support. And also using an army in the Philippines. So using business process outsourcing, to create better, more powerful, more scalable systems. I am not running a real estate company, I run a technology firm that currently is interested in real estate, who knows maybe tomorrow will be interested in something different. So it’s a tech company that believes in scale, it believes in behaving just like any other Silicon Valley company. And big data is our holy grail. It’s our Bible. It’s what we go by, it forces us to do things that we wish it didn’t force us to do like moving from one city to another every goddamn year because the data points to a new city every every single year. And that means that we have to unlike most indicators that you interview, we have to rebuild our connections and networks every 12 months.

J Darrin Gross 4:07

I appreciate you sharing that the I was looking in my notes here and the last time or one of the last time we spoke was the beginning of the pandemic. And I think we kind of did a little little talk on, you know, what do you expect to happen? And in just listening to your introduction, are you kind of you know, sharing with listeners a little bit about your background, commenting on moving to the different cities. I’m curious, has that always been the case? Or is that more prevalent now? Post pandemic?

Neal Bawa 4:44

It’s more prevalent for the industry. For me it hasn’t changed at all. So, pre pandemic I was already in 13 metros, in the US. I had properties in 13 metros in the US opposed endemic I’ve only added four cities to that list. So I’ve always been following cities I’ve never bought the argument that small metros in the US especially the ultra small metros are far riskier, because while in itself, that argument makes sense, a metro that has 150,000 people is not as diverse as a metro that has a million people. So that makes sense, right? But the problem is that argument is made in a vacuum. And whenever you make arguments in a vacuum there, they end up being wrong. But here’s the other half of the argument that nobody’s talking about. Well, that 1 million person Metro, we’ll call it Phoenix, we can call it Austin, you can call it lots of different metros, those 1 million person metros have seen massive increases in prices, massive declines in cap rates that do not match the rent increases. So when people are paying 50% More for a property that where rents are only 15% Higher. There’s this risk that has been created there, that delta between 50 15% and 50%, that 35% You know what that delta is risk. And so as these these cities, as the risk is increasing, as you keep paying up and up and up and up, you have to compare that risk with paying a lot less in a smaller Metro. So what has happened over time is that, you know, starting the 80s 90s, when real estate made more sense, all of those smaller cities were far riskier. But today, the risks have adjusted, and the bigger cities have become riskier, and the smaller cities are still risky, they just haven’t gotten any riskier, right. So when I buy when I go to Idaho Falls, and I make a building from scratch that cost me $170,000 A unit. And it’s a townhome, and a family of three will live there for five years. I see that as less risk than paying $400,000 A unit for a value add apartment complex in Saratoga, Florida. I’m not talking about Los Angeles, right? I just saw a $406,000 dollar property built in the 1980s sold in Saratoga in Sarasota, Florida, right. So when you can see $400,000 unit prices in Sarasota and in Atlanta and Dallas. My question is, what does it cost to build that asset? And the answer is a lot less. But we were always taught to say, Never buy an existing asset at you know, more than 60 or 70% of its replacement cost. Because that gap, that replacement cost gap is the value that you’re creating. And it gives some headroom for the price to go up. But today, people are actually buying value adds at higher than the cost of replacing them. And that risk is not being factored in. So the answer to your question, Darren is I’ve always been more interested in smaller metros, I’ve just been more validated by by the pandemic, where Cap rates and all of those smaller metros have, you know, gone down

J Darrin Gross 8:09

Right now and just the the migration, you know, the the work from home used to be like the exception, whereas now I find it? I don’t know, that’s the rule. But I’d say you know, by and large, the majority are the number of people able to work remotely is, you know, exploded compared to what it was in 2019.

Neal Bawa 8:31

Yes. And that’s very fascinating, right, because everyone thinks they understand this work from home piece. And I don’t think people really do. One of the data providers that I love to track, right since the pandemic started is this company that basically measures key swipes, key swipes at offices. So this is a company that provides some kind of a keen key, you know, swiping digital application. And so what they do is just like U haul does a report of who’s moving and what state are they moving to this company does a report of what percentage of people who were in the office one day before COVID struck have come back? And the answer is in Texas, which you know, really, I’ve you would think everybody would be back in Austin 43% of the people that swipe their key the day before the pandemic swiped it last week. Only 43% in Texas in a red state or deep red state, right. So what most people don’t realize is that the office market in the US is going to undergo a very powerful but very slow meltdown. Now why are very slow because luckily a lot of their leases were five year and 10 year leases. So they’re seeing a massive meltdown happening they’re very nervous, because as leases are coming up for renewal, only 70 or 80% of those leases are getting renewed. Well office is not really set up to have 70% occupancy, I mean office set up to be a 90% occupancy market, and that’s what the prices were based on. So if they are indeed going to end up But 70% occupancy compared to where they were before, there’s going to be an enormous and massive meltdown there. And that should tell you how big this movement this remote work movement is. And maybe that 43% example is excessive, but I think it makes the point that we do not think two years after the pandemic, when, you know, people are vaccinated people have boosters, there’s even, you know, there’s drugs available, like Pax COVID that you can take, if you get COVID. Why are today not 90 or 100% of the people back? Because something has fundamentally changed in the psyche of both managers and employees. We don’t go back to that world anymore. And if you don’t go back to that world, yes, you are right there in the smaller metros are the ones that are gaining, I’m looking, I’m tracking population gain. And, you know, there’s a small Metro that I’m very active in called called Idaho Falls, it’s the second largest metro in Idaho. It’s, uh, you know, about a third of the size of Boise. And everyone that I talked to over there says, I’ve always wanted to come back to Idaho Falls, but I didn’t have the choice. The people that are going to Idaho Falls are coming basically from two directions. They’re coming from Salt Lake City, right? Because a lot of Idahoans are Mormons, and so they come from that Salt Lake City area. And then they come from Boise, which is getting very, very expensive. It’s the most overpriced city in the United States at this point of time. So they’re coming from those two directions. And they’re still seeing very reasonable price. And I’ll tell you what reasonable means, right? So, of course, prices in Idaho Falls are going crazy, right rents have gone up, you know, some crazy number, home prices have gone up 31%, but they’re starting from a low base. So I’m renting beautiful, brand new three bedroom, two and a half bath units that I just finished building in Idaho Falls, so they’re done. And I’m renting them for 6095. Awesome. So for 6095 Somebody can basically get into a beautiful townhome that no one has ever lived in before. It’s amenitized. It’s got dog parks, it’s got, you know, barbecue pits, it’s got a backyard, but it’s still at 1695 You see how much headroom there is?

J Darrin Gross 12:06

Ya know, no, and just again, you know, one of the primary reasons that that market is growing is just this, this fundamental shift and like, I love the fact that you found it or a different source, because I think, you know, most of most of the time, the source that’s quoted or cited is the moving the the U haul, kind of thing. And, you know, pre pandemic, I think the focus was always a metro area with jobs, metro area with jobs, jobs, jobs, jobs, right, that was kind of the needed to have X number of people X number of employers growth, you know, some sort of those are kind of some of the the measurements that that I think people, you know, typically use to determine whether or not you were in a grow population or a or a non grow. And, but just this this fundamental shift, where it’s not even, like you cited, we’ve got the vaccinations, we have everything we needed to get back in the office, but we’re not going back to the office, and people are finding these new places that, you know, whether it be for cost or just the place they wanted to live, you know, but it’s really, I feel like the, you know, where is the population going to, it’s not as predictable as it once was based on just large metros, lots of employers, lots of jobs kind of thing.

Neal Bawa 13:23

And I disagree on that a little bit Darrin. And so I’m going to come back to you and say my data doesn’t suggest that here’s what my data suggests, the big metros are still very important, the big jobs, that Job Centers are very important. What has changed, according to my data, is the radius around those. So in the past, the radius around the big metros was basically an hour right. You know, that’s how far you can basically Drive for Work. What we are seeing now is that the radius has gone from being one hour to two and a half hours. Because people are coming into the office twice a week. And so that radius is very expanded. I mean, imagine two and a half hours, right? That’s a very, very large change in radius. So for example, somebody can actually work in Salt Lake City and live in Idaho Falls, right? That’s massive. That is huge. People can live in Tucson and work in Phoenix. And before that, this that was not even conceivable. So I still think that the big metros are important I still think Phoenix and Austin and you know all these superstar metros are very important. But the radius has expanded tremendously. And so what we’re doing is we’re now only exclusively looking at value adds between the one hour radius and the two hour radius. Right so this morning’s meeting, you know, we have full time staff for on the value add side and then we have full time staff on the development side. And so I do a one hour development meeting where I look at all the properties they are looking to all the land that they’re looking to buy and then I have another meeting with with the the value add people on what they’re looking to buy. And I was struck by the fact that today in the meeting ever any property that was discussed, was attached to a metro. But it was in every case at least an hour away from that Metro. So we had a property that was an hour from Knoxville from Nashville, an hour from Atlanta, and then an hour and a half from Phoenix. Right? Those are the sorts of properties I’m looking at and people go, so why aren’t you just looking in Phoenix? What’s wrong with Atlanta and Phoenix? My answer is, I don’t want to pay $300,000 a door, I’m still able to find properties at 130,000. A door. I have just purchased two properties this year. Okay, one of them. I paid 129,000 a door, one of them, I paid 130,000 door. Okay. And obviously, the rents there are lower, I get it. I mean, obviously, I’m not suggesting that these properties are cash flowing at 20 or 30%, nothing like that. My point is, I have headroom for further growth from 130,000, when the cost of construction has become so inflated, that I can’t even build new construction for less than 300,000 a door. Right? So my argument is, and maybe I’m wrong. I mean, who knows? Right? This is just This is what my my what data science shows. Today, when you buy an 80s property at $130,000 a door practically anywhere in the US that has growth. So you know, this argument only works if the this small city that we’re talking about that nobody’s ever heard of actually has growth, population growth, job growth, income growth, all those factors need to be present. And it’s not very hard to find those because I’m talking about 1000 small cities, right? You can eliminate 700 of them, 800 of them and just work with the 20%. That’s still 200 cities that no one else in Darrin Gross is ecosystem is looking at. Right? Right. So I can afford to basically reject a bunch of them. Well, when you buy an 80s property there, they especially if it’s brick property 430, my data shows that you’ve already got 20 or 30,000 in equity, because the syndication industry hasn’t figured out that the cost of construction in the last 18 months has gone from 200,000 a door to 300,000 a door. So that $100,000 door increase means that no one can ever build a property anywhere close to $200,000, even in that tertiary market, which means that there’s no construction possible at all in tertiary markets, these remote markets at all. And so that means that I can keep increasing my rents because I’m not going to have any incoming supply whatsoever. For years. For years. Yeah,

J Darrin Gross 17:30

No, and I think the you know, there was the I forget the name of the book was Sam Zell book, but one of the his mantras that I grabbed onto was exactly that if you can buy it for less than you can build it. You know, you’ve got some you got some value there. You’ve you’ve got a built in equity, like you’re saying,

Neal Bawa 17:48

Right. And to expand on that. What if you can make that gap bigger and bigger and bigger? That’s huge, right? So today 50, no one can build an apartment complex anywhere in the US for less than 250,000 a door. Even in a like remote market. I’m not even talking tertiary I’m talking remote. 250 is your starting point. If I can buy a property at 130 That’s only a 5053 54% of replacement cost. I think that’s to me, that’s looks less risky than buying the same property 100 miles closer to Phoenix at 250 a door, right? Because now you have a new construction property that can come in at 300 a door and completely outshine your 250 a door price.

J Darrin Gross 18:31

Well and even add to that what you’re seeing is this is the ring or the radius gets larger, those people in that metro area, they’re looking outside that area so that at some point, you’re going to have that, you know, the demand will shift because the you know, the overbilled or whatever that whatever that will be. That I mean, not, not that it will happen. But there’s there’s more likely that you could have more towers, more cranes, more more construction in that metro area. And like you said, if everybody’s having to pay $300,000 a door to build the rent, they have to charge just to make that work. Eventually, people are gonna say, you know, we don’t have to go to the office every day, if we only go like once a week, twice a week or whatever it is, what if we looked at IRL you know, and also now you’re Neil’s neighborhood, and

Neal Bawa 19:16

And you’re in a nicer area with nicer weather, right? Like, for example, Asheville has become one of these trendy new places. So I talk about these trendy new places Bend Oregon has become the kind of place where people have moved from San Francisco, there’s a plane that leaves bend at 620 in the morning, it gets to San Francisco at you know 745 The entire plane is filled with commuters. And they go on Monday and they come back on Tuesday and then they work from their home Wednesday, Thursday and Friday. And they have Ben’s gorgeous climate amazing, you know, amenities and homes in Bend are going completely insane. Same things happening with Asheville which has great quality of life. So what’s happening is each month some More and more people are coming to that conclusion. So it’s a triple it’s not a flood at this point in time. But each month there’s a trickle and that trickle is in favor of these remote locations.

J Darrin Gross 20:12

So you’ve identified the markets, which you you always have. You, you mentioned, and we’ve talked a little bit before we started recording how you’ve shifted some of your your work most of your your work from value add to now you’re you’re developing in these markets, were you finding these opportunities? Are you can you describe the percentage of of projects you have that are build new versus value add multifamily?

Neal Bawa 20:47

Right now, I think it’s about 70/30. So 70% of the time we build and 30% of the time to hold for value add. And some of it is, is also because, you know, our investors do not want 100% new development, they still want the tax benefits that come with value add property, they want the negative K ones, they want the cost, you know, segregation, and so to eat, to shelter, our own income. So I don’t think that that that ratio is ever going to go below 30% for value add, but I think the optimum ratio today is build in 70% of the cases and buy in 30% of the cases. And one of the things that we’re doing that people really like is that as some of these value add properties are selling, we’re actually transferring we’re 1030 wanting the money into new construction properties. So what’s happening is that we are going from a short term, okay, we did this, you know, we did the rehab, and in two or three years, we made you a certain amount of money. Now we want to put that money into a legacy property that we can hold for 10 years. And if we do new construction, that cash flow is high enough, so that for 10 years, we can hold it and take the cash flow to 8% 9% 10% 11%. And just hold that property for seven or eight years, as opposed to doing the typical two and a half year flip that we’ve been seeing in the marketplace. And so we have a lot of investors, the more let’s just call him investors with more white hair that really like that concept of I’ll start with value add and then move into new construction with my profits.

J Darrin Gross 22:16

Well, a new construction to your your capex is zero for those years. And when we want to have it fully developed there. I mean, that’s that’s kind of a beautiful, I mean, when,

Neal Bawa 22:27

Zero Cap X, low maintenance so that the first two to three years, the maintenance cost is very low. Most of the maintenance that happens in year one is basically just build back to the builder because it’s the property is under warranty. So we tend not to have much of a maintenance budget in year one year or two onwards, it starts to trickle up, but it takes a good 10 to 15 years for it to reach the level of a value add in terms of maintenance costs, right, because so many items in the property are under warranty. So and again, I’m not a huge fan of new construction. I’m not a huge fan of new construction, I’m a huge fan of value add, the question is is value add becoming an oxymoron, right? So why are people today buying a 60s property? That is, you know, completely, you know, in my mind that property is redundant and needs to be torn down, people are paying $200,000 a door for them. And I have a hard time trying to, you know, understand the value add story there, it’s it’s very difficult for me to wrap my head around it. So there’s, it seems that that price only works if cap rates continue to compress and they are decompressing, they are they are decompressing and rents continue to increase which they are so on the one side of the story is good we are you know, I just looked at the numbers for last month for for April 2022. And they looked very good. You know, it’s not like we’re gonna get the kind of rent increases we saw last year, but this year on its own looks very strong. So on the one side, the wrench story is very good. But on the cap rate side, I challenge anyone to come to me and say they have not seen a difference between, you know, today’s may 11. And what they were seeing on March 11. The answer is that if they’re saying that they’re lying, we are seeing more and more properties being rejected, especially the 70s and 80s product. Lenders that were at 75% LTV are now at 65 or 70%. LTV. We’re also seeing that people who are buying under cap for the lenders are simply not playing. They’re not playing and the cost of rate caps has gone through the roof. I mean a year ago, a $35,000 rate cap today costs $400,000. That’s 11 times the rate cap cost. So if your interest rates.

J Darrin Gross 24:47

Okay, gotcha, gotcha. Cap your interest rate there.

Neal Bawa 24:49

Right. So if you’re looking to cap your interest rate, it’s going to cost you basically a half a million bucks today compared to 35 or $40,000. Before so obviously that’s a cost that has To get added on, and everything goes towards the cost of the project. So my I’m very grateful that I am currently not engaged in the process of buying a value add property because this is a very, very difficult time, it’s a very sticky time to, to be there I am engaged in selling them. So I’m on needles and pennants and hoping that the sales go through.

J Darrin Gross 25:21

Right. No the other side of the coin there. So let’s talk a little bit about property. Tech, prop tech. I know you’ve you’ve been, you know, the technologist and and our big big proponent of remote virtual assistants and systems and and that and, you know, when we talked and I know that your your story from the standpoint of integrating that to increasing the occupancy and the follow through with the respective tenants and that, how do you see prop tech? Has it changed as a grown since that kind of a base? Are you? Are you using it in more in different ways? Or?

Neal Bawa 26:09

So I’ll give you an answer there that may not sound like a positive answer. So I am not seeing the industry use outsourcing substantially more than I was four years ago. So I’m kind of the unicorn in terms of how aggressively I use outsourcing. So I for every every one person full time that I hire in the United States, I hire two people in the Philippines, usually on the same day. And, and that, you know, one person in the US or two in the Philippines ratio has been consistent now for five years. So we haven’t changed that ratio. They haven’t seen any need to change it. And people ask us, you know, so what are those two people in the Philippines doing? The answer is everything they do, you know, operations, they do investor management, they call investors, they they help us, you know, build websites, they help us manage our properties, they make delinquency calls, and you might say, oh, so are you a property manager? The answer is no, we pay a regular property manager, we just basically build an efficiency layer on top of them. And that gets us a lot of noi, when I’m paying $6 to a trained Filipino who makes 10,000 delinquency calls across a portfolio of a billion dollars. That is a huge accelerator that no property manager in the US has ever been able to achieve. Not once, not a single property manager, I you know, take the biggest property manager in the United States, they still don’t have a call center like we do, right. So we’ve managed to do amazing things. And obviously, if you’re wondering, in terms of what have that has done to our returns, all you have to do is go to the end of the day, look at the logo behind me grow capitis.com Scroll down. And right there, you’ll see a track record. And I’m pretty sure you will see some amazing numbers there. So it has incredible benefits. But I haven’t seen anyone else in the industry build call centers the way that I have. I have obsessive belief in business process outsourcing and how it can completely revitalize a business or give you give you a advantage that nobody else can catch up to. I believe in that. And it’s been I’ve been validated by doing it over five years. But I haven’t seen the industry do it much I have not seen you know, I see people hiring virtual assistants to do basic work, but not the way we’ve integrated them into our into our flow. I mean, as far as we’re concerned, even right and yesterday, I was picking Employee of the Year awards, we just basically have two sets of them Employee of the Year in the Philippines employee of the year in the US Rookie of the Year in the Philippines Rookie of the Year in the in the in the US. We do as many summits in the Philippines as we do in the US. So we’ve integrated them so well that from our perspective, there really isn’t much of a difference between a person working in the Philippines or not. They have their own managers, their own directors, their own, you know, staffing people, they hire and fire on their own. So it’s a large service organization. I think it gives us tremendous, tremendous advantages. I have not at this point seen enough people in the industry do that. They’re doing it, they’re doing it a very surface level. So that part of technology. It hasn’t disrupted, you know what people are doing in real estate. Sure. There’s a few disruptors like me out there, the mad scientists that are out there, but we’re not having a big impact. I think the bigger impact of technology that we’re about to feel is in that tokenization realm that I also like to talk about, I think that one is far more disruptive and coming at a far greater speed than most people can.

J Darrin Gross 29:30

You say tokenization is kind of like the blockchain technology being applied for fractional ownership, or how are you? How do you see that?

Neal Bawa 29:40

That’s exactly right. I mean, so you think about real estate. Real estate is the largest industry in the world. So if you look at the total amount of real estate in the world is three times the size of the world stock market, right 326 billion. How is it that the largest market in the world is today you know? 50 years after the iPhone was invented, still can’t be purchased on a phone, you can go tap, tap, tap and basically do something. I mean, today I talked about Idaho Falls being a really good market, you’ve probably never heard of Idaho Falls, shouldn’t you be able to just whip out your phone and go to some app and go in there and say, you know, I want to buy $5,000 worth of multifamily in Idaho Falls $5,000 of single family, tap, tap, tap, tap, tap, right? Just like you do with stocks, because somebody gives you a tip when you’re at a party, and you whip out your phone and say, Okay, I’m gonna buy 50 shares or 100 shares of so and so stock because somebody just gave me a tip. That doesn’t happen. Real estate is simply not a digital economy. And yes, we’ve we’ve digitized pieces of it. But overall, we’re still buying real estate in much the same way as we were buying before. And one of the reasons was that the the the way real estate is bought and sold, the the counties are very involved, right. So there’s all this escrow and title and all these other processes that make real estate less efficient. And for the longest time, there was this need for a technology that would create transparency. So you would know who owns a property, you know, and all of the escrow and title pieces and make it transparent. Well, somebody built that technology back in 2009, for purposes that had nothing to do with real estate it blockchain was built to host Bitcoin. And as time went on, Blockchain became something much bigger than Bitcoin, it became much bigger than cryptocurrency because people realize that the the back end technology of blockchain was simply superior to the web technology we use today. Because if we are doing something with Gmail, we’re on a Google server. If we’re doing something with Outlook, we’re on a Microsoft server. It’s all walled gardens. And what blockchain does is from the very beginning, it’s designed to be both extremely secure, and extremely visible, at the same time, and no one can manipulate it. It’s not a walled garden. It’s actually an underworld garden. It’s designed to never be walled. So now you have the capability of a property, basically, that has been sold. Once it’s sold, its title is on the blockchain. And because it’s on the blockchain, if you and I are disagreeing about who owns this property, our lawyers can spend 15 minutes in a room, go look it up on the blockchain and say sorry, Darren, it steals property. It’s very clear. That’s that’s what’s on there. That’s just a very tiny example of how blockchain can be used. But there are hundreds of discrete advantages. There a future world where real estate is hosted on the blockchain, compared to today’s world. And one of the biggest pieces that quickness to pieces is tokenization. You can take a multifamily property that you bought for $30 million. And you can break it up into $100 tokens. And you can sell those tokens on the blockchain, on websites such as t zero, you might say, you know, how would I know where to sell it? You don’t? I mean, listen, when you buy an Airbnb property, you don’t go and build a website you just hosted on airbnb.com. Right? So people find you on airbnb.com. Well, the same sort of thing is going to happen for blockchain. T zero is currently the world’s number one website for this kind of product. So you can go to T zero and you can buy tokens of real estate right now. And this movement, just beginning, I mean, t zero just started hosting six months ago, started hosting multifamily property tokens. And a lot of people are thinking, but this is like Bitcoin and the price of Bitcoin went down 40% or 50%. Yeah, but Bitcoin doesn’t have an underlying asset, right? It is an underlying asset, its price, why would it change if the price goes down? 30% people are going to rush in and buy this property because it’s still the same property as six months ago when it was worth 30%. More. Right, right. So that’s why it’s actually far superior to buying cryptocurrency which can decline to half of its value, which is what we’ve seen in the last six or seven weeks. But that real estate is still there. So you’re never ever actually investing in a token, you’re investing in a property and rental properties ownership is held in a token on the right

J Darrin Gross 34:17

now, I think the whole tokenization thing and just the blockchain is just a I mean, it’s an amazing technology to be able to track you know, fractional and for you, Neil to make an independent transaction, irrespective of the sponsor of the deal, your your token, you can then fractionalize That token, can you not, if?

Neal Bawa 34:38

You can, but in practice, you can I think that it you do need the syndicator you do need the sponsor to host their property on a on an engine such as t zero. So, while while technically you could go and sell your shares on the web, I don’t think that’s going to happen for a decade. I think what is is going to happen is over the next two to three years. If you’re a major syndicator, and you’re, you know, selling or buying a $30 million property, you’re not going to be able to get money from investors unless you say, Yes, I am going to host a small number of my shares as tokens on P zero. And so if you need to sell your shares, you can go to T zero and you can transact independently, you can go to the property, and you can sell your tokens there, right. And maybe you can make extra money there. But for the moment, it’s primarily liquidity in the long run, I think that we will actually see values going up, we, you know, the stock market, when we got to the point where anyone could transact in the stock market, especially millennials with the Robin Hood app, we saw prices go up. And I think that will happen with real estate over the next three to four years as it becomes a truly liquid transactional asset class. Today, you cannot sell real estate in a day or a week or even a month. Yeah, but you’re about to enter a world where you cannot imagine not being able to sell it in an hour. And that’s tokenization. That’s it? That’s a sea change. That’s a enormous change.

J Darrin Gross 36:08

No, and if I just wanna make sure I understand, right, because I mean, what I what I vision and kind of heard you say, and then you said no, wait a second. So the having a property. So the syndicator lists the property on the t zero site. So that’s basically the host of the blockchain for that property. You have 100 tokens for a property, say and and you have one. And if you wanted to sell a portion of that, or or all of it, you could sell that that token independent of the syndicator. Could you not? Or do you have to wait for the syndicator. To sell the,

Neal Bawa 36:46

You definitely need the syndicator to do the listing on t zero for right because I mean, less expensive, right? So I think the listing is done, then you can go there and you can transact, right, so you can go to T zero and you can transact and, and to be honest, t zero is still evolving this process. So right now you can’t, you have to go to your syndicator. And this indicator has to be listed there. But that’s just it’s just software, it’s all going to get written out in the next year where you can basically go in there, you can get a key from the syndicator. And you can say this is your unique key, plug this key in. And now t zero knows that you actually own these tokens. And you can basically go through the process of you know, selling your tokens there. And I think right now the the location where the tokens are held, it’s, you know, called a digital wallet, it’s actually not on t zero. But in the long run, you’re going to be able to host the digital wallet in t zero itself, in which case, you just basically log into the t zero interface, just like you log in today to you know, get your que one, right, so you’re gonna be able to log in and go in there and click and sell just like you do for E trade or Robin Hood. So we’re moving in that in that direction. But I think that if there’s a number of steps that take 234 years, to get us to the final goal of liquidity where you can basically you just log into an interface and say, I want to sell half of my shares today, click List. And then you look at, you know, the offers that come in from people and just like you sell shares, and you can set a stop limit and say, I don’t want to shell them sell my shares below this number. That’s the kind of liquidity that people are looking for. And I think we’re going to get it and we would have never gotten to this point. If cryptocurrencies and blockchain hadn’t happened independent of real estate, because what that has done is it’s built the infrastructure, there are now hundreds of millions of digital wallets that are in existence with cryptocurrency in them. So people have become comfortable with this concept of blockchain being the backend that is moving all this money around. So now you basically created hundreds of millions of ready consumers.

J Darrin Gross 38:49

Somebody I was talking with earlier was talking about how even I think Visa and MasterCard or her now kind of greenlighted blockchain and the countries, right, I don’t know what the platform is, but it’s just because I was always wondering about, you know, from Bitcoin, I mean, this just a speculative type thing. If, I mean, if there’s no additional money, I don’t know how you can manipulate the currency like in, you know, the US dollar. I mean, that’s all about, you know, manipulating the currency, which is, as far as the, you know, the government that

Neal Bawa 39:24

We are seeing manipulation happened in the cryptocurrency market, we certainly are seeing evidence of that, you know, Bitcoin fell about 50% In the last four or five weeks. So I think that it has become a speculative asset, just like any stock, and, you know, big whales can move the numbers up, they can move the numbers down. So there’s a lot of, you know, challenges there. But keep in mind, one of the biggest reasons why it’s so speculative, why it’s so volatile, is there’s no underlying value. The only underlying value of Bitcoin is that other people believe it has value. And some there are days when people really believe that and there’s the is when they’re not so sure. And so you know, but with with real estate, the beautiful thing about tokenization is your your money is always going into a physical cash flowing property, that token is simply proof of ownership. So you’re just transferring ownership of the asset. So the underlying strength of the acid is truly what makes me believe that tokenization of real estate is, in the long run actually much more compelling than either cryptocurrencies, or these monkey NF T’s that I see on the web there that NFT stuff, in my opinion, is just bullshit.

J Darrin Gross 40:37

Yeah, I’m still having a hard time understanding exactly the value in that other than that it’s a novelty kind of thing. But I’ve always been in the slow ski kind of lanes. So hey, Neil, if we could I want to shift gears here just real quick. By day, I’m an insurance broker. And we tried to assess risk and, and determine what to do with the risk for our clients. And there’s a couple different strategies we typically consider. First, we look to see if we can avoid the risk. And if we cannot avoid the risk risk, then we look to see if we can minimize the risk. And then if we can’t minimize the risk, but let’s see if we can transfer the risk. And that’s what an insurance policy is. And as such, I like to ask my guests if they can take a look at their own situation. frame the question, however you like with regards to whether it be you the market? You know, whatever situation you’d like to frame it. But answer the question, what is the biggest risk? And again, just to be clear, while I am an insurance broker, I’m not necessarily looking for an insurance related answer. So with that, Neal Bawa, what is the biggest risk,

Neal Bawa 41:49

The biggest risk to the commercial real estate market. So I’ll stay away from single family. The biggest risk to commercial real estate family is that the jobs back in 2014, made it very easy to raise money raise have syndicators raise money. And what has happened today is syndicators have become such a massive percentage of the overall multifamily market, that they are inflating the market far, far beyond its fundamentals, not just beyond its fundamental fundamentals, but far far beyond, because their ability to raise money has accelerated far beyond, and far quicker than the property’s ability to raise rents. And so that has created a situation where there’s a very, very aggressive, all ships raising effect, that is making these properties go far beyond their fundamentals. And that is a very risky situation. We’re all in it. I’m in it, even though I’m doing new construction, I’m still in it. And so it’s something that we have to really watch very, very closely. I do not believe that it’s possible for this bubble to deflate, it has to burst. And so I’m, I’m just being very cautiously watching this to see if there’s any evidence of it bursting. And it probably isn’t ready to burst yet simply because rents are rising so fast. So to me, the point at which the bubble could burst is, you know, the Feds raising interest rates very, very quickly, they have to do their job because inflation is under control, which means and the Fed is only once out of 10 times succeeded in engineering a soft landing, which means that there’s only a 10% chance that we’ll have a soft landing, this time, there’s a 90% chance we’ll end up in a recession. So when that happens, rents could fall. And that I think is the point of greatest risk for the commercial multifamily market that has been flooded by syndicators including myself since 2014. So we’ve had eight years of crowdfunding and the syndicator flood, we have not seen the bubble bursts, all bubbles by their nature must first. I don’t believe in bubbles deflating. It happens sometimes I don’t think this one will deflate. So I’m curious to see what happens when rents drop a bit in a recession. And luckily, they don’t tend to go down a lot in recessions. Sometimes they won’t even go down at all in recessions, right? So most US recessions, rents haven’t decline. But if they do start declining, I’m, I wonder what happens to the industry at that point.

J Darrin Gross 44:23

Sounds like a recipe for keeping some powder dry. Just in case, right. That’s great. Well, Neil, thanks for sharing that. And, again, thanks for making the time to do this. Where can the listeners go if you’d like to learn more connect with you?

Neal Bawa 44:41

Well, I happen to be the only Neal Bawa on the World Wide Web. So Neal Bawa, hit Enter. If you’re interested in some of the typical topics I talked about talked about, you can type in Neal Bawa interest rates or Neal Bawa virtual assistants, or Neal Bawa, best cities in the US. We’re best known and there’s about 30 5000 people following us for publishing a list of never heard of cities that are astonishingly profitable. And we publish that list in January each year. We’ve already published it for this year, we picked dark horses. Some of those have done incredibly well, like San Antonio was picked as a dark horse three years ago. And now is the lowest cap rate market in the United States who had ever thought of San Antonio being the lowest cap rate market in the US, but check out the latest CBRE Market report. We said three years ago, this market is going to be extraordinarily low cap, and now it’s happened. So we pick markets like that every year. So check out you know, our website is multifamily u.com That’s multifamily, followed by the letter u.com. There you can see our 20 Plus webinars, I’d like to invite everybody to my latest webinar, which is on the 25th of May, which says what is the impact of inflation and interest rates on all of real estate, not just commercial real estate. And I believe there’ll be about 3000 attendees there. So the best way to interact with us is through our webinars.

J Darrin Gross 46:04

Awesome. Well, they all can’t say thanks enough. Always enjoy it. Look forward to doing it again soon.

Neal Bawa 46:11

Awesome. Thanks for having me on the show. Again, Darrin, thank you. All right.

J Darrin Gross 46:15

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 got this week. Until next time, thanks for listening to Commercial Real Estate Pro Networks. CRE PN Radio.

Announcer 46:31

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

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