Mon, 26 June 2023
Get our newsletter free here or text “GRE” to 66866. Storing your money at a bank entails more risk than you think. Your deposit is a bank’s liability. Banks must take risks with your money because they don’t charge you fees. Banks used to have a 10:1 reserve ratio. As of March 2020, all reserve requirements are now eliminated. Rather than storing lots of money at the bank, borrow lots of money from the bank. US households own $41T of owner-occupied property—$29T in equity, $12T in debt. The national LTV ratio is 30%, historically low. That’s 70% equity. Of the five ways real estate pays: one profit source is the market, two are from the tenant’s job, and two come from the government. Many Millennials plan to rent forever. 63% have nothing saved for a down payment. The interest-rate lock in effect keeps constraining the available supply of homes. This forces more homebuilders to build. Last week, NBC Nightly News covered the rise of build-to-rent communities. Resources mentioned: Show Notes: Get mortgage loans for investment property: RidgeLendingGroup.com or call 855-74-RIDGE or e-mail: info@RidgeLendingGroup.com Find cash-flowing Jacksonville property at: Invest with Freedom Family Investments. You get paid first: Text ‘FAMILY’ to 66866 Will you please leave a review for the show? I’d be grateful. Search “how to leave an Apple Podcasts review” Top Properties & Providers: Best Financial Education: Get our wealth-building newsletter free— text ‘GRE’ to 66866 Our YouTube Channel: www.youtube.com/c/GetRichEducation Follow us on Instagram: Keith’s personal Instagram:
Complete episode transcript:
Welcome to GRE! I’m your host, Keith Weinhold. Do you have any idea what banks do with your money? How home equity is like a bank, hot Millennial rental trends, and the proliferation of Build To Rent real estate, today on Get Rich Education! ___________
Welcome to GRE! From Glens Falls, NY to Klamath Falls, OR and across 188 nations worldwide, the voice of real estate investing since 2014. You’re listening to Get Rich Education. I’m your host, Keith Weinhold.
You did not wake up to be mediocre today. So we don’t focus on long-term budgeting here.
Correlating financial betterment chiefly with reducing your expenses is just a race to the bottom. You and your peers would just be racing to the bottom.
We know that, instead, yes, arbitrage is created when you borrow low and invest high. But the ultimate arbitrage - which is the gap or that spread, is when your quality of life vastly exceeds your cost of living.
That’s that gap that you & I pry open ever wider together right here, every week.
Savers lose wealth. Stock investors maintain wealth. REIs build wealth.
Savers lose wealth because inflation makes holding onto a dollar like a block of ice melting in your hand.
Retail stock investors only MAINTAIN wealth because their 9 to 10% long-term return is worn down to less than nothing with inflation, emotion, taxes, fees, and volatility.
And real estate investors BUILD real, durable wealth.
If you have a mentality of trading time for dollars, then you have a certain way of looking at your life.
If you realize that your investing mission in your life is to build things that pay you to own them, then you have a different way of looking at life.
The resources that you need to build those things are what we cultivate here on this show.
You know something though, by the time that I bought my first rental property, I didn’t have all of that figured out yet.
It really wasn’t until I bought my second property. It was also a fourplex, just like the first one. This second one cost $530,000. And check out how I bought it.
I bought it with a 10% down payment, interest-only loan, and interest rate of 7⅝%.
Yep, I took accumulated equity from my first four-plex and used it as a down payment on the second four plex.
Now, that way, I essentially had zero money in the deal - which is an infinite return strategy - and both fourplexes cashflowed.
Now, the interest-only loan on my second fourplex there… that gives some people pause.
Why would I do that?
That kept my monthly payment amount down - since I could pay only interest - and didn’t have to pay principal. That turned a property with a small cash flow into a nice cash flow.
Yeah, some people don’t like interest-onlys because then the tenant isn’t paying down your principal for you.
I typically take interest-only loans because for every dollar that doesn’t go into your illiquid principal as equity, instead, it becomes a dollar of liquid cash flow that goes into your pocket.
In fact, changes are that the reason that you have fat equity in home right now is from market appreciation, not principal paydown.
In fact, why don’t I approach the classic GRE principle of “your return from home equity is always zero” from a new and novel angle here today.
Gosh, this could make you hundreds of thousands or millions over your investor career.
Imagine a bank. We’ll call it a red bank. This bank is offering you zero rate of return, it’s difficult for you to withdraw your money from it, and this red bank might not even let you withdraw your own money at all - it is at their discretion.
How motivated are you to hold your money at that bank? Well, you aren’t at all.
Well, I just described equity that’s locked inside properties… and that’s why… your properties make terrible banks.
Equity is the opposite of you being liquid.
Instead, the GRE Way is leverage and arbitrage, but it needs to be supported by cash flow.
So, we are not quite on an island here with our strategy, because we’re still connected with the mainstream finance world - but we’re, say, a peninsula then.
And, like a peninsula, maybe, real estate keeps you insulated - though not completely disconnected from that more volatile stock and bond shuffle that most people are on - which provides little to zero leverage or cash flow.
Do you know what that stock and bond shuffle is - that seesaw?
Let’s remind ourselves… that when money flees the stock market, it usually ends up in bonds. As demand for bonds goes UP, interest rates go DOWN. Then, as interest rates go down, investors go back to stocks in pursuit of yield, and everything reverses. It’s an ebb and flow of funds which often provides you with zero real return. That’s how that seesaw goes. So rather than get a part-time job, which is selling your time for dollars, get a few rental properties instead.
Whether you manage them yourself or you manage the manager - like I do, I manage managers… you’ve got the income stream of a part-time job with an asset that appreciates at the same time.
As time passes, the reason that you will feel satisfied is because you took strategic risk.
Now, to stick to the bank analogy theme here, a lot of people still don’t realize that when you take your money to the bank, you are a creditor of the bank, and the bank is now lending your money out.
So, just think about what you’re doing - well, you yourself probably aren’t doing so much of this - you’re probably a better than average investor since you’re listening here.
But think about those depositors that keep a lot of money at the bank.
Yes, we know you’re losing to inflation, but besides that, just think about what happens to your money this way.
What about a parking garage and your car? OK, when you park your car at a valet, the valet is supposed to turn around and park it in a garage.
The valet does not have the right to take your car and let an Uber driver go make money with it while you’re off having dinner.
And then maybe they’ll give you the same make & model back at the end of the night… and they stick YOU with the risk of having a problem with your car - or your money.
That’s what banks are doing with your money when you park it there. It’s like a valet letting an Uber driver use it and take risks with it without your knowledge.
What isn’t FDIC-insured is… at… risk.
Well, what’s the alternative to banks lending out the money that you deposited with them? Well, the alternative to the existing system is that banks, instead, could make money off of fees that they charge you.
How is it that you avoid paying fees to your bank right now, like you are? I mean, afterall, banks have capital expenses, technology expenses, and employee expenses.
If banks charge fees to you rather than profiting from the spread that they get on lending your money out, we could have a safer system.
But most people like the allure of fee-free banking, partly because that’s what they’re used to.
Banks used to have to hold onto a dollar for every $10 they had in deposits. That’s also known as a 10:1 fractional reserve ratio.
Well, the risks of parking your money at a bank went up in March of 2020. That’s when the Fed just COMPLETELY eliminated reserve ratios for banks.
Now, for every $10 they have in deposits, banks can hold zero dollars in reserve.
Instead of parking your money at a bank, you do the opposite. You borrow from the bank, pay them their 7% interest and invest it in “Real Estate Pays Five Ways” property that beats 7%. Right there’s… your arbitrage.
Now you’re using their money instead of them using your money - like the valet that you entrusted your car with that lent out your car to the Uber driver while you were at dinner.
So outside of inflation, why is it risky to keep your money parked AT a bank - rather than borrowing from them. Because, as has often happened this year, banks implode.
Why are they imploding?
Well, just a couple years ago, when banks lent on mortgages at 3%, they’re only collecting 3% for 30 years.
What happens to the BANK when interest rates go up? No one wants to buy their 3% debt. The depositor (that’s you, the customer) wants their money back - because they can go invest it for 5% elsewhere. That’s a problem for the bank.
And if the government does come in to give a bailout of your bank - we know by now that they’re more likely to do it if it’s a large bank, like Chase, Wells Fargo, or B of A.
Well, more gov’t bailouts of banks… means more money printing… which means more inflation, making our eventual problems even worse.
So rather than keeping too much money at the bank, BEAT the bank.
Now, earlier, I mentioned how having a glut of equity in your properties is like keeping your money in a rather illiquid bank.
That is a germane point - a pertinent discussion to have right now, because take a look at this. This is America’s equity position, right now.
This is for the latest quarter ended. The Federal Reserve Flow of Funds report tells us that
U.S. households owned $41 trillion in owner-occupied real estate. Alright, $41T is the value of that US residential property.
Of that $41T, how much do you think is in debt, and how much is in equity? I’m just doing some rounding here.
$12 trillion in debt and the remaining $29 trillion is in equity.
Therefore, the national loan-to-value "LTV" right now is about 30%. That is historically quite low.
Another way to say it is that America’s primary residences have a 70% equity position today.
Yes, 70% of the value of American homes is locked into that vehicle that’s famously unsafe, illiquid, and always has an ROI of zero.
Homeowners today have an average of $302,000 of equity in their homes.
Now, as inefficient as that might sound from an opportunity cost perspective from homeowners.
There is, at least, a little upside to your neighbors having a glut of equity even if you try to opportunistically hold a low equity position.
This equity provides a cushion to withstand potential price declines, but also prevents any future housing distress from turning into a foreclosure situation.
Those equity cushions around American neighborhoods help prevent the down… drain in prices that we saw from 2007 to 2009.
I’ve got more for you coming shortly, including, has the Build-To-Rent concept that we’ve discussed on this show for years & years finally gone mainstream now that NBC news is discussing it?
You’ll hear that audio clip and get my commentary on it.
But first, I want to ask you, is this the "Golden Age" of quality NEWSLETTERS or what?
News WEBSITES are increasingly riddled with: paywalls, logins, banner ads, and pop-ups about cookies, the hassle of 2FA. Instead, a quality newsletter is just automatically “there” in your inbox.
Our valuable Don’t Quit Your Daydream newsletter is full of real estate investing industry trends and forecasts, broader economic forces that are going to affect you in the future & more.
Get top investment property news in under 5 minutes. You can sign up and get the letter free now at GetRichEducation.com/Letter.
In there, you get updates about what provider has inventory now - even exact physical addresses of properties.
In fact, I’ve featured two of my own rental properties in the newsletter as I broke down their financials. Again, sign up at GetRichEducation.com/Letter
I STILL write every single word of that letter myself. I don’t think that a lot of founders do that.
Upon signup, you’ll receive some lay of the land e-mails, and thereafter, I only send it about weekly. Not daily.
Alternatively, you can easily sign up for the letter by text. If you aren’t yet one of many subscribers expanding your means with my letter, you can simply text “GRE” to 66866 for our DQYD Letter. It is free.
Again, you can sign up by simply texting “GRE” to 66866. More next. I’m Keith Weinhold. You’re listening to Get Rich Education. _____________
Welcome back. You’re listening to Episode 455 of Get Rich Education. I’m your host, Keith Weinhold.
Five weeks ago on the show, you’ll remember that I reiterated why real estate does not pay 4 ways and does not pay 6 ways - it pays exactly five ways simultaneously.
Sometimes, amid uncertainty - and note that there’s ALWAYS - uncertainty.
It never abates. People wondered when the Fed would stop hiking rates at a meeting. Now they did. People wondered when inflation would get down to 4 - now it has.
But those that worry excessively will still point to something else that’s uncertain.
But in good times, bad times, and uncertain investing times, you might want to get more offensive. Other times, more defensive.
Real estate is both. Of the 5 ways you’re paid, appreciation and cash flow serve your offensive side.
At the same time, your return on Amortization, Tax Benefits, and Inflation-Profiting all serve your defensive side.
Now, let’s go and look at the sources - the headwaters - the genesis.
What are your 5 profit sources - for appreciation - it’s the market. It’s the vibrancy and diversity of the economic market that you bought in. That’s where your appreciation emanates from.
For the second way you’re paid, cash flow, it’s your tenant and your tenant’s job.
For the third way, your Return on Amortization - that ROA, that also comes from your tenant, since that pays your loan’s Principal & Interest.
The fourth way, tax benefits, that’s the gov’t.
And the fifth way, your inflation-profiting, that also comes from the gov’t.
Yes, that’s the source, the headwaters for each of the five ways you're paid and knowing that can help you be mindful about what to pay attention to in your investment real estate portfolio long-term.
Yes, this is just with carefully-bought buy & hold real estate. Unlike most investments, if the value of your property goes down, you still get paid 4 ways.
So to review the 5 Ways Real Estate Pays SOURCES - where your money actually originates, it’s:
Appreciation - from the market Cash flow - from the tenant ROA - tenant Tax Benefits - gov’t And Inflation-Profiting - also from the gov’t
Now, here at GRE, when we focus on your tenant and where your tenant comes from, you know, one word that comes up an awful lot is Millennials.
Why do we discuss Millennials so regularly? It’s not because we’re the first generation to embrace avocados or online dating over “in real life” dating or, it’s the first generation to be raised in a world of participation trophies. Ha!
It’s because, not only are Millennials the largest generation in American history, but they are in their prime household formation years.
Though there’s a bit of dissension among demographers, many agree that Millennials were born between 1981 and 1996. That makes them Age 27 to 42 - they are prime household formation years.
BTW, you probably know of the generation after that, Gen Z. They were born between 1997 and 2012, making Gen Z age 11 to 26.
But do you know about the generation after that? That is Generation Alpha. They were born between 2012 and today, making Generation Alpha age 0 to 11.
Well, the Millennial homeownership rate lags that of previous generations of people that were the same age. So this is why you have such a deep pool of people that’s driving demand for your rentals.
Millennials have the misfortune of being stung by back-to-back global crises.
When they were coming of age in 2008, many couldn’t get a job during the Global Financial Crisis. Then the pandemic disruption made getting their independence pretty bumpy.
In fact, fully 18% of Millennials say that they plan to rent forever. Forever! That’s up from 11% just five years ago.
Not just a few, but the MAJORITY of Millennial Renters have zero down payment for house savings. 63% of them have absolutely nothing saved for a house.
And in fact, another 14% have less than $5,000 saved - which is close to nothing. That is all according to a survey from Apartment List.
More Millennials plan to rent forever.
Now, I’ve done a fair bit of research on Generation Z real estate trends - again they’re the age between 11 and 26. And there are a few more Gen Z homeowners than you might think already.
But the short story on Gen Z, just isn’t that compelling. To distill everything I’ve researched, most Gen Zers want to own a home but few can afford it. Well, no kidding. That’s not a very novel takeaway, but that’s the REAL story there.
If Millennials are your current renters, then Gen Z are your current and future renters.
Now, I’ve talked to you a good bit about the “interest rate lock-in” effect. So many homeowners have ultra-low mortgage rates that they don’t want to sell their home, and when they don’t put it on the market, that further constrains supply.
Well, Redfin recently brought some new color to the interest-rate lock-in effect. They’ve shared some really interesting material with us.
92% of mortgage borrowers have an interest rate under 6%.
80% of them have an interest rate below 5%.
62% of these people have an interest rate below 4%.
And a quarter have a rate below 3%.
New listings of homes for sale and the total number of listings have both dropped to their lowest level on record for this time of year… and that is fueling homebuyer competition in some markets and preventing home prices from falling.
In fact, Redfin tells us that the national ASKING price for homes is the same that it was one year ago.
Sale prices increased most in these 5 metro areas. Cincinnati leading the way at (9.2%). We’ve got cash-flowing Cincinnati property at GRE Marketplace. Miami (8%) not really a cash flow market there. Third-best is Milwaukee (8%), rounded out by Fort Lauderdale, FL (6%) and Virginia Beach, VA (5%). They are the 5 metros with the highest appreciation. Current months of national housing supply is still just 2.6 months - scarce inventory. 6 months is a balance market.
Homes that sold were on the market for a median of 28 days. That is the shortest span since September. There’s a bit of a seasonal factor there though.
Now, when we talk about the paltry supply of homes since existing homeowners don’t want to lose their low rate, it’s forced more homebuilders to build - in order to make some inventory available.
It’s made a good opportunity for you to buy these homes that are built for renters from Day 1, and rent it to a tenant yourself.
Now, I know that your life is more interesting than watching the NBC Nightly News with Lester Holt and then dozing off to sleep at 9:30 PM (ha!), so in case you didn’t catch it, here it is on “Build-To-Rent” last week.
It really takes the perspective of the RENTER and why they want to pay your rent to stay in a Build-To-Rent home… longer than they do for an apartment. This is about 2 minutes long & I’ll be back to comment.
BTR on NBC News: https://youtu.be/BXwTerRQWNo?t=954
Yes, that’s the popularity of build-to-rent homes. Something that we’ve been discussing here at GRE, for, gosh, maybe 8 years now.
Like they said there, rents are on the rise. But they’re not rising nearly as fast as they were 1 and 2 years ago. Rent growth has slowed for both SFHs and apartments.
I think that the assurance for prospective income property owners like you is that in your Build-To-Rent properties, you can have a reasonable expectation of high occupancy and low vacancy as long as you buy your SFRs in a decent market.
And see, more often than not, a builder is only going to build new, rental single-family homes if there are plentiful jobs nearby to support that.
So you can kind of crowdsource the due diligence that the builder did on what’s demographically and economically feasible if you choose to add these property types.
Despite the build-to-rent properties added, today, America only has half as many homes available as 2019.
Compared to just a year ago, there are 5% fewer available properties today.
But, we’ve got available Build-To-Rent and existing income property here at GRE Marketplace. Yes, just create one login, one time, and get access to all national providers at GRE Marketplace.com.
But say you want a little help, a little coaching. Say perhaps you haven’t bought property before, or you haven’t bought one in a while, or you haven’t bought property across state lines yet - since that’s where the best deals usually are - or you just want to lean on a coach to bounce ideas off of as you’re looking for your next investment property.
Well, in that case, you can rely on our free coaching service. That’s at GREmarketplace.com/Coach
Our coaches don't blow the whistle at you for missing a play. You'll never find them as grumpy as, say, New England Patriots' Coach Bill Belichick. They’re not that kind of coach. It’s not the kind of coach that will ask you to start your morning with an ice bath.
And if you're new to real estate, there's no such thing as a stupid question with GRE Investment Coaches. No penalty flags are thrown.
To find that property that builds your residual income and pays you five ways, you can choose which coach you want to have help you.
Coaching is a completely free service to you.
What they do is...
Your Investment Coach can do more than this. If you prefer, they can do less than this.
GRE Marketplace is where the coaches source the properties. It is more like an organic farmers' market than a big box store. Property offerings change frequently.
Because there are limited slots available to talk with them through phone or Zoom, it helps if you've got your down payment and are ready to go.
Sheesh. If it were any easier, they'd even make your down payment for you.
Did I mention that it's completely free? To get started, choose your coach and book a time. Start at GREmarketplace.com/Coach
Until next week, I’m your host, Keith Weinhold. DQYD! |
Mon, 19 June 2023
The wealth of families often dissipates to zero within a generation or two. Learn about the Vanderbilt family’s downfall and how you can avoid these mistakes. Have an estate plan. I explain the difference between a will and a trust. I introduce you to my friend Michael Manthei. A regular GRE listener, Michael and his wife bought 55 units within 4 years and acquired $85,000 of annual real estate income. He thinks about generational wealth as: income, taxes and inflation, giving, faith, service, preserving stories, character, physical health, and that your family is a treasure. Learn the difference between inheritance and generational wealth. Today, Michael runs the Elevate Investing Group. His upcoming event, Generational Wealth 2023, is August 18th-19th, 2023 in Lancaster, PA. Register here. I’ve never heard of an event like this. Multiple generations of one family will tell you how they did it. Resources mentioned: Show Notes: Michael’s transformational event: Build a trust or will fast: Get mortgage loans for investment property: RidgeLendingGroup.com or call 855-74-RIDGE or e-mail: info@RidgeLendingGroup.com Find cash-flowing Jacksonville property at: Invest with Freedom Family Investments. You get paid first: Text ‘FAMILY’ to 66866 Will you please leave a review for the show? I’d be grateful. Search “how to leave an Apple Podcasts review” Top Properties & Providers: Best Financial Education: Get our wealth-building newsletter free— text ‘GRE’ to 66866 Our YouTube Channel: www.youtube.com/c/GetRichEducation Follow us on Instagram: Keith’s personal Instagram:
Complete episode transcript:
Keith Weinhold (00:00:00) - Welcome to G R E. I'm your host, Keith Weinhold. How do you build generational wealth? How do you keep it and how do you pass it on so that it stays within your family for generations? Part of this is today's conversation with A G R E listener that's doing something that I've never heard of anyone else doing today on Get Rich Education.
Speaker 0 (00:00:22) - Taxes are your biggest expense. The best way to reduce your burden is real estate. Increase your income with amazing returns and reduce your taxable income with real estate write-offs. As an employee with a high salary, you are devastated by taxes. Lighten your tax burden. With real estate incentives. You can offset your income from a W2 job and from capital gains Freedom. Family Investments is the experience partner you've been looking for. The Real Estate Insider Fund is that vehicle, this fund investing real estate projects that make an impact. And you can join with as little as $50,000. Insiders get preferred returns of 10 to 12%. This means you get paid first. Insiders enjoy Castle on a quarterly basis and the tax benefits are life changing. Join the Freedom Family and become a real estate insider. Start on your path to financial freedom through passive income. Text family to 66866. This is not a solicitation and is for accredited investors only. Please text family to 66866 for complete details.
Speaker 3 (00:01:31) - You are listening to the show that is created more financial freedom than nearly any show in the world. This is Get Rich Education.
Speaker 0 (00:01:54) - Welcome to GRE from Weehawkin, New Jersey to Weed, California and across 188 nations worldwide. I'm Keith Wein Holden. This is Get Rich Education. Shortly we will hear from a GRE listener that's an engaged real estate investor and is having an unusually large impact on other people with generational wealth. Soil has profound effects on the type of agriculture that's possible and therefore soil has had profound effects on the kinds of societies that have been historically possible going back 12,000 years since the advent of agriculture. So productive and irritable soil is what made real estate valuable. A pattern of farms that are passed down through this same family for generations. Well, that's something that's possible in fertile regions, but not in regions where the soil is exhausted in a few years and has to be abandoned. And a new site found while the first site recovers its fertility.
Speaker 0 (00:02:55) - Whole societies had to move when the land in any given location cannot permanently sustain them. Therefore, cities couldn't even be built or contemplated. So then when you have bad soil, you can't have anything that lasts. And if you can't plant your family's principles, call them seeds in fertile soil, which is my metaphor for having moral and cultural standards, well then you can't build generational wealth either. You won't have anything that lasts very far beyond your one finite life. And as society advanced, we have more historic examples about families that built and have still capped their fortune today after several generations like the Rockefellers or families that have built and squandered their fortune like the Vanderbilts. And how that started is that really the Vanderbilts have been heralded as American royalty. The icons of the Gilded Age and that rich history all started with Cornelius Vanderbilt, Cornelius.
Speaker 0 (00:04:09) - He's the one that started to amass the family fortune from railroads in shipping businesses in the late 18 hundreds. He became the wealthiest person in America in the 1860s and then he went to pass that title down to his son William Henry Vanderbilt. And then he became the wealthiest American during the 1870s and 1880s. But it began to fall apart with William. Yep, just one generation later. The second generation, one generation after the wealth builder Cornelius and then Gloria Vanderbilt was born. Her father had a gambling problem and squandered most of his fortune. There was also overspending on frequent international travel. So Gloria, the granddaughter of the one that started the Fortune Cornelius, she herself would go on to have four sons each from different marriages. One of her four sons is prominent in American society today, and it might surprise you when I reveal his identity shortly by the time of glory, Vanderbilt's passing, okay, her estate had dwindled from $200 million down to just one and a half million dollars.
Speaker 0 (00:05:25) - So from wealthy to almost middle class right there, her New York apartment was bestowed to one of her sons. Two of her other sons remained estranged and only one of her four sons inherited the majority of the estate. And that person is none other than the, I guess, somewhat esteemed broadcast journalist and author Anderson Cooper. So you can see in the Vanderbilt family how that fertile soil broke down culturally and became in fertile to build something that lasts. You need that fertile soil. There's more than just a cultural component to creating generational wealth. I mean, first of all, of course you need to build the wealth in the first place by listening to this show. You're either on your way there or you're already there. And that means they focus on things that most people don't do. It's places, frankly, a lot of people just don't even look or consider like getting lots of smart debt for leverage or being inflation aware, being tax savvy and owning assets that pay you while you hold onto them.
Speaker 0 (00:06:33) - There's also a legal component here. I am not a tax or legal advisor or professional. So just super briefly in one minute and in plain English you need to have an estate plan. Step one is have a will. That is like a letter that you write before you pass away. Really that's all a will is if you have possessions that you want to go to a certain place, even if you're only 20 years old or if you're 80 years old and you have say a car and a little money or pets, then have a will. You can write a rock solid will really cheaply start at a place like trust and will.com. Then after a will understand a revocable trust, that's a special account where you put your assets like money in real estate while you are still alive. And the key to the word revocable is that you can cancel or change it any time you want to.
Speaker 0 (00:07:34) - When you pass away, things go to your beneficiaries, your heirs, without the annoying probate process in court. Okay, that's a revocable trust. And why have a will versus a trust? Well, there are a few reasons, but if you have less than a million dollar net worth though, then that first step, the will, that's probably going to suffice for what you need. But if it's a million plus, then it's more likely the trust. So really there are two main trust types. I touched on the re revocable trust. Now the irrevocable trust, that's something you cannot change once you set it up. It is rigid, not flexible. Well then why would you set up an irrevocable trust if you can't change it? Well, it can protect you from taxes, lawsuits, and creditors in certain situations. So that is the quick one minute on basic estate planning wills and trusts, yes, there is far more to know like beneficiary designations and durable power of attorney.
Speaker 0 (00:08:37) - But look, here's the thing and the motivation for you devoting sometime to estate planning like that. If you die, you can be assured that your family won't squabble over dividing up your assets if you get that in place and you sure don't want that because they're already gonna be broken up about you passing away. You'll want your generational wealth to pass on in a planned way and also wills and trusts. That's the way that your family locates your assets in the first place. Today you'll see how our guests and his wife hit financial freedom when they had $85,000 worth of real estate income and note that that was seven years ago. So therefore on an inflation adjusted basis, that might be say 110 K or 120 K in today's dollars depending on what you think the rural rate of inflation is. And then you'll see how that got him thinking about generational wealth and what he's doing to help others with it.
Speaker 0 (00:09:40) - Like I said, he's doing something with it I've just never heard of before. But first, I hope that you've been enjoying our valuable, don't quit your Daydream letter where lately I sent you that great map that shows where the top job growth states are. That chart comparing your rent increases to your increase in operating expenses, that story about how Phoenix is going to have construction limits due to their declining water supply. And all those stories about how wacky California real estate has become, including State Farm recently halting new insurance policies in the state of California. If you aren't reading our letter, which has a dash of humor, I send it about weekly, then you are missing out. I'd love to have you read it. It is totally free. It's full of real estate investing industry trends and forecasts and broader economic forces that are gonna affect you in the future and more.
Speaker 0 (00:10:38) - And also whenever we have job openings here at G R E as we keep growing, they are announced in the letter as well. And now you can easily sign up for the letter by text. And if you aren't one of the many subscribers growing your means with my letter, you can simply text GRE to 66 8 66 for or don't quit your Daydream letter. Again, it's free and I rate every single word, all the letter myself. I don't think that many founders do that. This letter is written from me to you and you get top investment property news in just a five minute read. You'll get some valuable introductory emails and then after that it's only sent about once a week, not daily. And again, you can sign up by simply texting G r e 2 6 6 8 6 6 for the letter that's GRE 2 6 6 8 66 generational wealth straight ahead. You're listening to Get Rich Education with J W B Real Estate Capital. Jacksonville Real Estate has outperformed the stock market by 44% over the last 20 years. It's proven to be a more stable asset, especially during recessions. Their vertically integrated strategy has led to 79% more home price appreciation compared to the average Jacksonville investor since 2013. JW B is ready to help your money make money, and to make it easy for everyday investors, get started@jwbrealestate.com slash g rre. That's JWB real estate.com/g R E
Speaker 0 (00:12:14) - GRE listeners can't stop talking about their service from Ridge Lending Group and MLS 40 2056. They've provided our tribe with more loans than anyone. They're truly a top lender for beginners and veterans. It's where I go to get my own loans for single family rental property up to four plexes. So start your pre-qualification and you can chat with President Chaley Ridge personally. They'll even deliver your custom plan for growing your real estate portfolio. start@ridgelendinggroup.com.
Speaker 4 (00:12:49) - This is Hal Elrod, author of the Miracle Morning and listen to Get Rich Education with Keith Weinhold and don't quit your daydream.
Speaker 0 (00:13:05) - Hey, I would really like you to meet someone today. He and I met last year through our mutual friend Dave Zook and of all things last year we crawled through a cave in the middle of the woods in Lancaster County, Pennsylvania together and I mean Crawled. He is a real leader, he's a professional investor and founder of the Elevate Investing Group. Welcome to G R e Michael Manthei!
Speaker 5 - Michael Manthei (00:13:29) - Keith, thank you for having me been a longtime fan of you and the show and the worldwide impact you've had. So honored to be here
Speaker 0 (00:13:36) - In your bio, you haven't yet added that you're an amateur caver or spelunker as it is
Speaker 5 (00:13:42) - One attempt at S Splunking. I'm not sure if I can put it in the bio yet, but uh, maybe after a second round .
Speaker 0 (00:13:48) - Well Michael, you have done though what most everyone wants, which is actually not spelunking. You have achieved financial freedom in your early thirties and you're much older than that now. You've now got more than a decade of experience in syndications property management and you have over $200 million worth in real estate acquisition. So talk to us about how you obtained financial freedom after less than four years of investing.
Speaker 5 (00:14:17) - I feel like it could be, uh, you know, almost an infomercial with how it's gone. You know, I read Rich Dad Poor Dad and that completely changed my world growing up. I wasn't around wealthy people to know how they thought or what they did with their money or how they got there. So to get a glimpse through the book, rich Dad Poor Dadd changed my life and I set a similar goal as Robert had in the book of buying two properties a year. So after 10 years I figured I'd have 20 properties if everything went well, but could never have expected that. Yeah, like you said, within four years we bought 55 units, had enough passive income to retire. It went a lot faster than I thought, but incredibly grateful. We started with a single family house. I was completely broke when I got married.
Speaker 5 (00:15:08) - I was actually a missionary for seven years coming off the mission field, not a dollar to my name. Married my wife who had saved a lot of money for me at the time was $25,000 is what she came into our marriage with. And so I was broke. She had 25,000 and that's how we bought our first rental, which was interesting to work through that process with her, you know, using her life savings to buy the first rental when we were still rent a house. You know, she thought she'd save this for her first house and I said, Hey, how about instead of us buying a house for ourselves, let's buy a house for someone else and start this journey to financial freedom. From there we bought another single family house, then we bought a 10 unit property and with that 10 unit property I bought it cash with a hard money loan.
Speaker 5 (00:15:56) - When I went to the bank to go to permanent financing, it appraised for 150,000 more than we bought it for. And so we got all the money back plus a line of credit of $75,000 that then opened us to keep buying. But Keith, the real advantage of that deal was it unlocked my mind to say I don't have to be limited by my own capital. I had no money in that deal and I thought we were gonna be limited by our own capital the whole way, you know, save up 20% down payment. This deal happened in such a way that it kind of unlocked this infinite return concept. And so from there it was kind of off to the raises. Once the creativity was set free from that point, including that 10 unit, we bought 50 units in less than two years and achieved our goal of financial freedom.
Speaker 0 (00:16:46) - That is really fast. And I note that at that point with the 55 units, you had a million dollar net worth and those assets generated $85,000 in annual cash flow. But dropping back thinking philosophically the book that introduced me to the concept that I didn't wanna believe for a moment or at least it was one of the Robert Kiosaki books and that is being wealthy is a choice. I actually didn't believe that. And you are being very intentional with the out-of-the-box choices that you're making and you and your wife Kristen, much like me, when I started, I didn't have much of my own money either. I started with that three and a half percent down payment on a fourplex. So then really the impetus often for using other people's money is because you have to because you don't have much of your own money.
Speaker 5 (00:17:33) - Yeah. And that's part of, you know, creating the grit. It can be a a blessing to those of us that wanna learn and grow to not have a lot handed to us because the confidence that it brings to be able to figure stuff out and get creative. And what I love is, and what I hope my story helps provide to your audience is when you see somebody else that's done it or hear stories of real people that have done it, it just unlocks the capability inside to say, Hey, that guy doesn't look that special. I think I could walk down some of the same road. So totally agree that it's, it's a philosophical shift and for me the big one was buy cash flowing assets. That kind of became my mantra that all my work, all my effort, all my energy went into acquiring cash flow producing assets and that simple concept just opened a whole new world,
Speaker 0 (00:18:26) - Real assets produce real income. So you began with, it sounds like a rental single family home and then shortly thereafter this 10 unit apartment building that sounded like that was the real pivot point for you. It allowed you to get creative that just gave you that much more room, that much more leverage. Had that been a duplex and it appraised overvalue or probably wouldn't have appraised 150 K overvalue like a 10 plex did. So tell us more about the options that gave you in growing this fast.
Speaker 5 (00:18:55) - The reason I was looking for a larger building is cuz my wife had gotten pregnant. She was working part-time during that portion of her life and I just had it in my heart. You know, she had wanted to stay at home with our kids once we started having kids. So she's pregnant, I'm thinking let's go find an asset that would replace her part-time income. So I was looking for smaller things honestly. I was like, well maybe if I buy a couple duplexes or a couple triplexes and then this 10 unit came on the market, but I'd had some issues with this seller on a previous purchase that we were trying to work towards and they just seemed a little bit squirrely. So I said, you know what, I want to give the most airtight offer that I can. So I talked to a hard money lender, said, Hey, I'm gonna offer all cash, no contingencies.
Speaker 5 (00:19:43) - So it was a big risk. I mean we're buying 10 units, we only had two at the time, so it felt like this huge stretch didn't have, you know, the money to do it ourselves. So got the hard money loan. But then when we took it to the bank and they gave us the appraisals, like oh my goodness. So not only did they pay off the hard money loan and give us a $75,000 line of credit, they also gave us like maybe 10, $15,000 that we, you know, put in our bank account. But then we could use that 75,000 to go put down payments on other properties and go buy other properties cash and then refinance out of 'em. So it really just, it changed everything. It unlocked everything for us.
Speaker 0 (00:20:19) - If you were going all cash, why did you need the hard money loan?
Speaker 5 (00:20:23) - The hard money loan. Once I secured that, I could offer all cash to I see the seller. So I gave 'em a cash contract because I had the cash lined up with the hard money lender.
Speaker 0 (00:20:34) - So it was about that deal making using your intuition when one seems squirrely. So that really leveraged things for you there in order to grow that faster as you're going through this process, as you're building this portfolio. Okay, now you've got 55 units, which does give you enough cash flow, $85,000 a year for most people to declare financial freedom. The interesting thing is you had the million dollar net worth at that time. Most people with a million dollar net worth are really only about middle class because they don't have residual cash flow. So net worth matters, but it's not as important as your passive income. You had the 80 5K of residual income accompanying that million dollar net worth and that's what makes the difference.
Speaker 5 (00:21:23) - Yeah, it goes back to the cash flow producing assets. All my effort was focused on acquiring those assets that would pay me the rest of my life. Never flipped anything, have a lot of friends that do flipping and I didn't want to get addicted to that big payout. You know, I take one single family house and maybe I make 20, 30, 40, 50,000 on it. I felt like I was gonna get addicted to that. Whereas for us, the first house that we bought, Keith, like $200 a month of cash flow, it's like this feels like it's doing next to nothing. But I said, you know what, I have a long-term goal here. The only way to get there is one property at a time, one step at a time. You eat the elephant one bite at a time. And so I said, let me continue making steps towards my goal and it snowballed faster than I expected. But again, cash flow producing assets,
Speaker 0 (00:22:12) - Find that first property with say, $200 in monthly cash flow. That doesn't change really anything in your financial life, but it changes your mindset. It's a pretty incredible moment. Like ta-da when that $200 shows up month in and month out with little or none of your own effort at all. That's really where it starts. You talk about retiring shortly after this time and you had a major philosophical shift then when you retired at just age 33. So tell us about that.
Speaker 5 (00:22:42) - I thought retirement was the goal. You know, I read in four hour work week and other, you know, books like that and it's like inactivity is the goal and I'm ashamed to say that I bought into that and you know, I can't wait till I do nothing. So once we got there, literally within a week I was bored. I'd worked like crazy to get to that point. I was working, you know, 50, 60 hours a week at my normal job plus buying and self-managing, you know, up to 50 units on the side. So it was a lot of work and I needed some time to rest. But after a week of rest, all my energy came back and I said, this feels wrong. I just had this sense. I have not been created to go through the rest of my life from 33 on in my easy chair.
Speaker 5 (00:23:27) - I wasn't expecting that at all. It, it hit me by surprise. And so I realized that that goal of financial freedom was a great motivator, but very empty once we got there. We recalibrated, my wife and I, you know, a lot of time in prayer talking with each other. It was a new experience to think we can do anything we want now. You know, our decision on what we do next is doesn't need to be dependent on how to pay our bills. Simple lifestyle, 85,000 a year covers us, but as we considered it, realized absolutely love what I'm doing, but this would be so much more fulfilling if we did it in relationship, became a part of other people's story, helped them on their journey, invest together, build a community and get to know people, build long-term relationships. So that was the major shift and uh, it's been seven years since then, so I appreciate that. Uh, you said I'm not much older than 33, uh, 40, which I guess isn't too far out, but we've had a lot more fulfillment in the last seven years as we've been a part of other people's journey.
Speaker 0 (00:24:30) - So that was really the turning 0.7 years ago at age 33 where you're like, we did what we have to do now we get to do what we want to do. Yeah, you're a man that serves. So basically to that point you had been serving society with good housing and now you can pivot to serving investors.
Speaker 5 (00:24:48) - Yeah, and really to me, service is life. The Bible talks about if you want to receive, give and you'll receive. So I've never focused on how do I receive, how do I get more. For me it's simple. I try to simplify things. What is the one input that I can focus on that then will knock down the rest of the Dominos? So it's give. And so I've looked at how can I serve, how can I give? And that's been my focus and that has opened up tremendous, uh, doors of opportunity. So seven years ago a mutual friend with Dave Zuck and he's doing these syndications and I was like, Dave, I wanna learn this, I wanna do this. So he introduced me to the guys that taught him and we started doing larger deals and, and Keith, I started on the smaller end. The first two deals that I put together as syndications were both 11 unit apartment buildings.
Speaker 5 (00:25:41) - And I'd already bought 10 units and 11 units and 12 unit buildings myself at that point. And I didn't need other people's capital to buy those, that point of our journey. But the goal had shifted from before that it was, how can I maximize my profit on these real estate deals, you know, maximize my cash flow, maximize my profit, and it switched to how can I give people a great experience with me? And so to me you can't give without it coming back. So in one sense I gave away more equity than I would've needed to, to have some investors and partners come along the journey with me. But I knew that if I gave them a good experience and learned this business, that that would snowball into a scale that we would never have been able to touch outside of that, which is exactly what's happened.
Speaker 0 (00:26:32) - It's interesting that you mentioned 11 unit apartment buildings because I have owned some of those myself. Oftentimes that's a zone I've operated in kind of these mid-sized apartment buildings. Things that are, are a million and a half dollars in value or below because oftentimes the big boys don't play there. But now you learn how to be a go-giver, that's become part of who you are and that's how you could go bigger with larger apartment buildings in making those opportunities available to investors.
Speaker 5 (00:27:00) - Yeah, it's really hard to take on investors at a smaller level. So when the, the focus shifted to how can I be a part of people's journeys and make long-term relationships with people, the answer is to scale up. And so, you know, we've scaled from there to now we own over 2000 apartments, uh, with our investor group and me serving them as a general partner.
Speaker 0 (00:27:21) - Congratulations. One of the first things that struck me about you when I met you is really your holistic vision of what wealth is. Finances are obviously part of that, but only one piece of the pie and you often champion generational wealth. Tell us about how you think of total wealth and generational wealth.
Speaker 5 (00:27:42) - I have three kids now. Uh, they are the greatest gifts in my wife and i's life. And when you have kids and you have people that you pour into, you start thinking about how can you improve their lives and how can you build something that outlives you? So this generational wealth concept has been, I would almost say consuming me. I mean it's just how I filter everything that I do. Where you set your strategy, tells you what your tactics are gonna be. So if you're making short-term decisions, you can do things that work short-term. They don't necessarily need to work long-term. But I said, what's the most successful patterns that I see in the world of wealth, in the world of impact? And it's these family dynasties that grow, preserve and pass on wealth from generation to generation. And so for me, there's a few things that go into that.
Speaker 5 (00:28:40) - It's obviously the financial wealth that's a big piece of it. You need, if you're gonna talk about generational wealth, you're talking about a substantial amount of money that gets passed from one generation to the next in in such a way that it can be carried on by that next generation. But we've all seen examples where just giving the money is not a total solution. And so really focusing on the relationships around you and the people and your family. I'm a fan of making your wife the greatest treasure your spouse, you know, for our ladies out there, your significant other, make them the greatest treasure that you have on earth. I look at my wife as my greatest treasure. I look at our kids as our greatest treasure. My kids right now are eight, six, and two and we train them from day one to think of themselves as kings and queens.
Speaker 5 (00:29:32) - I started with two daughters and then my third born is, is a little boy. So he's our little king. But there's this princess culture. All the little girls are princesses. Yeah. And when we grow up we sometimes hear what we heard as a kid in first person. Sometimes people still have those tapes that play and what's a princess? I mean entitled. Yeah, you're royalty but you don't have any responsibility ever since day one. I was like, you're not princesses, you are queens, you're powerful, but you have responsibility. You have resources but you have an obligation to use that to serve the people around you. God made you beautiful. So let's be accepting of every single person that we see, whether they are beautiful or not on the outside the resources that we have. I feel like we are to be a steward of it's never given to us, to prop us up and make others serve us.
Speaker 5 (00:30:25) - For me, my resources is a responsibility to serve others with what I've been given. So pouring into the kids spiritual wealth, which we talked earlier about the Jewish people and how they're the highest net worth per capita people group. Yeah, you look at the rich spiritual history that they passed down for thousands of years from generation to generation to generation. And so in our family, you know the stories of faith, the stories of courage, the stories of high character, I have those in my family that I'm passing down and we're creating new stories that we're passing down. And then the final one for me here on the generational wealth kind of holistic topic is one that you and I um, have some commonality with. And just physical health. If you're not taking care of your body, that is a major hindrance to long-term wealth. You know, your income generating capacity grows as you get older.
Speaker 5 (00:31:21) - We have this retirement mindset in a lot of our country, which I bought into, you know, in my thirties. I don't think it's as helpful as we may think it is if we want to continue to serve others. Our capacity to serve continues to go up throughout our lifetime as long as we're maintain faculty. And so to continue serving, generating wealth throughout our life, lasting as long as we can, putting things in place for the next generation. I wanna be around for a long time. I know you do too. And uh, it starts with taking care of ourselves.
Speaker 0 (00:31:54) - If I do invest well I'm sure gonna wanna be healthy enough to enjoy all of that. So it's really a symbiotic relationship. And you host an event. This year's theme is generational wealth. We're gonna learn about that in just a moment. But why don't you tell us just as a teaser, how does one prevent their generational wealth from getting frittered away? We know that often happens and the generational wealth doesn't really become generational wealth cuz often it doesn't last beyond one or two generations. The Rockefellers are a good example of what to do and keep wealth generational for example. But how do we prevent our wealth from being frittered away? Cuz there's a difference obviously between an inheritance and generational wealth
Speaker 5 (00:32:37) - Just practically for a moment for people that, um, are listening. Number one, you need to learn how money works and you need to get your wealth into assets and protect it from inflation and taxes. You know, those are the two biggest thiefs. So that's number one is, is you need to safeguard your money. Then once you have the wealth built and protected, it's really about passing on the character. That's really what it all comes down to because if you hand an ill-prepared heir a bunch of money, that is typically the worst thing that you can do for 'em. So it's passing on the character and instilling that and developing that in your heirs. There's different strategies for this, you know, you can recording the stories, some of the origin stories of grit, of resolve, of sticking with something until it is successful. Those stories inspire the next generations.
Speaker 5 (00:33:32) - Maybe they don't have the need for the same level of grit, but they can understand the diligence that is required to create and steward the wealth. So recording the stories people do family conferences where you know, if you're a wealth creator for your family, fly everybody in and have some meetings, you know, do it in a fun place, have some fun connected to it. You can have sessions where you're teaching the next generation about how to steward that wealth. You're giving not only the wealth but you're giving the mindsets and the tools of how to create and steward that. So again, goes back to character and the internal wealth that is needed to steward the external wealth, the the physical wealth, the capital and assets and everything.
Speaker 0 (00:34:23) - Oh yeah, that's some really helpful actionable stuff there. If you want to have what most people don't have, you need to be willing to do what most people won't do. Like perhaps these extended family get togethers and yes, that is important stewarding generational wealth. You can watch a a 30 minute video and learn something about taxes or inflation, but character can't so easily be taught. And this is part of what you are talking about at your upcoming event, generational Wealth 2023 in Lancaster, Pennsylvania. Tell us about it.
Speaker 5 (00:34:56) - This is our third year of doing, uh, this event. It really strikes a chord with our folks because typically the people that come to our events, they've bought the concept that wealth is not merely an external pursuit and if you don't have the internal wealth to go alongside of it, it ends up being pretty empty. So generational wealth, it's getting people together that have created and stewarded that and then sharing some of the real life stories. Dave Zuck is gonna be a speaker. He's uh, second generation in their family business now. Dave has a bunch of other, you know, businesses with their, his syndication and incredible money manager that he is. But this year his father actually has agreed to talk with us about how he started the family company. So I'm gonna interview him then I'm gonna bring up the four boys, Dave and his three brothers and what it's like taking the business from one level to another, successfully managing that in the second generation and growing it and how they're now passing it along to their children and preparing them to step into leadership.
Speaker 5 (00:36:00) - So I have a couple large businesses that are multi-generation that are gonna share like this also have Mitzi Perdue, I don't know if you've ever gotten a chance to know her. She was the daughter of the man that started uh, the Sheraton Hotels. So grew up in that family dynasty and then married Frank Perdue who created Purdue Chicken and today has, you know, 20,000 some employees. So she's seen from a couple different angles, family dynamics and family wealth that goes generation to generation and she's just a wonderful lady. Such a heart for other people and so full of life. I think she's in her eighties, she's a teenager, she's just so full of life. So she's coming, have a lot of amazing speakers and attendees that fly in from around the country. Last year we had about 350 people excited to see who shows up this year.
Speaker 0 (00:36:49) - See, this is why I wanted to talk about this event because I have attended so many in-person real estate events and masterminds and general investing events. And rarely, if ever do I see multiple generations come up on the stage at the same time to talk about how to do this the right way. Generationally, very few people in events just really think this long term. So I have to congratulate you in advance for putting this together. It's August 18th and 19th and again it is in Lancaster, Pennsylvania. Do you have any last thoughts Michael?
Speaker 5 (00:37:22) - So if people want to go to invest elevate.com, that would be a spot to check us out.
Speaker 0 (00:37:28) - I'm highly confident the future generations of your family will know you for more than crawling through a rural Lancaster County Pennsylvania cave.
Speaker 5 (00:37:36) - Yeah, hopefully my legacy includes more than our cave, uh, adventure, even though that was a blast. Last thoughts Keith. I just wanna encourage people to step out into what they feel in their heart to pursue. You know, it takes faith, it takes risk, but it's absolutely achievable. And so I hope my story has provided some encouragement to folks and if any of your people want to come to our event, we would welcome 'em with open arms. So thank you for today, Keith.
Speaker 0 (00:38:02) - It's a unique event in my experience. It's been great having you on the show.
Speaker 0 (00:38:12) - Yeah, as I've gotten to know Michael, he is a real go-giver now. He and his wife began with a single family rental home while they were still renters. Yeah, they owned that rental property before they even had a primary residence. I know a lot of successful people that have done just that. And then it sounded like for him, his third property, a 10 plex, that was the real pivot point. Of course, my pivot point was that very first purchase a fourplex. So for each one of us, the pivot point really came when we felt like we had massive access to other people's money. And you might feel like you have massive access to other people's money with just a 75 or 80% loan on a single family rental or duplex. If that's where you're starting, you don't need Rockefeller or Vanderbilt fortunes to get this going there at Invest Elevate.
Speaker 0 (00:39:04) - The interesting thing about their generational wealth event two months from now is how, from talking to Michael, he's actually not super motivated to have speakers there that are the most well-known names and Polish speakers, even if he has the chance to get them. Now you are gonna find some of those there, but he's interested in real stories, real people, and making a real impact with speakers that don't have some big marketing or sales agenda. And some conference attendees just want to meet the biggest names and get an Instagram selfie with them. And there's nothing wrong with that. You might even do some of that here, but he values real connection in meaning. And yeah, I've never heard of anyone else getting multiple generations of the same families on stage as he interviews them, including people that aren't used to speaking to an in-person audience of a few hundred people. Besides the generational component, you're also going to learn a lot about investing and meet a bunch of genuine, authentic people. That's the environment that he's creating. Gratitude to. Michael Manti Today it is Generational Wealth 2023 in Lancaster, Pennsylvania, August 18th and 19th. Check out invest elevate.com. Until next week, I'm your host Keith. We hold. Don't quit your day. Adrian
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Mon, 12 June 2023
The world’s most powerful nation can’t even house its own people. Keith Weinhold discusses housing shortage problems and solutions. Meet our new Investment Coach, Aundrea. Coaching is free for you. It helps you purchase investment properties. Connect with both of our coaches now at: GREmarketplace.com/Coach We discuss: international RE investing, accumulated dead equity, portfolio loans, declining LTVs, rising insurance premiums, and regional markets. Aundrea can help you with properties nationwide. We discuss Southeast Georgia and the Intermountain West. Southeast Georgia has strong cash flow. We discuss mid-term rentals (MTRs) in the area. Many are single-families under $200K. MTRs are furnished and the owner pays the utilities. In LTRs, a 1% rent-to-price ratio is possible. The Intermountain West features new-build duplexes to fourplexes in fast-growth Utah. These are better for long-term appreciation and inflation-profiting. Often, you get built-in equity. Fourplexes prices are $970K. Aundrea’s coaching makes it easy for you. She’ll learn your goals. If you prefer, she’ll help you: run the property numbers, write your offer, negotiate inspection and appraisal, manage your property, and help you through closing. Get started at: www.GREmarketplace.com/Coach Resources mentioned: Show Notes: Free GRE Real Estate Coaching: Get mortgage loans for investment property: RidgeLendingGroup.com or call 855-74-RIDGE or e-mail: info@RidgeLendingGroup.com Find cash-flowing Jacksonville property at: Invest with Freedom Family Investments. You get paid first: Text ‘FAMILY’ to 66866 Will you please leave a review for the show? I’d be grateful. Search “how to leave an Apple Podcasts review” Top Properties & Providers: Best Financial Education: Get our wealth-building newsletter free— text ‘GRE’ to 66866 Our YouTube Channel: www.youtube.com/c/GetRichEducation Follow us on Instagram: Keith’s personal Instagram:
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Mon, 5 June 2023
Keith Weinhold and Ken McElroy discuss the impact of rising mortgage rates on the commercial real estate market. They talk about the foreclosure of a Houston real estate investment firm, and the need for syndicators to anticipate changes in interest rates and have capital reserves in place. The speakers predict that high-rise commercial office buildings will be the first domino to fall in the commercial real estate market. They also discuss the potential fallout from the expiration of commercial debt and the upcoming Limitless Expo event in Scottsdale, Arizona. Resources mentioned: Show Notes: Get mortgage loans for investment property: RidgeLendingGroup.com or call 855-74-RIDGE or e-mail: info@RidgeLendingGroup.com Find cash-flowing Jacksonville property at: Invest with Freedom Family Investments. You get paid first: Text ‘FAMILY’ to 66866 Attend the Limitless event, June 15th-17th: $22M Office Building to Convert to Multifamily: https://www.loopnet.com/learn/deal-of-the-month-22m-office-teardown-makes-way-for-multifamily/2115617288/ Will you please leave a review for the show? I’d be grateful. Search “how to leave an Apple Podcasts review” Top Properties & Providers: Best Financial Education: Get our wealth-building newsletter free— text ‘GRE’ to 66866 Our YouTube Channel: www.youtube.com/c/GetRichEducation Follow us on Instagram: Keith’s personal Instagram:
Complete transcript:
Keith Weinhold (00:00:02) - Welcome to GRE. I'm your host Keith Weinhold last year's spiking of the Fed funds rate caused banks to fail this year and last year's. Doubling of mortgage rates is causing commercial real estate to fail this year. Why is it happening? How bad is it with commercial real estate and how bad will it get? That's the topic of today's conversation with Ken McElroy on Get Rich Education.
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Speaker 2 (00:01:36) - You are listening to the show that has created more financial freedom than nearly any show in the world. This is Get Rich Education.
Keith Weinhold (00:01:59) - Welcome to GRE from Montreal, Quebec to Monterey, California across North America and spanning 188 nations worldwide. I'm Keith Wein. Hold in your listening to Get Rich Education. Real estate investing is our major here. Minors are in both wealth mindset and the economics of real estate. That's what the matriculated graduates with here at G R E. You can think of an interest rate as how much it costs you to use money and to help you understand the preeminence of the cost of money. Let's you and I step back together for a second. If you go buy apples at the supermarket and Apple cost increase affects you. If you go buy a gallon of paint at Home Depot, a paint cost increase affects you. And if you go buy an acre of raw land, a land cost increase affects you. But rising interest rates mean that there was an increase in your money cost and you use money to buy those very apples paint or raw land.
Speaker 1 (00:03:04) - And now you begin to realize how interest rates touch and percolate into every single thing that you buy as a consumer or as an investor. And we know that interest rates are not currently high. Historically, yeah, you heard that right now that's not much consolation to those that are in trouble. But the Fed funds rate is about 5% and all year here the mortgage rate on an only occupied home has stayed between a range of six and 7%. Actually, mortgage rates are a little low. Their 50 year average is about seven and a half percent. Well, so then what's the problem? Well, the problem is not what are indeed historically normal rates. It's that rates rose so fast last year. You look at a graph and they climbed a wall. In fact, it's unprecedented, at least in you and i's lifetime to have them rise that fast. Just last year alone, mortgage rates spiked from 3% up to 7%. Economists estimate a 56% chance that they indeed are going to raise the Fed funds rate again. Yep. There is another meeting. Just next week, let's learn about commercial real estate deals blowing up with Ken McElroy.
Speaker 1 (00:04:28) - I'd like to welcome back longtime real estate investor influencer and multi-time bestselling real estate author and G R E podcast guest regular. Really? Hey, it's the return of Ken McElroy. How's it going Ken?
Speaker 3 (00:04:40) - Great Keith, how are you? It's good chief. Terrific. Great to see you in Arizona too recently.
Speaker 1 (00:04:45) - Yeah, that's right. We were just together in Arizona a few weeks ago, both there and everywhere across the United States, we know that residential loans are for the one to four unit space where those properties typically have long-term fixed interest rate debt, 15 to 30 years. The five plus unit department space is tied to commercial lending even though it's residential property and they often have variable rate debt for a shorter term. And commercial loans are where the trouble is in this world of higher mortgage rates. And a few months ago it made a lot of news in our world, Ken, that a Houston real estate investment firm that was at one time one of the city's largest landlords with $500 million worth of multifamily. They got foreclosed on and launched 3,200 apartments at the time. And one major reason were these floating interest rates that rose so much and rents couldn't keep up proportionately and more deals are going belly up like that. So Ken, tell us about what you are seeing out there now in regard to rising mortgage rates affecting the commercial lending market.
Speaker 3 (00:05:45) - Well, it's true. Obviously we all know that the Fed raise rates 10 times, so they were obviously fighting inflation. So if you bid around this business enough to know, know, you should have known that the Fed usually increases rates when inflation goes high. And so it is one of the tools that they use to kind of tampering 'em down inflation because that, no, the Fed is more concerned about inflation than interest rates because you obviously inflation affects everyone. So yeah, if you're in the real estate space, you might feel like you're being picked on. But the truth is, it's not surprising to anybody who's been around that they use this interest rate increases as a mechanism to lower inflation or the masses. So some of those mistakes that were made, I think it was Arbor, you have to go back to the experience of the syndicator. They elected not to buy interest rate caps and have other kinds of protections around those assets. And unfortunately, you know, some of those investors that invested in those assets, those were things that maybe weren't very clear to them. Uh, we're not exactly sure of all the details, but what's gonna happen next Keith, is we're going to start to see there's gonna be a big division of the experience versus the inexperience, I would guess
Speaker 1 (00:07:08) - A divergency, yes, of course that Fed has that dual mandate of full employment and stable prices since they're still doing pretty well on the employment. They want to get stable prices and the way to get a handle on that is to continue to raise rates. And when the Fed raise rates essentially from zero to five in just about a year, things are going to break. And we're talking about right now what is breaking first in the real estate space. And you mentioned a syndicator, when one buys an apartment building, oftentimes they get what's called a value add project, this renovation stage. And during that time they often have this variable interest rate debt. So often we are talking about apartment syndicators here, sponsors that put the deal together and what the syndicator essentially does is buy the apartment, renovate it, raise the rent, and then they cash it out to investors by either selling it or refinancing it at a higher value. And right here, these are the people that we're talking about that are in trouble due to their rates being jacked up.
Speaker 3 (00:08:07) - That's exactly right. I think you always have to anticipate a change in interest rates, whether they're up or they're down. And I think a lot of times people just always believe that they would stay as is. And I think that was obviously a flaw in their thinking and a flaw in their strategy. The other one of course is capital reserves. You know, cash, you have to have all these things in place. It looked to me from the article, the articles and the, and the different pictures and and things I've seen that they may have run into the problems on the management side as well. And you know, so there's a number of issues that I could see potentially that affected them. And I actually am hearing others kind of stories around this Keith as well. The first domino really to fall I think is gonna be some of these highrise commercial office buildings.
Speaker 3 (00:09:01) - That would be my guess because in a very different scenario where a lot of the folks that own those and maybe were in those, a lot of those tenants are deciding that they don't want their people to come back. Maybe they're doing a work from home model or the people that work for them decide that they don't wanna be back or whatever scenarios there are. There's definitely a lot of vacancies. I was looking today, you know, we're looking at pretty high uh, vacancies in la we're looking at very high vacancies in San Francisco, Portland, Seattle, New York. When I'm talking about high, I'm talking about unprecedented. We're talking about 30, 40% in many cases and in some cases even more so we know that if you have a vacancy that high, you're definitely not paying the debt. And so there's all kinds of these big landlords that are actually defaulting on their loans of those commercial office buildings.
Speaker 1 (00:10:01) - Now we're talking about vacancy in the office space there and we think really in our residential world, of course people think of you as a multi-family guy, but you also are in, you know, self stores in some other spaces. But we just think about the crux of the problem and how that's centered on residential. Maybe you can just talk to us, Ken, about exactly the details of the problem or maybe you have an example from a case study and just what that, that structure looks like for those in trouble.
Speaker 3 (00:10:29) - Why would I be concerned about it? Is, is probably a really good question. And the reason is is because don't forget, we all go to banks for stuff. So if it's an auto loan, a residential loan, a commercial loan or a business loan, it's still a financial institution and it's all connected even though we might only be going for one piece of that. And so as the commercial paper starts to default and starts to make its way into these large regional, smaller community banks, then what's going to happen is the underwriting criteria is going, they're gonna pull back because they don't care. They just know that they're taking water in the boat and they're in trouble. So, so that's why I look at it, you know, obviously, but you have to look at the real estate, the landscape completely, and you realize that, you know, while you might be just doing one piece of that, there are lot and these banks are connected out in the community in many, many, many ways, right?
Speaker 1 (00:11:30) - Yeah, that's it right there. Maybe people, some don't think about just a complete seizure and a reluctance to want to extend loans at all if they have enough on their books that are in trouble,
Speaker 3 (00:11:40) - Right? So that's why I'm looking at it from the multi-family standpoint as well, because we're already seeing underwriting criteria or in other words, banks are saying we're gonna give you less 50% loan to value, 55% loan to value. So why would that be? The reason is is that you know, they're looking at their, just like you would be and and all your personal assets that you have, stocks, bonds, gold real estate, whatever it is, business, each one is performing differently. A bank looks at it exactly the same way. So if something's happening over here that's negative, it's affecting over here and it's shining a light on the whole thing. And so we're already seeing a tougher underwriting. And what that means is that means that you're gonna have to come up with more money for down payments. And of course the banks are gonna be very cautious about any kind of lending if it's on a single family, if it's on a multi-family, if it's on a residential or retail or industrial or office buildings or self storage or whatever it might be. It we're all connected. And so that's what I think is gonna be hitting us is we're gonna be in a debt and a credit crisis here in the next 18 months.
Speaker 1 (00:12:54) - So there could be downward pressure on loan to value ratios, your bank wanting you to put more skin in the game so that they are less exposed and you are more exposed there. So we're talking about maybe new purchases oftentimes in that discussion. What about those that have a loan? Maybe the interest rate has gone higher, they want to refinance it. You know, a lot of times we talk about cash out refinances is something that we want to do when equity accumulates, but could this be an environment for cash in refinances with a lot of these commercial loans?
Speaker 3 (00:13:29) - Yeah, so we've done a couple cash in personally. Yeah. So what does that mean entirely? So what happens is, well let's say you had a load at three and now of course they're over five. Well our rate caps hit us at five, but we still don't forget, we went from three to five. So that little bit of piece was expensive for us even though we had a cap though, recap is simply just an insurance policy on the original purchase, that's all. So we're like okay, that cost us about 20 grand a month on this one property as an example,
Speaker 1 (00:13:59) - The rate cap below
Speaker 3 (00:14:00) - The rate cap below the rate cap purchase was less, but the three to 5% that increase in the mortgage payment was about 20,000 a month. Okay, so call it 250,000 for the year for one asset. So you're like, uh oh. I went from having great cash flow to having a lot less cash flow because my rate went out now it hit the cap. Well I was protected but it still went up 2%. So we started to take a look at what would it cost for us to fix this rate and it was uh, about a million bucks for a cash in. So we did it, we said let's do a million dollar cash in, fix the rate because I'm also afraid of future rate increases. So that $1 million that we put in to fix the rate at 5.2%, we know it's a four year payback or 250,000 times four is a four year payback.
Speaker 3 (00:14:52) - So it's a four year loan. But really what we're doing is we're hedging the entire time and of course we have that cashflow coming out each and every month. And the beauty of that E as you know, is what you do is you hedge the upside. You can always re refinance on the doubt. And all I was trying to do was protect that thing from when the recap expired, what's usually caps for two or three years, let's say. I didn't wanna be in a position where it was, you know, six or seven or something. So that's why we did it. We were just protecting against the future. And these are the kinds of things that you can do if you've been in the room before, you know what I mean? You, if you have the experience and and you see these kinds of things happening, you could take action to help yourself and help your investors. And that is clear that the arbor had not set up their loans that way. They had not set up their cash that way and they perhaps weren't looking at some of those things critically like that.
Speaker 1 (00:15:49) - Anna and I were each active real estate investors through the global financial crisis. So we know a crisis well, we see what each crisis is a little different when we talk about hedging ourselves against the crisis. Can you talk about rate caps, which is basically this insurance that one can buy to put a cap on how high their rates can go. If you go ahead and buy a property to 3% interest rate and you have a 2% rate cap, that means your cap cannot exceed 5%. So therefore if rates go up to 7%, you're kind of in the money.
Speaker 3 (00:16:19) - That's exactly right. And so it's clear to me that they didn't buy those cap, by the way, they're not the only one. There are others. And so if you shine the light on the multifamily industry, there's a fair amount of people that didn't do that either, not just them. And also there's other people that don't have the cash perhaps like the million dollars that we used to do a cash in. And so they're going out to their investors to try to preserve the asset. The crazy thing about it, as you know is we're still very under supply and on a housing stamp. Yeah, the fundamentals of the apartments are actually good though we're still seeing a a little bit moderate red growth and we're hitting theis and the occupancies are good. The apartment industry is not in any kind of crisis. The one thing that's changed is the cost of debt has got up a lot.
Speaker 1 (00:17:14) - Why don't we talk about that some more and just how bad is it going to get Ken, maybe through the perspective of just how much commercial debt is about to expire.
Speaker 3 (00:17:24) - If you google this, you'll see that there's about 1.4 trillion expiring by the end of 2024. So that's a lot . And so what has to happen is, Keith, let's say you all bought something. Well actually there's already examples. If you Google, there's an office tower that was appraised and valued at 250,000,002 years ago and it just traded at 70 as an example. Wow. So there's a big, big haircut there, right? So first of all, all the equity on that original deal gone wipe down and then the that 70, all that does is cover part of probably the debt. So some bank somewhere took it in the shorts, you know, on that deal. And so that is a good segue to say what happens is anything that was purchased, let's say in uh, call it one to three years ago, is subject to massive valuation change.
Speaker 3 (00:18:23) - And if they have a situation where they're trying to do a cash out refi and they're not going to be able to, if they have a situation where they're going to sell, they're not going to be able to because the value of that asset is probably 20 to 30% less than it was just two years ago. So what's going to happen is if they can wait, they might be able to wait it out. If rates go down like everybody's hoping it will, or cap rates go back down like everybody's hoping it will, then you're going to be fine. The issue is going to be the maturities and when they hit,
Speaker 1 (00:19:01) - There's a 20 to 30% loss in value as we know at a 75% loan to value loan. Yes, that is a complete wipe out of the equity. Ken, when we think this through, of course apartments have debt that someone is holding onto and apartments also have equity that someone else is holding onto and equity could be held by. It's not just investors in a syndication, it's also a pension fund or a family office. And if these go under, we have to think about those ramifications of course, but we think about equity that's held by LPs limited partners, which are those individuals that invest in a syndication. What do you think that LPs should do? What kind of situation are they in? I mean are syndicators communicating with their LPs and letting them know things like, hey, there just isn't gonna be a distribution this quarter and I don't know about next quarter either or, how's that communication been?
Speaker 3 (00:19:52) - So it's hard to know. Obviously if you read the article about Arbor, there was not much and a lot of the investors were surprised. It's interesting though, cuz if you really dial into it, there's no way that they were making distributions for a long time as the things were defaulting. So there must have not been distributions on those assets for some time. That would be obviously a red flag. So I think that some syndicators are probably communicating very, very well. But in this particular case, that wasn't happening because of what some of the people were saying in the article that had invested with them.
Speaker 1 (00:20:31) - And when you're talking about Arbor, you're talking about that group in Houston that I brought yeah, up earlier. That's really become sort of like the poster child for what's coming can often that might make one think like the LP that invests in someone else's syndication that might make a savvy investor wonder, well gosh, I wonder if there's going to be a contagion effect. Even if a syndicator shows me a deal and that one particular deal looks really good, does that syndicator have other deals behind him that are blowing up and could affect this good deal that looks good in front of me right now. So what are your thoughts about any sort of contagion effect that way? Are you seeing any of that out there?
Speaker 3 (00:21:08) - It's certainly possible. I know that a lot of it's gonna be based around the debt itself. So if somebody got a deal like we did like two years ago or one year ago that put fixed rate debt on it, not a problem. So you have to take a look at the maturity of the debt. There's a lot of people that have bought properties that where they assumed alone in the commercial space you can assume something, people are still doing deals, you know, so if you could step into somebody else's loan at three, three and a half percent, let's say you're not gonna have a default issue, you're not gonna have a debt issue where the debt's gonna go up while you bought something, it's fixed. And that was kind of the whole point. As you know, I've been telling people to get in fixed straight debt for two years. If you go back and look at my videos, I probably said it a hundred times, getting fixed straight debt, getting fixed straight debt, getting fixed straight debt because you have to know what your debt payment is month to month to month for a long period of time. You don't want a fluctuating variable number. And so the people who didn't do that, the people that in my opinion were inexperienced and didn't by caps, this is the result of that.
Speaker 1 (00:22:23) - We've been talking a lot about problems here. Of course the flip side of any problem is an opportunity. You are an excellent opportunist. You just talked about situations where apartment values could be down 20 or 30%. So are you seeing opportunity, especially with respect to apartment buildings and what's going on coming ahead?
Speaker 3 (00:22:43) - We looked at four deals on Tuesday, we've been in opera on one of 'em. So to your point, if somebody's sitting on some assets and they need cash for ones that aren't doing well, for example, they might sell a couple of the good assets. And what's a good asset? A good asset would be something that's highly occupied and is stable and has fixed rate debt and it's something that you can easily underwrite, easily buy, and you know it's gonna be like clipping a coupon moving forward. That would be what I would call a good asset purchase. And those are definitely hitting the market. So I mean, you think about your own portfolio, you know, at any given time you're looking at the winners and you're looking at the losers, sometimes you have to sell a winner to pay for some of the losers. So we're starting to see some good assets hit the market.
Speaker 3 (00:23:32) - That might be great. They help somebody that's um, in a situation that might need cash for something else. So that is exactly what does happen. That is what's happening. So we're gonna be all over those issues and try to snap up some of these really, really nice assets. Another really good opportunity is going to be on brand new class A apartments that are just now being completed. So you know, as you know on a new construction deal, you do not get fixed straight debt because there's no asset. It doesn't exist. So you have a land, you have to build it until it's considered in service, which means you have all the occupancy certificates and it's blessed and the city says, okay, it's all ready to move it. That's in service. And until that point you can't put fixed rate debt on anything. So there's going to be this many opportunities on assets that are under construction that are in trouble because of these high interest rates. People that come in with all cash, for example, are going to be able to buy some of those properties. What I would guess at under replacement costs, it's going be a very exciting time moving forward for buying perhaps real trophy assets or assets up that people have already done a lot of work on or under what they're worth.
Speaker 1 (00:24:51) - That could be a good niche to exploit. You're listening to get Resu education. We're talking with Ken McElroy about trouble in the commercial lending market and how that affects real estate. Warren, we come back. I'm your host Keith WeHo with J W B Real Estate Capital. Jacksonville Real Estate has outperformed the stock market by 44% over the last 20 years. It's proven to be a more stable asset, especially during recessions. Their vertically integrated strategy has led to 79% more home price appreciation compared to the average Jacksonville investor. Since 2013, JWB is ready to help your money, make money, and to make it easy for everyday investors, get started@jwbrealestate.com slash gre. That's jwb real estate.com/gre. GRE listeners can't stop talking about their service from Ridge Lending Group and MLS four 2056. They've provided our tribe with more loans than anyone. They're truly a top lender for beginners and veterans. It's where I go to get my own loans for single family rental property up to four plexes. So start your pre-qualification and you can chat with President Chaley Ridge personally. They'll even deliver your custom plan for growing your real estate portfolio. start@ridgelendinggroup.com. This is peak prosperity's. Chris Martinson, listen to Get Rich Education with Keith Wein old and don't quit your daydream.
Speaker 1 (00:26:33) - Welcome back to Get Education. We're talking with Ken McElroy, longtime influencer and very successful author, A great influencer in the real estate space. And can you hit mentioned some other sectors outside of the residential and the apartment space earlier, and we look at potential problems or opportunities outside of residential and we think about what's happening to office space. You touched on that earlier, that's probably about the worst real estate sector I can imagine in their high vacancy rates, hotels and retail and warehouses, which actually think about one sector as doing pretty good since the pandemic and online shopping really lifted the warehouse sector. But do you really have any other thoughts about those sectors, how commercial loans affect them or any good opportunities in those outside of residential?
Speaker 3 (00:27:24) - As everyone knows, you know, when you buy a home, they look at your FCO score, right? They look at your credit and they look at you or me as the person paying that home as they should. When you move to the commercial side, they look to the asset. So they're very, very different. One's an individual. Another one is the actual asset. So as these asset values go down, as interest rates go up, I think that anything that's going to need any kind of a loan and the next year or two is going to have a problem from an asset value standpoint. Because what we were all used to in the last 10 years were these value add. So you'd buy something and then you would improve it and it would be worth more money at the credit and debt markets were stable, you know, so you could go, uh, you had a very calculated model where you can go put new debt on there and scoop that out and do a cash out refi that's gone right now because the values are down and of course the cash out refi option is off the table.
Speaker 3 (00:28:30) - So th those are the real problems that people face moving forward. So that could be all kinds of things. It could be retail, it could be industrial, it could be multi-family cuz everything is impacted even though we've had high cracy and red growth in some of those areas. If you're a seller that has a 3% loan and you're trying to sell it to somebody like us who's a buyer, we're probably at six or seven. We're looking at cash flow very differently than they are when our debt costs are almost double. So we're not gonna be able to pay that price. And so that's what the debt, rising debt costs have done. If the income, any expenses are the same, but the debt costs are double, then we as buyers can't afford to pay that. So therefore the prices that we're we can afford to pay are gonna be a lot less. And so that's actually what's happening
Speaker 1 (00:29:26) - And what we think of as perhaps ground zero for problems in the real estate market. I think office first comes to mind, you've talked about office vacancy rates in many American cities being really high earlier, it was a particularly noteworthy stat that was released not long ago that in New York City they have 26 Empire State buildings worth of empty office space. So we talk about all this open office space with more of the work from anywhere crowd and this dearth of residential housing. You know, can you experience, do you learn about very many office buildings being viable for tear down and conversion into residential? Or is that not feasible very
Speaker 3 (00:30:07) - Often? Yeah, so that's the million dollar question. What are we gonna do with these big, big office buildings? And think about this, Keith, let's say it's a 50 story building, which is a very common building all over the place and it's got 20 or 30% occupancy. My guess is, you know, what do you do? Like you have to wait until it's a hundred percent vacant, obviously before you can even do something. So what's going to happen is the banks are actually gonna be taking these back, the banks are gonna be managing these and they're gonna have to figure that out. And the only way to take down an office building is if it's a hundred percent vacant. And even then it might not be worth it because let's don't forget, you step into the shoes on day one of the property taxes of the utilities of the insurance, regardless if it's full or not in order to maintain it.
Speaker 3 (00:30:59) - So there's an operating cost that exists whether there are people in it or not. And so you have to be careful that you're not catching a falling knife. You know, like, I mean if somebody said to me, I'll give you this vacant office building or a dollar, I probably wouldn't take it because unless I had some kind of a solution for the, uh, on the income side. So I'm not saying I wouldn't, but you have to have a solution on the income side to cover your operating expenses. Otherwise you're just gonna be writing checks just like the person before you
Speaker 1 (00:31:34) - That is so well explained on the difficulty of making a conversion feasible from office to residential. Well, if you're like me, you read a lot of Ken McElroy's books like the ABCs of Property Management, the ABCs of Real Estate Investing. Can I read the Return to Orchard Canyon on a beach in India a little over three years ago? Actually, I love that more recent book from you and you have a great live in-person event coming up really soon where the audience can come to see you at a bunch of other speakers. It's a fantastic event. It's a second year, you're doing it, it comes up really soon here in Scottsdale. Tell us about it.
Speaker 3 (00:32:15) - Thank you. It's, I cannot be more excited, especially what's happening right now. It's called Limitless and uh, it's at limitless expo.com. So it's just limitless expo.com. But kicking off the very first day is Joseph Wang, who wrote a book called Central Banking 1 0 1 and he is good. He used to work in New York for the Fed and is going to talk specifically about what's the Fed going to do in the second half of the year in 2024 based on all the things that he did on the open markets desk for the Fed. So that's gonna be very exciting. We've got Chris Martinson as well talking right after him, got kiosaki. We have a whole bunch of people around entrepreneurship and um, kind of side hustle stuff just to try to figure out what the heck is happening and what could we be doing to protect ourself moving forward.
Speaker 3 (00:33:11) - So this is really, this year in particular is a not to miss year because these are things that all of us are trying to figure out. I don't have a crystal ball just like anyone does, and I'm studying like crazy to try to figure out what's happening next. We've got 45 speakers all coming to try to help us understand what we can do next. Chris boss, who's, uh, wrote the book, never Split the Difference. If you guys haven't read that book, you need to read that book. He's the hostage negotiator in the world and he works for the FBI and Harvard. And, and his talk is going to be how to negotiate during troubled times because these are going to be real things, Keith, real things that are happening. You know, when there's a debt maturity or a loan coming up or you have problems with your limited partners or, or whatever it might be, this is the room you wanna be and that's the talk you want to hear. Chris is gonna be there, I'm gonna do a podcast with him. He is gonna do a book signing, so it's really fun. It's gonna be Thursday, uh, the 15th, the 16th or the 17th of June. And uh, it's right in Scottdale, Arizona.
Speaker 1 (00:34:21) - Janice Prager will be there as well. And yeah, it seems like you just keep adding speakers. Okay, I wanna talk to you. Last month it was 40 speakers, now it's 45. So you, you have a buffet that you can sample there as an audience?
Speaker 3 (00:34:34) - We do. I can't wait to meet Dennis Prager. I, I've been to his compasses in la I, I'm a big fan of, you know, his messaging and, and what he, he has a billion downloads last year, A billion with a B. That's incredible. So he's getting to be there. I just think it's like the who's who, right? It's tweet thought
Speaker 1 (00:34:52) - 100%. You can get started@limitlessexpo.com. Can I and our audience have benefited from your knowledge for years? Thanks so much for coming back onto the show.
Speaker 3 (00:35:02) - Yeah, my pleasure. Always great to be on
Speaker 1 (00:35:10) - Most of those speakers at the Limitless event. Were guests here on G R E, so you'll probably find a lot of residents there, including Chris Voss who was the FBI's lead hostage negotiator. He was on the show with us here twice you'll remember. And yeah, you'll remember that pretty fondly because it was entertaining the first time Chris was here back in episode 331, how the World's Best negotiator and I, Chris Voss did a mock face off in negotiating the purchase of a fourplex building. But getting back to imploding apartment syndications, they aren't just blowing up deals and blowing up investors, but also blowing up banks when the borrower cannot repay the loan. And banks have to take back apartment buildings and office buildings unlike, which is actually pretty unusual in a way that they need to take back apartment buildings. I mean, everyone understands how the work from anywhere movement created, the office space decline, but there is quite a demand for all residential types, single family homes and condos and trailers and apartments.
Speaker 1 (00:36:17) - But it's those resetting rates that blow up apartments despite the demand for people to wanna live there. So what this does, it makes banks more conservative with lower rent values being delivered, lower rent to value ratios also coming on the way. I would expect more of that ratcheting down. And for more people wanting to refi from a variable rate to a fixed rate, you know those syndicators they have got to put cash in in order to meet that lower loan to value ceiling will well capitalize syndicators. They can do that and others can't. Syndicators might very well be asking for capital calls from their investors then for their investors to help fund that cash in refi to keep those deals alive. The timeline for when you should expect a lot of this activity are from the peak 2021 and early 2022 deals that had short-term debt on them.
Speaker 1 (00:37:17) - They are going to face resetting rates late this year and into 2024. You probably noticed that just beyond the halfway point in the chat with Ken. I pivoted from talking about problems to discussing opportunity and the opportunity being that others might sell a good apartment deal because they need the cash to get out of that deal so that they can go take those funds and perform a cash in refi and shore up one of their other deals and get that other deal into fixed rate debt. Most modern offices, you know, they simply cannot be adapted over to residential uses due to their wide and deep floor plates that restrict natural lighting to only the perimeters. And because of the overhauls required to run mechanical and electrical and plumbing to individual residential units in the rare office building where conversions are possible, that sort of thing is wildly encouraged by everyone, developers and brokers and all kinds of governmental bodies.
Speaker 1 (00:38:19) - In fact, there was recently a sale of a 150,000 square foot office building in Orange, California oranges between Anaheim and Santa Ana. It's sold for 22 and a half million dollars and it's planning to be converted from office to residential. But yeah, multi-family conversions like that, they just aren't common. And the full story about that from LoopNet is in the show notes for you today. We've been discussing the difference between one to four unit properties and five plus unit multi-family apartments today. The difference in lending is really what makes all the difference. So those larger apartments bought with variable rate debt, say one to three years ago, they are problematic where the one to four unit space instead stays shielded with long-term fixed interest rate debt. Next week here on the show, you're gonna meet our new investment coach at GRE Marketplace. You have heard this person on the show before. I'll introduce you next week. Yes, we're adding a second one to keep up with demand for you. Until then, I'm your host Keith Wein. Hold, don't quit, it's your daydream.
Speaker 4 (00:39:31) - Nothing on this show should be considered specific, personal or professional advice. Please consult an appropriate tax, legal, real estate, financial, or business professional for individualized advice. Opinions of guests on their own information is not guaranteed. All investment strategies have the potential for profit or loss. The host is operating on behalf of Get Rich Education LLC exclusively.
Speaker 1 (00:39:59) - The preceding program was brought to you by your home for wealth building. Get rich education.com.
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