August 2022

Kathleen McCarthy of the investment management company discusses shorter lease durations as a strategy for growing cash flow from real estate assets, as rents continue to climb.

David:
This is the BiggerPockets Podcast, show 646.

Trey:
If you look at building your own business, you’re building your own equity, that’s probably your fastest, best way to wealth, but it’s highly concentrated. All your time is in this one business. You’re putting all the sweat equity into it, you’re growing it, but the payoff could probably be worth more than anything else. Real estate, I think, is the next step down from that where it’s definitely effort, more so than stock market, and it’s definitely probably the second best way to grow well, but it just takes a little bit less effort than maybe running a day to day business yourself.

David:
What’s going on everyone, this is David Green, your host of the BiggerPockets Real Estate Podcast here today with my good buddy and co-host Rob Abasolo as we interview one of the hosts of the We Study Billionaires Podcast, Trey Lockerbie. In today’s show, we get into the good nitty gritty and big picture stuff about what the heck is going on in today’s economy. Rising interest rates, seller panic, people that aren’t sure if we’re going into a depression or if this is a great buying opportunity, stocks, crypto, real estate, we get into some really good stuff by someone who makes his living studying very successful investors. Rob, what are some of the highlights that stood out to you from today’s show?

Rob:
I mean, Trey is quite the impressive fellow. Well, first of all, we should call him Trey “Mr. Butter Voice” Lockerbie, because very soothing, so this is definitely a very, very easy listening one. But very impressive fellow. I mean, he is a songwriter, a relatively established, it seemed like, from what we could pry out of him, and used to tour with Lady A. Then he really got into the whole… He casually found himself at dinner with Warren Buffett, and he’s really made, I guess, a career you could say out of studying Warren Buffett’s investing principles broke, broke down the four pillars of how he invests, and by he I mean Warren Buffett, and really just a nice change of pace because we always talk about real estate. That’s what this podcast is all about.
But it was really refreshing to hear a new take as it pertains to the stock market, to crypto, and how they’re all interconnected by all these levers around the world and how they all play into each other. So this is a really, really nice little masterclass on economics that are at play at the moment, and I think the takeaway today is how to invest, how to invest consistently and how to diversify in all that goodness.

David:
Yeah, absolutely. We talked about properties I’m buying, cryptocurrency that I just bought. You talked a little bit about some of the factors that led into your decision to get into crypto and what happened and the mindset behind when we do well or when we don’t do well, how we stick with it. So I thought this was fascinating. I’m already thinking we should have Trey back. But here’s what I want to know. As you listen to this, did you like today’s episode with Trey? Let us know in the comments on YouTube. So if you’re listening to this there, tell us what you liked, what you didn’t like, what you disagree with, or what you wish we had asked, and we will read them. And before we bring Trey, today’s quick tip is brought to you by Rob Abasolo.

Rob:
So if you like today’s conversation and you’re interested in investing even outside of real estate and in wanting to diversify your knowledge on how to invest in stocks, I think their podcast is really great for just opening your mind to the world of investing as it pertains to stocks, crypto, everything in between. It’s a very, very, very interesting conversation to talk about how billionaires became billionaires and how they make their money. So be sure and give We Study Billionaires a download, even outside of the episode that we do with them.

David:
All right, great job on the quick tip there, Rob. Let’s get to Trey. Trey Lockerbie, welcome to the BiggerPockets Podcast, how are you today?

Trey:
I’m doing fantastic. Thanks for having me on.

David:
So for anyone who hasn’t heard of you, which there’s probably quite a bit of our audience that has.

Trey:
Most people.

David:
Well, I don’t know about that. Can you tell us a little bit about what your background is with business and investing and then what you do for a living?

Trey:
Quick origin story is I actually got started out in the entertainment business, specifically music. Really always thought I’d wanted to be a touring musician. I just thought people on the road looked free to me. They weren’t wearing suits, they weren’t in an office, they were playing music. It just looked the dream that I wanted for myself. So I set out to achieve that right after I graduated high school. Went to college, but started a booking agency out of my dorm room that got me my first gig with an artist going out on the road. That artist group I should say became Lady A, and I started doing some touring with them and some other songwriters. Ended up dropping out of school because it picked up so quickly and I got so busy. I dropped out, moved to Nashville with them.
Started to become more of a songwriter. I made some of my first big checks actually songwriting. And when I got my big checks, I thought, “What do I do with this money?” So I called my dad and I said, “Hey, what do I do with this money?” He’s like, “I don’t know.” I called my uncle. My uncle was like, “Put it in the S&P 500. And I was like, “What is that?” I was just so clueless on all of this stuff, and it really-

David:
It’s good advice, though.

Trey:
It was. Looking back, it was perfect. I didn’t know how to do it. I didn’t know what it was. This is around the time right after the global financial crisis, so I was like, “The stock market? Get out of here. That’s insane.” But just my personality, I was like, “This whole global market that just exists in the background of my life is so prominent for so many other people. It’s something I should probably have some literacy on. I should probably know the basics of this.” So I started going down the rabbit hole and I also thought, “Hey, wouldn’t it be fun to be on the tour bus sitting at a venue, there’s so much downtime when you’re touring, I could just be trading or making extra money or generating stuff like that.” And along the way, I had this opportunity to…
Well, I’ll actually pivot there. Basically at a certain point I realized that music itself, that lifestyle, the touring element of it wasn’t sustainable for me. I was missing people’s weddings. I was missing events. I’d get home. And I just felt a whole year had passed and I wasn’t really moving or progressing in my personal life. So I ended up wanting to pivot and find a different career. And it was around that time I met my now wife who was also a touring artist. She was a background singer for Rihanna. She did that for about four years. And she and I’d both come to the same conclusion, which was, “Hey, that was fun. We’re in our early 20s. We got to see the world, get paid for it, what an amazing experience, but how do we move forward with something else?”
And my sister was diagnosed with breast cancer and through that I actually got introduced to kombucha tea, and that’s a living tea, it’s a probiotic tea, and it’s popular in the cancer community for multiple reasons, these health benefits that it provides. So she told me that I should go start drinking this stuff because it was making her feel so great. And I went out there to the store and I bought some, and I basically spit it out. I always like, “Get out of here. This is ridiculous. It tasted like vinegar.” And I swore off of it for about a year. But she was so adamant that I drink it, that after a while, I was like, “Well, I grew up in the south a little bit. I love peach tea, maybe I could brew this at home. Maybe I could make it taste good.”
And I brew up some peach tea kombucha. And I remember the first time I tried it, this light bulb went off for me, because it was so delicious that I was like, “Oh my God, everyone would drink this if they just knew it’s actually supposed to taste good.” And there’s a lot of reasons why it’s manufactured in different ways and produces a vinegar taste for most brands. But my now wife and I, Ashley, she and I decided, “Well, this could be fun. We’ll set out at farmer’s markets. We’ll sell some tea. What an idyllic lifestyle.” And that’s how it started, and much like anything else, it just snowballed. So we started at farmer’s market, sold out quickly. Then it was like, “Okay, we got to show up next week, I guess. So it just kept going from there. Trader Joe’s came along, different retailers came along and we had to keep being like, “Okay, are we doing this or not?” And scaling.
And then around that time I was starting the business, I had this really strange opportunity to have dinner with Warren Buffett. And at the time I was trading, I was actually doing options and all kinds of crazy stuff like that, starting this tea business, and had this three hour dinner through a family friend with Warren Buffett, and he really changed my life. I mean, he made me look at everything differently. And after that dinner, I was just determined to read everything I could about him. I mean, I realized the people I was looking up to who were trading, who were doing X, Y, Z, he made more money in those three hours sitting with me than had in their entire career. I mean, I would just put everything in perspective to say, “He’s doing something right.”
So that got me thinking and I got into… I became a Buffettologist, I say, I started studying everything about him. I found the show called We Study Billionaires and they were heavily focused on Buffett style investing and got to know the host of that show over the number of years I was listening through events they put on and Berkshire Hathaway meetings and stuff that. And then they offered me a job to be the host of We Study Billionaires. So it’s a really winding path. So I apologize for the long intro, but music, tea, now an investing podcast.

Rob:
That’s great. No, this is perfect because David and I probably have 17 questions to ask and we’re like, “Well, where do we even start?” There’s a lot of good stuff there, but I am curious, I got to know. You casually are like, “Yeah, and then I found myself at dinner with Warren Buffett, one of the most famous people in the world of investing.” How did that happen? Because that’s nuts. I mean, a guy like that, I’ve always heard of these really big people, they’re like $40,000 an hour just to hang out with some of them. I got to imagine Warren Buffett, he’s probably a very, very difficult person to get time on his calendar. So how did that happen?

Trey:
So it probably also makes me seem I grew up in some wealthy family, which is not correct. It really just came through this really amazing opportunity through a family friend, where they were hosting him for this book launch he was doing, and I invited myself, quite frankly. I mean, as soon as I found out about it, I just called and was like, “I’m coming to this dinner and I’m going to be there.” So I just peer pressured them to let me sit in on it. So it was a six degree opportunity that I just capitalized on. I mean, looking back what an opportunity. I just heard that he auctions off a dinner for charity and this year it went for $12 million. It was at least a 12 million opportunity that I took advantage of there and it didn’t disappoint.

Rob:
So you met with him and then was there actually any insider words of wisdom that came out of that conversation where something changed in your life or was that just the spark where you then went to go on and effectively deep dive and study his investment style?

Trey:
A little bit of both. So upon having dinner with him or prior to that, I definitely did a little bit of research, and I came to this conclusion that this value investing thing that a lot of people call it, that used to work maybe in the ’50s and ’60s when you didn’t have the internet, but now everyone’s got all the same information. There’s really no arbitrage left in the market. Everyone’s got real time data. The market is fairly efficient. I mean, that’s how I was operating, especially trading options. It’s all built around the efficient market theory. So that’s where I was coming from, and I wanted to quiz him on this, and looking back, it wasn’t the worst question I could go off from, but I have heard other people ask him this over the year. So it wasn’t a new question for him by any means.
And he was very gracious and he basically said, I’m paraphrasing, but something to the degree of, if the market was efficient, I wouldn’t be where I am. And he went on to explain, there’s a couple chapters in the Intelligent Investor, one of his favorite books. I brought it with me, actually. I had him sign my copy. And I think it’s chapters 8 and 13 that are really about how the market is just backed by human behavior. So I like this quote by Jim O’Shaughnessy, it says the last arbitrage is human behavior. Because that’s what’s happening. Things either get overbought in the market or oversold, and the way you avoid that trap is doing what Warren Buffett does, which is looking at these numbers on a screen that are green and red and flashing and telling you to do something actually as businesses.
And that’s where people get tripped up a lot. Stocks are so intangible. They’re just numbers on a screen and everyone gets caught up in the performance element of it. But if you realize that that stock is a small fraction of ownership in an actual business, and you actually look at the stock and what it represents for how the whole entire company is currently valued, you look at it quite differently. So for example Tesla, it was at $1,200, now it’s at $700. That’s a good buy. What is the market cap of Tesla at $1,200 versus $700? At $700 is it still worth more than the entire energy sector combined? Probably close. So you have to compare market caps, look at these things like businesses, and realize that human nature is not going to change. People will get either greedy or fearful and the market will swing to your advantage just because of that.

Rob:
So this is actually a very common quote by Warren Buffett, and he talks about… It’s is going to be very awkward if it wasn’t him, but I’m 99.99% sure he says, “When people are being greedy, you should be fearful, and when everyone’s fearful, you should be greedy.” And we’re sort of at this paradigm shift right now in the economy, seemingly just based on all the clickbait and alarmist headlines and a lot of people coming in with their hot takes and everything like that. Right now, what is your read on that? Are we at the point where people are being fearful and we should be greedy or vice versa? Because I feel we’re in the middle at the moment. There’s a lot of investors that are saying, “Oh yeah, I’m jumping in right now.” There are other investors that are saying, “Well, probably not.” I think David and I are still investing pretty heavily, but I’m curious on your take here.

Trey:
It definitely depends on who you ask. I will give you my opinion. I looked at a recent Bank of America research paper and they were showing this graph of… Imagine a speedometer in a car where on the far left it’s fear, on the far right it’s greed, and the arrow goes either way. It was flat line to fear. So it was hitting zero, basically saying this could not be any more… People cannot be any more fearful than they are today. And I definitely feel that, which is really interesting, because I can walk you through a bunch of macro reasons why I think the market’s actually going to go lower, but it’s rare that you get this sentiment where everyone is so bearish that they’re actually right about it. Usually when the sentiment is what it is, it’s the opposite that’s really happening.
I will say that the market corrected. It went down to past 10% to about 14, 15%. When I say the market, I mean the S&P 500, which is basically 500 of the biggest stocks in the US, and the 14 to 15%, that’s the 100 year average for a correction. So when it was sitting right there, that was a really hard thing to manage, because you’re like, “Okay, at one point, this could go a lot lower. If you look at it this way, though, it’s hitting the average, so it could maybe bump up from here.” It’s now gone down about 22%. So that’s bear market territory. And I’m of the opinion it’s actually going to get worse before it gets better, even though the sentiment is what it is and it’s as bearish as it is. But that would mean that this time is different and usually it’s not.

Rob:
What about you, David? Would you consider yourself bullish or bearish at the moment?

David:
I would agree. Well, we’re talking about the real estate market right now, or did you guys want to stick to the stock market?

Rob:
We were in the stock market, but I mean, I guess just personal investment strategy.

David:
I would say we just interviewed Ed Mylet, I was trying to find the episode number, but I couldn’t find it. Someone can look that up. We’ll say it in a minute. And he referred to the collective psychology. It’s this idea that, like you were saying, Trey, everyone in general, they kind of function… I call it flock of birds. It’s the same thing. But they all move in the same direction. Bitcoin’s going up real. Estate’s going up. I should go buy. I’m hearing all these success stories of people that bought. And then they run in there. Real estate’s going down, Bitcoin’s going down, I should flee right now, cut my losses. And I think most people make decisions based off what they see other people doing and the emotions that that gives them.
What I love about your advice that you were talking about, which comes from Warren Buffett, is try to be objective, try to think, what would that property be worth? What would that asset be worth? What would that company be worth independent of the emotions that you get when you watch the stock price trending up or trending down, if you can separate yourself from that, you get a much clearer understanding of what the thing is worth. And that’s very important. When we were talking with Ed, he was saying those are the people that make good money, because when you can detach yourself from the frenzy of what you hear in the news constantly, and understand the impact that has on you, you just make smarter decisions. So Warren Buffet’s really good at seeing, “Hey, this stock is really low. That company is really good. That stock got pulled down for a bunch of other reasons. I want to buy a bunch of it.” And vice versa. That is not worth what people are paying for it objectively speaking.
So when I’m buying real estate, there’s a part of it that says it doesn’t really matter what everyone else is doing. It’s going to cash flow this much, it’s going to make me a return. I’m going to hold it for a long time. So right off the bat, I have a foundation that’s very safe. And then I add onto that where I’m monitoring everyone else’s psychology, not throwing mine in with it. So I put 10 properties under contract in the last two or three weeks. A lot of it was because the sellers, I think, are panicking. They’re watching Jerome Powell saying, “Don’t buy a house.” They’re hearing news interest rates are going up. They’re thinking, “It’s going to be a blood bath. We have a depression type event on the way. I got to get out right now.” And I’m looking at it like, “This house is in an amazing location. It’s a very good property. It’s going to make me money, regardless of what the value of the house is.”
I’ll give you an example. I had one property I just bought was listed at 1.5. They were too high. Sat for a long time. They steadily dropped it 50 grand at a time, which is not the way to do it, so now they’re chasing the market down. When I saw it was at 1.2, it had been on the market for 70 days or so, so I know as a real estate agent that the psychology of the seller is getting into a panic mode. They’re thinking, “Terrible. No one’s ever going to buy my house. I’m stuck with it. I’m bleeding on the mortgage because I don’t have tenants in there and I got to get this thing sold.” So I wrote an offer at 1,050,000, with 35,000 in closing cost credit, so just over a million, and they countered me and said, “We’ll take your price, but not the closing cost.” And I thought, “There’s no way that he’s going to blow this deal over 30 grand.” So I just held firm. Next day he accepted where I was.
There’s no reason I should have got that house for a million dollars. It’s it’s 1.2 to 1.25 in a normal market. That seller was watching too much news. Just to rebuild that house would cost way, way more. And you can’t build in that area because they’ve shut down a lot of the building. So when we’re talking about what I’m buying, it’s not real estate in general. I’m not just by any house because they’re all the same. It’s more that I’m trying to tap into the human beings that are overly worried because they’re paying attention to what everyone else is thinking. And I don’t know if I made a good call or not, but I just bought my very first crypto ever two days ago.
I watched Bitcoin and of all the cryptos I see so far, and I’m not an expert, I just want to come out right now, I’ve listened to a lot of Michael sailor, I thought that sounds a smart dude, I like what he’s saying. So he swayed me on Bitcoin in general and it was about $65,000 a coin, and it dropped to 20, and I bought my first Bitcoin. So I was like, “Okay, so now I’ll go in.” Is it going to drop more? Yes, it dropped to 19 the day after I bought it, but I just don’t really care. Is it going to stay at that point? Well, if it’s a good asset, no.
So I’ve learned to detach myself from the immediate results of what I’m seeing and just shut down those emotions. I don’t give myself credit for a win when it does good, and I don’t kick myself when it does bad. Now I’m going to turn it to you Trey, because I don’t actually know if the way I’m going about it in your mind, because I think you study this stuff more than me, is wise, so I’d love to hear what your take is on that.

Trey:
I have a lot of thoughts on that. So first and foremost, to your point earlier, you’re absolutely right. It deserves more nuance, this conversation. Sweeping generalizations like real estate, yeah, you should get in, it’s prospect specific, to your point. And there’s this thing happening. I was talking with my buddy who’s in commercial real estate yesterday, and he’s having the hardest time with investors and he’s presenting them with this opportunity that I think is easily yielding, let’s say, 25%. Whereas a week ago or two weeks ago it was at, I don’t know, 40%. It was something kind of… Whatever it was, his estimation was much bigger.
And to me what I’m seeing, there’s this analogy about being a monkey with two bananas. I don’t know if you guys have heard this before, but it’s basically you give him monkey one banana, very happy. Give him monkey two bananas.,He’s stoked. And then you take one of those bananas way, and furious. He still has the one banana. And I think that’s what’s happening in the market a little bit, especially maybe with real estate. People are so used to these amazing opportunities with these low interest rates, but you can still find opportunities that are good and maybe even exceptional in some areas of the market, depending on where it is. And to your point about Bitcoin, I would just say, I look at Bitcoin personally like it is property. I very much look at it like that. I always have.

David:
That’s literally what bought me into it, yes.

Trey:
Yes, that’s exactly right. And the problem with it is so many people have different perspectives on it. Is it your new currency? Is it your new store of value? Is it your new X, Y, Z? The thing that made the most sense to me and what got me in was thinking of it… I think someone described it as New York, and the property’s on New York, and there’s only X amount and that’s all there’s ever going to be. And that’s what Bitcoin is in the digital space. So I dollar cost averaged into Bitcoin. I bought a big chunk a few years ago and then I just have a set it and forget it weekly thing, it’s almost like a savings account for me, and I don’t even watch the price quite frankly, because in my mind, all I’m thinking about is how many SATs I’m accruing. So at the end of, say, 10 years from now,
I think all that’s going to matter is how many actual Bitcoins do you own, because there’s only X amount, and you can corner the market for lack of a better way to say it. I mean, that’s what’s happening. If you look at some charts, the beautiful thing about Bitcoin is that it’s an open ledger and you can see actually all these wallets that are holding Bitcoin and you can analyze them. You can see how long they’ve held the Bitcoin. And if you study those, what’s called on chain analytics, you can actually see that the people who have never really sold their Bitcoin are accumulating more, and that number is only going up. So that’s really interesting. You see these big institutions who may be bought in saying, “Okay, this thing seems hot. We need to stay relevant. We’re going to buy a little bit of it.” And maybe they panic sell because they don’t really understand it. Or maybe it’s just directly correlated with the NASDAQ because Wall Street doesn’t really understand it. But the people who understand it, understand it very well and they’re not selling.

Rob:
It’s, It so much more relaxing when you aren’t watching the Bitcoin counter all the time? I mean, I bought Bitcoin, honestly… The majority of my Bitcoin was purchased in the all time high, I’ll admit. And then I bought some Bitcoin when it was at the 45 and the 40 mark. So I’m averaging down a little bit in that capacity, and I was just checking every single day, and then I was like, “Oh, I’m rich. Oh, I’m richer. Oh, I’m poor, I’m poor, I’m rich, I’m rich, I’m poor.” And I played that game for three, four months. And then I just finally was like, “You know what? I think I’m just going to stop doing that.” And then I stopped looking for… I mean, I haven’t really looked in the past three or four months and it’s just nice to know that I have it.
I don’t really care about the price that it’s at, because I never intended on selling it anyway. So whether it’s worth $100,000 or $20,000, I don’t care because it’s not something that I plan to sell right now, because my investment strategy was to buy and hold onto it for a very, very long time. So right now a lot of people are freaking out because they’re like, “Oh, my crypto portfolio is wiped.” And mine is a little bit, but it doesn’t really matter because I think what matters is to look at it from the the bigger perspective of the bird’s eye view, and now I sleep a lot better not looking at the Zillow home appreciation prices and my 401k and everything that, because that’s not… Investing should never be short term that.

Trey:
I absolutely agree. And if you look at property, if you look at it like that, you can compare it to some billionaires we’ve studied like Bill Gates. He’s been buying a hundred million plus dollars worth of farmland. I mean that produces a yield and we can say how Bitcoin actually produces a yield because it can, but that’s where people are going and moving to right now as hard assets, real estate. Bitcoin I consider to be a hard asset. I think it’s a really good way to hedge the inflation situation that we’re all getting ourselves into.

David:
And I’m a little nervous that I just mentioned I bought it, because what I don’t want is either everyone on BiggerPockets to go say, “David’s buying Bitcoin, I’m going to go buy it.” Or, “I can’t believe he said Bitcoin. That’s heresy.” So just to clarify, the reason that I… Just like you said, Trey, it was explained by Michael sailor as not a currency, but more of a property. And what, in my opinion, has led to a lot of us crushing it in real estate for the last 5, 10 years is quantitative easing and over printing of money. So when they print a lot more money and that money has to find a home, it tends to find itself in different assets like the stock market, like cryptocurrencies, especially real estate, and it gives you the impression that you’re making more money than you actually are, because money’s just becoming worth less.
And that’s what I don’t like about keeping cash in the bank. My normal personality is to be super conservative, save, keep my money the Warren Buffett style. He doesn’t pull the trigger very often, but when he does, he takes down the big prize. You can’t play the game that way when they’re just ripping money off left and right. It forces you to be a little more aggressive or at least proactive might be another way to put it than I would prefer to be naturally. Well, with Bitcoin there’s a limited number of what they’re able to make, so when I stop looking at it a currency, and like you said, I started seeing it as a property. That’s where I felt better about buying it.
Now, do I know it’s going to go back up? Could it be replaced by Schmidtcoin? I literally don’t know. I’m not planning on using this to become wealthy. I do however think that it’s very likely that wealthy people will start moving Bitcoin around to buy things, to trade in, and as the dollar becomes worth less, Bitcoin becomes more valuable because it’s set in place. So I just wanted to give my rationale behind why I bought it, and then I want to open it up to you. Is there any holes that you want to poke in that or a misunderstanding that I might have about it?

Trey:
Well, I want to touch on what you said at the top there, which was don’t just go buy it because we said. So you have to really understand it. I can provide a backdrop, maybe a framework that could help some of your listeners. So I’m borrowing this from my co-host Preston Pitch, who is so brilliant when it comes to these macro themes that are happening right now, the way he describes our current economy is imagine you have two monopoly boards, two groups playing monopoly, and the only difference is they can buy property on each other’s boards. And every time they go around the board, they collect $200. So maybe that’s your 2% annual inflation that we’re all used to. But let’s say the global financial crisis happens and we don’t want to go bankrupt, so we printed a lot of money, we printed around $800 billion back then, 2008.
So that’s kind of like one of those tables, instead of someone going around the market, instead of someone going around the board collecting $200, say they go around, they collected $700, because that money just was injected into the game. So the people with that money start buying properties on the other board. So all the people on the other board, let’s call it a different country, they start being like, “Well, where’s all this currency coming from. And the other board just keeps doing it. They keep injecting more and more money. That was our quantitative easing that we all went through. More injecting into the money. But the problem with that, there’s this thing called the Cantillion Effect, where the people who are getting the money, they’re usually holding these billion dollar bond tranches. They don’t really need the money.
So the fed was buying bonds from these very wealthy people, and what do the wealthy people do? They go buy assets, to your point. They buy stocks, they buy real estate, they buy X, Y, Z. But there’s not that kind of trickle down element happening so that the values of… And by the way, because they’re buying all these bonds, the interest rates stays down. So those low interest rates versus all these people buying assets, it creates this huge discrepancy where asset prices are going to the moon, interest rates have been staying low, and it’s priced out the normal person. And I think that’s where people… Everyone feels this, they know it’s… They maybe can’t articulate it, but they know it’s happening and they’re getting antsy about it. They’re getting maybe disgruntled about it, and you’re seeing the social unrest that can bubble up here and there because of it, in my opinion.
So that’s where things UBI start becoming a conversation, “Hey, let’s forgive student debt. How do we take care of the little guy who’s the patsy at the game here?” So that’s where people really, I feel like, discover Bitcoin, because Bitcoin is an off-ramp to the currency we currently have. You can’t just keep printing more and more and more of it. And the reason I said earlier that I think it’ll get worse before it gets better, usually what’s happening globally on a currency basis is that we’re printing, say, the amount of money we’re doing for quantitative easing. Well, every other country is also on a fiat standard and they have to debase their own currency just to stay competitive.
But what’s happening now is we’re actually tightening, we’re actually taking money off the table. We are raising interest rates. We are selling those bonds that the Fed bought. We are basically taking money off of the table, extinguishing some of that money that was created. Meanwhile, places like Japan and other parts of the world are still loosening. That’s why you’re seeing the yen just dropping precipitously versus the US dollar. That’s why you’re seeing the us dollar climb higher and higher and higher. If you look at the DXY index, which is the USD versus all other currencies, it’s almost as high as it’s ever been. I mean, it’s at a 20 year high. So that’s what’s happening in the background. That’s what’s leading to people to find, I think, a store of value like Bitcoin, that in my opinion is an off ramp to that currency debasement.

Rob:
A couple things here. David mentioned earlier about the met Ed Mylet episode, that’s episode 620. That’s very relevant to what we’re talking about. So if you haven’t listened to that, go listen to it. That is one of the more popular ones that has come out in the last month, I’d say, month or two. A lot of views on that one, because I think it just resonated a lot. He talked about the little guy and making sure how the little guy is going to be able to make their foray, their entry into the market because the playing field is evening a bit. So you mentioned UBI. So I wanted to dive into that just a little bit, and can you just define what that is and that concept just so we can unpack that a little bit and how it relates to the whole real estate market and the correlations there.

Trey:
Most people will probably understand it the way that Andrew Yang was pitching it at the last presidential election, which everyone gets a thousand dollars a month. The government’s just going to print you money. There’s actually some interesting ideas around this, but if you look at America a business, think of it like a dividend. You operate in and exist in the most successful country of all time. Therefore as a shareholder, if you will, you get a little dividend. It’s an interesting idea. The problem now versus back then is we didn’t have inflation back then. And actually why that was a good idea is we couldn’t really figure out how to get inflation, and the only way to raise interest rates off of zero is to get some inflation going. So at the time it kind of made a little bit of sense.
Now it’s unfeasible to, in my opinion, because we have inflation now, and the inflation came mostly from the COVID policies that went into effect where they printed $3 trillion, they did PPP loans, they did EIDL loans for businesses. They actually literally sent checks to citizens to say, “Here’s what we’re going to do.” And once that faucet is turned on, it’s really hard to turn it off. So I think what you’re going to start seeing now is UBI, but it’s not how you think of it. For example, I highlighted earlier, let’s say debt forgiveness for colleges. I mean, that’s a form of UBI. That’s putting more cash in your pocket, but they’re not actually sending you cash. But I think, and you’re seeing this in Europe, in other places as well, they will be getting more and more creative, I think, in finding ways that will help keep people playing the game, keep them in the game, because otherwise we’re all going to fall too far behind.

David:
The point you’re making about how, if you forgive debt, that is the same as giving someone money, is very… It’s noteworthy because that’s the same way… I say things like we printed a bunch of money. That’s not accurate. We didn’t actually print money. We bought bad debt from people. They use fancy accounting principles to take debt out of the economy and push money into it that they can then lend. And the result is the same as if they had printed more money. And that’s often how this stuff plays itself out. You combine that principle with, if you want to get voted in as a politician and people are scared, the collective psychology is worry, fear, what’s going to happen, and you’re the person that comes and says, “Well, I’ll give…” That’s why we did that during COVID. We’re shutting down the economy and everyone says, “What am I going to do for money?” “Don’t worry. We’ll give it to you.”
That principle, at least this is just my personal opinion, is probably not likely to change. I don’t think we’re going to see the entire country of America turn around and say, “No, no more of that. We want everybody to just eat beans out of a can and go through hard times when this happens.” But what’s very interesting to me is how those policies or the impact of them affects real estate investing, building wealth in general. The way that I tend to look at this is that we’re probably headed down that road. I’ve said before. I think at some point we’ll see an expansion of the section eight program and the government that people will be complaining about the price of housing, because as inflation goes up, landlords charge more for rent, but many people are not in a career or have a job where their wages are keeping up with that. Especially if it’s something that isn’t cutting edge improving.
So if you’re the person renting a house, you may very well find yourself, gas is more expensive, food is more expensive, rent is more expensive, but my wages are the same. When those cries rise themselves up, you’ll see, “Okay, this person’s eligible for section eight. We need to put more money towards the section eight program. Oh, we need to create more money to be able to fund that.” And I see a world where less people are able to own homes. And that’s one of the reasons why I’ve been at a bit of a sense of urgency with don’t go out and buy stupid properties, but be more intentional about finding good deals because they may not be there forever.
The same would be true of Bitcoin. If it takes off, there’s a limited amount of it. There’s only so much to buy at a certain point. It’s incredibly expensive to get it because it’s a finite resource. Really that understanding of what we’re investing in are finite resources, and the US dollar is clearly not that, because they can manipulate it, is why we’re wanting to exchange the dollars into the finite resources. Is that similar to how you’re seeing stuff outside of just the real estate market?

Trey:
Absolutely. And what I was highlighting there earlier about the dollar going higher, my simple framework, and I think why it plays into what you’re saying, is it has an impact on the rest of the world. It’s hard to wrap your head around the global… I mean, I it’s over my head for sure, but my simple framework is as the dollar goes higher, everyone’s debt around the world gets more expensive. If you’re operating in a different currency and that currency is losing value to the dollar, because we have a world reserve currency, most of this debt out there is in US dollars because, say they have to buy oil or something, a lot of oil is priced in US dollars. So all this debt is getting more and more expensive.
So the way you do that is you either debase your currency to come up with more of your own currency to buy more dollars or you liquidate your assets. So a lot of people may have… Say they live in China or elsewhere, they probably have some us assets. So that’s why I think you’re seeing a lot of liquidation right now. The dollar is going higher, the stock market is selling off, a lot of real estate is selling off. People are liquidating. They need to come up with capital to extinguish some of this US dollar denominated debt around the world. And once you turn on the spigot, as I was saying with this printing money, it’s really hard to turn it off. So that’s where the Bitcoin, to your point, comes in.
Because if your thesis is that at some point we just won’t need to print more US dollars, then that’s a different scenario. But if you’re, if your thesis is that this trend is going to continue and we can only operate in this world where everyone’s going to keep debasing their monetary currency, then Bitcoin stays the same and it becomes a store of value. It’s going to be very volatile, for probably many more years. And I want that to be clear as well. But say over 10 years, it’s a piece of property that you’re going to own and it’s part of only 21 million.

David:
I was just having a conversation with someone yesterday and they were asking me, “Why are you buying if we’re heading into a depression, we’re going to go over the cliff, the whole thing’s going to fall apart?” And it was the first time that I had to articulate how my gut feels or what thoughts are going on in the back of my head and turn it into an actual conscious conversation, which is why I think it’s good that we talk about these things, because sometimes through the process of talking about it, you get more clarity than what you had before. And the way I’m seeing it is that the market, whether it’s a stock market, the real estate market, the crypto market, whatever it is, is sort of like a big basin in a field, and as money gets pumped into it, the ground can absorb so much of that water at a time.
And if you pump in more water than what the market can actually absorb from supply and demand, then the tide will start to go up, the amount of water goes up, which creates people thinking, “I’m making a ton of money. Bitcoin is skyrocketing. Real estate is going up a ton.” There wasn’t enough supply for the demand that was created when we just created all this money. Well what we’ve seen when interest rates went up, talks of the war with Ukraine and Russia, overall bad news, quantitative tightening, like we said, the big players have pulled their money out of that pool. They are like, “Okay, we’re selling off the Bitcoin. We’re letting the prices go down.” I see a lot of people putting real estate on the market and selling it. Quite frankly, people that bought real estate in the last two years that they didn’t do it very wisely, they’re probably going to lose their properties or have to sell at a loss.
But in my mind, I see there’s still water out there. It’s just been pulled out of that basin. It didn’t disappear. We haven’t lost that actual money or that wealth. And it has to come back in at a certain point. And I’m not saying to just… It’s not like you’re buying an index fund, just buy it all, sell it all. Like you mentioned, it is individual pieces, but that’s how my mind is working. I’m looking at… There’s so much money that has to find a home in some place. They’re not going to hold it in cash, especially with this inflation forever. And it feels like more of a temporary correction that we’re having that frankly we’re long due for. What’s your thoughts on that perspective?

Trey:
My perspective is that they can only raise interest rates so much before something breaks, and the thing that breaks, as I mentioned earlier, is how all this dollar liquidity needs to get out into the market and where other third parties are going to struggle to come up with the capital they need, and it’s just going to get worse before it gets better. This has been a 40 plus year trend. So if you go back to the ’80s, interest rates have just gone down more and more. And every time they inch them up, they can’t get as high as they did before.
So the last time we did a… I think it was 2018, we raised interest rates, we got to about 2.5%. So I’m of the I’m of the belief as of this moment that 2 to 2.5% is going to be the high end of what we see before things start to get really ugly, and then the Fed is going to seemingly reverse course and lower interest rates again. And there’s going to be this period, hopefully where things have sold off, things have gotten really cheap, and then they lower interest rates again. And that is going to be-

David:
And then what are we going to see when that happens?

Trey:
Well I think that’s the time to buy, and not that you can time that stuff. So to your point, if you find opportunities along the way, you got to take them, but that I think is going to be a very big buying point for pretty much any asset.

Rob:
So I guess we’ve covered a little bit here on crypto, we’ve covered a little bit on the stock market, we’ve covered a little bit on real estate. I want to bring the conversation back to our good friend WB, Mr. Buffet. Just kidding, Mr. Warren Buffett. Sorry, Warren, if you’re listening. And I know that you’re an expert in all things Warren Buffett. So I’m curious, based on what you’re seeing right now, how is he investing? Because I think that’s the big question right now. Is he diverging a lot from his philosophies and his POVs or is he right on brand for how he’s enacting his investment strategies?

Trey:
No, so Buffett at 92 years old keeps surprising everybody. For many, many years, for example, he was saying that he didn’t understand technology. His best friend is Bill Gates, he owns Microsoft, but yet Warren Buffett never bought Microsoft. I mean, how do you explain that? But he claimed that he didn’t understand technology. And then a few years ago he buys Apple. He surprises everybody, buys Apple, he puts 30 billion or so into it. It’s now the best performing investment, I think of all time. I think maybe before the correction had gotten up to something around 130, 150 billion. So just an incredible return dollar for dollar. So lately he’s also, over the years, gone back and forth on things oil and he’s actually taken a very big position in Occidental, and that’s really interesting to me as well.
It’s always the same old Buffett flavor, but sometimes he pivots on exactly what he says he’s a specialist in or not. What’s in what he would call his circle of competence. So him buying oil companies, he’s actually to be quite honest, never had much success with in the past, I think he’s broken even at best, but he’s taking a big position there. My theory on that is because when we did all the EIDLs and the PPP loans and all those things, the 3 trillion or so dollars that we printed during COVID, a lot of businesses took those, rightfully so. But unfortunately you saw a lot of businesses just turn around and buy their shares back off the market. They didn’t take the money. They probably still let some people go. They bought their shares back and they didn’t invest in infrastructure. The thing that’s needed to continue to create supply.
And that’s, I think, what you’re seeing in oil and the thesis behind it why oil will probably continue to go higher because as of right now, the supply is not meeting the demand and it’s been volatile, don’t get me wrong. It’s down today. It could go either way. But my thesis is that over the long term, say the next couple years, it’ll probably continue to go higher. Which, by the way, is one of the biggest factors in the CPI inflation number, which means that if oil continues to go higher, inflation will theoretically be higher, quote unquote, whatever you define inflation, which could also create lots of its own different issues we can get into. So I digress. Buffett is I think doing what you would expect him to do. He’s been more active this year, surprisingly, than he was even when the COVID drop happened, where we went down 20% in 2020.
I thought back then, “Okay, this is his magnum opus. This is his opportunity to sail off into the sunset. He’s going to eat up all this cheap equity and that’s going to be his huge return for years to come.” And he really didn’t do that, which was very surprising. So more interestingly, he’s been more active this year. He’s been buying more companies. He bought Allegheny, he’s buying Occidental. So in some ways Buffet’s the same old Buffett, in some ways he’s not.

Rob:
If he’s the greatest investor of all time, it would make sense that evolves a little bit, but you said, he is on brand. Couple things I wanted to call out here. You said CPI earlier, can you just define what that is? I know what it is, but just for David’s sake, just in case he doesn’t know.

Trey:
CPI is the consumer price index. It’s the shorthand… I mean, it’s what a lot of people look at or define how they define inflation because it’s made up of all these different parts. It’s the way our government has… It’s their best ability to capture all these price increases across multiple products and industries, and it all rolls up into this CPI number. And you can just Google it. You can actually see how it breaks down. You can see how much of oil and energy in general is contributing to the overall number. But when you see something inflation is at 8.6%, that’s the CPI number.
And it’s really important, I think on that note to understand that the biggest asset in the entire world is the bond market, and that’s a hundred plus trillion dollar market. And the way bonds are supposed to be priced is at a premium to inflation historically. So right now that’s not happening, hasn’t been happening for a long time, but as interest rates climb higher, the value of the bonds goes down and that can create its own issues. So lots of macro things here to potentially have things get worse before they get better, as I said.

Rob:
A lot of levers being pulled in a lot of directions, I’m sure. So I guess, understanding Warren Buffett’s investment strategy a little bit, talking about how he is in changing it up and he’s investing in more oil and gas, Occidental and all that stuff. Can we talk about maybe a few actionable tips for people that are wanting to invest in stocks and how, if we were wanting to diversify a bit, and if now is really a good time to buy because of the dip… I know obviously it’ll be even less at some point, but can we talk about some actionable ways that you can evaluate a company and if a stock is worth putting your money into at this time?

Trey:
Let’s just take the Warren Buffett way. It’s important to understand how Buffett got started. He basically was under the tutelage of Ben Graham, and the whole idea with Ben Graham’s method was that back then you could find businesses that were trading below the value of if you bought the entire company and liquidated all the assets. So let’s say you had a factory worth a million dollars, and the stock was representing the price of the whole company at $500,000. That would be what they would be looking for. That’s very rare these days. So to your point about Buffett evolving, he definitely did. So he’s gotten away a little bit from that. Now he says instead of buying a fair company at a wonderful price, he wants to buy a wonderful company at a fair price. So Apple might be a really good example of that. Something that’s going to continue to compound, and may be overpriced, but you know it’s going to compound into the future.
So those opportunities are happening right now in my opinion. If you look at a lot of the tech companies, for example, tech has just gotten absolutely crushed, and I think these are companies that have been compounding at 20 plus percent a year and continue to do so over decades. They’re total unicorns. I think that’s a really interesting area right now. Like I said, could go lower, but as it stands right now, fundamentally speaking, they’re priced very cheaply by almost any metric you can come across. A lot of people look at things price to earnings. That’s one of the most common ways to look at a business and see how it’s cheap, how cheap it is. So basically you’re looking at the stock price over the amount of earnings that the company is making, and right now they’re at near historic lows. So that’s creating incredible opportunities.
If you’re Warren in Buffett, though, you have to make sure it’s in your circle of competence, meaning you understand what the business does, how it actually makes money. You’d be so surprised if you ask people about a certain business, maybe they own or not how it makes money, and they don’t know. So it’s important to understand the business, find something you can get behind. So for me, example, I own actually a lot of food and beverage companies, food distribution companies, grocery stores. That’s an industry that I really understand because I operate in it on a daily basis. So it’s a really good place to start somewhere like that, that you can actually understand. You can look at things like the PE ratio and there’s other metrics you can check out to see if it’s at a fair price historically or not.
And there are other metrics to see if there’s good quality of management, so you could Google something the interest coverage ratio. That will basically tell you how much debt the company has, how they’ve been managing that level of debt, if they can afford the debt. That’s a big indicator for me about how the management of the business performs. So those are basically… If I want to break it down and simplify it, the four pillars of Warren Buffett are basically great management, something that compounds over time, something that is stable and understandable, and at a cheap price. Those are the four pillars. And price probably should come last, in my opinion. I think you want to start with what you understand, make sure it’s a good team, make sure it’s something that’s compounding and growing, and then check the price.
And a good way to do this, how you can be proactive right now is you can just start there with that universe of stuff you understand, start doing your own valuation of it, and create a watch list. And there’s so many stocks out there that I’ve been looking at and you say, “This is an amazing company, but it’s just too expensive.” But the stock market does it does a favor for you and shows up and offers it on sale, then you can step in and buy it, and you’re prepared… You’re not irrational. You’re not reacting emotionally to what the market’s doing. You’ve done this very stable research ahead of time when you’re more calm. So I think that’s something people could be doing right now.

Rob:
That’s great. David, do you invest in any stocks, by the way, or are you mostly… Are you just a crypto bro now?

David:
No, it’s very, very little. I look at the Bitcoin purchase and the stock purchase was everybody is panicking, they’re all selling, the stock market is plummeting. That’s the only time I go in and buy. And it’s not a noteworthy position. It’s throw away money that I’ll buy. My theory with stocks and crypto, basically investments that you push a button on a computer to buy, part of their benefit is that they don’t take as much time or knowledge. You need knowledge to know what to buy. I’m not saying that. But you don’t have to have knowledge of how to run a company if you’re buying stock in the company, like Trey was saying. You’re looking at the management of the company. You’re buying real estate, there’s more elbow grease that goes into it. You have to have a plan in place and knowledge of how to manage a property or how to market a property. There’s specific information that makes real estate investing… I think you can make more money at it than other things, but that’s because you did more work upfront.
It’s not really a comparable investment to a stock or when I bought Bitcoin that took me 14 minutes to set up an account and now I can buy it in three seconds. So I tend to put much more focus on real estate. But the principles that Trey is saying here are exactly the same. People worry way too much about price. Location matters way more. They worry way more about ego, and like, “Hey, the seller told me they wouldn’t fix this thing,” and they get really upset about it versus looking at, “Is this area going to grow and do I have a management team in place that’s going to run this profitably?”
I think so many people get tied to the spreadsheet, what’s the ROI going to be, and they have no plan how to operate that asset, especially in the multifamily space or the short term rental space. The way that Rob runs a short term rental versus the way that Joe Blow runs it could be incredibly different and literally make that a great investment or a terrible one just by the management. Everything you said, Trey, it applies to real estate, absolutely. But the reason I don’t buy more of that other stuff is because I feel like that’s for people who don’t know how real estate works. That’s the way that I tend to look at it. If I knew nothing about real estate, I wouldn’t be looking to jump into it either. It’s very scary. You can get hurt really bad treating it like a stock.

Trey:
There’s a saying that I love where you stay concentrated to grow wealth and then diversify to maintain wealth. And I think that’s relevant here because as I look at it and I can speak a little bit from my experience, when I think about building wealth, which is probably what a lot of people are interested in listening to this show, I look at it, unfortunately-

Rob:
Theoretically, yeah.

Trey:
I really believe that it’s high effort, high return. So if you look at building your own business, you’re building your own equity. That’s probably your fastest, best way to wealth, but it’s highly concentrated. All your time is in this one business, you’re putting all the sweat equity into it, you’re growing it, but the payoff could probably be worth more than anything else. Real estate, I think is the next step down from that where it’s it’s definitely effort more so than stock market. And it’s definitely probably the second best way to grow wealth, but it just takes a little bit less effort than maybe running a day to day business yourself. And then you have the stock market. And unfortunately I think that of the three is the worst way to grow wealth, but I do think it’s the best way to diversify and maintain wealth once you have it.
So I was always operating with this philosophy of like… Even when I was poor, I was like, “Yeah, I don’t have money yet. But one day I’m going to have money and I’m going to want to know how to diversify and manage that money.” That’s why I started learning about the stock market, because I think it is. It’s great for that kind of thing.

Rob:
Well, we need to get you into real estate, man.

Trey:
Well, we’d love to. My wife and I just bought our first home. It was a great opportunity. It was a two bed, two bath. We made it a three bed, three bath pretty quickly. It’s gone up 50%. I mean I live in LA. This is a little bit ridiculous. We have three homes in our neighborhood that have recently gone a million dollars over asking. I mean, it’s really ridiculous here. Fortunately we got in 2019 and we rode this wave and who knows where it’ll go from here, but that’s my one real estate experience so far and we’d love to do more rental kind of stuff. But again, it’s that opportunity cost of I’m growing equity in a tea business right now and taking time away from that to put something in on a cash flowing business, it’s a different calculation.

David:
And that is a great point when it comes to why some people are better off investing in stocks or in cryptocurrency or in whatever asset that doesn’t take as much time and elbow grease and attention. You click a button and other people are doing the work, because if you’re really good at making money and other things, you can actually lose money in business by making money in real estate. And I think for those of us that are just hardcore in love with real estate, it’s easy to miss out on that. You’re just thinking about, “Oh, this duplex could get me another 500 bucks a month, and if I get 700 of them, I’ll finally be wealthy.”
But most people that are doing really well in real estate are making money in other areas, and that’s why they take the Buffett approach. They’re wanting to be in the best area, the best location, the best management. They’re not overly excited about getting the best price or the best deal when you’re new. And this is a great transition before we get out of here to ask you about your business. Can you share some advice at a general level to why you think that this business took off and you did well or what you’ve learned through it that you wish you knew in the beginning?

Trey:
It’s funny because what you just said there, that framework, I really do think it applies to everything, even your own business. So for example, you could argue that my tea business is in real estate, because the way my business operates is we’re fighting for shelf space, say it’s in a grocery store, what have you. A grocery buyer is looking at every single slot on their shelves as an investment. What am I going to put in that slot that’s going to give me the best return? And they look at it basically at dollars per linear square foot. So what I’m fighting for in my home business, even though it’s tea, is real estate, I’m buying for this real estate on that shelf. And I have to come up with a story too, and a way to acquire that real estate. So that’s something I wish I learned early on, to your point.
We were very naive when we started. And the best advice I like to give to people just starting out, if you’re going to start your own business, begin with the end in mind, which is such a cliche saying perhaps, but it’s so incredibly important. Because when we started, we just started to say, “Hey, we just want extra income.” But if you’re good at what you do that can snowball and get you into these situations where you’re like, “Well wait, hang on, now what? How deep are we going down this rabbit hole here?” So when you’re starting a business, it’s important to say, “Is this going to be a family owned business? Is this going to be something that we we want to be profitable, that we want to be stable and grow slowly and maybe hand off to our kids or whatever might have you? Or is this something we want to grow and sell?”
So one way to frame that is the speedboat versus the sailboat approach. If you’re taking the speedboat approach, you probably want to think through it and say, “Okay, who might acquire this business? What revenue do I need to get to in order for them to even consider buying the business, and how am I going to get to that revenue?” And oftentimes it requires a good amount of capital, whether you’re a startup software company or a tea business, or what have you, oftentimes it creates a lot of money to go fast. So that means you have to take on outside investment, you have to bring on partners, you have to raise money.
And we’ve done all of that. But over the years I’d say we were starting down the sailboat approach, and then when we saw the potential in our product for real and it became achievable in our minds of how far we could really take it, we shifted and said, “Okay, now we’re going to take outside capital and now we’re going to go the speedboat approach.” But you have to know that that was a big decision, it was a big transition to go from one to the other. And it’s simpler if you understand it, I think, from day one, and that will help frame your decisions a lot easier.

David:
So smart. In fact, I don’t know that I ever, when I started a business, had that conversation, and I’ve definitely had those thoughts. Once you get into it there’s this wolf by the ears phenomenon where the business is doing good and it’s making money, but that’s because you’re involved, and if you want to step out of it, it can then lose money, so you don’t want to step out of it, but then at the same time, this isn’t why you did it. You didn’t do it so you just have a job all the time, and it’s often a problem that you don’t realize is a problem until you’ve already got the wolf by the ears and you’re kind of stuck.

Trey:
I’m going to have to borrow that, wolf by the ears. I’ve never heard that. It’s great.

David:
The idea is if you let go of the wolf, it’s going to bite you, so as long as you’re holding it, you’re safe, but you also can’t get away. You’re stuck in this standoff. And many times I find myself with that same feeling when you’re in business, and that’s very sound advice. So as far as your personal skills, Trey, can you share how you’ve changed as you got into the entrepreneurial space and the business has done better?

Trey:
This is where Warren Buffett, I think, ties into my tea business. So what I learned from Warren Buffett over the years is that he is the greatest capital allocator to ever live. And what I mean by that is he’s at the helm, he’s got this pool of money, he’s deciding where to put it and expecting the highest return, what’s going to give me the highest return. And I don’t think a lot of people, when they think about entrepreneurship and they think about, say, just even being the CEO of a company, I don’t know if it’s the first thing they think of at least, where that person’s role is being a capital allocator and it could be, “Hey, are we going to hire so and so?” Because they’re going to give us a return. You’re doing it for a reason. Is the marketing team proposing a $300,000 budget for this year to you? Well, you have to understand, I’m going to spend $300,000. What am I going to get out of that? What’s the return on that?
So almost every single decision, it could be small decisions, too, really, really small decisions. Every decision when you’re running your own business becomes capital allocation in my mind. That’s how I think of it. So the natural thing to do would be to study the best capital allocator whoever lived, in my opinion. And Buffet’s actually not only a great investor, he’s an amazing operator. Most people don’t give him enough credit for that as well. But that’s what I’ve learned over the years and how I’ve evolved from just winging it to gripping the wheel, getting, getting at the helm of the ship and being like, “Okay, this is… I’m controlling the controllables. What I can control are my decisions, how I’m going to lay out capital to get a bigger return.”
And that could be, again, do we expand into this region or that region? It’s really everything. So that’s the framework I operate from. And I really encourage people… I mean, it’s a very dry read, but Warren Buffett has left all these sprinkles of, what do they call it, crumbs to success. He’s written a letter every year for, I think, 50 years, and he basically talks about that last year, what he learned, how they’re changing, how they’re making different decisions, and you get to go back and read, it’s totally free. And the that’s probably better than a college degree in my opinion. So if you’re starting out, I highly recommend that.

Rob:
Well, before we close out, Trey, I mean, this has been a really… I mean, a very nice change of pace for us, because we’re always talking about houses and stuff. But I wanted to ask you one final question here, and it’s… If you could give some tangible advice to someone investing right now, do you think… If people are looking to get invested even outside of real estate, do we go all in now that we’re at this all time low for the past year or so? Do we just consistently invest? What’s your final thoughts here as far as… I like that I’m asking you a giant lofty question to close this out, but what do you think? Consistently invest here until we see this whole thing play out or should we just hop in and make some equitable stakes in the companies that we want to invest in?

Trey:
I mean, I think it goes back to that other quote about, “It’s not timing the market it’s time in the market,” and if there’s one regret I have it’s that it didn’t start sooner. I mean I’m in my mid 30s, but the difference of starting in your early 20s to your early to mid 30s is millions of dollars potentially in returns over that compounding. The magic of compounding is just something that isn’t taught enough, isn’t appreciated by most, and those years, that extra time you have in the market smooths out everything else, smooths out all the volatility. So depending on your time horizon, I definitely think, to your point earlier, is it’s not timing the market.
I mean, I think getting in a little bit of the time, whether it’s contributing to your 401k, whether it’s dollar cost averaging into something like Bitcoin, which in my mind is real estate. Is it finding an amazing real estate opportunity, even though the market could go either way? I mean, no one has this crystal ball and no one knows… Really no one knows nothing, and if there’s anything I’ve learned from hosting this show and I’ve experts from all over the world, talking about investing, they all are so confident and all have really different opinions. And they’re all highly intelligent. So it’s just that alphabet sou of sorts. You come to this conclusion while like, “Man, really no one knows.” I mean, they’re very smart. And I would just say I’m definitely not as smart as they are, so I certainly don’t know. So the best thing I can do is take the bird in the hand. If I see a good opportunity, I’m going to take it.

Rob:
I mean, arguably I would say if there is one thing we know it’s that time in the market beats timing the market, except for a very small minuscule set of people that got very, very lucky or are extremely smart, smarter than us. But I think that’s the big thing that I’ve been hearing over the past two, three years from just a lot of people on TikTok, on YouTube comments, my students. One thing that I always hear is, “Oh, are we at the top of the market? Should I just wait for the crash?” And at that time interest rates were 2, 3, 4%, really in the threes, and now, yeah, okay. Maybe there’s going to be a little bit of a dip in the price, but now our interest rates are going to be 5, 6, 7%.
So I honestly would’ve rather have just overpaid a little bit a couple months ago and lock into 3.5% versus some of the 7.5% loans that I’m closing right now, because over time, over the course of 30 years, the amount of time that I plan on holding these properties, I would’ve saved hundreds of thousands of dollars in interest. So it just really goes to show that if you just consistently invest, if that’s always your idea to just invest every single year, whether it’s stocks or real estate, doesn’t really matter, that’s ultimately what’s going to make you a wealthy person, not putting it all on the proverbial, I don’t know, roulette table. Black on roulette, and then hitting it big on one of these stocks or real estate investment. So with that, man, thank you so much. David, you got anything?

David:
I’m trying to drop my mic, but it is frozen in space. That was really a good line. Probably Rob’s best line as the co-host of the podcast here. Way to go with that.

Rob:
Probably.

David:
Probably the best line ever. Trey, I thought your advice was awesome too. When you were saying that, what it made me think about-

Trey:
I appreciate that.

David:
We’re often asking the wrong question. We’re asking what’s the market going to do because we think it’s so simple, that it’s going down, I’m going to buy, it’s going up, I’m going to wait or whatever. But it never works that simple. Like Rob just said, yeah, prices may have come down some but interest rates went up, so it might overall be more expensive, and we don’t think about that. So I thought, Trey, you did a really good job of highlighting what questions we should be asking as opposed to is it going up or is it going down? What are all the factors that play together, and then how do you use that information to make a decision that’s wise for you?

Trey:
I was going to say, can I end with one more question to that point, which is you should be asking yourself what is enough? Because to your point, Rob, about people asking me, “Hey, should I do X, Y, or Z?” They have to determine for themselves what enough is and enough might just be putting your money in the S&P 500 at 7% annually or whatever it is for over 30 years. Depending on your income and whatever else, that might be enough. So a lot of people don’t do that first step and I would just highly recommend starting there.

Rob:
I’m doing it backwards. I’ve never really done the whole stock thing. I did my 401k match when I worked at my nine to five about a year ago, and then I just went all in real estate, and now, honestly, I’m putting a lot in the S&P 500 and really nothing else. I just set up a retirement account, maxed it out with my S Corp, it’s all S&P 500, because I’m just like, “Oh, they figured it out. They’re smarter than me. I’ll just go with that.”

Trey:
Circle of competence, man. I get it.

David:
Trey, if anybody wants to follow you or get ahold of you, where do you recommend people do so?

Trey:
Yeah, if you want to find me, I’m on Twitter @TreyLockerbie. I’m the host or one of the hosts of We Study Billionaires, which is another podcast where we interview billionaires mostly, people who have made their money in investing. And you can check that out at theinvestorspodcast.com, or simply search any podcast resource or platform. And if you are curious about kombucha and/or just a refreshing tea, you can always check out betterbooch.com and there’s there’s every social handle behind that as well.

Rob:
And where can people listen to your music? One of your smash hits?

Trey:
I’ll never say.

David:
Is that a song writer thing, you let the artist take the credit?

Trey:
Exactly. Exactly.

David:
All right. Well, you’re a classy man, as well as an intelligent one. That’s awesome, trey. Yep, you can find me @DavidGreen24 online or David Green Real Estate on YouTube, and then Rob you’re Robuilt pretty much everywhere except for TikTok where it’s Robuilto.

Rob:
Yep. That’s right. You can find me at Robuilt.

David:
Well, thanks Trey. It was good to know you. I really appreciate you sharing your expertise. It’s not every day you get to talk to someone who studies billionaires and then puts that information out there for everyone else to hear. I’ll get us out of here. This is David Green for Rob “Dropping That Mic” Abasolo, signing off.

Dave:
Hey, what’s going on, everyone? Welcome to On The Market. I am super excited that you are all joining me here today for my conversation with Cal Inman, who is the creator and principal of ClimateCheck. ClimateCheck is a website that provides really cool and pretty unique data about what risks exist based on your property for climate. So, whether that’s wildfires or floods or extreme winds or hurricane, basically, every property in the country has some level of risk from natural disaster or climate. And depending on where you live, it could be really different.
Obviously, I talk about this a little bit in the episode. In Colorado, we have a lot of risk of wildfire. I experience that directly with one of my properties, but if you live on the coast, maybe it’s hurricane or wind or flooding or something like that. This data that Cal and his team have created can be a really helpful asset to investors when they’re underwriting their deals. Whether you are predicting or trying to figure out where you want to invest next or if you’re looking at a particular property and want to understand the risk, that is really helpful when you’re trying to understand what you should be buying. That’s what we’re going to talk all about today, as well as some strategies that you can use to mitigate any of those risks.
So, with no further ado, let’s get into my conversation with Cal Inman, the creator and principal at ClimateCheck. Cal Inman, welcome to On The Market. Thank you so much for being here today.

Cal:
Hey, thanks for having me.

Dave:
I’ve previously looked into your background and you are a real estate developer, a real estate investor, a grad school lecturer at UC Berkeley, and the creator and principal at ClimateCheck. So, can you just tell us a little bit about your background briefly and how you got into all these things, being a real estate developer and ultimately the founder of ClimateCheck?

Cal:
Yeah, I guess it sounds like a lot when you put it like that. I have a short attention span, I think, is the executive summary. I grew up in the Bay Area. My father was a journalist and he covered real estate news. So, I got a deep dive into interviewing all these real estate developers and I was just totally intrigued by it, worked for a developer, cut my teeth, learned a lot about the process, went out on my own, started doing small single family, then rolled that into apartments, then did more commercial style buildings, small office, small retail, did that from 2009 to 2016 or so, then started lecturing at UC Berkeley Masters in Real Estate Development. That was cool and I still do that. It’s a great experience. The folks in there are just super excited to go build buildings, invest.
While I was there, I came across this climate data and we had rental properties. Yeah, super curious how they’re going to be affected by climate change. You read about climate change in the news. Iceberg’s melting. This is existential risk that’s going to affect everyone. How are my properties going to be affected? Are my properties in West Oakland along the San Francisco Bay going to flood with sea level rise? Is there going to be another fire in the Oakland Hills that I experienced when I was a kid? Are those rental properties at risk for burning? Tried to search for the information and it wasn’t really available.
And I’d primarily think about it when I was renewing insurance policies, but then I came across these climate risk data sets. And the next thing I found out was that a lot of big institutional developers and investors, big LPs were using this data to inform their real estate decisions, their due diligence, how they’re going to improve properties, what properties they’re going to dispose of, how they’re structuring their insurance policies. It felt like I deserved access to this information too. Smaller single family homeowners deserve access this information. That’s set me on a new trajectory toward climate data and building ClimateCheck.

Dave:
That’s a really interesting story. I do want to get all into to ClimateCheck, but now, I’m curious just about your own real estate investing first. Are you still developing properties and buying rental properties, and are you primarily still doing that in the Bay Area of California?

Cal:
Here in the Bay Area, yield on investments is tough. There’s too much capital in the market and I haven’t been able to really make deals pencil for the last four years. I was early to exit. I still invest in real estate. I still own property, but I’m not an active sponsor in ground up real estate development deals at all. I’m 120% into this data world. I still lecture at UC Berkeley. So, I still keep my foot in it. A lot of friends are still active and I invest in deals still. So, I’d say I’m still active, but I’m not out there boots on the ground, buying parcels, building buildings.

Dave:
Got it. All right. Well, let’s get into the data. Obviously, that is my area of interest and expertise. You said you were lecturing, you were curious. What was your first encounter with this information and what data is it? What are you actually physically looking at when you talk about climate-related data?

Cal:
Yeah, totally. It’s a really good question. So, when we talk about physical climate risk data, we’re looking at how natural hazards are going to increase or decrease in intensity moving into the future. And so, that we look at six hazards, wildfire, flood, which is more complex, we can come back to that, extreme heat, extreme precipitation, drought, and high winds. And so, we look at what’s the risk profile of each of these perils today and then what’s the risk profile in the future and how’s that changing.
So, when we look at something like flood, for instance, we measure what’s the probability it’s going to happen and then what’s the intensity of it. So, in the future, we have a 40% chance of a two-foot flood on your parcel at 123 Main Street. And so, we try to take these very complex concepts and make them easy to understand, because I think most people get basic percent chance of a flood happening that’s a foot deep. So, we give a 1 through 100 score of risk rating, 100 being the riskiest, 1 being the safest, and then we give these metrics alongside it.

Dave:
How do most real estate investors or homeowners for that matter, I assume, both groups use your tool? How do they use this data?

Cal:
Yeah. So, I’d say the primary group using this information are investors, the folks on the equity part of the capital stack, private equity, REITs, and they’re using it the same way they look at any risk data, due diligence of new assets when we buy a new industrial asset that’s across docking station or a multi-family property. Whatever you’re buying, we do a lot of due diligence. I mean, protecting our downside in real estate is 90% of the work and then creating the value is the last 10%. So, when we look at all these factors, are there underground storage tanks? What’s the market risk? What’s the risk of the tenants? What’s the risk of the municipality, climate risk?
The risk of these natural hazards increasing into the future fits nicely into that due diligence process. So, I’d say that’s the first way it’s used. Second way is just overall portfolio analytics. Let’s look at existing portfolios every year and let’s understand what the risk profile of it is. And the last way it’s used is to inform investment thesis. So, we have a portfolio of properties. We might have an outsized exposure to risk to a certain hazard, and we might want to diversify into other regions with different risks or less of that risk.

Dave:
Got it. That makes sense. So, it sounds like people when you’re buying a new asset are using this to understand their own risk. And then when you’re building a portfolio or perhaps even looking for insurance policies, this could be another time to start using this data. So, you mentioned that institutional investors were previously using this data. Have they always been looking at climate risk and now it’s becoming more important or is this a totally new data set to the real estate investing industry?

Cal:
Yeah, I mean, that’s a good question. I mean, it’s a relatively new data set. We’re bringing more and more data. I mean, even when you look at phase one environmental data, this is relatively new, the ’80s and the ’90s. And then by the late ’90s just became completely ubiquitous. Every commercial property we buy, we get a phase one report on. We’re seeing the same progression here for climate risk reports. It’s becoming best practices. I think you’ll find most REITs, big private equity shops are using this data when they’re buying new assets.
And as more and more folks use it, the rest of the investors want to also be looking at it, because possibly, when you’re buying a property that you want to sell in three to seven years, if the buyer of that property is looking at this data, you want to be aware of it before you purchase that property, because it’s going to affect your exit value and ultimately affect your IRR, which is what we’re looking at when we’re investors. What’s the return? That exit, that disposition value is probably the biggest chunk in your IRR calculation as an investor. So, I think to boil it down, I think that’s probably the most important reason and why most people are starting to ingest this data.

Dave:
That’s really interesting. I didn’t think about that, because obviously, as an investor, if you’re at risk for flood or wildfire, you want to know that during your hold period, but especially if you’re buying a multi-family or something that’s going to be purchased by an institutional buyer like a hedge fund or a private equity firm coming in there. If they’re, as you’re saying, looking at this, then you should be basing your valuations off the same thing that they’re going to be basing their valuations off. So, that’s super interesting. Are you creating this data? Do you have your own climate models or are you aggregating other data from sources?

Cal:
Yeah. Yeah. What are the inputs? So, I mean, our team is 100% product focused. So, it’s a team of data scientists, climatologists, and they’re a lot smarter than me. What they do is aggregate all the best climate data, downscaled climate data, academic data, government data, bring it all into one place, synthesize it in some ways. So, we can search it on a parcel level and then query it for the information that’s useful for you when you’re buying a new property. We do some in-house modeling where there’s gaps in that data. But I think if you think about it like a cake, all of the ingredients we get are academic and government sources.

Dave:
Okay. So, you’re taking all these third-party sources, and like you said, connecting them. So, that if I say I have 123 Main Street, you could have all this different data related to that property and as an investor or homeowner, you can get a good sense of what the risk is.

Cal:
Oh, yeah. I tend to oversimplify it. So, if you look at flooding for instance at your property at 123 Main Street, we use government elevation maps, which are topographic maps. We use government information and data around what soil type is at that property. And then we’ll use these projected climate models to understand the future rainfall volumes and then we’ll do a flood model of the entire United States. We’ll understand at your property at 123 Main Street, “Does water accumulate there and what’s the depth of it?” So, there’s a lot of synthesis in modeling into it, but again, all those fundamental building blocks are all government and academic data sources.

Dave:
Got it. I actually came across your company, because I about a year or so ago was investing or looking to invest in a multi-family syndication in Houston. And I talked to a friend who used to live in Houston and he was like, “Man, you got to make sure you’re not in a flood plane in Houston.” And I was like, “Oh, man, I’ve never even thought about something like that.” And so, I started Googling all this information and came across ClimateCheck, but all sorts of data sets that was complicated. It was hard to understand.
So, I definitely appreciate that you and your company are making it easier for people to simply understand what’s going on there. Now, of course, some climate risk has always existed, right? Floods have always existed. There have been wildfires. What does the data tell you about how the quantity and severity of climate risk is changing over time?

Cal:
Yeah. I mean, I think every hazard’s different, first of all, and every region’s different and even every neighborhood’s different. We have different exposure to risk. And I think that’s why it’s really important to understand the data on a granular local level, because the story’s different everywhere. But I’d say overarching themes, we’re seeing an increased frequency and severity of the fundamental pieces of climate change, which are precipitation and heat. We’re seeing more hot days and hotter days moving into the future and talking over a pretty big window of time, 10, 20, 30, 40 years.
We’re also seeing a higher frequency of heavy rainfall events and those two things feed into the rest of these hazards. So, we’re seeing an increased frequency of flooding and deeper floods, more inundation, and same with fire. Some regions are getting better and they’re all changing. That hazards that each community’s exposed to are different, but there is a higher frequency of these events.

Dave:
Have you seen yet that the availability of this data and the increased risk of climate hazards, has it yet impacted home buyer decisions?

Cal:
I think on the home buyer level, there’s a lot going into that transaction and a lot of it’s emotional, but I think it starts with where’s my job. Okay, I’m a remote worker. Where’s my family? What’s the school district? Probably the first question, what’s the price point? There’s all these factors that go in and same with the commercial real estate transaction. We’re looking a lot of things, yield, demographics.
So, this is one data point alongside all these other things that we think about in a transaction, whether you’re a home buyer or whether you’re an investor. But to answer your question, there aren’t strong signals right now impacting value and climate risk. That being said, as more and more people ingest it and particularly once lenders start ingesting the data, we see a world where that does start affecting values and something we need to think about.

Dave:
Interesting. The appraisal, for example, might be impacted on a lender or similar to how a lot of mortgage companies won’t lend on a property that’s not up to code or needs a ton of rehab work. If there is a property that has a significant amount of climate risk, it might be difficult to get a loan. I had not thought about that at all, but that’s a really interesting point. When I was thinking about this show, my immediate thought went to insurance, right? Because you already start to see that, that insurance in places where there’s risk of hurricane or flooding or wildfires or whatever, those have gone up a lot recently and are probably continuing to do so. Do insurance companies use this data currently, your data or any data like this when they’re evaluating properties?

Cal:
Yeah, we don’t license into the insurance industry, but they look at all sorts of data. I think fundamentally, they’re underwriting your policy with something called a catastrophic risk model, which looks at historical data. But if you think about what an insurer is giving you, they’re giving you a policy that covers you for one year into the future. And when we’re looking at these signals and climate risk, the profile of each of these hazards is changing slowly over time.
So, if they’re only going to ensure you for one year, that 10-, 20-year look isn’t so important for insurers and they can adjust their risk as insurer by changing the premium. Exactly what we’ve seen, right? We have a property here in Northern California and insurance has tripled in the last two years because of wildfire risk. So, I think the alignment of the insurer versus the owner and the lender, it’s different. And I think the owner and lender need to take a longer look.

Dave:
That’s interesting. So, the risk that you’re modeling out is over 10 or 20 years. And obviously, it seems like with all things climate, the change is modest on a year-to-year basis, but it’s the long term trend that is concerning. Because the insurer base gets to reset their own risk, they get to re underwrite it once a year. They’re not too concerned about it as long as the consumers are still willing to pay that increased premium.

Cal:
Yeah. Yeah, exactly. And I think in insurers care, I’m not writing them off, but I think it’s customers’ perception, customer education on their end and helping people understand why these premiums are increasing. But I think building it into their model and how they price the premium, I think it’s less important.

Dave:
So, I had this experience, I guess, it was in 2020. I have a short term rental in the Colorado Mountains. Similar to California, a lot of increase in wildfire activity. My sister was actually staying at the property for the first time ever and called me and had to evacuate because there is a wildfire in the area. Fortunately, didn’t lose the house, but it really got me very nervous and got me to beef up my insurance policy.
But for a while, I couldn’t even find an insurance policy that met my criteria. I wanted to make sure I had business interruption insurance. I wanted to make sure that the replacement value was keeping up with the cost of construction and all these things. And it made me worried that in the future, some of these properties that are either like mine in wildfire risk or coastal or in a flood plain, is there a risk in your opinion that they will be uninsurable at any point?

Cal:
Yeah. I mean, we’ve seen that happen in California here. Folks can’t find insurance and the state is having to step in and create policy to help people get insurance. So, yeah, there are these risks. I think ultimately, you can get insurance. What’s the premium you have to pay for that risk? How does that affect us as investors? I mean, insurance is a line item on our cost. It increases our OPEX. If that expands too much, alongside all the other factors, maintenance and repair, which is also affected by these hazards, ultimately affects our net operating income and the yield of these investments. So, I think it’s an important factor to look at.

Dave:
Yeah, that makes a lot of sense. And I guess for me, traditionally, having underwritten deals and analyzing deals, insurance is not something I normally think about that much, to be honest. It is what it is. You assign some standard inflation pegged increase in costs. Premiums go up 5%, 10%. But especially in these riskier areas, I understand that owning a property in the mountains in Colorado is risky and will become riskier over time. I should probably rethink how I’m modeling those premiums and make sure that the numbers still make sense on those kinds of deals.

Cal:
Yeah. And I think also, with the data, I mean for your property in Colorado, you can start understanding the risk, right? You’re aware of it. It’s a tangible risk. You’ve experienced it in evacuation. Next step is quantify the risk, put rails around, understand what the risk really is. Insurance is an impact and line item impact, but there’s CAPEX projects you can do on that property to reduce the risk. That’s really how folks use the data.
We give the risk data and then the next step is, “How do we protect ourselves?” You can clear brush around the building. You could put smaller vents over your roof fence, finer roof fence. So, embers don’t fly in. There’s very simple, inexpensive things you can do to that home, to that rental property to reduce your risk of loss, some type of insurable event happening to that specific property.

Dave:
That’s super interesting.

Cal:
Yeah. More than just quantifying how your insurance is going to increase over time, but what can we do to protect ourselves, protect our homes, protect our communities?

Dave:
Right, right. Yeah. This place in Colorado I have, there’s an HOA. It’s a small HOA, but the HOA basically exist for fire safety and they clear brush. They offer these wood chipping programs, where if you clear brush, they’ll come around and do wood chipping. They put in three cisterns and retention ponds in the community in case there is fire. So, I definitely resonate with what you’re saying. Somehow I get all of that for $20 a month. That’s all the HOA costs. I don’t really know how that happens, but it seems like a great service to me.
So, I’m lucky in that I have some of those resources, but in your effort and your company’s effort to bring this data and information to mom-and-pop investors and not just having these institutional investors use this, is there a place where our audience and listeners can go to learn some of those commonsense ways that they can mitigate risk and protect themselves against climate risks in their area?

Cal:
Yeah, totally. I mean, go to our website, pull a report on your property. We give a 35-page deep dive into climate risk. With each hazard that we cover, we give ways you can mitigate those risks, ways you can adapt your property to prevent damage. They’re pretty easy things. We list them from the least expensive to the most expensive. So, yeah, we want to be a resource for folks to protect their properties. The goal is not to scare you and get you to sell your property in Colorado, but more how can we help you and how can we help you reduce your risk?

Dave:
Got it. Yeah, that makes a lot of sense. Obviously, people are going to live in these places. It’s about adapting and making sure that just like with anything in your business, you understand risk and are taking the proper steps to mitigate it. I want to ask you, because you have experiences as a developer, do you see this increased climate risk and some of this data that’s coming out influencing developers? I guess specifically I’m curious the type of buildings that they’re creating, are they more climate resistance in some way? And the places where they’re building, are they building more in areas where there is less risk or is that something that is just maybe going to come in the future?

Cal:
It’s a really good question. It depends on the hazard and it depends on the developer and the type of development. The safest places in general that we see across the data and particularly for wildfire are urban environments, urban infill, right? We’ve built these natural protections. We have fire departments. We’ve got some space from the wildlife where the trees are, where the burns happen. We did a study with Redfin where a lot of new developments happen in the wildlife urban interface, right? Greenfield, suburban developments, alongside the edge of the forest where fires happen.
So, we are building the newer suburban areas into these higher risk locations for wildfire. So, those development patterns are a little concerning. I think it’s something that folks need to be aware of when they’re thinking about a location for development and what the investment thesis is around where to build.

Dave:
Yeah. That’s always been a question of mine, because you start to hear about honestly, a premium for some of these features. As a consumer, a lot of people want climate neutral or climate safe buildings. Like you said, do they have the vents? Do they have defensible space? I’m not super versed on what the other mitigation strategies are, but it seems like not only is there a societal benefit opportunity, but there is an economic opportunity for developers to be considering these things as they are building new properties.

Cal:
Yeah, completely. Understand the risks, address them, and I think that takes friction out of the transaction. Whether you’re renting the property or selling it to a homeowner or selling it to another investor, this information’s becoming more and more ubiquitous, right? So, the buyer knows, the renter knows about it, but say, “Hey, look, we understand these risks are here and we’ve done these three things to help mitigate the risks.” And then it helps you move on from that point.

Dave:
I’m not sure if you’ve had data about this, but I’ll put you on the spot. It makes me wonder if consumers will be asking for this in a rental situation too, right? I can imagine being a home buyer, it’s your first home. You’re in Colorado or California and you’ve experienced these things. You’re worried about wildfires or floods or whatever. I wonder if renters are going to start approaching their rental decisions with the same type of concerns and demands from their rental properties. Do you know anything about that at all?

Cal:
I mean, you could imagine, right? I mean, it depends on the market. If it’s supply constrained, you’re going to rent what you can get. And I think it’s the same thing from investment, right? Supply constrained, you’re going to chase yield and buy the property you can get. But I think there’s a world where everyone starts looking at this and want to understand it, because look, if there’s a flood event, a renter’s impacted, right? There’s loss to them. There’s displacement. We do find that people search for hazards that they are familiar with, right? You’ve had an experience with wildfire, folks in New Orleans, Houston. Hurricane areas have experiences with flood, whether it’s storm surge or surface flooding.
It’s been part of their life and something they think about. It’s an intuitive risk for them, for their location. So, we’ll see people searching risks that they understand, even if they’re moving to a new market. And so, really, what we’re trying to do is make everyone aware of all the risks, especially as we’re moving to different states, different cities. I think there’s a lot of good information in there that might not be as intuitive for people, but it’s intuitive for the people that live there and have experienced those risks.

Dave:
Yeah. That makes total sense. I mean, now, I’m always thinking about wildfires, because I have this hopefully one-off experience. I lived in Colorado for 10 years. I’m sure in California, you hear about it every summer. You go camping and you can have a fire or you can see the smoke. These experiences, they impact you for sure and they definitely make you think about how you can protect yourself. Do you have any data or high level stats about the general risk in the country? Are most homes at severe risk of some climate emergency or issue, or is this just limited to some of the cities that we’ve talked about so far?

Cal:
Yeah, I think everywhere is impacted. I mean the answer to that is there’s risk everywhere. What is the risk? We think about the Southwest and extreme heat risk, something we haven’t talked about today much, but this is a big risk. There’s going to be a huge increase in the number of extreme hot days. How does that affect you as a renter, as a homeowner, as an investor? There’s going to be increased utility costs for AC. There’s quality of life issues. We think about coastal cities and sea level rise. This is a big one.
Flooding is pretty consistent across the US. A lot of areas are exposed to different types of flooding. Drought in the West, we’re seeing a lot more drought. So, again, it’s really region specific, but everywhere carries some type of change in your exposure to these natural hazards. So, it’s not necessarily one thing everyone’s going to experience, but we all carry some risk to climate change.

Dave:
Yeah, absolutely. It seems like it’s like a Whack-A-Mole thing. You look for one area. It’s like, “I don’t want to be near a flood,” and it’s like, “Okay, you don’t need to be near flood, but you’re going to get some wildfire.” It’s like, “Well, I don’t want wildfire. Well, you’re going to get some extreme risk.” It just shows the breadth of the challenge and the situation we’re all going to be dealing with over the next couple of decades. Are there any areas in the US or even in the world that are more climate… I think the word’s resilient and I don’t mean in terms of infrastructure, how prepared people are. I mean, from a natural sense, are there certain areas that have relatively less climate risk?

Cal:
I think as you move north more, certain risks decrease, get away from the coasts. I think urban core’s probably the safest answer. And I think those community municipal adaptation strategies, building a sea wall, building a fire break around the city, those are really important.
How are we adapting as communities? Because these risks exist and it’s not like everyone’s going to leave the United States and go to Canada or something, but how are we dealing with it as a community? Are we putting bonds in place to create adaptation strategies, to keep the local communities safe? So, I think a lot of this is about just engagement discussion around the risks and figuring out, “What are strategies in individual property level and then what our strategy is as a neighborhood in a community?”

Dave:
Yeah, that makes sense. I don’t know if you know this, I live in the Netherlands, in Amsterdam. I think it’s about 26% of the Netherlands naturally is below sea level. They have reclaimed a lot of land. They pump out water and they dredge. They’ve been doing this for 800 years or something like that. They’re obviously all worried about sea level rise because we’re already below sea level here. And so, it’s interesting to see what mitigation strategies different communities are taking. They’re building huge sea walls and expanding dikes and all of these things.
And it is nice to see that there is some proactivity. It does sound like in the US, we’re starting to see some more proactivity about mitigation strategies, planning in worst case scenarios. Do you have any information that you can share with us about that? How are communities, municipality, states preparing for some of these climate change centric risks?

Cal:
Yeah, I think adaptation’s a big conversation and it’s complex and it is federal level. It is state level and I think we’re seeing most of the stuff happen on a local municipal level. We see it here with how in California where we have built in fire breaks, putting together Cal Fire, making sure it’s well funded to protect from wildfires, educating individual homeowners about what they can do. The same thing in Miami, right? We’re thinking about where you live, sea level rise, and what we’re going to do about that to protect the cities. So, I think it really all comes down to local solutions and so engagement with those politicians and all those stakeholders.

Dave:
Yeah. Well, that’s interesting. I think for our listeners here, if you’re buying properties, in addition to looking at some of the risk that Cal’s been talking about for your individual property, it would be helpful for you to also look at what your municipalities are doing and if they’re acknowledging any risks or how they’re preparing or resources that might be available to you to upgrade your property.
A lot of times municipalities offer tax breaks or incentives to do some of these mitigation strategies. So, that could be a really good option for people out there. When I was researching before this show, I read some article, I don’t even remember where it was from, that said that Duluth, Minnesota is the most climate resilient place. Do you think all of a sudden millions of Americans are going to converge onto Duluth, Minnesota and start moving there?

Cal:
Yeah. I mean, as a company, we try to stay away from the extreme fear and to help people sell your house now and move here, because I don’t think that’s necessarily a solution, but I will say there are a lot of smart people, folks in academia and investors that are looking at these ideas of climate migration, when these big events happen, where are folks going to move and what is safer, and exploring ideas of climate gentrification.
I do think there will be movement of people around when these impactful events happen. We’ve seen it in the past. Big floods, folks get displaced and they go to other communities. So, I think it is something to watch and think about and build into your investment thesis. By no means, are we trying to say, “Sell now. Don’t go to this area,” but I think it’s a factor to consider as you’re going out there.

Dave:
Yeah. Yeah, for sure. I thought it was funny just Duluth just seemed like such a random place with no offense to anyone from Duluth. Yeah, I was curious and actually written down a question for you. Do you think there will be climate migration? Because I read, I think both for Hurricane Katrina back in 2005 and then the Houston flood, I’m blanking on what year that really bad flood was, people got displaced, left, and never really went back. It did strike me that if there is increased risk of wildfire or flood in major metropolitan areas, I don’t know if it’s going to be like a wholesale large migration change, but could have at least some migration and population changes in the US because of some of these risks.

Cal:
Yeah, definitely. I mean, those two events are great examples of folks. Where did they move? They moved to similar cities that had similar job market, similar supply of housing, but it’s adjacent and close to family. So, I think there’s a lot of factors to consider beyond the risk of the event happening when you’re thinking about climate migration. It’s a complex thing to model out and so multifactorial, but it does happen as these events occur. Again, I think it’s an important data point to think about and look at as you’re investing or buying.

Dave:
Great. Well, thank you so much for this information. We do have to get out of here in just a minute, Cal, but is there anything else you think our audience should know about climate risk for real estate investors or anything else just about the data that you think is worth knowing?

Cal:
No. I think, use the information alongside all the other information you look at when you’re doing your due diligence. Information’s now available, accessible. All you have to do is go to our website and go to climatecheck.com. Search an address and try to understand your risk to climate change a little bit while you’re looking at all these other data points in your investments.

Dave:
Awesome. Well, thank you to Cal Inman, who is a real estate developer, investor, and the creator and principal at ClimateCheck. Thank you so much for joining us On The Market.

Cal:
Hey, thank you.

Dave:
Super interesting interview there with Cal Inman. I really enjoyed having the opportunity to talk with him. I personally learned a lot and hope that you all did too. This has been something that I’ve been thinking about. As I said during the interview, I’ve had some experiences recently where a property I had came close to burning down in a wildfire. I’ve invested in some cities that have experienced significant hurricanes, for example. I’ve just been curious to learn more as an investor, “What risks are out there due to climate change and some of the changes in insurance and lending that Cal was talking about?”
I thought Cal did a great job just presenting the data as it is and talking about how to appropriately use it. He’s not saying that you should be going out there and changing all of your plans or to be panicking. What he is saying is just to inform yourself about what risks exist and what you can do to mitigate those risks if there are significant ones that you’re worried about for your particular properties. This is just like when we talk about evaluating an individual market or individual deal, there are tons of data points that you have to think about and factor in and decide which markets are right for you to invest in, which deals are right for you to invest in.
And hopefully, from this episode, you can now add climate data and climate risk to your factors and your underwriting when you’re considering deals. Thank you all so much for listening. I hope you enjoyed this episode. As always, if you have feedback or thoughts on this episode, you can hit me up on Instagram, where I am @thedatadeli. And if not, we will see you on Monday for another episode of On The Market.
On The Market is created by me, Dave Meyer, and Kaylin Bennett, produced by Kaylin Bennett, editing by Joel Esparza and Onyx Media, copywriting by Nate Weintraub, and a very special thanks to the entire BiggerPockets Team. The content on the show On The Market are opinions only. All listeners should independently verify data points, opinions, and investment strategies.

David:
This is the BiggerPockets Podcast Show 645. The way I’ve always approached life or any goal that I have, is that there’s going to be something about me that has to change, to be successful in whatever I want. So if, for instance, I want a better body, I’m going to have to change my eating habits and my workout habits. I’m going to have to go to the gym and develop different muscles or stronger muscles to get what I’m looking for. If you’re looking to save money in taxes, you can use some strategies that work with your current W-2 situation that is much harder. It would be much easier for you if, you found ways to make income that were not beholden to the W-2 world.
What’s going on everyone? This is David Greene, your host of the BiggerPockets Real Estate Podcast. Here, today with a Seeing Greene addition of the podcast on these episodes, we take questions from you, our fan base and those that we are trying to help grow wealth. And I answer them in person, myself, giving the best advice that I possibly can. And then we let everybody else hear how the information was disseminated, what my advice was and most importantly, what I was thinking when I gave it. The goal with this is to help you overcome the obstacles that you’re facing in your investing career, give you information to better, equip you to build wealth and make a connection with you, because I love you guys. And I know you love BiggerPockets, so we’re happy to join.
In today’s show, we get into some really cool stuff. One of the things is we bring in some private lenders and you get a special treat. You’re going to get private lending advice from people who wrote the book on Private Lending for BiggerPockets, so you’re definitely going to enjoy that. I also talk about how to get out of the fear box when you’re scared in every step that you want to take in a different direction gives you something else and be scared about, and it bounces you back to write where you started. And then we get into when to sell, when to hold, when to bail and when to fold. So one of our questions is all about, should I keep my house? Should I sell my house? If I sell it, what should I do with it? What’s happening in this crazy market? And I take my best stab at that. All this along with some tax advice and some other specialists joining me for backup on this episode, you don’t want to miss it really glad you’re here.
But before we get into the show, today’s quick dip, go to biggerpockets.com/podcast. You see all the different, BiggerPockets Podcasts have their own show pages where you can get cool free content. If you want to learn how to build a bigger brand for yourself, well, at biggerpodcast.com/reshow, you can get a masterclass from Brandon Turner and how to do just that. We’ve also got lots of freebees like Scott Trench, the author of Set for Life and the BiggerPocketS CEO has a free rookie checklist. Amy Missouri has information on a four second power pitch for raising money. Dave Meyer has data drops with relevant information that you need to make good decisions investing in this market and more, so visit biggerpockets.com/podcast. Check out your favorite show and see what free goodies we have for you there. All right, let’s bring in our first question.

Tom:
This is Tom Wheelwright. I’m the best selling author of the Win-Win Wealth Strategy: 7 Investments the Government Will Pay You to Make. And we have a question from Parshan, and the question is, “can we use unused depreciation against income from a salary job?” So I’d like to change the question to, how can we use unused depreciation against income from a salary job? The answer is yes, there are certain things that you do have to do. So either for example, you have to be active in the real estate and not have very much income from your salary job, or you could be a real estate professional, those are very specific tests. Or there are a few other things that you can do that are going to require frankly, some work with your tax advisor. The challenge is you can never use more than 500,000 of losses from real estate or business against your salary, that is a strict limitation.

David:
Hey, thank you for that reply, Tom. That is some very good advice and also very specific. So since Tom has handled the specifics of this, I will take a more general approach with my two cents. The way I’ve always approached life or any goal that I have is that there’s going to be something about me that has to change, to be successful in whatever I want. So if, for instance, I want a better body, I’m going to have to change my eating habits and my workout habits. I mean, I have to go to the gym and develop different muscles or stronger muscles to get what I’m looking for. If you’re looking to save money in taxes, you can use some strategies that work with your current W-2 situation, but is much harder. It would be much easier for you if you found ways to make income that were not beholden to the W-2 world.
So I don’t think you have to quit your job and just start a brand new venture. But can you look for ways to earn income that would be reported differently than W-2? That is much easier to shelter with the current tax rules that we have. This is why I’m a big proponent of stop looking at it like, should I go W-2? Or should I go full-time investing? There’s a whole spectrum in between. You could become a loan officer, you could become a real estate agent, you could become a title officer. You could start a construction company, you could get into pool service. You could be like Tom, and become a CPA. There are so many different ways that you can serve in the real estate field and earn income that are different than a W-2 job. And many of these will give you the flexibility to work that opportunity while still having a W-2 job and still investing in real estate.
So if you’re passionate about real estate, find something within the scope of real estate that you really love, like what I’ve done and work that. And if I can help you with that, Parshan, please let me know. I’d be happy to connect you with someone from one of my companies. If you’d like to do that within the world I’m in, and maybe you can reach out to Tom and ask the same. All right, our next question comes from Darby in West Central Missouri, I will summarize Darby’s question. He is currently in his mid ’40s, owns 13 doors made up of single and multi-family properties. His question is rooted in the phrase seasons of life. When Darby started his real estate journey, he was a single man with no children and plenty of free time. Fast forwarding, 20 years, he’s now happily married with three children and a full-time job in healthcare.
He now has an investment portfolio to manage and maintain and a hobby farm to look after needless to say, Darby is very busy, but he’s still hungry and wants to continue scaling his investment portfolio. He loves a passive income stream that has provided, and the increase in equity he’s seen during this inflationary time period that we’re in. Darby has a very solid debt income ratio, still has some cash reserves and a lot of equity that he can deploy from what he’s seen, particularly due to inflation in his portfolio. He doesn’t need cash flow because he has several steady income streams who would like to focus on long term appreciation. Darby also mentions that he prefers investing locally because investing out-of-state appears daunting. He would like to invest in an extremely, but that in all caps “passive way where I can still balance my career in family while also scaling my portfolio, interested in your advice, David, and perspective on my investing future. And I would love to hear your thought on an upcoming podcast. Keep up the good work.”
All right, Darby. So let’s talk about a few things here. You did a very good job of laying out what your goals are. So I appreciate that, you also laid out the challenges. And the bad news in this is that, most of what you’re describing here is you want to have your cake and eat it too. You want to have extremely passive income, you also want it to be something that’s going to grow inflationary and you also don’t need cash flow. And then you don’t want to invest out-of-state, but you mentioned you’re in West Central Missouri. Now I’m not an expert on your area, but when I just think off the top of my head about West Central Missouri, I don’t picture any rapid appreciation type of environment happening in that location.
If you’re looking for appreciation, there’s two ways that you get it. You have forced appreciation, that would be finding a property and adding value to it in the multifamily space. This would be increasing the NOI and you would do that by increasing rents and lowering expenses. That’s going to take quite a bit of your time, which you’ve also mentioned, you don’t want to do. The other way outside of forced appreciation would be natural appreciation. And this would be investing in a market that is seeing increasing demand, but steady supply or restricted supply so that the scarcity of the resources that everybody wants, makes the prices go up. And that is an actual legit concrete method that you can use to put appreciation in your favor. Appreciation is not always the same as speculation, which is just hoping that prices go up. There’s actually things that you can do and decisions that you can make that put the odds in your favor of that happening. That’s one of the ways that I’m investing. And it sounds like you want the same.
The problem with forced appreciation is it’s going to take time and effort, which you’ve said you don’t want to do. The problem with natural appreciation is you’re going to have to pick a market outside of Missouri. That’s also something that you’ve said you don’t want to do. You’re also in a position with golden handcuffs. So you’ve got income coming in. You don’t need to do this, but you’d like to do this. So you are in a position that I often call the fear box. And it’s not the perfect analogy because, I don’t know if you’re necessarily afraid, but it works the same way for people that are. So imagine that you’re in the middle of a box or maybe a field and you don’t like where you are in life.
So you want to go somewhere else and you’re looking outside and you’re like, Ooh, I could go there, anywhere’s better than where I am. Which direction do I want to go? And you start walking in that direction, and then you hit something that scares you. It’s like an electric fence in that field. Ooh, I don’t want to go out of state. Okay, I’m going to come right back to where I was. And then you start walking in a different direction. Ooh, that looks like it’s too much work, I don’t want to go there. And you start backing back to where you were. You start going in a different direction. Ooh, that looks like it’s got a little bit too risk, I don’t want to go there. And you bounce around from all the things that you find that you don’t like. And you find yourself exactly where you started in the very middle of this field. And you’re still not happy with where you’re at.
And I understand that is why you reached out. And you submitted this question to us here at BiggerPockets on the Seeing Greene edition, and I appreciate that. But what I’m getting at is, you’re going to have to let go of something. You’re not going to pull this off with all the restrictions that you’re putting on yourself. If you want something super passive, you’re probably not going to get a lot of appreciation, unless, you go into a market where you can get that. There’s plenty of markets I could give you right now where I’m saying, Hey, you could buy a property, it’s not going to cash flow a ton. It’s probably going to go up a lot in value. And in the future, it’s going to cash flow ridiculously well. But that means investing out of state. Or I could say, Hey, you can create a ton of appreciation by buying a property and adding value to it, but that’s not going to be extremely passive.
So I think rather than trying to find an investment that doesn’t exist, you’d be better off to say, off everything, I’m worried about investing out-of-state, putting a lot of work into what I’m going to be doing, needing appreciation, not wanting a whole bunch of effort to be spent. You’re going to have to let go of something, you have to make peace with that. My advice would be, to let go of the fear of investing out-of-state. I think that’s the easiest hurdle of everything you mentioned to get over. So I think you should find an area that a lot of either Californian or New Yorkers are moving to. This could be like the area of Texas, maybe Dallas or Frisco. You like to see a lot of appreciation there. Austin, I think, still has a lot of room to run.
South Florida is exploding right now, you’ve got a ton of opportunity in that market. You’ve got areas in suburbs around Nashville or around Atlanta, that we’re going to likely continue to see a lot of really strong growth. I think Savannah, Georgia is prime to do really well as more people move there. And both South and North Carolina have a ton of opportunity that I would expect continued appreciation from businesses and people that are moving there. You would then find a property in one of the best neighborhoods that you could and hire a property manager to manage it. Maybe you get a short term rental and you pay somebody 25% of the revenue to manage it for you. And that 25% may have been your profit margin, so you’re not going to cash flow a ton. But by buying in the best neighborhood that you possibly can and getting the best property that you possibly can and waiting the revenue will slowly grow every year. And the property will likely continue to appreciate if you buy in the right area.
That would be the simplest solution that I can recommend to you for how you can achieve the appreciation that you want without a ton of work. But you’re going to have to accept that you’re walking outside of investing in your state. Another option would be investing in someone else’s fund. You could invest in a syndication. You can invest in a fund like Brandon’s at ODC, and just give someone else your money and let them grow it. That’s going to be very passive for you, but I don’t think you could say you’re getting appreciation. You’re getting a return, this is now becoming more like cash flow. So as you can see, there isn’t going to be the perfect investment vehicle for everything that you want. And that’s probably why you’re stuck in the middle of the fear box, because every single direction that you start walking in, there’s something that you don’t like about it.
So in order to create a path for yourself out of it, I’ll summarize my advice here. Figure out what you are most okay with compromising on and go in that direction. My advice would be to invest in a growing market. Don’t worry as much about cash flow because you’ve already got a lot of cash flow, pick the best neighborhood, the best property in the best market that you can and let time do its thing.

Jon:
Hey Dave, Jon Barr from Orlando, Florida here, I’ve been listening to BiggerPockets for roughly about three years now. And I have a question that probably a lot of people are asking, which is, do I sell? So some background, I bought this place just over a year ago. It’s my one and sole property at the moment. However, I bought it for the equity growth and it has grown. I bought a 100K of equity in it at the moment and kind of want to get into a new living situation, cut my living expenses in half. And I want to move into some cash flowing units. However, the market’s so crazy right now. One of the options I see is maybe selling this place, pulling on my liquid asset from keeping it aside and maybe 6 to 12 months when this place looks well. When the market looks a whole lot better, making some big deals on 3, 4, 5 places. My other option’s to refinance, but the numbers aren’t a 100% there. Give me your thoughts, how do I make this market work for me when I have a high equity property? Thank you.

David:
All right. Thank you for that, Jon. Let’s break down some of what you have proposed. First off, if you sell and then rent or live with someone else and wait for the market to what you said, “improve,” which I assume you mean prices are coming down, cashflow opportunities will arise. You’re taking a pretty big gamble that, that’s going to happen. So I know there’s a lot of people out there saying a crash is coming, get out of real estate, wait. And it could happen, I’m not here to say it can’t happen or it won’t happen. But I would ask a couple questions. What would make that happen? A lot of people say, well, interest rates continuing to rise is going to push home values down. Let’s say that’s true, because it very well could be. The reason that it’s pushing home values down is because it’s making it more expensive to own them.
So if that does happen and home values come down, you’re still not going to achieve the cash flow you want because your mortgage payment is going to be that much higher. Like you don’t really avoid the problem of cash flow by just having the market have home values drop. So I don’t know that’s the best strategy. Like even if you do get a house at a cheaper price, your mortgage will be higher, you’re not going to cash flow. And then if it doesn’t happen, well, now you just got out of your asset and now you’ve got nothing and then, the market took off on you. I would probably be looking at hedging your bets. So if I was in your position, I would first ask if I moved out of the house I have now, would it cash flow? I’m assuming the answer is no. And that’s why you’re not talking about that.
So the next question is, what would have to be different about this house so it would cash flow? And oftentimes, the answer to that question is, I would need more units. What if you had a single family home with a garage conversion and a separate unit in the back or a duplex with an ADU. Or a house with two levels with separate entrances that also has an ADU. Something where you could get more than one unit out of your property. In that situation, it probably will cash flow. So what if you sold the house you’re in now, and you found a new property that was like that? Something that had more than one unit that would make more cash flow for you. You could then buy that property with the low down payment as a primary residence homeowner. This would allow you to get out of a house that doesn’t cash flow, into a house that could cash flow if you didn’t live in it and probably will still have a cheaper mortgage than what you have now.
If you are living in it and it would allow you to save that nest egg, that liquidity that you mentioned to the side in case the market does go down. I like that overall approach. Now, what if the market doesn’t go down? Well, you could just look for other properties to buy. You could buy a property that does cash flow. You could buy yourself a short term rental and then you could have two properties instead of one. You’ve basically eliminated all of the things that could go wrong. You don’t have to worry about the market taking off on you. You don’t have to worry about if the market crashes and not having enough capital, you’ve improved your situation. So if you do move out of the new house that you buy, it will cash flow and it will become a rental property.
And you open doors to let yourself buy a new investment property, like a possible short term rental that could earn you more cash and get you more experience investing in real estate. So this is advice that I often give when people are in a either or situation, try to be creative and look for a way to get away from either or to give yourself multiple options. I always feel better having multiple options, especially if you’ve got a lot of equity because you don’t have to move all that equity from one house into a new house. You can often spread it out amongst a couple, like you mentioned. Hope that helps and let us know how that goes. All right, we’ve had some great questions so far and I want to thank everybody for submitting. Please continue to submit your questions at biggerpockets.com/david.
And in addition to doing that, please continue to comment on YouTube and this segment of the show. I like to read some of the comments that you all have left on, BiggerPockets YouTube page and see what you’re thinking. Comment number one, comes from Stephanie Mokris. “I am officially addicted to the BiggerPockets Podcast. I’m a travel nurse with a one hour and 20 minute commute. And I love listening to you guys while driving. Thank you for all the value provided to your audience. I do have a question regarding the series. What is the strategy used to pay the private lenders back? I can see in a flip or a bur, but how about if the borrower used the private money for a turnkey property?” Okay, that’s not just a comment. It’s a comment mixed with a question, that’s pretty cool. We got a little hybrid here. Thank you for that, Stephanie.
All right, when I borrow private money, which I do pretty frequently, there’s been a lot of people that have been sending me money and then I pay them a return. I kind of set it up like a bank. So instead of it, at the end of when I pay them money back, they get it with interest. While I have their money, I just deposit the interest into their account every single month. So they get access to that capital. It almost functions like passive income and it’s as passive as possible because they don’t do anything. They just get a check or actually not even get a check because they’d have to deposit that, they get a direct deposit into their account. All they have to do is pull up the app on their phone and check to see that they made money. And I could pay that money back in several ways. Oftentimes, it could come from the refinance of a property. It could come from the refinance of a different property. And then I could use that money to pay back that person’s loan.
It could also come from the good old fashioned way of me just earning more money, right? I borrow money because I make money in several different ways. And so I have it coming in at all different times and I could pay back loans just by saving up money and paying it back. It could come from money that I have in reserves that in a worst case scenario, I could just pull it out of reserves and I could pay somebody back their capital. It could come from selling a property or a couple other properties. At any given time, I have several properties that I own free and clear. And I could refinance those and reinvest the money, but I’d rather borrow the money from other people, get them paid passively, develop a relationship with them and then keep the equity that I have in my properties as a safety net. So I could always refinance those and pay it back.
To your point, you said, “what if someone borrows money to buy a turnkey property?” That could be dangerous because turnkey properties are typically not coming with any equity. So a refinance is usually not an option. They’re often in areas that don’t appreciate as much, not every one of them, but turnkey companies tend to operate in mass, in low appreciation, but high cash flow markets. So if that’s something that you do, you are going to have a plan for how you get that money back or else you’re going to have to sell, to repay the person and you don’t know where the market’s going to be when you go to sell. Now, that’s becoming risky. In general, if someone isn’t making a lot of income, isn’t saving money and doesn’t have a plan to pay back their investor. They probably shouldn’t be using private money and they definitely shouldn’t be doing it to buy a turnkey property.
Next comment comes from Dakota Slaton. “I love the content, I’m 20 years old. These videos give me great pointers to get my foot in the door, greatest podcast all around.” Ah, thank you for that Dakota, I appreciate your sweet words there. Hopefully we continue to impress you and do our job of holding your attention and giving you value. Last comment comes from PureUnwindASMR. This was related to the Amy Missouri podcast, we just did on raising private money. “This is so powerful and I’m going to re-watch all four when they’re available. Thank you so much for this.” Well, that feels good to hear too. I’m glad we are providing value and helping improve your lives because that’s all that really matters in this entire world of beautiful chaos that we live in.
All right, we love it. And we appreciate your engagement. Please continue to do so, like, comment, subscribe on YouTube. And if you’re listening to this podcast on an app, please give us an honest rating and review there. Whether it’s iTune, Spotify, SoundCloud, Stitcher, let us know what you think about the podcast and give us a rating, it helps us reach more people. Thank you very much for that. I recently had the pleasure of meeting Alex Bashirs and Beth Johnson, BiggerPocket Publishings, newest authors who wrote a book, Invest to Live, about how to raise private capital or use private lenders to grow your portfolio. And I thought it would be a good idea to bring them in as some backup here, to help me answer questions particularly about raising capital, borrowing money to invest in real estate.
So let’s see what they have to say. All right, ladies and gentlemen, thank you for joining me. We are going to jump right into this. So the first question is from Brock Dallas and Brock says, “Hey David, I know you were taking on exclusively debt investors to save yourself some time and effort in terms of getting everyone up to speed. I am curious, what would you consider to be favorable equity payouts on private lending, specifically for high end flipping 1.5 million plus?” Alex, let’s start with you. What do you think about that question?

Alex:
I think that really depends on having a conversation with the person that’s going to be providing the capital because realistically, if you are trying to use someone else’s capital, figuring out what their paying point is, do they want steady cash flow? Are they lending because they need that cash flow to live off of or are they trying to get a big payout lump sum, which it would be more like equity investing? So when you talk about that, really you want to talk with them about what their ultimate goal is and then you can structure the deal in favor of what their goal is.
Since Brock, specifically mentioned equity, the equity side would be something that’s laid out in the operating agreement between you and whoever this other person is. So that can be fully negotiated as far as percentage of equity, you might want to outline and let them know if they are asking for equity that they could get some of the downside too. Equity’s not always up. You know, we’re kind of in a strange time right now. So making them aware that there is a downside to being on the equity side, well, it sounds great. You’re going to get 20% of whatever the net profits are, but you might also be getting 20% of what the net losses are too. So that’s why I say have a conversation with the person first.

David:
So important to acknowledge that. The assumption is how high of a return can I get, or if I can get equity in the deal, I can get it higher. You’re also losing the floor when you lose the ceiling. And so that’s very important to acknowledge. Beth, what say you?

Beth:
I generally like debt more than I like equity. I can see it in some circumstances where they want to offset the actual interest rate so that they can keep carrying costs low and then push that towards the equity side of things. But as an investor, I don’t typically like that simply because, I feel like that leaves too many cooks in the kitchen. And even though there’re supposed to be playing a silent role or a passive role, there’s so much vested into it, that they can sort of metal that I’ve seen in certain circumstances. And then as a lender, I truly like being in a passive role. That’s why I choose being in a debt position as opposed to an equity position. I don’t have to care quite as much. So, there’s ways in which it works well for some people. It’s just not something that I’m a super fan of, just because it creates a little bit of conflict of interest.

David:
So, I think you mentioned saying that you prefer the equity side. Did you mean you prefer the debt side in the beginning?

Beth:
Oh, sorry. Yeah. So the debt side.

David:
I might have heard you wrong, but you’re saying you do prefer to bring in people as debt, oh, sorry, as equity? No, I’m getting myself confused. You prefer to work with people who are coming into your deals as debt investors versus equity, correct?

Beth:
Correct.

David:
Yeah. And you made a very good point that as soon as somebody has equity in the deal, now there’s almost an entitlement, this is my deal too. I want to use this color of flooring or I want to price the house here or can we use my cousin as the real estate agent? Have you seen some problems like that pop up with your deals?

Beth:
I had. I mean, from having that silent partner to show up on the job site, you may not even be there as the active investor. And they’re having conversations with the contractors. They’re trying to make some decisions and insert themselves for calling and texting you from the location and wanting to know this and that. And it just becomes a little bit cumbersome to say the least, right. So I just choose to either be on the debt side or the equity side, just makes things a little cleaner to know what your roles and responsibilities are.

David:
That sounds like you’ve got some good stories there for another time.

Beth:
I have a lot of war stories to share, some buy-in and some from my investors.

David:
Rob, what do you think about this?

Rob:
This is a tough one because I think it can go both ways and it’s obviously going to depend on what kind of transaction we’re talking about. Is it a flip, is it something that you’re trying to buy long term? For example, I just bought a hotel, it’s a 20 unit and we have an investor on that, but he’s an equity partner on that. And that’s a little bit of a different deal because he is incentivized strictly on the IRR and then the sale price that we’ll have in three to five years, once everything is stabilized. And that was really enticing to him, right? The possible cap rate in the exit there. And he wants to be a long term partner too. But on the flip side of this, I guess if I were going to have it my way, debt is always cheaper than equity in the long run, I think, for most successful deals.
And when you have someone in, from an equity standpoint, that investor has a vested interest in the performance of that property. And thus there’s a little bit more emotion that I think can get mixed into that. Which leads to too many cooks in the kitchen, too much micromanaging. Whereas, from a debt standpoint, obviously there’s the vested interest that they want you to pay them back and be successful, but it’s very black and white. You get paid this, this is a guaranteed return from a debt standpoint, you’ll get a 10% on your cash, whatever it is, whatever you agree on. And it’s just a lot simpler and cleaner. I think that you can really keep the emotion out of that, because it’s just a much easier calculation to make and model for, personally.

David:
Okay. Next question from Nadia Chase. “Hello David, I have a family member in Switzerland that is willing to partner with us. She’s about to retire and is able to ask for a lump sum of money in advance. She said, she’s thinking about asking a $100, 000 and either lend us that money as a private lender for us, or be a silent partner in one of our investments. We have some experience with private lending, we are not sure how to structure the silent partner option. And if there are other things we would need to research when working with money that would come from outside the country. Finally, which of these two options would you recommend? Thank you a lot.” Beth, what do you think?

Beth:
Well, I think we already discover that, debt is probably going to be cheaper and easier than having an equity position. That said, I think that there’s some concerns on the legal and the tax side of things that they would need to shore up first, before they entered into some sort of arrangement together legally. And first off, I want to retire and get access to a $100,000 a lump sum. I’m not sure how that works in Switzerland, but I should just call that out there because that’s kind of fun. And so generally speaking, for us, when it comes to creating joint venture agreements, we like to come up with at least an MOU or a memo of understanding that helps outline the implications financially, rules and responsibilities, exit strategies, disillusion, and some sort of structured legal arrangement. But again, I think that there’s some concerns just having them based in Switzerland and the folks being based in America that could have some challenges legally and tax wise.

Rob:
Yeah. I actually want to dive into that a little bit, because I don’t think I’ve really run across an MOU very intriguing. How is that really differing from a joint venture or from like an operating agreement? Because I feel a lot of that stuff is typically in those agreements, but what’s different from that? What differentiates them?

Beth:
Well, I’m not an attorney and we’ve had attorneys draft them up for us before. But I feel like there’s a little bit more of a looser construct in terms of just outlining rules and responsibilities. What the capital inclusion might be. It’s a little looser framework, but it still has some legal parameters around it. I find oftentimes, especially with my borrowers that we lend to, when we see their operating agreements, a lot of the times they’re just canned, their boiler plate templates.
There can be from online or from an attorney, but they don’t really bake into the agreement, what the specific scenario might be in terms of who’s providing what capital, who does the project management? How are you going to get your money back out? Is your capital going to be placed in as debt as opposed to being just your personal part of the project? So MOUs are just how we’ve started the conversation and drafted them up in a legal framework. We’ve either notarized and signed those with the help of an attorney or they’ve been translated into an operating agreement so that, it’s baked into something that’s a little more specific to this particular venture.

David:
Alex, what’s your thoughts on this? And I realize, I read that question a little while ago. So if you need a refresher, let me know.

Alex:
Oh no, I’m good. I think Beth, pretty much handled the kind of the legal aspect. So the way I’m going to look at it, actually is from a relationship standpoint. So anybody, I get questions like this a lot, my best friend’s cousin wants to start a real estate investing business. What do I do? And I always tell people the fastest way to lose friends and family is to lend each other money. So this is someone who’s, in the family and it’s retirement money. So a lot of people take that relationship for granted and be like, “oh, I trust them. Don’t worry about it. You know, this is my aunt, we’re good. We don’t need anything because we inherently trust each other, because we’re a family.” But in reality, that’s probably the situations you need at the most.
So like what Beth mentioned, where the framework’s already in place, it’s on paper, it’s black and white. If this happens, then this other thing happens and you’re taking the emotion of the relationship out. So I would definitely say, anybody that’s thinking about investing with friends and family, even if they’re outside of the country or inside of the country, take that into consideration, how valuable is this relationship to you? So if this goes bad, is that going to make Christmas dinner really awkward for the rest of your life? Because that might not be worth it, it might be cheap capital, but what is it costing you in human capital?

David:
That is a great point. I’ve found the quality of relationship is always based on the expectations of the parties. And when you’re working with someone close to you, in my experience, whether you’re representing them, selling their house, or you’re doing some form of business with them, they tend to look at it like you’re going to give them something extra more than what everybody else gets. And the person who’s using the money is like, “no, we have an agreement in places is a professional relationship.” You’re used to it from people that are expecting it to be professional. And I rarely have ever seen those expectations lower with family. You think it’s going to be easier? It’s quite easier to get into it, but it is much harder once you’re there.
So I like that advice, maybe don’t go with friends and family, unless that’s your only option. It would be better to find someone that you don’t know that has more reasonable expectations. So last question, “hi David and team, my husband and I have contacted several banks regarding lending parameters and have been unable to identify any lender who would provide a multifamily loan for house hacking with less than 20% down. Do you have a product that allows for less than 20% down towards a multifamily that would be our primary residents? Or do you have any advice about how we could go about acquiring one?” Ladies, how do you feel about that?

Beth:
Well, I was going to pun back to David just simply because, I mean, I think that FHA loans can allow, but it’s for one to three units. But it’s not something that you can technically do most often in a hard money or private money role because it has to be non owner occupied.

Alex:
Yeah. I mean, I’m going to say the primary residence part is going to be the sticking point, because that falls underneath federal regulations as opposed to non-owner occupied investment, property falls under state regulations. And it’s very different licensing requirements, very different limits. You know, there’s a lot of consumer protection laws in place for primary residences. So that’s, the difference we are running into.

David:
So, at The One Brokerage, we can do 15% down on a duplex, but three or four units, it’s going to be 20% down, even on a primary residence. That’s a new change that was just made for conventional loans. And then you can still go FHA though. So, or FHA or VA, you can get those terms on multi-family housing. So one thing that people will do is, they’ll use an FHA loan to get in and then they’ll refinance into conventional. Even if the rate isn’t better and then they have another FHA loan that they can use for future properties. So if you’re willing to play that game, you can’t do it, but it is a little trickier because multifamily housing is what everybody wants to do for house hacking. It’s the easiest way to get into that. And then these regulations were just changed, but it didn’t necessarily drop the demand for multifamily housing down because there’s so many people that are trying to park their money somewhere.
They just did a 1031 exchange, they’ve got 400 grand. They have to put somewhere, they’re not going to go buy a single family house. They’re going to buy a triplex, they’re going to buy a fourplex. And so these things, at least in the areas that I invested and work in are just getting sucked off the market so fast, there’s so much demand for those. So it’s tricky for the person that was trying to get into the market, which is what most people that are listening to our podcast are looking to do. So what we recommend people do is instead of just going for multi-family housing, find a house with an ADU, find a house you can convert the garage, find a house that is sort of structured to where it can already be rented out as to units or three units. And many times those are in areas that are zoned for multi-family housing as well.
Very good answers though, I’m impressed with everybody so far. Thank you guys for helping me there. All right, that was our show, I hope you liked it. I know it’s been a while since we’ve had a Seeing Greene. So I just wanted to say we’re back and I appreciate you guys being here. Please, again, let us know on YouTube in the comment section, what you think, what you’d like to see more of, what you enjoyed and maybe what you didn’t enjoy. So we can avoid doing that in the future. You could follow me online, I’m @davidGreene24, check out my Instagram, that’s what I am on Facebook. It’s what I am on Twitter, LinkedIn, pretty much everywhere or I’m on YouTube at David Greene Real Estate, so youtube.com/davidgreenerealestate. And then please like, and share and subscribe to the BiggerPockets YouTube channel. Share this with everyone you know, so that we can reach more people. Appreciate you guys. If you have any questions, you can message me through BiggerPockets or on my social media. And I will see you on the next.

Ashley:
This is Real Estate Rookie, episode 206. My name is Ashley Kehr, and I am here with my co-host, Tony Robinson.

Tony:
Welcome to the Real Estate Rookie podcast, where every week, twice a week, we bring you the inspiration, information and stories you need to hear to kickstart your real estate investing journey. One of the things we love to do on this show is highlight some of the amazing reviews we’ve gotten from the Rookie audience. Today’s review comes from Jesse Bruce. Jesse wrote, “So many gems! I love this podcast. It breaks down people’s journey in a way that is understandable for rookies while still providing value for seasoned investors. So many gems in each of these episodes. I feel like I’m getting a crash course on different aspects of real estate investing every single week.” Jesse, we appreciate you. If you guys haven’t yet, please leave an honest rating and review on whatever platform it is you listen to, Apple, Spotify, iHeartRadio, YouTube. The more reviews we get, the more ratings we get, the more people we can reach.

Ashley:
Yeah. Thank you guys so much. We love it when you guys leave us a great review. Don’t forget, you can also call and leave us a voicemail. The voicemails get sent directly to us. We get to listen to every single one, and we may play your voicemail on the show. You can call in at 18885-ROOKIE. Even if you want to share just a win with us, we would love to listen to that too and play it on the show. That’s 18885-ROOKIE. Today, Tony, I am going to use this as a therapy session, a lesson that I have learned so all of you can also learn this lesson. I fired a contractor, a general contractor, a GC. I had to let him go. We’re probably about 75% done with the project when I let him go, and I know that you have done this too, that you had to let a contractor go during it, so I thought we could do this episode on firing contractors as painful as it is to talk about.

Tony:
Yeah. I’m glad you said that, because so many new investors, I think, one of their biggest concerns is managing that relationship with the contractor. The truth is, it is not always easy. The level of professionalism and business acumen and just integrity in the world of contracting varies quite a bit. There are a lot of people in that industry who are fantastic people. There are a lot of people in that industry who are just full of BS. You’ve got to weed your way through these different folks until you find the right person. Ashley and I both had some of those experience. We thought it would be good to share with you guys. Ashley, why don’t you go first? Tell us about your recent experience. What led up to you firing that contractor and what was the final straw that broke the camel’s back?

Ashley:
Yeah, this is the second time I’ve ever hired a general contractor who’s just going to do the whole project. The first one I hired was actually the builder that built my house, and it’s a one man show and he does everything. He had built my house. He’s also my neighbor. Everything went so smooth with my house project. It was wonderful, so I had him do another property for me, a pretty extensive rehab on that. It went amazing, no oversight. Didn’t have to really keep an eye on him. An idea came up, he would ask before he did it. And so, that was such a great experience for this. It’s my A-frame project, so if you follow me on Instagram, @wealthfromrentals, you’ve seen pictures of this project. And so, when we closed on it, we ended up hiring a contractor.

Ashley:
It was a crew of three people, and then they had one part-time younger kid that would come and help them. Right away, there were red flags that I was so amped up and ready to get this project going that I was blinded by them. The first red flag was that they wanted to be paid hourly. That is something I’ve always gone against, doing that, and I was… They could start right away. They went through the property, were telling me things that needed to be done and looking at… Giving me ideas of how to do it, that I was so blinded by that, and I didn’t stick to what my criteria is with a contractor. And so, they started right away. At first, it was such smooth going. I mean, they started working on the structure of the actual building, and it just seemed like they were flying through. Then after about two and a half months, it’s just like, it went stagnant.

Ashley:
It felt like there was no progress. There was one person on the crew that any time we would say we wanted to change something or do this, he would question us, “Why do you want to do that?” and turn it into this huge conversation. And it’s like, just do what we want to do. And then, there was a couple things that started to come up, questions they were asking that just didn’t make sense, that maybe they didn’t know what they’re doing or they were trying to get us away from… Almost, I don’t want to say gas lighting, but making me question myself that I know what I’m doing. And so, I finally got to the point where I didn’t even want to go to the property because I was so depressed over the slow progress that was happening. And so, my business partner would go and he would update everything and keep an eye on things.

Ashley:
Finally, I just got to the point, I was like, you know what? I think that I’m going to let them go. I went to the property one night when no one was there and I went through stuff and I was like, the bleeding has got to stop at some point. This was, I think, a Friday night I went and I said, okay, Monday morning, when they come, we’re going to cut them their final check and send them off. They can pack up their tools, everything, and send them on their way. That’s what happened. Darrell went to the property Monday morning, let them know that we were going in another direction, it wasn’t working out, sent them on their way with their last check. Since then, it was two weeks, and we hadn’t got anyone else in there and I am very impatient.

Ashley:
I just went in there with two of my kids last weekend, and we started going to town on stuff. We bought everything needed to do the tiling. We got set up for tiling. We cleaned up a ton of the garbage. There was a whole bunch of drywall and everything. My kids hauled it all out. We started working on that. And then now, my business partner, he came in and he’s like, that’s all he’s doing right now, is just getting this cabin to finish, get it to complete. My biggest takeaways, my lessons learned were, first of all, have your contractor criteria and stick to it. If it seems too good to be true, these people fell into our laps the right time, they could start right away, and the hourly rate was only $20 each, we were paying them.

Ashley:
It was not very expensive. It was actually pretty cheap, but it’s just they took so long. Then as I was going through, last Saturday, when I was going through the project with my kids, I was looking at things that even I noticed were wrong. Me, who literally knows nothing about construction rehab. And so, my second thing would be is if you do know something, don’t second guess yourself just because somebody else says that’s not the way it was done. For example, the tile for the back splash was done in the kitchen, and there was about this much gap of drywall, because it’s the A-frame, so the wood slats come down. There was no bull nose, but they had already grouted the tile and everything. That’s one thing Darrell worked on today, was adding the bull nose on top and re-grouting it.

Ashley:
And also, the shower just… I would’ve done Hardie Backer board onto it, and they did a cement board and then they muddied it and then they put primer over it, where I would’ve just put the Hardie Backer board, maybe some Aquaphor on it. All these little things that were happening, I was second guessing myself because I’m not a contractor. My first thing would be stick to your contractor criteria. When you are hiring a contractor, don’t be impatient. Wait. If you can’t get a good contractor, figure that into your holding costs. And then, just don’t let anyone gaslight you. If you stick to your gut, if you think you know something is wrong, speak up and stick to it. Don’t let somebody tell you that it’s not. Those were the biggest things. Honestly, I should have probably let them go earlier. The third thing would be to hire slow, fire fast. That’s my rant. That’s my therapy, my word vomit, going to call it that, mental breakdown of my life. Yeah.

Tony:
But so many good lessons in there.

Ashley:
Yeah.

Tony:
I think your point about, the fact that they could start right away, to me, that in and of itself is a huge red flag because most good crews today are…

Ashley:
So busy.

Tony:
… backed up. Maybe they can say, “Hey, I’ve got a project ending in two weeks, but my next one starts in six weeks. Maybe I can give you four weeks”. But if they’re like, “Yeah, sure. I can start tomorrow”, that means nobody else is thinking about them, and there could be a reason for that. And then, I say this, Ashley, because something similar happened to us as well where we found another crew and they were able to start immediately and they were relatively inexpensive, and we had to fire them. They were about 75% through one job and maybe about 10% through another job.

Tony:
I mean, a lot of the same lessons you spoke to as well, is that… Actually, the one thing that we did that I was proud of is that we did pay them on a milestone basis. It was like a 10% upfront, then I think a 20%, 20%, and the last one was a 60% payment. We were able to withhold that last payment. And then on that first [inaudible 00:10:41], we only gave them 10%. The payment didn’t hurt us as badly, but then we still had to go out, pay another crew to finish the first job, and then pretty much go off and start the second job, so now we’re over budget on both of those flips by a decent amount because we had to pay two crews and all this other stuff. Yeah, really good points on the busy-ness piece and the pay progress. The other thing you said that I thought was interesting that I’ve experienced as well is letting them go sooner.

Tony:
The mistake that I made, we had a… It was this crew, the same crew, it was our first time working with them. We gave them one job, and we already felt like their work was good. The work they were doing was good. We had no concerns with the quality of their work, it was just the speed at which they were moving. The progress was coming way too slow. I felt like it was an issue, but our hands were tied because we didn’t have anybody else. We just got another flip under contract and our go-to contractor was still too busy with our other flips, so we had decisions like, can we find somebody else? We couldn’t find anybody else. It was like, either we sit on it or we give it to this other guy who hadn’t even finished his first flip for us yet.

Tony:
We made the mistake of giving him two properties before he finished one, which is why we ended up having to fire him from both. To your point, and just add on to that, I guess, make a contractor finish a job before you give them a second one. See it all the way through the end, because someone could look amazing on day one, but look very different on day 90. You want to make sure that you see the day 90 version of someone before you give them an opportunity to do a second job for you, because that really came back to bite us in the butt on our flips too. Lots of lessons learned on both sides.

Ashley:
Yeah. I know. It’s frustrating to look back at. It’s like, wow, geez, why did I let this go on for so long? I think that I just… I get busy. So many other things going on that it’s like, “Ugh, I don’t want to have to deal with this, so I’m just going to let it keep going” or “It’s easier to keep them on the job and bleed money in holding costs letting the project drag on than it is to fire them”. But really, all it takes is some work. Okay, me and the kids and even my business partner, he’s in there now working on things. We made some phone calls. We got all the flooring installed by an installer. We have a roofer coming out to take care of the roof. And so, it takes that extra work, but you’re going to get a better product and you’re going to probably save more money than if you do just keep letting the job drag out and hope that they eventually finish.

Tony:
Yeah. It reminds me of this, I don’t know, this saying that I’ve heard recently. I was literally just telling my son this last night, but it was about choosing your hard. I gave him the examples of, it’s hard to study for your test, but it’s even harder to have Fs. It’s hard to get up in the morning and train for basketball, but it’s even harder to not play as much as you want during a game. As a real estate investor, the idea of having to fire a contractor seems hard, but it’s significantly harder to continue to work with a bad contractor.

Ashley:
Yeah.

Tony:
You can fire that contractor and it’s hard for five seconds, five minutes, however long it takes to have that conversation, or you could deal with him for the next four months while you go through this rehab, and that is much, much harder. Just choose your hard. Short sacrifice for the bigger, long term day.

Ashley:
Tony, I remembered before when you had shared stories of things you have told your son, and I wish you would share more, these analogies and lessons that you give him, because I appreciate that. I listen intently. I do. Thank you.

Tony:
I appreciate that. Hopefully, he’s listening as intently as you are.

Ashley:
Yeah. Thank you guys so much for joining us for this week’s Rookie Reply. I’m Ashley, @wealthfromrentals, and he’s Tony, @tonyjrobinson on Instagram. Make sure you guys leave us a review on your favorite podcast platform. We would greatly appreciate it. Check out the Real Estate Rookie on a YouTube channel and make sure you are subscribed. Thank you, guys. We will see you next time.